The Ukraine is about to adopt the Convention on International Financial Leasing
In January 2006 the Ukraine Parliament passed new national leasing legislation, bringing its legal system in line with the regime of the UNIDROIT Convention on International Financial Leasing (CIFL). This significant step clears the road to the Ukraine’s adoption of this treaty. It is expected that the CIFL will become effective in this state in the very near future. The treaty entered into force on 1 May 1995. This instrument is also referred to as the Convention of Ottawa, as it was realized in this Canadian city.
The need for leasing in the Ukraine
This moment in time, in the Ukraine there exists a fundamental need for new capital goods. This modern equipment will enhance the modernization of its service-related businesses, and of its industrial and agricultural infrastructure. In addition, the country requires a thorough renovation of its fleets of aircraft, trains, trucks and other forms of transportation. The financing of these types of very expensive equipment is typically facilitated by the use of transnational leasing transactions. The Ukraine’s acceptance of the CIFL will make cross-border financial leasing more available. Moreover, the legal regime of the Leasing Convention can function as a blue-print to test the adequacy of the existing Ukraine domestic leasing legislation.
The purpose of the Convention on International Financial Leasing
The CIFL has two main goals. First, it solves the existing legal problems concerning international financial leasing transactions, while it keeps the interests of the interested parties to these devices in mind. Secondly, it creates opportunities for the national and international financial leasing markets. Under the modern legal regime of the CIFL, a financial leasing transaction is described as a transaction that contains two contracts. It entails a supply agreement and a leasing agreement. The CIFL provides for a useful model for states that need a legal framework with regard to leasing transactions. It has already been helpful drafting national leasing laws in many European, Asian, African and North and Middle American states. It is particularly designed to assist leasing economies that are in transition. The Ukraine is a very good example of such an economy.
The reasons for national and international leasing
There are many tax-related and non-fiscal reasons for leasing. The main function of a leasing transaction is to provide the lessee with the use of an object, without the need that it pays the cost of its acquisition upfront. Simultaneously, it gives the lessor a steady return on its investment. Additionally, the lessor retains the ownership of the leased object. Accordingly, the legal position of the lessor is safeguarded. For that reason it is faced with less economic unpredictability, which, in turn, will lead to lower interest rates. In many states with emerging capital markets leasing is the only source of financing the acquisition or use of capital goods on reasonable conditions. Particularly, leasing gives major cash flow advantages to new companies that have not been able to built-up a stable and reliable credit history. In addition, leasing provides smaller companies with the opportunity to borrow money, without the requirement of collateral. In general, leasing expenses are lower than the costs of the traditional banking devices. Furthermore, leasing can generate funds up to 100% of the financing needs. The total value of world leasing industry increased more than ten-times over the last twenty-five years. The leasing market expanded most in North America, Europe and Asia.
B. Patrick Honnebier, LL.M.
Expert International Leasing Law
Associate Professor of Law
University of Utrecht
Department of Commercial, Financial and Corporate Law
The Netherlands