Kseniia Prokhur, Deputy Chairman of the Ukrainian Bar Association’s Committee on Procedural Law, Counsel at Baker McKenzie, analyzed the current situation with the impossibility of enforcing court decisions formulated in foreign currency in Ukraine and made an overview of possible ways to solve this problem in a column for JURLIGA.

What are the consequences for creditors?

From February 24, 2022, it remains impossible to enforce court decisions formulated in foreign currency in Ukraine. It is about decisions of national courts on the merits of the dispute, as well as decisions of foreign courts and international arbitrations, which are enforced in Ukraine.

So, for example, foreign creditors who have foreign currency accounts abroad cannot obtain the execution of decisions in their favor in Ukraine.

This situation is due to the current restrictions on the purchase and transfer of foreign currency, which make it impossible to carry out operations on the purchase of currency and its transfer abroad, including for the purposes of executing court decisions.

It is obvious that the relevant restrictions were introduced by the regulator to prevent risks in connection with a full-scale invasion of the aggressor state. At the same time, taking into account the negative consequences for creditors, a certain balance must be ensured between averting potential risks and ensuring the rights of creditors under court decisions.

Is it possible to achieve such a balance in the current conditions?

The essence of restrictions

From the moment NBU Resolution No. 18 of February 24, 2022 "On the operation of the banking system during the introduction of martial law" entered into force and until now, executive service bodies and private executors have not been able to apply for orders to purchase foreign currency for the execution of court decisions in foreign currency , as well as to initiate the transfer of such currency abroad to the bank accounts of non-resident creditors.

Thus, due to existing restrictions, enforcement bodies are unable to perform:

• decisions of national courts on recovery of funds in foreign currency (for example, under credit agreements) in favor of both residents and non-residents;
• decisions of foreign courts and international commercial arbitrations on recovery of funds from residents of Ukraine in favor of non-residents that are recognized in Ukraine.

Accordingly, during the implementation of executive proceedings for the following decisions, taking into account relevant regulatory acts:

• in the event that funds in national currency are found on the debtor's account, the enforcement body has no opportunity to initiate the purchase of currency at the expense of such funds in order to charge it to its account for further transfer to the creditor;
• in the event that foreign currency funds are found on the debtor's account, the enforcement body, even after withdrawing such funds to its own currency account, cannot transfer them to the creditor's currency account outside of Ukraine;
• in case of identification of the debtor's property and its forced sale, the enforcement body is again unable to initiate the purchase of foreign currency at the expense of the funds received from the sale and transfer the funds in foreign currency to the foreign currency account of the creditor outside of Ukraine.

In fact, the only effective scenario for the execution of judgments in foreign currency is when the judgment is executed in favor of the creditor who has a foreign currency account in Ukraine and — most importantly — the debtor's account(s) have funds in the relevant currency and in sufficient quantity. In that case, such funds may be recovered by the enforcement body and transferred to the creditor's bank account in a Ukrainian bank. However, such cases are rather pleasant exceptions to the general rule.

The consequences for creditors

It is obvious that the existing situation violates the rights of creditors regarding the execution of court decisions rendered in their favor in Ukraine; it does not meet the expectations of creditors, which they could be guided by, including by initiating court or arbitration proceedings even before the introduction of the specified restrictions.

So, for example, until February 2022, a foreign creditor, initiating arbitration proceedings abroad or in Ukraine against a debtor who is a resident of Ukraine, quite reasonably counted on the possibility of enforcing such a decision in Ukraine at the expense of the debtor's property. Therefore, the decision to initiate an arbitration process, including from the point of view of the cost of such a process in relation to the future prospects of collection, was obviously taken by the creditor taking into account the possibility to enforce the relevant decisions by court order declared in Ukraine.

However, in the conditions of current restrictions, the creditor already at the stage of execution of the decision is faced with the actual impossibility of such execution, which is caused not by the lack of funds/property of the debtor (a risk that the creditor should certainly have taken into account), but by the establishment of appropriate restrictions by the state of the place of execution. Did the creditor have the opportunity to take into account the risk of such circumstances while initiating the arbitration process? Unlikely.

It is important that the state's guarantees regarding the mandatory execution of court decisions continue to "work", but, unfortunately, currently only in a declarative form.

Accordingly, the Ukrainian state's obligations to ensure the enforcement of foreign court decisions and decisions of international commercial arbitrations in the jurisdiction of Ukraine are now equally declarative. Ukraine undertook such obligations in accordance with the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the recently ratified Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters.

As a result, the current currency restrictions not only violate the rights of creditors and the obligations of the state, but also:

• put foreign creditors who don’t have foreign currency accounts in Ukraine in an unequal position relative to Ukrainian creditors with foreign currency accounts in Ukrainian banks, as well as
• give an unjustified advantage to debtors on court decisions formulated in foreign currency, in particular by de facto delaying the execution of decisions against such debtors outside of the statutory procedure for granting adjournment.

Alternative ways

The search for possible options for getting out of the situation (except, of course, easing of the relevant restrictions by the regulator) suggests such options as: (1) changing the currency of the execution of the decision through changing the method/order of execution, (2) ceding the right of claim and replacing the party of the enforcement proceedings (for example, from a foreign creditor to a resident creditor).

In addition to the fact that both ways require the initiation of separate legal proceedings (which is by no means interesting for the creditor under the current court decision), none of the mentioned ways guarantees the execution of the decision as a result.

In the conditions of the existing practice of the Grand Chamber of the Supreme Court of Ukraine, which provides that decisions must be executed in the currency specified by the court in the operative part of the decision, and in the absence of positive practice regarding changing the currency of execution in connection with currency restrictions, the chances of changing the currency by the court through the procedure of changing the way/order of decisions’ execution are not high.

For its part, the replacement of the party at the stage of execution, although it may seem attractive to a foreign creditor who is ceding the right of claim, may put a new resident creditor in a similar situation with the impossibility of purchasing currency by the enforcement body for the execution of the decision. Thus, the prospects of a successful assignment of the right of claim in favor of the resident are also quite illusory. In fact, the only effective option, as stated above, in this context may be to identify sufficient funds in the relevant currency on the debtor's accounts and transfer them to the new resident creditor.

In any case, it is clear that a creditor who has gone through a long and thorny path to obtain a decision in his favor (such as in national courts or in arbitration/foreign courts, and then also in national courts to recognize the decision in Ukraine) finds himself in a situation where he is forced to take additional actions, spend an additional significant resource, in order to achieve the result (implementation of the decision) he was counting on, guided by valid guarantees from the state.

Alternatively, the creditor can, of course, wait with the execution of the decision until the relevant restrictions are lifted, but that, however, will give the debtor an absolute advantage in his ability to dispose of funds/property to avoid enforcement of the relevant decision in the future. In addition, one should take into account the limitation of the term of submission of the decision for execution, after which the creditor will again be forced to take additional actions and bear additional costs to extend such a term.

How to be?

At first glance, the answer to the question is simple — to allow the acquisition and transfer of foreign currency by enforcement bodies for the purpose of executing court decisions, except for decisions in favor of residents of Russia. However, of course, not everything is so simple.

On the one hand, the solution to the specified situation can seem to lie in the area of limiting the circle of subjects in whose favor decisions can be executed: removing restrictions on the execution of court decisions in favor of those creditors who are not related to Russia, the founders/participants of which are not subject to the restrictions applied by Ukraine and foreign partner countries, etc. At the same time, the question of who exactly and how should establish the existence of a "connection" with Russia and, accordingly, the possibility/impossibility of purchasing foreign currency for the execution of the decision, remains open.

In addition, it is obvious that such an actual ban on the execution of the decision in favor of a certain category of subjects (Russia-related creditors) must be determined by law, including it must be consistent with the provisions of international treaties, according to which Ukraine guarantees implementation of decisions without exceptions based on the criterion of "connection with the aggressor state".

On the other hand, the imposition of the relevant restrictions certainly had an economic reason, which, in the conditions of martial law, must certainly be taken into account when assessing the possibility of establishing certain exceptions to the general rule prohibiting the purchase and transfer of foreign currency, regardless of the principles of binding court decisions and international obligations of Ukraine in this part.

Thus, the way out of the current situation obviously lies in the development of criteria for the application/non-application of currency restrictions in the procedure for the execution of court decisions in foreign currency. Such criteria and the mechanism of their application should be developed, first of all, by the National Bank of Ukraine in cooperation with the Ministry of Justice of Ukraine with the involvement of representatives of enforcement bodies and legal practitioners. The specified criteria and the prohibition/restriction on the execution of decisions in favor of certain debtors should be properly reflected at the regulatory level, since at this time the normative acts in the field of decision execution and international treaties don’t reflect the current position of the state in this part.

Taking actions by the state in the direction of solving the mentioned problems should also be a signal for the international community, foreign creditors, in particular, to add confidence regarding the prospects of cooperation with Ukrainian business, which is not least due to the possibility of obtaining the execution of court decisions and decisions of international commercial arbitration against Ukrainian debtors in Ukraine.