Debts during the war: Parliament seeks to protect creditors from inflation

This is set out in draft law No. 15205, which concerns amendments to Article 625 of the Civil Code of Ukraine.

The Verkhovna Rada is proposing to clarify the rules for recovering inflation losses arising from the default on financial obligations under martial law.

This refers to draft law No. 15205, which aims to establish a uniform approach to the liability of debtors.

The essence of the initiative concerns Article 625 of the Civil Code of Ukraine.

Currently, this article stipulates that a debtor is not exempt from liability for the inability to fulfil a financial obligation.

If an individual, company or state body is in arrears, the creditor is entitled to claim more than just the amount of the debt.

The debtor must also pay the amount adjusted for inflation for the entire period of delay.

In addition, three per cent per annum is charged on the overdue amount, unless a different rate is specified in the contract or by law.

For the average person, this means that the debt should not ‘lose value’ due to delayed payment.

For example, if the money was due to be repaid a year ago but was not, the amount may have lost some of its real value during that time due to inflation. It is precisely this loss that inflation charges are intended to compensate for.

Inflation losses and three per cent per annum form part of the monetary obligation.

They are a means of holding the debtor accountable for late payment and are intended to compensate the creditor for losses resulting from the depreciation of money.

It is also, in effect, a fee for the use of another person’s funds, which the debtor was supposed to have repaid earlier.

The draft law emphasises that this is the minimum guarantee of protection for the creditor.

If this is restricted, a situation may arise where the debtor formally repays the same amount, but due to inflation, it will already be significantly less than its real value.

The draft law proposes to explicitly stipulate in Article 625 of the Civil Code that the debtor’s special status during martial law does not constitute grounds for exemption from inflationary losses or a reduction in their amount.

This primarily concerns debtors who have the status of a special or specific public authority.

In other words, state bodies, ministries, departments or law enforcement agencies will not be able to rely solely on martial law to avoid paying inflation losses on overdue debts.

For citizens and businesses, this is important in cases where the state or a state body delays payment for work performed, services, contracts or other financial obligations.

If the draft law is adopted, the law will more clearly stipulate that martial law does not in itself exempt parties from liability for late payments.

For state bodies, such changes will mean an obligation to fulfil financial obligations in a timely manner.

If payment is delayed, inflationary losses will increase the amount of the debt.

The explanatory note to the initiative states that judicial practice has already effectively established this approach.

The Supreme Court has repeatedly stated that inflation losses and three per cent per annum form part of the financial obligation.

They also constitute a specific measure of the debtor’s liability for delay.

Such charges protect the creditor’s property rights, as they compensate for losses arising from the depreciation of funds and the use of the money held.

In particular, in Resolution No. 910/15411/21, the Supreme Court considered a dispute between a state-owned enterprise and the Ministry of Defence of Ukraine.

The dispute concerned the recovery of inflation losses for late payment for work performed under a state contract.

The Ministry of Defence insisted that its special status as the body responsible for the state’s defence capability during martial law should be taken into account when calculating inflation losses.

The Ministry also pointed out that the obligation to pay arose not from the moment the certificate of completion was signed, but only following the court’s decision in 2021.

The Supreme Court noted that inflation losses form part of the monetary obligation and are recoverable regardless of the debtor’s status.

Neither the state of war itself nor the Ministry of Defence’s performance of its functions exempts it from liability for late payments.

Thus, the court confirmed that even in wartime, state bodies are liable for breaches of monetary obligations.

Inflation losses must be paid and cannot be waived solely due to the debtor’s special status.

As reported by ThePublic, a parliamentary committee is examining the draft law “On the Management of the Housing Stock”, which could change not only the rules for managing buildings but also the procedure for recovering debts for utility services. One of the most notable changes is the proposal that claims regarding utility arrears should be filed not at the debtor’s place of registration, but at the location of the flat or building where the debt arose.

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