Escrow Accounts Introduced and Regulation of Bank Account Pledges Improved
On 23 March 2017, Verkhovna Rada of Ukraine passed the Law No. 1983-VIII "On Amendments to Certain Legislation of Ukraine Regarding Improvement of Corporate Governance of Joint Stock Companies" (the Law). The Law introduces the concept of escrow accounts and improves the mechanism for establishing, maintaining and enforcing bank account pledges.
Escrow accounts: Key points
The newly introduced concept of escrow account (rakhunok umovnogo zberigannya) includes the following elements:
- The escrow agent (the bank where the escrow account is maintained) is only permitted to release funds from the escrow account upon having received the documents or other evidence confirming the fulfilment of the conditions set out in the respective escrow account agreement.
- Until released in accordance with the terms of the escrow account agreement, the escrow funds will be blocked in the escrow account, and neither the client nor the beneficiary will be permitted to dispose of such funds (unless the escrow account agreement provides otherwise).
- The funds standing to the credit of an escrow account cannot be subject to any enforcement or arrest procedure, nor can such funds be included in the account owner's liquidation estate in the account owner’s bankruptcy proceedings.
- An escrow account agreement may only be terminated upon the beneficiary’s prior written consent.
Bank account pledge: What has changed?
The Law resolves a number of issues arising under a pledge of rights to funds in a bank account (the Pledge):
- The Law expressly requires a Ukrainian bank to refuse performing any transaction with the pledged funds in a current account on the instructions of the account holder if such transaction would decrease the balance of the account below the threshold established by the escrow account agreement.
- It will no longer be required to execute a direct debit agreement with the bank in order to enable the pledgee to debit the pledged account, as the Law allows enforcing a Pledge by way of the bank directly debiting the pledged account following the instruction of the pledgee, provided that the bank has been notified of the Pledge and the pledge agreement expressly permits the pledgee to debit the account.
- The Law clarifies that a Pledge can be enforced not only through the assignment of the pledged rights to funds in the bank account in favour of the pledgee, but also through the sale of such rights to a third party buyer.
- The Law stipulates that a pledgee's direct debit instruction delivered in connection with the Pledge will enjoy priority over any conflicting claims to the funds in the “pledged” account.
- A Pledge may not be created in respect of the rights to funds in a bank account that is blocked or is subject to a public encumbrance, as well as where a prior pledge agreement prohibits the creation of subsequent Pledges.
- Any termination or amendment of a bank account agreement for the account that is subject to a Pledge may only be carried out upon the pledgee’s prior written consent.
The Law will enter into force upon its official publication, which we expect to occur soon.