The development of micro, small and medium enterprise (MSME) segment in Ukraine is based primarily on raising debt finance, particularly bank loans. However, more and more frequently banks are facing difficulties trying to return the provided funds. On August 22, 2012 a discussion on this topic was held entitled "Legal aspects of working with troubled assets segment of micro, small and medium enterprises (MSME). Practice. Problems. Prospects."

The event was organized by the International MSME Lending Program in Ukraine supported by the European Bank for Reconstruction and Development. Kseniya Ostrovskaya, VKP's banking and finance associate and Oleg Kachmar, senior associate with VKP's dispute resolution practice, shared Vasil Kisil & Partners experience in this area. The discussion was also attended by representatives of other law firms, large commercial banks, and entrepreneurs.

In their reports, lawyers addressed possible ways of returning troubled loans, particularly at the level of the contractual relationship binding the bank, the borrower and the guarantor. Kseniya Ostrovskaya outlined the strategy and the trends of dealing with distressed loans, in particular, methods and ways used by banks to sell these non-performing facilities, especially focusing on how to document these sales (cession, factoring) of distressed loans portfolio, as well as the assignment of rights to the accompanying securities. "Today, the market has developed an approach to the sale of troubled loans, which has been worked out and tested in practice. However, the legal risks have not been eliminated entirely and therefore the structuring of such transactions should be done paying particular attention to the protection of personal data, and to whether or not use assignment or factoring in each case,"- said Ms. Ostrovskaya.

Oleg Kachmar highlighted some issues of judicial practice in cases of mortgage foreclosure, in particular, the vexed issue of jurisdiction and the division of jurisdiction over cases regarding mortgage foreclosure, determining the nature of the claim and claim value, as well as the amended position of the Supreme Court of Ukraine regarding foreclosure on the mortgaged property by judicial procedure resulting in assigning the ownership of the mortgage to the banks. Oleg also provided examples of courts practice regarding the application of individual provisions of the Law of Ukraine "On Mortgage".

"The law does not provide for the refusal of the court to consider the foreclose on the mortgage due to debt on the loan that is disproportionate to the value of the mortgage. In addition, if, prior to 2010 the position of the Supreme Court was to ensure that the law does not provide for the recognition and registration of ownership of the mortgage on the basis of the decision of the court, beginning in 2011, the Supreme Court took a different position stating that if the parties can resolve the issue of mortgage foreclosure by the mortgagee assuming the ownership of the mortgage out of court, it would be illogical to assume that the parties are deprived of this right in court, based on the decision of the court", - said Mr. Kachmar.