January 24, 2013
Please be informed that recently Ukrainian parliament adopted a law, which we believe will have major impact on Ukrainian agricultural market, namely the Law of Ukraine “On Agricultural Receipts” (“the Law on Receipts” or “the Law”) which was signed by the President and published on January 18, 2013, becomes effective on March 19, 2013.
The Law on Receipts is aimed at one of the main problems of Ukrainian agricultural market, shortage of credit funds available for agricultural manufacturers. With recent legal changes Ukrainian government tries to put into circulation new tool available for agricultural market participants, namely agricultural receipts.
Briefly, this Law allows any person having agricultural land in use, either in ownership or lease, to issue agricultural receipts as financial instruments. Each such document is the borrower’s nonnegotiable pledge to return the loan, either by delivering produce or by returning the money, on the terms and conditions duly agreed upon. Basically, it is a promissory note of sorts that allows the issuer to receive a loan or a supply of farming equipment, seeds, etc. Each such ‘agricultural receipt’ determines the amount and quality of shipment – or the sum to be repaid, considering the current prices, or the price on the date of the contract.
However, we would like to highlight several issues which should be taken into consideration when either using agricultural receipts or simply dealing with agricultural receipts issuers, as it appears third parties may be affected by the Law on Receipts as well even when not doing business with agricultural receipts directly.
First of all, we would like to mention that the Law on Receipts addresses one of the main problems hindering agricultural financing under the pledge of future harvest at the moment, namely the difficulties of identification of the harvested grain as pledged after the crops are harvested and stored. It is almost impossible under the current conditions for the pledgee to prove that the grain in question is indeed harvested on the land plot envisaged in the future harvest pledge agreement and thus constitutes a pledge which may be collected.
Trying to cure the described problem, the Law on Receipts however does not aim at the main root of the problem, lack of efficient mechanisms of harvest identification, for example by establishing simple unified harvest register. Instead, the government provides the right of the pledgee to perform monitoring of farmer’s activity (which, we have to note, was usually established by respective pledge agreements anyhow, thus the Law does not implement any new monitoring tools for pledgee at all) and tries to place a ‘shortcut’ by granting the creditor a right to collect any other property of the debtor or his counterparties who purchased pledged property.
Firstly, in Article 7 of the Law on Receipts it is provided that in case the pledged harvest is absent or its amount is insufficient, or the harvest is destroyed by elements or pests, the agricultural receipt holder has the right to receive full satisfaction at the cost of any future harvests gathered on the same land plot described in the receipt. However, such mechanism would work only in case the lease right for such land plot still remains during the next marketing year. When the respective right to use the land plot is absent, for example by mutual termination of the respective lease agreement, it would be impossible for the creditor to receive satisfaction at the cost of the next harvest as it would belong to the third parties.
For the sake of completeness we have to note that under the Law on Receipts transfer of the land into use of other person does not cease validity of the agricultural receipt but only till the end of the current marketing year. Hence, future harvests are not covered by this guarantee.
On the other hand, in Article 13 it is provided that in case the Agricultural Receipt issuer fails to perform under such receipt the creditor has the right to receive satisfaction at the cost of any other property of the debtor. The Law is unclear in what cases the creditor may take this approach and in what cases the above procedure regarding future harvests should be applied.
We would like to emphasize one issue under the Law on Receipts which in our opinion may have major impact on grain traders’ activity in Ukraine. Under paragraph 4 of Article 13, in case the debtor sales the harvest pledged under the agricultural receipt, the creditor may collect such pledged harvest from its current owner or, in case such harvest is absent already, collect any other property of such third person. Taking into account absence of any effective instruments on harvested grain identification we mentioned above, when buying any commodity from a person who issued at least one Agricultural Receipt, the purchaser is always exposed to risk that such purchased commodity would be deemed as pledged and its price may be collected, either in kind or at the cost of other property.
The Law on Receipt does not provide creditor’s obligation to prove that the third party indeed purchased commodity pledged under the agricultural receipt. Instead, the Law envisages the obligation of the farmer to prove origin of the specific commodity and respectively, is it or is it not covered by the Agricultural Receipt. Hence, until the farmer proves otherwise, the creditor’s right to collect pledged commodity or its price from farmer’s counterparty is nonnegotiable which puts commodity purchaser in unfavourable position.
Moreover, the Law on Receipts established simplified procedure of state execution procedure which is aimed at enforcing the agricultural receipt within 7 calendar days without court participation, via extrajudicial procedure. Even when later grain trader would be able to defend his rights in court, proving that collected property was pledge-free, reverse execution for returning his own property may be very time consuming and costly procedure.
Please note that the above comments do not constitute an advice and are offered for informational purposes only. In specific situations we recommended to obtain full professional advice.