Starting from 22 September 2012, the beneficial owners (aka controllers), substantial shareholders, and senior executive officers of Ukrainian commercial banks could face personal financial liability for the insolvency of banks during liquidation.

This follows from Law of Ukraine No. 4452-VI "On the Individual Deposit Guarantee System", dated 23 February 2012 (the "Law"). The Law grants the Individual Deposit Guarantee Fund (the "Fund")significant authority in managing the insolvency and liquidation proceedings of Ukrainian commercial banks.

Introduction of Personal Liability

The Law introduces personal financial liability for the following categories of individuals regarded as members or officials of a Ukrainian commercial bank (the "Principals"):

· owners of a substantial shareholding, i.e., holding more than 10% of the shares in the bank;

· beneficial owners (aka controllers) of the bank; and

· senior executive officers of the bank.

If the Fund believes that the bank incurred losses or the interests of its depositors or creditors were affected by an act or failure to act of any of the Principals, the Fund is entitled to satisfy the claim of the bank's creditors in part at the expense of the Principals. If any of the Principals are unwilling to voluntarily satisfy such claims, the Fund can enforce its claims in court.

The Law does not provide any further guidance on the criteria or mechanism for determining how the Principals may be subject to the personal financial liability described above. The Law also fails to establish any limits for the liability of the Principals.

Some Other Developments

Other noteworthy changes introduced by the Law are:

· the Law excludes certain categories of private deposits from the guarantee coverage of the Fund. Such exceptions include deposits with foreign banks and deposits placed by the owners of a substantial shareholding in the bank;

· the Law shortens the duration of temporary administration for banks from one year to three months (or to six months for systemically important banks);

· pledged property of a bank is included in the liquidation estate of the bank. It can be used solely for satisfaction of the claims of the pledgee but subject to the Fund's authorization.

The new requirements are aimed at improving the financial discipline of the shareholders and executives of Ukrainian commercial banks. Coupled with the strengthening of bank ownership transparency requirements introduced in 2011, the Law has the potential to improve the position of private depositors and creditors of Ukrainian banks. However, it remains to be seen how the provisions of the Law will be implemented in practice.

Additional notes

This LEGAL ALERT is issued to inform Baker & McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.