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Is it possible to collect debt gentlemanly?

What for is the trust property law as a way to secure performance of obligations

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If people didn’t trust each other, they would have to live within the pocket.

Herbert Proknou

Ancient Roman principle Pacta sunt servanda (agreements should be performed) is one of the generic elements of the market economy and the rule of law.

However, deficit of business culture, specific experience of primary capital accumulation, and a range of devaluations helped the national business community to form its own maxima: “Only the cowards repay”.

As the result, we acquired overload and inefficiency of the state enforcement service and common practice of unofficial ways of collecting debts, which barely fits and even cross the border of law.

Furthermore, legislation that regulates the most common way to secure performance of obligations – the pledge – proved to be staggering inefficient.

People who would like to get an overview of how pledge holders are left in the lurch are recommended to take a look at the diverted by the Verkhovna Rada of Ukraine draft law #2286a that was an unsuccessful attempt to fix some gaps in the pledge legislation.

Are there any options to solve the problem of non-performance of obligations? It seems so. Implementation of private executors as an alternative and a competitor of the state enforcement service, legislation reform in the field of bankruptcy and settlement of restructuring procedure could probably help.

However, the subject of this article is another tool – implementation of the trust property as a way to secure performance of obligations, which is an alternative to the pledge.

It refers to the mechanism known as fiduciary transfer of title. According to it, in order to ensure performance of their duties the debtor delivers to the creditor ownership of some of his property similarly, to how the property is transferred to the creditor as a pledge. The creditor can sell the transferred property only in case the debtor does not perform his duties, moreover, excess of the proceeds should be returned to the debtor.  From the first sight, the described mechanism resembles the pledge. The only exception is the fact that the right of ownership for an object belongs to the creditor.

This difference is the main advantage of the trust property over the pledge – as a rule, the creditor would not need to go to court or apply to enforcement services for execution upon property in trust ownership. He would be able also to do that independently and on his own behalf.

In this case, the debtor would be unable to use most of the existing mechanisms that could block the execution upon property, because he wouldn’t have ownership of such property.

However, this mechanism has its own drawbacks. The main of them is the property rights of the creditor. After all, it will be psychologically difficult for the debtor to agree to give away his property.

Moreover, the creditor’s financial position and his reputation could be unattractive. In addition, the balance of interests in these relations is clearly unequal – the creditor has significant advantages and the potential to abuse his rights.

That’s why, the private trustee status should be very carefully regulated and the use of trust property in practice will be naturally limited to the cases when the debtor has no other way to get a loan.

Probably, most lawyers reading this text right now understood from the very beginning that trust property as a security way is a result of the Anglo-Saxon legal system. Therefore, many people have doubts about its implementation in the Ukrainian legislation. We can agree with such doubts, but the fact that the EU countries having civil law systems could integrate the transfer of title in their legislation quite easily offers some room for optimism.

Moreover, according to the Directive 2002/47/EU, the possibility to transfer the property in trust as a secure performance way should be implemented by each EU member state. Another interesting fact is that Ukraine also committed itself to fulfill the above-mentioned Directive under the terms of the EU-Ukraine Association Agreement.

Will it be easy to implement the trust property concept in Ukraine? We can say with certainty that it won’t. Introduction of a new secure performance way will require making amendments to the tax law, accounting and the bank reserve standards.

The jurisprudence should be formed from scratch as well. Is this work worth such efforts? It seems so. Provided that the Parliament works efficiently and carefully – this interesting and serious tool would be introduced.

Original publication: “Economichna Pravda