On March 3, 2022 the Ukrainian Parliament passed the Law of Ukraine “On Grounds for Expropriation of Assets of the Russian Federation and its Residents in Ukraine” (the Seizure law), allowing for the seizure of Russia-linked assets in Ukraine.
Our review of that law can be found here.
In addition to the Seizure Law, the Ukrainian Parliament passed amendments to the Law of Ukraine “On sanctions,” allowing seizure of assets not related to the Russian Federation, within sanctions regulatory framework (the Seizure sanction).
While the outcome of asset seizure is basically the same under both the Seizure law and the Seizure sanction (i.e. seizure of assets without compensation), the grounds, procedure and scope of persons to whom the seizure may apply differ.
The Seizure sanction’s regime may be outlined as follows:
- The Seizure sanction may be introduced against persons (individuals and legal entities) who become subject to asset blocking sanction in Ukraine after May 24, 2022 (“Qualified Person(s)”) and only during a period of martial law. In Ukraine martial law was introduced on February 24, 2022 for 30 days and was subsequently extended (so far, until August 23, 2022).
- The grounds for applying the Seizure sanction are broadly drafted and generally cover Qualified Persons’ activities that significantly affect national security, territorial integrity and sovereignty of Ukraine. In particular, the Seizure sanction may be used against Qualified Persons in the following cases:
- The Qualified Person paid taxes to the state budget of the aggressor-state, provided that the total amount of paid taxes for three consecutive tax quarters exceeds the equivalent of UAH 40 million (for legal entities) and UAH 3 million (for individuals); or
- The Qualified Person invested in government bonds of the aggressor-state in an amount exceeding the equivalent of UAH 3 million per year.
- The procedure for applying the Seizure sanction differs from the general one provided by the Law of Ukraine “On sanctions.” The Seizure sanction may be introduced based on a judgement of the High Anti-Corruption Court (HACC), per application of the special governing body responsible for the search and seizure of assets of sanctioned persons. The HACC’s decision in respect of a Seizure sanction may be appealed to the HACC’s Appeal Chamber.
- Any incumbrances (e.g. arrests, pledges, mortgages) imposed on assets subject to the Seizure sanction will not constrain their seizure in favor of Ukraine.
Ukrainian law does not specifically address the consequences when a particular asset subject to seizure constitutes collateral (under financing or otherwise) or if the Qualified Person is a debtor/borrower under the financing. In this regard, we have outlined high-level bullets for creditors to consider in the event their collateral or generally assets of their debtors/borrowers become subject to seizure:
- Ukrainian law does not provide specific rules whether the security survives upon the seizure. Under a general rule, the transfer of ownership title should not affect the validity of the security (e.g. pledge, mortgage). Specific formalities in respect of the title change over the collateral should be complied with. In particular, the records in Ukrainian public registers (the State Register of Encumbrances over Movable Property or the Unified State Register to Property Rights over Immovable Property (as the case may be) may need to be updated.
- Enforcement against state-owned entities and their assets is usually limited by a number of moratoriums provided by Ukrainian law. Depending on the type and scope of moratorium applicable, creditors might not be able to enforce their claims against state-owned enterprises. As a result, creditor rights might be limited in respect of the debt enforcement against the Qualified Person or foreclosed on the collateral after expropriation. The Ministry of Justice of Ukraine has prepared a mapping of the moratoria and regulatory impact assessment (in Ukrainian only), which might be considered by creditors prior to enforcement against state-owned entities.
- While the Law of Ukraine “On sanctions” strictly bans compensation to Qualified Persons for expropriated assets, it is silent on whether such compensation could be claimed by secured lenders due to security’s loss, diminishing the value of the debt (as a case may be). In this regard, general provisions on the investment protection and respective Bilateral Investment Treaties (BIT) to which Ukraine is a party should be considered.
Source: Law of Ukraine “On amendments to some legislative acts of Ukraine to increase the effectiveness of sanctions related to the assets of individuals” dated May 12, 2022 No. 2257-IX.