On 4 June 2017 the Law No. 1983-VIII “On Amendments to Certain Legislation of Ukraine Regarding Improvement of Corporate Governance of Joint Stock Companies” adopted by the Verkhovna Rada of Ukraine on 23 March 2017 (the “Law”) came into effect. In addition to the legislative amendments aimed at reforming the corporate sector in Ukraine (please see our legal alert), the Law also introduces a concept of escrow account and improves the regulation on funds pledge, including its enforcement. The importation of an escrow concept (commonly used in foreign jurisdictions) into Ukrainian legislation is a major step for the country.

Although the temporary foreign exchange restrictions currently in force limit the possibility to enjoy all the advantages of the instruments, the parties nevertheless now have much more flexibility to implement certain commercial arrangements which were previously (until now) difficult to implement in Ukraine.

In light of the NBU’s policy of gradual liberalisation of the currency control regulations, it is expected that the new escrow and improved funds pledge mechanisms will become actively employed by various businesses.

Escrow Account

The following are the essential terms in relation to operation of an escrow account:

• the release of funds from the escrow account shall be done by an escrow agent (bank) only upon performance of conditions set out in an escrow account agreement. The agreement can authorise either the bank or a third party to verify whether the conditions provided by the escrow account agreement have been satisfied; 
• funds may be released from the escrow account only as specifically provided in the agreement;
• funds on the escrow account can be used only for payments to a beneficiary or repayment to an account-holder as defined in the escrow account agreement;
• no enforcement or arrest against the funds on the escrow account can be imposed to satisfy any obligations of the bank (except for funds in amount of bank fees due), account holder or beneficiary, including in the case of liquidation of any of the parties;
• amendments (with some exceptions) or termination of the escrow account agreement can only be made with the beneficiary’s written consent (even if the beneficiary is not a party to such agreement);
• upon written request the beneficiary has a right to receive from the bank information about the escrow account and operations thereon.

Funds Pledge

The Law introduces the following novelties aimed at creating a more comprehensive legal framework for the pledge of rights to funds in a bank account (the “Pledge”):

• the Law expressly requires a bank to refuse performing any transaction with the pledged funds in a bank account on the instructions of an account holder, if such transaction would decrease the balance of the account below a threshold established by the Pledge agreement. In case the bank fails to perform this obligation, while it was notified on the Pledge, such bank will be liable to a pledgee for any losses caused;
• the account bank is expressly authorised to debit funds provided in a Pledge agreement if the account bank was notified of the Pledge. No separate agreement between the bank and pledgor is required for that;
• the account bank has an express right to refuse performance of the transactions which are not allowed by the Pledge agreement;
• The Pledge can be enforced by way of debiting funds, as well as by way of assignment of rights to the pledgee or sale of rights to third parties;
• the pledgee's direct debit instructions delivered in connection with the Pledge will have priority over any conflicting claims, including those under other pledges of a lower rank, to the “pledged” funds in the account;
• the bank account agreement can only be terminated or amended (with some exceptions) with the written consent of the pledgee. The Law also introduces joint liability of the pledgor and the bank for amending the bank account agreement without consent of the pledgee in case the bank was notified of the Pledge;
• the bank is not allowed to prohibit the Pledge but has a right to charge a reasonable fee in case the pledge is established.

Legislation:

Law of Ukraine No. 1983-VIII “On Amendments to Certain Legislation of Ukraine Regarding Improvement of Corporate Governance of Joint Stock Companies” dated 23 March 2017 Authors:

Graham Conlon, Acting Managing Partner, graham.conlon@cms-cmno.com

Kateryna Chechulina, Senior Associate, kateryna.chechulina@cms-cmno.com

Khrystyna Korpan, Lawyer, Khrystyna.Korpan@cms-cmno.com