Last week, the President signed a new Law on Financial Leasing. It will enter into force in three months. The previous law on financial leasing has been in force since 1997, and its rules are significantly outdated.
Ambiguous case law on leasing relations over the past few years continues to gradually reduce the amount of non-bank financing in Ukraine.
Let’s try to understand on concrete examples why a simple and profitable for the whole world way of acquiring current assets is becoming more and more inaccessible for Ukrainian business and consumers.
It will no longer be possible to recover the money paid
At the beginning of the year, the lessors were shocked by the Ruling of the Commercial Court of Cassation, based on the interpretation of which, you can lease property (equipment), use it for a long time, then recover all the amount previously paid.
Seredynetske LLC purchased agricultural machinery from Agrotek LLC on the basis of financial leasing under standard contracts and paid lease payments for some time.
After the payments stopped, the lessor terminated the contracts and returned the equipment compulsorily according to the notary’s writs of execution.
A typical situation would be when the lessor also filed a lawsuit against the client to recover the debt for unpaid payments, but something else happened.
Financial leasing market: the experience of the European Union
After a long use of the equipment, the lessee collected from the lessor through the court the amount of payments previously paid by him and also in dollar equivalent at “today’s” exchange rate.
In making such a decision, the courts proceeded from the general provisions of the legislation governing supply relations, and the peculiarities of the leasing legislation were ignored.
In this case, the lessor not only did not receive the income he expected when concluding the contract, but also remained at fault to the client, who used specialized equipment, it turns out, almost for free.
A new law recently passed by the Verkhovna Rada takes these gaps into account. Lease payments are not refundable to the lessee in the event of a unilateral refusal by the lessor (in case of non-payment of payments, for example)
But payments will be refunded if the unilateral withdrawal from the contract or its termination is made before the transfer of the object to the lessee. The position is quite logical, fair and economically justified for both parties to the agreement.
How much will it cost to refuse to return the leased object
Even more shocking for the lessor is the situation when an unscrupulous client does not even return the leased property after the termination of the contract.
At present, the courts have different views on the legal nature of the lessor’s claims for lease payments after termination of the contract and evasion of the lessee to return the property.
The Commercial Court of Cassation as a part of the Supreme Court (decisions of 3.07.2018 № 904/6270/16, 13.05.2019 /5 924/569/18, 17.05.2019 № 924/570/18) notes that in case of termination of the contract for at the initiative of the lessor, if provided by the terms of the contract, the lease payment may be considered a fee for the use of the leased object.
According to the Commercial Court of Cassation, the parties to the lease agreement may agree on the terms of the fee for the use of the leased object after the termination of the agreement.
That is, the commercial court now protects the right of the lessor, to whom the thing is not returned after the termination of the contract, to demand from the client, who unreasonably uses this thing, reimbursement for the entire use of this thing, which is a way to protect property rights.
However, the Civil Court of Cassation in the Supreme Court has a slightly different opinion. In its ruling of April 22, 2019, the court points out that there are no grounds to recover from the client in favor of the lessor arrears of lease payments, as such arrears are accrued after the termination of the contract.
The Court of Cassation with reference to Articles 655, 692 of the Civil Code of Ukraine noted that the consequence of termination of the contract is the lessor has no obligation to provide the leased object in the future in the ownership of the client and, accordingly, no right to demand payment.
That is, in case of termination of the lease agreement is not paid by the lessee as part of lease payments, the purchase price of the leased object is not subject to recovery from the lessee in connection with the termination of the lessor’s counter-obligation to transfer ownership of the leased object.
The Grand Chamber of the Supreme Court in case № 904/5726/19 has to reconcile two different positions of the courts of cassation.
However, the new law will resolve the controversial position and fill in the gaps in the outdated normative act.
The lessor will have the right in case of withdrawal from the financial lease agreement and failure of the lessee to return the object of financial leasing within the period prescribed by the agreement to demand early payment of all future lease payments in terms of payment of the financial lease.
Moreover, the lessee’s failure to return the leased asset is the basis for charging a penalty of twice the amount of the lease payment that had to be paid in the last period, unless another penalty is determined by the terms of the financial lease agreement.
Notarization of the contract will not be mandatory
The Civil Court of Cassation of the Supreme Court followed the same path as the Supreme Court of Ukraine.
In his decision of October 3, 2018 in case № 288/383/15-ts, he enshrined a legal opinion, applying Article 799 of the Civil Code of Ukraine and declared that the lease of a vehicle (and hence the lease agreement) with the participation of an individual is subject to notarization .
As a result, non-bank consumer financing of vehicles was challenged: all concluded agreements that were not notarized are null and void. Under such conditions, lessors were not only effectively deprived of the right to recover debts under leasing agreements, but also suffered a flurry of lawsuits from the lessees themselves with demands for a refund as paid without legal basis.
The new law will regulate the relationship between the conclusion of the lease agreement and the consequences of its invalidity. As a general rule, a financial leasing agreement will not be subject to notarization , except in cases established by law or by agreement of the parties.
It is separately determined that the contract of financial leasing of a vehicle with the participation of an individual is subject to notarization only at the request of one of the parties to the contract.
The consequences of recognizing a leasing agreement as invalid or invalidating it are directly foreseen. In this case, the lessee is obliged to immediately return to the lessor the subject of the lease agreement in the condition in which it was received, taking into account normal wear and tear, or in the condition specified in the contract.
In this case, lease payments paid at the time of recognition of the lease agreement invalid or void, are not refundable.
Indirect leasing: “was” vs “will”
However, not all gaps are taken into account by the new law on financial leasing.
Currently, indirect leasing, which is the cheapest for the lessee, cannot operate under Ukrainian law.
The financing model, in which the lessee independently determines the subject of the lease and its supplier, exposes the lessor to significant unjustified risks.
Part 1 of Article 808 of the Civil Code of Ukraine provides that if in accordance with the contract of indirect leasing the choice of seller (supplier) of the subject of the lease was made by the lessee, the seller (supplier) is liable to the lessee for breach of quality, completeness, serviceability of the lease, its delivery, replacement, free elimination of defects, installation and commissioning, etc. However, the legislator is silent about the risk of non-delivery as such.
In practice, lessors of indirect leasing have repeatedly fallen victim to fraud. The conditional client applies to the lessor with a request for financing of specific equipment or equipment, as well as independently indicates the seller of such a leased object.
After concluding the contract, the lessor buys the goods from the seller selected by the lessee and transfers the funds. And here’s the whole trick: the seller disappears from the horizon and no delivery occurs.
Of course, the lessor can return the subscription in court, but this process is by no means instantaneous, and it is often impossible to enforce the court decision at all.
Especially when the seller is chosen by the lessee not by chance. But in any case, neither the Civil Code nor the current special law on leasing releases the lessor from liability for non-delivery by the seller .
What does the new law offer? It is stipulated that if the choice of the seller (supplier) of the subject of the financial leasing agreement is made by the lessor, the seller (supplier) and the lessor are jointly and severally liable to the lessee for the obligation to deliver as such and for return (including advance payment). number for payment of a penalty.
That is, the lessor’s liability for the supply of the leased asset at the choice of the seller by the lessee is not removed.
At the same time, the legislator does not take into account the principle of release of the lessor from liability, enshrined in the provisions of the UNIDROIT Convention “On International Financial Leasing” of 28.05.1998.
Thus, under Article 8 (1) (a) of the Convention, unless otherwise provided in this Convention or in a lease, the lessor shall not be liable to the lessee for the equipment, except where the lessee has suffered damage as a result of the assignment. the experience and opinion of the lessor and through the lessor’s interference in the choice of supplier or technical requirements of the equipment.
Article 10 § 1 of the Convention provides that the supplier’s obligations under the supply contract also apply to the lessee, as it would be if the lessee were a party to that contract and if the equipment had to be supplied directly to the lessee.
A key provision of the Lessor’s Liability Convention is Article 12 § 5, according to which the lessee may not make any other claim against the lessor for non-delivery of equipment, delayed delivery or delivery of equipment which does not comply with the supply contract , except as a result actions or omissions of the lessor.
In addition, similar provisions were provided for in the Model Law on Leasing, adopted at the twenty-fifth plenary session of the Interparliamentary Assembly of the Commonwealth of Independent States (Resolution No. 25-6 of 14.05.2005). In accordance with its part 2 of Article 14, the risk of non-performance by the seller of obligations under the contract of sale of the leased object is borne by the party who chose the seller, unless otherwise provided by the lease agreement.
However, this provision was not reflected in the current legislation of Ukraine. Unfortunately, it is not in the new law on leasing.
Author: YEVHEN LITVINOV
Lawyer, Director of the Dispute Resolution Department KPD CONSULTING Law Firm