Ukraine Abolishes Penalties for Non-Payment of Loans During Quarantine
The Law “On Amendments to the Commercial Code of Ukraine and the Civil Code of Ukraine Concerning the Prevention of Penalty Sanctions on Credits (Loans) During the Quarantine Period Established to Prevent the Spread of Coronavirus (COVID-19) in Ukraine” came into force in Ukraine on July 1, 2020.
Law No. 691-IX (hereafter referred to as the “Law”) amends the transitional provisions of the Civil and Commercial Code, in particular the application of Art. 549 of the Civil Code (“The concept of penalties”) and Art. 230 of the Commercial Code (“Punitive sanctions”).
The law stipulates that if, during the quarantine period or within 30 days of its official end, a borrower delays the fulfillment of monetary obligations under the loan agreement (for example, failure to meet a payment which is due), the borrower is relieved of the obligation to pay any penalties or fines for such a delay.
The quarantine in Ukraine was introduced on March 12, 2020 and recently extended until July 31, 2020. Borrowers are therefore exempted from paying penalties for failing to make payments under the loan agreement for the entire specified period and for up to 30 days after its completion (until August 30, 2020 inclusive).
However, borrowers and creditors should take into account the following factors:
- The wording of the Law allows for some ambiguity of interpretation. Exemption from the obligation to “pay” penalties can be interpreted to mean that this exemption does not prohibit the accrual of the penalty with the subsequent obligation to pay it after the end of the quarantine. This interpretation contradicts the legislator’s publicly stated intention to fully relieve the debtor from penalties and may be the subject of controversy in the event of litigation. To reduce the risks, we recommend making appropriate changes to the text of your loan agreement to make the relief exact and clear and therefore remove the possibility of different interpretation.
- The law does not cancel the accrual of ordinary interest under the agreement. At the same time, the National Bank of Ukraine has previously recommended that banks restructure loans to borrowers whose businesses have suffered due to the introduction of quarantine measures. We therefore encourage borrowers to use this recommendation and discuss with their creditor, even if it is not a bank, the possibility of restructuring the loan, and in particular extending the repayment period and/or cancelling interest for the quarantine period or until the resumption of full business activities.
- The law does not abolish the obligation of the borrower to pay compensations for late payments in the form of inflation index loss compensation and an additional three percent per annum under Art. 625 of the Civil Code of Ukraine. We suggest discussing this provision separately with the creditor/lender.
- In cases where the loan agreement is regulated by foreign law, for example English law, the new law should not be applied, since it introduces amendments only to the civil and commercial legislation of Ukraine and is, therefore, applicable for loans governed by Ukrainian law. At the same time, one cannot rule out the possibility that some Ukrainian borrowers will attempt to apply the new law to avoid paying penalties under the agreement. In this case, we recommend that the creditor contacts Ukrainian lawyers to prepare an appropriate response.
If you have any questions regarding the application of the new law, please contact Taras Tertychnyi, Associate Partner, by email email@example.com or by phone +380 44 277 2447.
The new law is the latest move by the Ukrainian government to help borrowers and other businesses that have suffered from the introduction of quarantine measures. We have previously reported on government measures such as:
- Important changes for business and the broader population amid Ukrainian state actions aimed at stopping transmission and preventing the spread of Coronavirus (COVID-19) – read more at >>>
- Further changes to tax laws to provide economic safeguards due to the spread of Coronavirus (COVID-19) – read more at >>> (in Ukrainian only)
- СOVID-19 and business: how to avoid bankruptcy during quarantine and what can be learned from other countries’ practices? – read more at >>> (in Ukrainian only)
- Emergency Amendments to the Labour Law – read more at >>>
- Applicability of force majeure during the quarantine and wider fight against the spread of Coronavirus (COVID-19) – read more at >>>