Serhii Kliutsa, Managing partner of Daryna Law Firm, Associate partner of Crowe Mikhailenko

 

Having the aim to attract new credit resources for agribusiness, the Parliament of Ukraine has adopted the Agrarian Receipts Law on 06 November 2012.

This law has implemented the new tool to attract credit resources for agribusiness providing the creditors with the pledge of future crops or other future agrarian production. The efficiency of this tool is proved by the amount of additional credit resources that Ukrainian agribusiness has received using it.

Today agrarian receipts (sometimes also translated as crop receipts) are efficient tools to attract credit resources that reduce farmer’s deficit in trade credits and classic bank loans, do not demand any state expenses or aid and satisfy the farmers demand in working capital and production resources to keep farming within the current marketing year.   

The tool of agrarian receipts was developed with assistance of the International Finance Corporation of World Bank Group and the European Bank for Reconstruction and Development spreading in Ukraine the best practices of private credit to agribusiness from Brazil as the country with the most dynamic agrarian market development of that time.

The outcome is really impressive: the amount of credit resources received by agribusiness of Ukraine using the agrarian receipts has reached 2 bln. US$ on the day the large-scale Russian offensive started.

This instrument is still attractive even after the beginning of the large-scale Russian offensive. Dozens of agrarian receipts have been issued for more than 59 mln. UAH (app. 1,5 mln. US$) within the period of martial law in Ukraine.

Today agrarian receipts are used as quasi-pledges to secure contract obligations: creditors receive rights under agrarian receipts and hold them until proper fulfillment of a contractual obligation of a debtor (either to supply products or to return the loan and pay interest rate or to pay for the products and services). In case of default creditors enforce agrarian receipts in out-of-court procedure of the notary writ and obtain money under financial agrarian receipts  or products under commodity agrarian receipts (in addition to the contractual obligation or with their set-off depending to the clauses of the contract) 

Agrarian receipts as financial tools hold their niche of “the instrument of the last hope” for the creditor that is not willing to use unsecured “blank” credits, or as an instrument used by the distributors to provide additional guarantees to their suppliers so their debts could be paid by the farmers who consume their products and issue agrarian receipts.  

Nevertheless, agrarian receipts failed to form transparent market of agrarian production; they have not become a mass instrument to set prices and volumes of crops to supply in future. Agrarian receipts also failed to attract any visible credit resources from the investors who have not invested into Ukrainian agribusiness earlier.

Draft law “On electronic agrarian receipts” (9266) that was approved by the Parliament at the first hearing on 13 July 2023, has the aim to fix the above mentioned problems by using recognizable name of agrarian receipts.

It`s worth mentioning that there are more differences than similarities between agrarian receipts and electronic agrarian receipts. In fact, all the relations except the name of the instrument, unconditional nature of obligation, pledge of future crops and rules of its monitoring are different: something a little bit, other things differ significantly.

What are the key differences?

1.      Electronic agrarian receipt will be a security that means completely another procedure for its issuance, transfer and execution

The procedures of electronic agrarian receipts issuance will involve the National depository of Ukraine office instead of the notary. Technical details of such an involvement will be revealed when the governmental decrees be published, but definitely such an involvement will demand fees or other forms of compensation  (as there are no public expenses reserved  for Electronic agrarian receipts registry maintenance) that will be charged before the farmer receive the access to the Electronic Agrarian Receipts Registry to issue electronic agrarian receipt; all further interactions with the electronic agrarian receipt are to be tracked in the Electronic Agrarian Receipts Registry so would also mean relations with the National Depository of Ukraine and demand relevant fees or compensations.       

When the agrarian receipt is issued the notary must verify if the person who issues the agrarian receipt has real right to do it, owns or legally possesses land plots where the pledged future crops is to be grown, and there are no other encumbrances on the future crops. The notary also includes information about the agrarian receipt and the pledges it sets to the relevant registers making it public. Notaries are not doing it perfectly (e.g. court case  №914/2848/20 in which the notary provided the registers with incorrect description of the pledge giving rise to the dispute on bona fide acquirer of pledged crops), but as the whole they are efficient intermediaries between  different state registers and are able to describe properly in all relevant registers the processes of agrarian receipts turnover and their outcomes, to explain the participants meaning and outcomes of their actions.

Instead, when the electronic agrarian receipt is issued all the verifications mentioned above are to be made by the creditor who will become the owner of such security himself or rely on results of expected Electronic Agrarian Receipts Registry automation and its integration to the other state registries.

Not only the issuance of electronic agrarian receipts but also their indorsement and execution will be done via Electronic Agrarian Receipts Registry and in relations with the National Depository of Ukraine. It means those actions will be done without notaries but not free of charge. Moreover, execution of financial agrarian receipts shall be performed via bank accounts of the  National Depository of Ukraine: instead of direct payment from debtors account to the creditors account as it is done as a performance of an “ordinary” agrarian receipts, debtors under electronic financial agrarian receipts will have to pay money to the bank account of the  National Depository of Ukraine, and upon the receiving of such payment the National Depository of Ukraine will pay money to the creditors.

 

2. Electronic agrarian receipts will be a security (valuable paper) that dramatically changes all business processes of how this instrument will be used.

Electronic agrarian receipts will be a security (valuable paper) in a non-documentary form existing only as an entry to the register and a writ in the account, all operations with them are to be reflected in the company books and affect its financial results (instead, “ordinary” agrarian receipts being received without the aim of receiving performance of the unconditional obligation they create could be accounted at the off-balance account and therefore do not affect the financial results neither the debtor and the creditor).

Draft law also stipulates that electronic agrarian receipts could be used for payment or as a separate financial instrument but does not settle the problem with VAT refund for exporters who receive crops as the performance of electronic commodity agrarian receipts or pay for commodities by transfer of electronic financial agrarian receipts. Therefore eхport oriented  companies are still unable to use this instrument as the Tax Code prohibits them paying VAT refund that demands the exported commodities to be fully paid in cash. This problem has limited the area of  “ordinary” agrarian receipts turnover by the current niche and will be in place for  electronic agrarian receipts.

The turnover of electronic agrarian receipts as securities (valuable papers) imposes on the creditor the duty to account such operations and report about them in a specific manner. E.g., according to the p.141.2.1, 141.2.2, 141.2.4 of the Tax Code of  Ukraine the creditor will be obligated to adjust his financial results so possible negative results of his operations with electronic agrarian receipts decrease only taxable profit of the company received as a result of operations with securities (valuable papers)

Mentioned adjust of financial results will not be obligatory for:

-        Companies with annual income less than 40 mln. UAH at the end of the previous year that have informed Tax Office about their decision not to adjust their financial results (134.1.1 Tax Code of Ukraine);

-        Debtors under agrarian receipts (sp.1 p.141.2.6 Tax Code of Ukraine)

-        Repurchase operations and other operations with securities (valuable papers) that are recognized to be credit operations according to  the Regulations (standards) of accounting  (sp.2 p.141.2.6 Tax Code of Ukraine).

Finally, electronic agrarian receipts being  securities (valuable papers) will be subject to the rules of estimation, surplus and reduction of financial instruments, including their revaluation, amortization, etc. Such a complicity provides tax  officers with a wide list of opportunities to justify the additional charge of monetary obligations to taxpayers.

3. The benefits of future crops pledge are significantly limited

 

The Draft Law “On electronic agrarian receipts” contains the rule that the debtor’s crops become a pledge once they are harvested and the debtor is obligated to prove the origin of his crops. The same rule contains the Agrarian Receipts Law.

This rule was subject to consideration of the Cassation Commercial Court of the Supreme Court of Ukraine within cases №914/2848/20 and № 906/708/20, and was interpreted by the court so any crops of the debtor shall be considered as the pledge unless the debtor provide enough evidence to prove the other decision.

Providing that the pledged crops are sold, the creditor according to p.4 atr.13 the Agrarian Receipts Law has the right to settle his demands under agrarian receipt using the assets of the buyers. This procedure became even easier after the Supreme Court has provided parties with official interpretation of that rule in court rulings в справах №914/2848/20 та № 906/708/20:  the buyer has the same as the debtor obligation to provide enough evidence to prove that purchased crops are ton object of pledge otherwise purchased crops are to be considered as pledge under the crop receipt

Electronic agrarian receipts have completely different regulations. The crops subject to the pledge under electronic agrarian receipts are no longer the pledge once its owner is changed, and all the disputes about the pledge could be only between the creditor and debtor.

4.  Additional possibilities for enforcement

 

From what has been said, an impression could be created that electronic agrarian receipts have only disadvantages in comparison with “ordinary” agrarian receipts (that are still on the track even after the Draft Law on Electronic Agrarian Receipts comes into force). That is not true as there are plenty of areas where electronic agrarian receipts are regulated in a more efficient manner, e.g. the enforcement procedure.

For example, upon the issuance of electronic agrarian receipt the debtor will be limited in free disposal of the land plots where pledged future crops are planted. That will make impossible transfer of land plots to the other company that will continue farming without paying debt under the electronic agrarian receipt in default that in fact had taken place with the “ordinary” agrarian receipts.

Another advantage is a possibility to convert obligation under the commodity electronic agrarian receipt to supply crops into financial obligation to pay money in out-of-court procedure and enforce the debt as it is enforced financial electronic agrarian receipts. The debt under electronic agrarian receipts  can be charged  using all the assets of the debtors (despite charging  only pledged crops as it is set by the Ministry of Justice of Ukraine for “ordinary” agrarian receipts in the Instruction for rulings enforcement)

Finally, electronic agrarian receipts provide creditors with the possibility to charge the penalties under  commodity electronic agrarian receipt in out-of-court procedure charging money in parallel with seeking and transferring commodities.

Some rules are absolutely innovative, e.g. special extracts from the Electronic Agrarian Receipts Registry to be enforcement documents in electronic form that are provided in automatic way upon the creditor`s request .

Overall, adoption of the Draft law “On electronic agrarian receipts” will not cause immediate creation of the instrument alternative to the “ordinary” agrarian receipts.  It will be only the first step on the way to prepare Electronic Agrarian Receipts Registry, let it synchronize with other registers in automatic way, to build relations of its users with the National Depository of Ukraine, to settle accounting and taxation issues, to start organized trade of standardized electronic agrarian receipts on the stock exchanges, etc.  In other words, to pass the process that took three years to implement instrument of agrarian receipt in 2012-2015 that was significantly easier in the technical view.

There are a lot of changes to the Draft Law “On electronic agrarian receipts”  offered by the MPs but all of them concern only technical details of the system that do not change the core features and principles of the electronic agrarian receipts.

 No doubts, despite any technical changes the adoption of the Electronic Agrarian Receipts Law will provide the security brokers with convenient alternative instrument to deliver credit resources for agribusiness that due to the simplicity of its turnover could attract new creditors and in some circumstances could form organized market of crops and other agrarian production.