Crux (#7-8 July-August 2020)

Legal Digest

During the past month the UJBL editorial team monitored the most significant changes in legislature, as well as new prospective initiatives. Among the most attention-worthy ones are the draft laws On Meditation, On the Institution of the Business Ombudsman in Ukraine and On Joint-Stock Companies. New laws and drafts related to the electricity market should also be highlighted. We asked experts to provide their points of view on the mentioned and following matters.

Draft Law On Mediation No. 3504 and its alternative, No. 3504-1, were registered in Parliament. What are their main provisions, and what are the main differences between them?

Dr. Svetlana Kheda,
Certified Mediator,
Counsel, Sayenko Kharenko

It seems that for many years Ukraines Draft Law On Mediation has not been able to escape Samsara. This is an odd situation when the main and alternative drafts of the Law On Mediation walk in pairs, provoking heated, lengthy debates in the professional community but never becoming the Law On Mediation. In May and June 2020, the wheel of Samsara made a new turn, presenting Ukraine with yet another set of mediation law drafts, namely the main Draft Law No.3504 (submitted by the Cabinet of Ministers) and the alternative No. 3504-1. It remains to be seen whether any of these drafts will finally passed into law by Parliament, thereby starting a new era of mediation development in Ukraine.

Draft Law No. 3504 was developed as a framework law by leading Ukrainian practicing mediators and is well received by local and foreign experts. This document emphasizes the leading role of mediation centers in developing mediation rules and organizing training and certification for mediators, and leaves only the key issues to state regulation. In general, the primary purpose of Draft No. 3504 is to encourage the spread of mediation in Ukraine by declaring this to be a part of state policy. The details should be left for mediation centers to be reflected in their rules and for the parties to a dispute, which would follow global best practices.

Draft Law No. 3504-1 contains a number of controversial provisions and in quite a few places does not fully meet international standards. For instance, contrary to best practices, it proposes to establish the Unified Register of Mediators of Ukraine. Moreover, the definition of a conflict (dispute) suggested by Draft No. 3504-1 seems to limit mediation to controversies arising only out of legal relationships. Curiously, the authors of this Draft neglected such a key principle of mediation as voluntariness. Trying to statutorily preserve the neutrality and independence of a mediator, Draft No. 3504-1 (unlike Draft No. 3504) limits the right of parties to waive the mediators possible real or potential conflict of interest, which may adversely affect labor mediation among other things.

Based on the above, the decision of the Parliamentary Committee on Legal Policy to recommend the Verkhovna Rada to adopt, in principle, Draft No. 3504 in the first reading while including certain well-regarded provisions of Draft No. 3504-1 in the second reading of the text was a welcome one.

The Verkhovna Rada of Ukraine adopted the Draft Law On Cloud Services in the first reading. What are its key provisions and what is the necessity for the development of cloud services in the fields of governance, education, science and others?

Mykyta Polatayko,
Head of IT practice, Aequo

Parliament passed Draft Law No. 2655 On Cloud Services in the first reading. It would introduce the main definitions (IaaS, PaaS, SaaS, SECaaS; public, private, community and hybrid clouds; etc.) and regulate the use of cloud services via the public sector. However, certain clauses would apply to cloud services provided to business entities and consumers (e.g. joint liability of service providers jointly rendering cloud services to customers).

The main idea is to save state budget funds. State bodies, state companies and organizations, local self-governance, as well as any entities with state authority of any kind, (Public Users) may not purchase any software or hardware provided there is a relevant cloud service as an alternative. Public Users will have the right to buy cloud and related services only from qualified providers. However, they would procure services from qualified providers using a simplified procedure (under the Law of Ukraine On Public Procurement). In addition, Draft Law No.2655 sets out detailed material terms of cloud service agreements with Public Users.

Who are qualified providers? The Government will adopt requirements of them, which should be similar to the code of conduct (the EU Regulation On a Framework for the Free Flow of Non-personal Data refers to). The supervising authority (preliminarily, the Digital Transformation Ministry) would qualify cloud service providers based on these requirements and the following:

if the service provider can process state-owned data in compliance with information protection legislation, it will submit documents proving such ability;

PaaS, SaaS, and SECaaS providers shall submit licenses for the software used;

the Government shall adopt additional requirements to qualified cloud service providers, which will depend on the type of services offered;

a qualified provider may use or resell third-party services if such a party is also a qualified provider and provides the relevant consent.

There are two main discussions related to the Draft:

whether Public Users will use cloud services instead of purchased software and hardware or may do so; and

whether or not Public Users are able to use cloud services rendered by foreign providers (including Amazon Web Services, Google Suite, Office 365); unfortunately, there are no Ukrainian alternatives to most foreign SaaS.

On 19 May Draft Law No. 2788-, which proposes to allow state postal provider Ukrposhta to provide banking services, was adopted in the first reading. What are the key pros and cons of the mentioned draft, and might be the results of this for the Ukrainian banking system?

Anna Kalanichenko,
Senior Associate, Kinstellar

Although the idea to allow Ukrposhta to provide banking services is not a new one and the banking community has been discussing it for a couple of years, it was only in May 2020 that the respective Draft Law was submitted to Parliament.

Such initiative has its pros and cons, which are now subject to heated discussion in the banking services market. The main concern related to the new draft law is that the National Bank of Ukraine will not be able to regulate activities and apply bank-specific ratios to the postal operator like it does in relation to other banks, which will lead to additional risks for consumers and give Ukrposhta a competitive advantage over other banks. Moreover, the NBU argues that the national postal operator does not have an effective financial monitoring system, which could have a negative impact on anti-money laundering. The other problem is an increase in the share of the market held by state-owned institutions. After the nationalization of PrivatBank in 2016 the states share in the banking sector has grown to 55%. The NBU, in unison with the Government, planned to decrease it to 25% over the next 5 years and entry of another state-owned company into the banking services market might complicate achievement of this ambitious goal.

On the other hand, it is unfair to pay no attention to the social role of Ukrposhta, especially in villages and small towns, where commercial banks are unwilling to open their branches. In general terms in Ukraine, like all over the world, there has been a tendency over the last few years to close branches and extend online services. Thus, allowing Ukrposhta to perform some banking operations (it is worth noting that Ukrposhta will be able to open accounts, issue payment cards and attract deposits and will not be allowed to provide loans and perform other banking operations) legislators will support the development of a more inclusive financial system and cashless economy in Ukraine which, in its turn, will have a beneficial effect on stronger and more sustainable economic growth.

While different players continue to debate the appropriateness of Ukrposhtas new role on the banking services market, the law-making process has been already initiated and we will see and be able to assess the results of such initiative very soon.

At the beginning of June Draft Law No. 3607, On the Institution of the Business Ombudsman in Ukraine, was registered. What are its main provisions, and what are the arguments for the implementation of such an institution at the juridical level?

Oleksiy Bokhan,
Legal Assistant,
AVER LEX Attorneys at law

Draft Law No. 3607 defines, in accordance with the preamble, the organizational and legal basis for the establishment and operation of the institution of the Business Ombudsman, the principles of its relationship with public authorities, which aim to eliminate, prevent cases of unfair conduct, and creation of effective mechanisms of protection against interference in business.

The Draft proposes to change the status of the institution from an advisory body to a non-governmental non-profit organization; give the right to meetings between the Business Ombudsman with officials of all public entities as a matter of priority; establish the obligation of cooperation with the institution to public entities; to expand the responsibility of officials of public entities for illegal refusal to provide timely information on request, etc.

From the above it can be seen that legislators propose not only to strengthen the role of the Business Ombudsman and his team, but also to reformat the institution into a non-government non-profit organization that has the status of a legal entity and strong legal guarantees.

It should be noted that the Main Scientific-Expert Department does not in its Opinion support the adoption of the draft law, referring to the legal incorrectness of the adoption by Parliament of special laws on certain non-profit organizations.

However, we can mention the Law of Ukraine On Chambers of Commerce and Industry in Ukraine, which regulates the activities of the Ukrainian Chamber of Commerce and Industry as a separate non-government non-profit organization. Therefore, there is a precedent for the legislative method of enshrining similar legal institutions in domestic legislation.

By way of conclusion, we believe that the draft should be finalized taking into consideration the requirements of legal techniques. At the same time, the adoption of the relevant law is an important condition for strengthening the protection of business interests in our country.

Parliament adopted Draft Law No. 2493 On Joint-Stock Companies in its first reading. Key novelties as compared to the currently applicable law

Alesya Pavlynska,
Counsel, Arzinger

Yana Babych,
Associate, Arzinger

On 16 June the Ukrainian Parliament adopted in the first reading the Law of Ukraine On Joint-Stock Companies aiming to update legislation related to joint-stock companies and harmonize rules with EU standards. 

The key novelties of the new Law significantly changing the legal status quo may be illustrated as follows:

— shifting from the mandatory two-tier corporate governance model to the possibility to choose between the well-known two-tier system and one-tier system with a board of directors combining management and supervisory functions and consisting of executive and non-executive directors. It is also worth noting that the new Law enables such option for limited liability companies too;

— development of the fiduciary duties concept (e.g., duty of care and duty of loyalty) and enhancing the level of the corporate officials' liability;

— creating a more efficient shield for minority shareholders, inter alia, via lowering thresholds for derivative claims (5% instead of the current 10%);

— designing more transparent and straightforward rules for the reorganization of joint-stock companies avoiding excessive administrative burden (after the reform just one general shareholders’ meeting will be needed to complete the registration procedure);

— offering a flexible solution for convening and holding the general shareholders’ meeting and implementing the system of electronic voting;

— providing a higher level of protection for title to shares in LLCs through the national depository system, with such option remaining optional.

The working group is currently involved in the fine-tuning of the draft to deliver a solution acceptable and beneficial for all stakeholders. However, we assume that the mentioned conceptual alterations will remain the same.

Of course, the new Law is not a cure-all for existing “corporate” diseases. However, it is one more step towards creating a comfortable business environment and further development of capital markets in Ukraine.

 

The Cabinet of Ministers of Ukraine registered Draft Law No. 3657 On Amendments to the Law of Ukraine on the Electricity Market. What is the goal of this Draft, and how will it influence the overall situation on the electricity market?

Olena Sichkovska,
Associate, Asters

On 15 June 2020, Parliament registered Draft Law No. 3657 On Amendments to the Law of Ukraine On the Electricity Market. On 19 June 2020 Parliament attributed urgent status to this Draft and shortened the terms for preparation of alternative draft laws.

The Draft originated from a list of specific measures developed by the Anti-Crisis Energy Response Team to resolve the issue of financial deficit of the State Enterprise Guaranteed Buyer (GB). The measures are focused on the following:

reaching agreement with investors on voluntary reduction of RES tariffs, increasing the share of bilateral agreements with end users in the sales portfolio of Energoatom and the GB;

abolition of trade restrictions applied by the Regulator and the Cabinet of Ministers exclusively to the GB;

non-tariff measures to finance the assignment of special responsibilities for the supply of electricity to the population and ensuring the production of RES.

According to the Acting Minister of Energy Olga Buslavets, this Draft will, along with other drafts, help to avoid a significant increase in the tariff for electricity transmission of NEC Ukrenergo.

In the event of the drafts adoption, it will have the following impact:

shorter deadlines for tenders on building new generating capacity and implementation of measures to manage demand;

postponement of the tender for determining the universal service provider for one year and extension of the term of the obligation of the existing universal service provider to supply electricity to households and small non-household consumers for another year;

extension of the obligation of the current supplier of last resort to supply electricity for another year;

granting the right to the GB to sell electricity under bilateral agreements at electronic auctions at prices determined according to the results of the auction and setting a maximum price for the sale of electricity for the GB;

temporarily suspend the import of electricity from countries that are not members of the Energy Community;

reduction of the amount of electricity that is subject to mandatory sale on the day-ahead market, which will automatically increase the amount of electricity that will be sold under bilateral agreements at electronic auctions.

The Verkhovna Rada adopted amendments to the Bankruptcy Code of Ukraine, in particular, a moratorium on the bankruptcy of state enterprises (Draft Law No. 2276). What are the arguments for the necessity of such amendments, and what results are anticipated?

Olena Volianska,
Partner, LCF Law Group

The main idea of the Bankruptcy Code of Ukraine was to introduce new mechanisms for the most rapid recovery of unprofitable enterprises or their least painful removal from the market.

However, even before the specialized law came into force, experts had spoken up in favor of amending it. The purpose of such changes was, according to part of the professional community, to eliminate gaps, technical inconsistencies and unbalanced provisions.

Parliament supported the proposed changes in the second reading and final readings of Draft No.2276 On Amendments to the Bankruptcy Code.

The proposed changes were aimed at resolving problem issues that arose during the practical application of the Code. Thus, the changes eliminated the possibility of budget institutions financed exclusively from the state budget filing for bankruptcy. Due to the imperfect wording of the Code, such a possibility existed theoretically. And a court could receive a statement, for example, on the bankruptcy of a court or prosecutors office.

Another problem issue was the impossibility of appointing an insolvency practitioner with the help of the Unified Judicial Information and Telecommunication System before its launch. Thus, in October 2019, by the time when the Code came into force, UJITS was not working properly. And this caused objective inconveniences both for the courts and for the parties of corporate and individual bankruptcies.

This problem was resolved quite successfully. Regarding the bankruptcy of individuals, the debtor was given the right to nominate an insolvency practitioner. In corporate bankruptcy, such appointment is made by the commercial court independently from among those persons listed in the Unified Register of Bankruptcy Trustees of Ukraine, in the order operating before the Code came into force, using an automated system.

I would like to mention one more provision that was included into the draft before the second reading and was absent in the initial version of the draft.

Thus, another moratorium on the opening of bankruptcies of institutions and organizations in the field of heat supply and sewerage for the duration of the Law of Ukraine On Measures Aimed at Settlement of Debts of Heat Supply and Heat Generating Organizations and Enterprises of Centralized Water Supply and Sewerage for Consumed Energy.

The legislator substitutes another crutch for unprofitable enterprises, upsetting the balance in the field of enforcement of court decisions and rehabilitation of inefficient enterprises, instead of reforming the utilities sector. And again, creditors become the hostages of simple solutions. And the solution to the problem is only postponed.

Parliament adopted Draft Law No. 2386 On Debt Repayment Measures on the Wholesale Electricity Market. What are its main ideas, and what can its consequences be for the market?

Andriy Olenyuk,
Partner, EVERLEGAL

The operation of the electricity market has recently created significant debts to be repaid by the majority of market participants, including SEEnergorynok. As of 31August 2019, the total debt owed by Energorynok came to UAH28.1billion, and the total debt owed to Energorynok was UAH30.9billion. Although the rules of the energy markets operation have already changed, outstanding indebtedness has been rising and this is creating challenges for the new electricity market.

On 17 June 2020 the Verkhovna Rada of Ukraine adopted Draft Law No. 2386 On Debt Repayment Measures on the Wholesale Electricity Market, the aim of which was to resolve the current situation with settlements on the wholesale electricity market. Taking into account the fact that the majority of debts are reciprocal between energy market participants, Law No.2386 sets out, among other mechanisms, a set-off procedure to regulate indebtedness.

Accounts with a special mode of use

For the purposes of debt recovery, current accounts with a special mode of use will be used. The distribution system operators, electricity suppliers with functions of the universal service provider and last resort providers will repay their indebtedness from such accounts to the wholesale electricity suppliers current account with a special mode of use. The payments will be made until full recovery of indebtedness is made.

The wholesale electricity supplier shall distribute the funds from its current account with a special mode of use to electricity producers and PJSC NPC Ukrenergo in accordance with the procedure set out by the National Commission for the Regulation of Energy and Utilities.

In the event of no debt owing to the wholesale electricity supplier, the funds from the current accounts with a special mode of use will be transferred to the distribution systems operators, which are electricity suppliers with functions of a universal service provider and last resort providers current accounts.

According to comments made by the Main Legal Department of the Verkhovna Rada, the discussed provision of Law No. 2386 does not comply with current Ukrainian legislation, given that the procedure for opening bank accounts and their modes of use shall be determined by the National Bank of Ukraine and not by Parliament.

Assignment of rights

Article 5 of Law No. 2386 provides for a debt assignment procedure. It should be noted that Article 5 will enter into force on 1 July 2021, which means that only after that date will a debt assignment procedure be implemented. In particular, according to Article 5 within 1 month from the date of the said Articles coming into force, the distribution system operators, electricity suppliers having the functions of universal service provider and last resort providers, electricity producers and Ukrenergo will confirm the amounts of their indebtedness. Furthermore, within 2 (two) months the said participant of the wholesale electricity market will have to assign their debts.

Accordingly, Energorynok shall determine the sum of debt owed by each debtor to the wholesale electricity supplier. Such debt shall be paid to each creditor of the wholesale electricity supplier. With respect to outstanding indebtedness after such repayment has been made, Energorynok shall assign its rights as a creditor.

Within one month after an assignment procedure has been completed, Energorynok will confirm the outstanding accounts payable and accounts receivable, which shall be charged off within 2 months.

An indebtedness charge-off

According to Article 4 of Law No. 2386, the following indebtedness shall be charged off:

debts of enterprises of the coal industry owed to SE Regional Electric Networks and the SFTC Ukrinterenergo;

debts of SE Regional Electric Networks and SFTC Ukrinterenergo owed to Energorynok; and

debts of Energorynok owed to state-owned electricity producers and Ukrenergo.

Additional capitalisation

Law No. 2386 stipulates that additional capitalisation of SE NNEGC Energoatom and PJSC Ukrhydroenergo will be performed for charging off a sum of debt, as described above. Such additional capitalisation will be performed by the emission of state bonds.

The Parliamentary Budget Committee emphasizes in its conclusion that emission of state bonds will increase the level of state debt. In addition, the Ministry of Finance says in its expert opinion on Law No. 2386 that the proposed provisions of Law No. 2386 will create fiscal risks for the state budget coming to UAH28.1 billion in the event of implementation of Law No. 2386.

Conclusion

Law No. 2386 will be part of the major goal of effective operation of a new energy market model, which requires settling down the challenges of the previous model. The current situation with settlement of payments on the energy market requires imminent measures. Moreover, effective operation of the Ukrainian energy market is one of the important requirements necessary for further cooperation with European partners and investors.

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