In credit relations, security for performance is critically important, but Article 1057-1 of the Civil Code of Ukraine cannot be used as a universal mechanism for blocking property
However, the situation becomes significantly more complex when a credit agreement or a pledge agreement is declared invalid. The question then arises: does the creditor lose all protection if the security agreement ceases to be valid, or does the law provide a special mechanism to protect the creditor’s financial interest?
The answer is found in Article 1057-1 of the Civil Code of Ukraine, which establishes special legal consequences of the invalidity of a credit agreement or a pledge agreement. At the same time, this provision is often mistakenly interpreted by creditors as an independent legal basis for filing a separate application or claim for seizure of property. Such an approach is legally vulnerable.
The Special Nature of Article 1057-1 of the Civil Code of Ukraine
Article 1057-1 of the Civil Code of Ukraine was introduced as a special mechanism for protecting a lender where a credit agreement or a pledge agreement is declared invalid. Its logic is that the invalidity of a transaction should not automatically allow the borrower to retain the loan funds without returning them to the lender.
As a general rule, where a transaction is declared invalid, the legal consequences of invalidity apply, including the return by each party of everything received under the transaction. In credit relationships, this means that the borrower must return the funds received from the lender. If a credit agreement is declared invalid, the court determines the amount of money to be returned to the lender.
If the borrower’s obligation was secured by a pledge of property, the law allows the court, upon the lender’s application, to impose seizure on such property. A similar mechanism applies where the pledge agreement itself, which secured the borrower’s obligations under the credit agreement, is declared invalid.
Accordingly, seizure of property under Article 1057-1 of the Civil Code of Ukraine has a derivative, additional and protective nature. It does not exist independently. It is connected with the court’s consideration of a dispute concerning the invalidity of a credit agreement or pledge agreement and with the need to secure the return of funds to the lender.
When the Court May Impose Seizure on Property
Seizure under Article 1057-1 of the Civil Code of Ukraine may arise in two principal situations.
The first situation is where the court declares invalid a credit agreement in which the borrower’s obligation was secured by a pledge of property belonging to the borrower or a guarantor. In that case, the court, upon the lender’s application, imposes seizure on the relevant property.
The second situation is where the court declares invalid a pledge agreement that secured the borrower’s obligations under a credit agreement. In that case, the court may also impose seizure on the property that was the subject of the pledge.
The wording of the law is crucial: the court imposes seizure when declaring the relevant agreement invalid.
Therefore, the issue of seizure is not considered in isolation, but within the dispute on the merits, where the court establishes the invalidity of the credit agreement or the security transaction.
to the lender.
subject of the pledge.
Why a Request for Seizure Cannot Be a Separate Subject of
Proceedings
The content of Article 1057-1 of the Civil Code of Ukraine shows that a lender is not entitled to apply to court with a separate standalone request for seizure of property based only on this provision, without the simultaneous resolution of the substantive dispute concerning the principal or security obligation.
In other words, Article 1057-1 of the Civil Code of Ukraine does not create a separate remedy for a bank in the form of independent proceedings for seizure of property. It defines a consequence that may be applied by the court in a case concerning the invalidity of a credit agreement or a pledge agreement.
This distinction is fundamental. If a creditor asks the court only to seize property, without bringing or maintaining claims concerning the invalidity of the agreement, determination of the amount to be returned, recovery of funds or another substantive issue, such request becomes detached from the legal basis with which the law connects the possibility of seizure.
The court cannot treat Article 1057-1 of the Civil Code of Ukraine as a universal instrument for freezing a debtor’s property. The provision has a specific purpose: to preserve the property that served as security until the borrower fulfils the obligation to return funds to the lender.
Seizure under Article 1057-1 and Interim Measures: Not the Same
Thing
It is important to distinguish seizure of property under Article 1057-1 of the Civil Code of Ukraine from ordinary interim measures. Interim measures are applied to ensure the real enforcement of a future court decision and to prevent such enforcement from becoming difficult or impossible. To obtain such measures, a party must substantiate the risks of non-enforcement, the proportionality of the measure and the connection between the
claims and the property to be seized.
Seizure under Article 1057-1 of the Civil Code of Ukraine has a different nature. It is a special consequence of the invalidity of a credit agreement or a pledge agreement. Its purpose is not merely to secure a claim temporarily, but to preserve the asset base for returning funds to the lender after the agreement that previously secured the obligation has lost its legal effect.
For this reason, such seizure cannot exist separately from a court decision declaring the relevant agreement invalid or from the dispute in which the court determines the relevant legal consequences.
The Position of the Courts
Court practice proceeds from the view that seizure of property under Article 1057-1 of the Civil Code of Ukraine is applied in connection with a judgment on the merits of the dispute. This means that the court must resolve the substantive legal dispute, establish the invalidity of the credit agreement or pledge agreement, and only then, upon the lender’s application and where the statutory conditions are met, decide whether to impose seizure.
In such cases, courts also note that procedural rules treat seizure of such property as an element of the court’s judgment. This means that it is not a matter of separate standalone proceedings, but a component of the decision adopted following consideration of the dispute on the merits.
This approach is logical: if the court has not yet established the invalidity of the agreement, has not determined the legal consequences of such invalidity and has not clarified whether an unfulfilled obligation to return funds to the lender exists, there is no proper legal basis for applying the special seizure mechanism under Article 1057-1 of the Civil Code of Ukraine.
The Creditor’s Mistake: Using Article 1057-1 as an Independent
Pressure Tool
to the lender.
subject of the pledge.
Proceedings
possibility of seizure.
Thing
The Position of the Courts
Civil Code of Ukraine.
Pressure Tool
In practice, creditors sometimes attempt to use Article 1057-1 of the Civil Code of Ukraine as an independent remedy by filing applications or claims aimed solely at seizing property. Such a strategy may appear attractive tactically, as it allows the creditor to quickly block the property of the debtor or property guarantor.
However, from a legal perspective, this position is weak. Seizure of property under this provision is not a sanction against the debtor, not a form of preliminary punishment, not a way to create additional negotiating pressure, and not a separate property claim. It is a special measure directly linked to the consequences of invalidity of a credit or security transaction.
If a creditor wishes to protect its interests, it must choose the proper procedural model: bring substantive claims concerning the obligation, request the application of the consequences of invalidity of the transaction, claim the return of funds and, where there are grounds, request seizure of property within that dispute.
Significance for the Borrower and Property Guarantor
For a borrower, pledgor or property guarantor, the correct interpretation of Article 1057-1 of the Civil Code of Ukraine is equally important. If a bank or other lender applies to court only for seizure of property without a proper dispute on the merits, such request may be challenged as inconsistent with the content and purpose of the provision.
The defence in such cases should be built around several key arguments. First, it is necessary to verify whether there is a court dispute concerning the invalidity of the credit agreement or pledge agreement. Second, whether claims have been brought for the application of the legal consequences of invalidity or for the return of funds.
Third, whether the property to be seized is connected with the relevant credit obligation. Fourth, whether the creditor’s claims have already been satisfied by other means.
If these elements are absent, the request for seizure may be viewed as an attempt to extend Article 1057-1 of the Civil Code of Ukraine beyond its direct meaning.
When Seizure Must Be Lifted
Article 1057-1 of the Civil Code of Ukraine also determines when seizure must be lifted. If a credit agreement is declared invalid, the seizure must be lifted after the lender receives the funds in the amount determined by the court. If the issue concerns the invalidity of a pledge agreement, the seizure is likewise linked to the fulfilment of the obligation to return funds to the lender under the credit agreement.
This again confirms the protective nature of such seizure. Its purpose is not to give the creditor unlimited control over the property, but to guarantee the return of funds received by the borrower within the credit relationship.
Once the relevant monetary obligation has been fulfilled, the legal basis for maintaining the seizure disappears.
Practical Conclusion
Article 1057-1 of the Civil Code of Ukraine is an important special mechanism for protecting a lender, but its application has clear limits. A creditor may not use this provision as an independent instrument for a separate seizure of property without the resolution of the substantive dispute.
Seizure of property under this article is possible only in connection with the invalidity of a credit agreement or pledge agreement and the application of the relevant legal consequences. It is derivative from the main dispute and is not an independent remedy.
For a creditor, this means that claims must be formulated correctly and the procedural strategy must be chosen carefully. For a borrower or property guarantor, it creates an opportunity to object to attempts by banks to expand the meaning of Article 1057-1 of the Civil Code of Ukraine and turn it into an autonomous mechanism for blocking property.
to the lender.
subject of the pledge.
Proceedings
possibility of seizure.
Thing
The Position of the Courts
Civil Code of Ukraine.
Pressure Tool
security transaction.
provision.
When Seizure Must Be Lifted
Practical Conclusion
blocking property.
The proper application of this provision ensures a balance of interests: the creditor receives protection against the loss of security, while the debtor and property owner are protected against seizure without a proper legal basis and without consideration of the dispute on the merits.
to the lender.
subject of the pledge.
Proceedings
possibility of seizure.
Thing
The Position of the Courts
Civil Code of Ukraine.
Pressure Tool
security transaction.
provision.
When Seizure Must Be Lifted
Practical Conclusion
blocking property.
to the lender.
subject of the pledge.
Proceedings
possibility of seizure.
Thing
The Position of the Courts
Civil Code of Ukraine.
Pressure Tool
security transaction.
provision.
When Seizure Must Be Lifted
Practical Conclusion
blocking property.
to the lender.
subject of the pledge.
Proceedings
possibility of seizure.
Thing
The Position of the Courts
Civil Code of Ukraine.
Pressure Tool
security transaction.
provision.
When Seizure Must Be Lifted
Practical Conclusion
blocking property.