Changes in applying of an extrajudicial (out-of-court) method of mortgage foreclosure after adoption of Law No. 2478-VIII - ALEXANDROV&PARTNERS
Changes in applying of an extrajudicial (out-of-court) method of mortgage foreclosure after adoption of Law No. 2478-VIII

On 04 February 2019, Law No. 2478-VIII dated 03 July 2018 “On Amendments to Certain Legislative Acts of Ukraine on the Renewal of Crediting”, which was published on 3 November 2018 in the Holos Ukraiyny, became effective.

This Law has provoked lively discussions in the social media, since it is aimed at the renewal of a national sphere of crediting and minimization of risks for banks when deciding on extension of loans. Thus, this Law, inter alia, stipulates that banks should submit to the NBU credit registry the information on the lending transactions, the arrears of which (the principal plus interest) equals or exceeds 100 minimal wages or the equivalent of the amount in a foreign currency.  The specified information is to be submitted without a debtor’s consent in accordance with the Law of Ukraine “On Amendments to Certain Laws of Ukraine concerning the Creation and Keeping of the Credit Register of the National Bank of Ukraine and Improvement of Credit Risk Management Processes of Banks” dated 06 February 2018.

Moreover, this Law specifies that liquidation of a legal entity which is a joint and several debtor or death of an individual which is a joint and several debtor does not terminate the liability of the remaining debtors to the creditor and does not change the scope and the conditions of its fulfilment.  The Law six times extends the period during which the creditor will be able to file a claim to the surety. Now this term lasts not six months but three years. If the obligations are fulfilled in parts, the period of suretyship is calculated separately for each part of the obligation.

It is worth pointing out at the impact this Law will have on the mechanism of the out-of-court settlement of bad debts. Thus, pursuant to paragraph 2 of the Section “Final Provisions”, this Law applies to the existing legal relations, i.e. the relations which had been established prior to its entry into force and which continue to exist after it became effective, except for Article 36(4) of the Law.  Therefore, it can be stated that the Law was adopted mainly to secure consistent and uniform application of the case law regulating areas of concern effecting creditors, debtors and sureties.

Thus, the said Law amended Article 36 of the Law of Ukraine On Mortgage, made more specific the conditions and mechanisms of extrajudicial mortgage foreclosure.

Thus, Article 36 as amended by Law No. 2478 has been changed and supplemented, inter alia, with the following parts:

“Upon completion of an out-of-court settlement, any subsequent claims of a mortgagee regarding fulfilment of the principal obligation:

by an individual debtor is invalid unless otherwise provided by a mortgage agreement or a loan agreement, or an agreement for satisfaction of claims of the mortgagee;

by a debtor constituting a legal entity or an individual entrepreneur is valid unless otherwise provided by a mortgage agreement or a loan agreement, or an agreement for satisfaction of claims of the mortgagee.

If the mortgagee claims are secured by several mortgaged property items (including under several mortgage agreements) and the foreclosure is made at the expense of a separate mortgaged property item, the mortgagee may claim (including through an out-of-court settlement) that the debtor and/or the mortgagor fulfil their obligation in the part which remained outstanding after completion of the out-of-court settlement under such a separate mortgaged property item.

The out-of-court settlement is deemed completed after the state registration of titles to all mortgaged property items securing the principal obligation:

– in the name of a mortgagee (if the mortgaged property item is foreclosed in favour of the mortgagee);

– in the name of a buyer (if the mortgaged property item is foreclosed through the sale thereof by the mortgagee to the third party).”

Earlier, the creditor which forecloses the mortgaged property without a trial could not file any subsequent claims to the debtor (even the total amount of debt substantially exceeds the value of the mortgaged property). However, the current situation has changed. Law No. 2478-VIII allows the creditor to claim the repayment of debt in the amount remaining after the extrajudicial mortgage foreclosure unless otherwise provided by the mortgage agreement.  However, the said provision does not automatically apply to individual debtors. For being applicable, this provision must be explicitly stated in the respective mortgage agreement. It is worth noting that the majority of practicing banking lawyers believe that the said amendments are one of the most important ones out of those introduced by Law No. 2478-VIII.

Therefore, according to lawmakers, due to elimination of gaps in the laws establishing the procedure for and the mechanism of the out-of-court foreclosure on mortgages property items and application of the provisions to the relations established prior to the adoption of the Law, the mortgagees will apply the extrajudicial mortgage foreclosure more often. That is very important for the effective protection of rights of the mortgagees, given that the extrajudicial method is more cost-efficient and less time-consuming way of mortgage foreclosing as compared to the judicial one.


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    Tkachuk Oleksandr


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