Crux (#3 March 2018)

Legal Digest

Over the last few months the public authorities have taken a number of important decisions and nominated many legislative initiatives. In this issue, the UJBL editorial team has enlisted the help of experts to comment on the latest changes and the large number of proposed drafts. Our latest digest includes, to a large extent, initiatives and already adopted laws that touch upon companies with limited and additional liability, auditing activities, energy market, strategy for reforming state supervision, aviation practice and more.

The Verkhovna Rada of Ukraine adopted the Draft Law No. 4666 On Companies with Limited and Additional Liability in the second reading. What key changes would you point out? How will adoption of this law affect the attraction of foreign investment?

Sergii Korniienko, Partner, Antika Law Firm

More than half a million companies are registered in Ukraine today in the form of a limited liability company. However, the activities of such companies are regulated fragmentarily by different regulatory acts, with the main ones being the Civil Code of Ukraine, the Commercial Code of Ukraine and the Law of Ukraine On Business Entities. The only law that governs the activity of limited liability companies in a comprehensive and systematic way has not existed in the legislation of Ukraine until now. That is why the adoption of the Law of Ukraine On Companies with Limited and Additional Liability should be considered as a significant step towards comprehensive regulation of the activities of companies in the form of a limited liability company.

The Law of Ukraine On Companies with Limited and Additional Liability introduces a number of innovations and changes to corporate law governing the activities of these companies. Among the innovations and key changes we can distinguish the introduction of the Institute of corporate agreements with the possibility of issuing an irrevocable power of attorney on corporate rights management, resolving issues related to the exclusion of a participant from the participants list of the company, the possibility of establishing a supervisory board in a limited liability company to monitor the activities of the executive body, settlement at the legislative level of the issue of the conclusion of significant transactions and interested party transactions, solving the issue of converting debt into capital, etc.

Compared to the current legislation governing the activities of limited liability companies, the law significantly simplifies the procedure for the creation and State registration of companies in the form of a limited liability company, also abolishing the quantitative restriction of the participants of the company and the necessity to state all the participants of a limited liability company in the charter.

All changes and innovations of corporate legislation are aimed, prima facie, at improving existing and creating new mechanisms for the implementation and protection of the rights and legitimate interests of participants of limited liability companies, providing them with effective mechanisms for preventing and resolving corporate conflicts. That is why the Ukrainian legal community, as well as business, expects that the introduction of these changes will be a prerequisite for improving the investment business climate and should, in general terms, facilitate the attraction of foreign direct investment into Ukraine.

On 7 February the Law No.2258-VIII On Audit of Financial Reporting and Audit Activities was officially published. What effect will this law have on raising the level of credibility in reporting by domestic enterprises, as well as the credibility of banks?

Alina Kucher, Senior Consultant, KPMG Law Ukraine

The Law of Ukraine On Audit of Financial Statements and Auditing Activity (the Audit Law) comes into force on 1 January 2018 and applies, with some exceptions, from 1 October 2018. The law establishes strict requirements of audit firms performing audits of the public interest entities (the PIEs). These requirements relate to the minimum number of qualified personnel, management of audit firms and lead audit partners, internal control procedures, reporting to controlling bodies, etc. The law also specifically prohibits audit firms from performing audit of the PIEs and from performing certain non-audit services such as management consulting, accounting services and some other services (e.g. representation of clients in courts).

The law also raises the standards and requirements of audit firms performing audits of the PIEs (but not exclusively) in relation to internal control procedures, obligatory rotation of the audit firms, maximum terms of services of lead audit partners, limitations on the audit and non-audit fees earned by audit firms, professional insurance of audit firms, etc. Special sections of the law are devoted to the responsibility of audit firms (including financial sanctions), establishing and functioning of bodies controlling the activity of audit firms.

In general, the law appears to be a very positive change in Ukraine. Among many positive things, the law can raise trust towards banks and financial institutions.
The financial statements audited in line with the strict requirements of the Law (and monitored by the new controlling authorities) should give much more comfort for people in order for them to understand the financial health of the banks and make conscious decisions regarding placing the funds with the banks. This is especially important today, when the financial knowledge possessed by most people is far from the level which enables them to fully understand the financial position of the banks.

Draft Law No.7348 On Amending Certain Legislative Acts of Ukraine Regarding Development of Production of Liquid Fuel from Biomass and Implementation of Criteria for the Stability of Liquid Fuel from Biomass and Biogas Designed for Use in Transport was registered with Parliament. How can adoption of this Draft affect domestic producers and the market of bioethanol and biodiesel?

Viktoriia Pysmenna, Associate, Kinstellar

With the implementation of the EUs Third Energy Package, sustainability has become one of the three pillars of the Ukrainian energy market. Sustainability implies energy efficiency and increasing the share of renewable energy. Thus, introduction of Draft Law No.7348 is seen as a logical step towards a more environmentally friendly future.

However, the Draft Law provides only the centrepiece to the regulations on biofuel production in Ukraine, and there are approximately a dozen by-laws that should be passed within six months following the Draft Laws coming into force. Imposing mandatory biodiesel blends from 1 January 2019 can be seen as opening the market by introducing a stick to fuel importers or producers, but no carrot for potential investors is currently envisaged, unless the market opportunity itself is a carrot.

On the positive side, the Draft Law sets requirements for sustainability and provides for a flexible system of proving the sustainability of biofuels, either by a national agency or independent auditor, if the latter is included on the list approved by the Government. By minimising the involvement of the state and allowing producers to choose from among auditors, projects for the production of biofuels can be expected to be more predictable for potential investors.

In the context of changes to the Tax Code aimed at the temporary suspension of VAT refunds for export of rapeseed and soybeans, the Draft Law is able to bring the production of biodiesel to the agenda of oilseed production companies. However, as long as the suspension of VAT refund is limited in time and biodiesel producers are largely dependent on long-term biomass supply contracts, smaller players may have to reconsider their capacity to maintain contracts in the future.

Overall, although many predict that the Draft Law will have a stimulating effect on the producers of bioethanol, the forecast for the production of biodiesel in Ukraine is less clear. The date of the Draft Laws coming into force, the quality of the by-laws passed and support schemes, if any, will all influence decisions on whether or not to invest in biofuel production Ukraine.

The National Securities and Stock Market Commission by its Decision No.904 of 19 December 2017 approved the procedure for supervision over registration of shareholders, holding a general meeting, voting and summing up its results at general meetings of joint-stock companies. What changes should shareholders expect?

Mykola Voitovych, Attorney, Gramatskiy & Partners

The new Procedure benefits the business environment as it mitigates the regulatory pressure of the Commission on the process of a general meeting of shareholders (GMS). The most important achievement of the Procedure is the transition from a punitive approach to a preventive one. With the new Procedure, if at any stage of GMS some violations are detected, the Commission will not bring to responsibility but, as a preventive measure, will send a report to the company with the description of the results of provided supervision and discovered violations. Such a measure must prevent a company or any other participant of GMS from future wrongdoings. Unlike the previous form of report, the new one does not even need to be signed by company officials. Ultimately, the Commission was deprived of the authority to prosecute and to penalize a GMS procedure breaker, which constituted a huge corruption risk.

It is also important that, in contrast to the previous version, failure to provide documents upon a request by the Commissions representatives is no longer grounds for an extraordinary inspection. It was another major field for abuse of power where Commission representatives required an amplified amount of documents and explanations in order to gain the ground for an extraordinary inspection that covered a wider range of company activities in the respective area.

As in the past, the Commissions supervision is not an obligatory procedure for every GMS and is the Commissions right. At the same time, shareholders or company officials may no longer initiate the procedure of the Commissions supervision. Such initiation has become the sole discretion of the Commission. The new Procedure also specifies in more detail the process of designating the Commissions representatives who will be more prepared for supervision actions, as they will have to analyze lots of information about GMS and a targeted company in particular.

At the initiative of the Ministry of Economic Development and Trade, on 7 February the Cabinet of Ministers of Ukraine decided to establish the Export Credit Agency and approved its constituent documents. How will creation of this agency influence support for Ukrainian exporters?

Olena Omelchenko, Head of International Trade Practice, Ilyashev and Partners

The Law On Ensuring Large-Scale Expansion of the Export of Goods (Works, Services) of Ukrainian Origin through Insurance, Guarantees and Cheaper Export Credits has granted authority to Ukraines Government to set up the Export Credit Agency (ECA). The Agency will insure and reinsure exports on a voluntary basis, and secure contracts aimed at facilitating export. In addition, the ECA will participate in implementing the program for reimbursement of a certain percentage of the interest on export credits.

The ECA will operate as a joint stock company and its founder and shareholder holding at least 50% plus one share is the Government, i.e. the Cabinet of Ministers of Ukraine. Equity interest in ECA held by the Government will be managed by the Ministry of Economic Development and Trade. The private placement of ECAs shares consisted of 200,000 units. Certainly, these financial instruments will not be enough to provide support to all Ukrainian exporters who are interested in it, therefore the challenge for the Government will be to seek additional funding.

Today, such institutions operate successfully in over 100 countries. The ECA belongs to legitimate forms of export support and is not a violation of WTO rules. However, Ukraine should intensify organizational efforts on accession to the OECD framework convention in order to prevent anti-subsidiary investigations.

The ECA will be tasked primarily with insurance of foreign economic agreements, export credits and direct investments from Ukraine, provision of guarantees and partial reimbursement of export credits. The Agency will mainly support manufacture of aircraft, machinery and professional equipment, shipbuilding, garment and pharmaceutical industries, food and furniture industries, and IT sector. However, for some reasons the Law does not cover certain classes under the Ukrainian Classification of Commodities in Foreign Trade, including such value-added products as caramel and chocolate.

Establishment of the ECA will encourage exports of high-technology products as well as all required components and replacement parts for it. Consequently, the Agency will help ensure a transition from commodity exports to value-added exports in the above industries.

The ECA will undoubtedly spur exports, promote Ukraines economic growth and play a crucial role in building the trust and confidence of foreign businesses and investors in Ukrainian companies.

The Cabinet of Ministers by its Regulation No.1020-r approved the Strategy for Reforming State Supervision (control). How will the adoption of this strategy influence the balance of the interests of protection of economic entities and the state?

Veronika Zbryzka, Attorney, Associate, ADER HABER

It is no secret that almost every inspection reveals some violations. Such disappointing statistics of inspections illustrate that the purpose of inspection is to punish and to fine rather than to prevent the violation.

Currently the activities of the state supervision (control) authorities have a punitive vector. Meanwhile, such activities are not assessed on their effectiveness. Moreover, the credentials of such state authorities are often duplicated, which causes additional burden on Ukrainian business.

In this regard, on 18 December 2017 the Cabinet of Ministers of Ukraine approved the Strategy for Reforming the State Supervision (Control), developed by the Ministry of Economic Development and Trade of Ukraine (hereinafter the Strategy).

The main idea of the Strategy is to transform the supervision and control system into a risk management one. The Strategy stipulates the implementation of a risk-oriented approach. In particular, such approach involves the creation of list of requirements for each type of business, an assessment of the importance of each requirement and the creation of a positive incentive to comply with these requirements. That means that the state supervision (control) authorities will inspect only the most important requirements from the created list. Afterwards the results of conducted inspections enable evaluation of the effectiveness of the state authorities.

Summing up, successful implementation of the Strategy will provide certain benefits for companies. First of all, the companies will clearly understand what requirements they need to comply with not to be fined. Secondly, companies will be aware of the essence of the requirements and the reason for their existence. Thirdly, companies will gain a competitive advantage over those that do not meet the requirements. As a result, the number of violations and inspections will be reduced along with pressure on Ukrainian business.

Consequently, the Strategy is based on business-oriented goals, though only time will tell whether all the planned measures will bring benefits for Ukrainian business and encourage the arrival of new foreign companies to the local market.

Draft Laws No. 8030, 8032 and 8031 On Amendments to the Civil, Economic Procedural Codes and to the Code of Administrative Procedure respectively were registered with Parliament.
These drafts stipulate introduction of the institute of request for a preliminary ruling. How can implementation of this mechanism influence judicial practice?

Olena Pertsova, Attorney-at-law, Head of Dispute Resolution Practice, Pavlenko Legal Group

The idea of implementing a legislative innovation on the collateral estoppel request was discussed at the stage of preparation of new editions of procedural codes. Nevertheless, at that time the working group came to the conclusion that Ukraine was not yet ready for such an innovation.

Drafts No. 8030-8032 propose returning to this idea again. It is assumed that the courts of the first and appellate instances will be able to take decisions on appealing to the Supreme Court regarding the application of a particular rule of law. The main condition for such a request is the existence of a different practice of the courts of cassation on the application of the same provision of the law.

In my opinion, the legislative innovation is extremely controversial.

On the one hand, the collateral estoppel request will really help the courts in cases when the parties of the case will refer to different practice of the cassation courts on the same issue. For the parties of the case, in turn, the ruling of the Supreme Court in collateral estoppel court proceedings will be the actual marker that foreshadows the outcome of the case.

On the other hand, such requests have a number of obvious drawbacks.

Firstly, with the slightest unwillingness of the courts to hear cases, the latter will claim to the Grand Chamber of the Supreme Court. The Grand Chamber, however, as it is already clear, is catastrophically overloaded with old and exemplary cases requiring consideration, and the number of such cases will only increase.

Secondly, in modern Ukrainian realities, collateral estoppel requests will be used as a tool for delaying the consideration of cases, because according to the draft legislation, the entire procedure should not take more than two months. Moreover, if the Grand Chamber does not consider the request within 60 days, the lower court will still be obliged to reopen proceedings without waiting for the opinion of the Supreme Court.

Thus, even with all the advantages of a collateral estoppel request, this legislative innovation looks premature.
In my opinion, it will be reasonable to return to it in one and a half or two years, when the workload of the Grand Chamber of the Supreme Court will enable such requests to be considered promptly.

The Committee on Legislative Support of Law Enforcement decided to recommend the Verkhovna Rada to adopt in the first reading Draft Law No. 7451 On Amending the Criminal Code Regarding Additional Measures to Protect the Security of Citizens and Employees of Law-Enforcement Agencies. How do you assess this initiative?

Opanas Karlin, Partner, ESQUIRES

The Draft Law provides amendments to Article 36, Paragraph 5, Necessary Defense of the Criminal Code of Ukraine, by extending the list of cases in which the actions of the person shall not be considered as exceeding the limits of necessary defense.

Pursuant to the amendments, the use of weapons or any other object for the prevention of an unlawful violent intrusion into a vehicle, regardless of the severity of the harm done to the offender, shall not be considered as exceeding the limits of the necessary defense and will not result criminal liability. That is, the norm is supplemented by another object of the persons possession, any protection of which is covered by the necessary defense, namely, a vehicle.

In other areas of law, the vehicle has already been the subject of private property, and it is subject to protection at the same level.

The reason for this step is the significant increase in the number of crimes against property. I would also add the insufficiencies of law-enforcement agencies. The above-mentioned increases the role of the individual, an ordinary citizen, in his/her self-defense of property. So, the state tries to expand the limits of the legitimacy of such self-defense.

If the relevant changes are adopted, I would advise not to attempt to penetrate another person's vehicle, regardless of the purpose and the method, since the damage that may be caused by the vehicle owner, may be inadequately grave and not necessarily consistent with the danger of an encroachment or security situation.

It is also proposed to add Part 2 to Article 348 of the Criminal Code of Ukraine "Attack on the life of a law enforcement officer, a member of a public formation for the protection of public order and a state border or a serviceman", which shall establish a number of qualifying attributes for increasing punishment for crime.

Draft Law No. 7514 On State Specialized Fund for Financing of State Expenses for Aviation Activities and Ukraine's Participation in International Aviation Organizations was registered with Parliament. What is your assessment of this legislative initiative? Should we expect a decrease in the number of litigations in this area?

Maryana Sayenko, Associate, Asters

Although this new draft, on the state fund for financing aviation expenditure, No.7514 (the draft) doesn't introduce any significant changes to the existing legal framework, this initiative generally meets its overall objective of dealing with the serious legal deficiency of the State Aviation Authority
of Ukraine (SAAU) administering aviation charges.

Currently, the list of state charges levied on the passengers' departure on domestic and international flights from Ukraine (State Charges) as well as their rates and collection procedure are set out at the level of CMU Resolution No.819 of 28 September 1993, as restated by CMU Resolution No.182 in 2017. However, such regulatory status of the State Charges directly contradicts the mandatory requirement of Article 92 of the Constitution of Ukraine, which provides that the system of taxation, taxes and levies must be regulated exclusively by the laws of Ukraine.

The existence of the above drawback is often used as a legal ground for challenging the lawfulness of the State Charges in order to avoid paying them to the SAAU. In most cases, claimants are successful in proving the lack of legitimate basis for the State Charges, which results in the adoption of court decisions that are not favorable to the SAAU. The most illustrative examples of such court practice are decisions of the Kiev District Administrative Court in cases Nos. 826/17492/16, 826/810/16 and826/11299/14.

To address this legislative uncertainty, the draft finally establishes a valid legal basis for the State Charges by incorporating respective regulations at the level of a legislative act.

Nevertheless, while making improvements in the fiscal sphere, it seems that legislators missed a moresystemic problem relating to the legal nature of the State Charges being somewhat too rigid for the purposes of the aviation market. According to the detailed market survey "IATA List of Ticket and Airport Taxes and Fees", departure taxes and levies similar to Ukrainian State Charges are rarely found in developed countries. Instead, in countries like the United Kingdom, the departure tax is moreflexible as its rate varies according to the distance travelled and passenger class. Another positive example is our neighbor Turkey, where the departure tax only applies to Turkish citizens and, thus, does not add value to flights taken by foreign tourists.In most other countries, there are no departure taxes at all and the price of a ticket only includes airport service charges.

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