The lender’s rights “live” for three years?
Сolumn by Natalia Taraba, advisor to the director of the Department for work with special assets of “Investohills Vesta” FC LLC, Ph. D. in law for AFI.
Against the background of the changes that are expected with the adoption of the new law on financial services and financial companies, and almost every month the regulatory acts of the regulator are implemented, it is not surprising that the financial market sometimes does not show a strong reaction in response to targeted legislative initiatives. However, some of them pose fundamental threats.
Thus, serious changes are expected for all financial institutions that have problem debt, or are working on its recovery, in the event of the adoption of the draft law of Ukraine “on amendments to certain legislative acts of Ukraine concerning the termination of mortgages after the statute of limitations expires”, registered on 02.09.2021 under the number 5883 (hereinafter referred to as Draft 5883).
Draft law 5883 provides that with the expiration of the statute of limitations for the relevant obligation (the total term of which is 3 years in Ukraine):
* the mortgage is automatically terminated;
* the creditor loses the right to out-of-court methods of protection, including foreclosure on pledged property, crediting counterclaims, retention, etc.
It seems necessary to raise the following objections to such a legislative initiative.
First of all, the legislator’s interference in the sphere of contractual relations between the debtor and the creditor is obvious in violation of the constitutional principle of equality of participants in legal relations.
The creditor and debtor under the main obligation, guided by the principle of freedom of contract, independently choose one or another type of security for the performance of obligations. Termination of security in accordance with the requirements of the law without any compensation and guarantee of the creditor’s rights creates an imbalance in legal relations, providing advantages to the debtor only on the grounds that the statute of limitations for the creditor has expired.
In addition, in this way, the creditor is deprived of the rights provided for by the norms of Articles 19 and 20 of the Civil Code of Ukraine, according to which everyone has the right to self-defense of their civil right, the exercise of such a right at their own discretion, the existence of a civil right, regardless of whether the person performs its protection.
Secondly, although the legislator in draft 5883 did not explicitly indicate the repayment of the debtor’s obligation due to the expiration of the statute of limitations, however, the deprivation of the creditor’s right to use any out-of-court means of securing the performance of the obligation is rendered nothing more than a de facto termination of the debtor’s obligations.
Attempts by debtors to recognize their obligations and means of securing them as terminated due to the expiration of the statute of limitations are well known in judicial practice. Thus, refusing to satisfy the claim for recognition of the mortgage terminated, the Supreme Court in its decision of 18.07.2018 in case No. 537/6072/16 noted the following:
“Within the meaning of Article 267 of the Civil Code of Ukraine, the expiration of the statute of limitations in itself does not terminate the subjective right of the creditor, which consists in the possibility of obtaining from the debtor the performance of the obligation both in court and without the use of judicial coercion. In particular, the court has no right to apply the statute of limitations except at the request of the parties, and without such a statement can satisfy the claim after the statute of limitations has expired (part three of Article 267 of the Civil Code of Ukraine). In case of omission of the statute of limitations and the existence of a party’s application for its application, the court may recognize the reasons for omission as valid and decide to satisfy the claim (part five of Article 267 of the Civil Code of Ukraine). In addition, even after the statute of limitations has expired, the debtor can voluntarily perform the obligation and the law recognizes such performance as lawful, carried out if there is a sufficient legal basis (part one of Article 267 of the Civil Code of Ukraine), establishing for a person who has fulfilled the obligation after the statute of limitations has expired, a ban on demanding the return of what was performed.
Consequently, the Civil Code of Ukraine does not recognize the expired statute of limitations as a separate basis for termination of the obligation. The debtor’s performance of an obligation after the statute of limitations expires is allowed and is recognized as having a sufficient legal basis. Omission of the statute of limitations also does not give rise to the right of the debtor to demand termination of the obligation unilaterally (part two of Article 598 of the Civil Code of Ukraine), if such a right is not established by contract or law separately.
Thus, as a general rule of the Civil Code of Ukraine, with the expiration of the statute of limitations, even if there is a court decision to reject the claim on the grounds of omission of the statute of limitations, the obligation does not stop.”
Consequently, in accordance with the legislation and judicial practice, due to the expiration of the statute of limitations, the debtor is not released from performing his duty, but the possibility of forcing the debtor to perform such performance on the basis of a court decision is lost. It should be noted that in Germany, the Netherlands, Greece, Estonia and other Central European countries, the obligation due to the expiration of the statute of limitations also continues to exist, although the defendant is granted the right to refuse to perform.
If the obligation continues to exist, then there are no grounds for termination of the contractual security of such an obligation, as well as there is no logical connection between the creditor’s right to implement out-of-court protection mechanisms and the fact of its application to the court.
Third, an artificial link between the statute of limitations and the duration of enforcement of obligations will create more court cases than solve problems.
Thus, draft 5883 does not provide for the procedure and subject in which the fact of the expiration of the statute of limitations for the creditor will be established, whether the norms of articles 263 and 264 of the Civil Code of Ukraine will be applied, which sets out the rules for stopping and interrupting the statute of limitations, how valid reasons for missing the statute of limitations will be taken into account, and so on.
Also, draft 5883 does not contain transitional provisions that allow us to clearly determine the fate of obligations whose statute of limitations began or ended before its adoption.
With the adoption of draft 5883, unscrupulous debtors can get unlimited opportunities for abuse of their rights, and will be able to alienate property without repayment of loans, even knowing for certain that the creditor (mortgagee) had valid reasons for late application to the court, such as:
* validity of the statutory moratorium on satisfaction of the creditor’s claims,
* leaving without consideration a claim filed in compliance with deadlines, etc. (see, for example, the decision of the Grand Chamber of the Supreme Court of 29.06.2021 in case No. 904/3405/19)
* recognition of the bank as insolvent (the statute of limitations for obligations realized by the Deposit Guarantee Fund during the liquidation of banks is usually expired).
Finally, such an initiative will ultimately harm the interests of the debtors themselves. The creditor, under the threat of inability to exercise its rights in any other way, will be forced to apply to the court in all cases of non-fulfillment of obligations by the debtor, forcibly sell the debtor’s property, and refuse to grant a postponement of the performance of obligations.
In our opinion, financial market participants should join the active discussion of project 5883 and make changes to it that will protect the rights of the lender.