Bankruptcy Proceedings in Ukraine. Results of 2020

If we want to go into the year 2020 in the field of bankruptcy in Ukraine then, first of all it should be noted that this is the year when the approbation of the specialized law — the Code of Ukraine on Bankruptcy Procedures (CUoBP), introduced in late 2019, was completed. In the same year it was realized that a number of declared know-how disguised similar uncodified provisions of the Law of Ukraine On Restoring Debtor’s Solvency or Declaring a Debtor Bankrupt in combination with errors that complicate their practical application.

On the other hand, the truly progressive changes aimed at speeding up and improving the bankruptcy process in Ukraine came at a time of circumstances that were impossible to predict in principle, namely the COVID-19 related lockdown.

That is, the foundations laid in the CUoBP for a healthy economy and in order to improve the investment climate in Ukraine, in fact, have become a time bomb for any credit company, whose business has become hostage to “weakening” and “strengthening” of quarantine and does not belong to the category of “privileged”, without which the life in the period of COVID-19, according to the relevant sanitary institutions, is impossible.

A reminder that the concept of the updated legislation provided for the simplification of the requirements for initiating bankruptcy by the creditor via:

•  elimination of the need to collect the debt through the court and its pursuing, waiting for non-execution of the court decision this three months;
•  removal of restrictions on the amount of such debt.

As a result, the commencement of proceedings, hypothetically, became possible not so much as a result of establishing the circumstances of a debtor’s insolvency, as in the absence of satisfaction of the creditor’s claims in full before the preliminary case hearing. Which, in turn, entails the consequences of claiming by other creditors, pla­cing of a moratorium, etc.

It is clear that such opportunities for the period of the pandemic have become too “progressive”, and along with blocking the business itself, the legislator has decided to partially block the bankruptcy process, or at least suspend it.

Thus, from 17 October 2020 the Law of Ukraine of 18 June 2020 No. 728-IX prohibits the commencement of bankruptcy proceedings against debtors — legal entities at the request of creditors on claims against the debtor which arose from 12 March 2020, for the period of quarantine and for 90 days from the date of its cancellation. Along with this, some important procedural periods in bankruptcy were extended, including the terms of:

•  preliminary court hearing;
•  application for invalidation of transactions performed by the debtor;
•  moratorium on satisfaction of the creditors’ claims;
•  announcement of auctions;
•  implementation of the debtor’s financial recovery or debt restructuring plan;
•  procedures for disposal of property, liquidation, debt restructuring and repayment of the debtor’s debts, etc.

At the same time, the legislator decided to “play it safe” regarding blocking new bankruptcies. Thus, on 15 October 2020, the President of Ukraine submitted to the Verkhovna Rada of Ukraine as urgent the Law No. 4220 of 15 October 2020, which already proposes to remove restrictions on the commencement of bankruptcy proceedings against debtors on claims that arose from 12 March 2020. Currently, in accordance with the public information posted on the website of the Verkhovna Rada of Ukraine, the bill is being drafted by the relevant committee^[1].

In addition, the Law of Ukraine of 5 June 2020 No. 686-IX prohibits bankruptcy proceedings of debtors-state-owned enterprises and budgetary institutions from 17 October 2020, as well as the financial rehabilitation of such debtors before the commencement of bankruptcy proceedings.

But everyone understands that blocking of new bankruptcies and delaying of existing ones is only temporary — the most interesting thing in this area is yet to come, and to be precise, after quarantine.

Coming back to the progressive changes concerning simplifications at the stage of initiating bankruptcy in Ukraine, it should be further noted that the legislator left the opportunity to refuse to commence such proceedings, provided that the creditor’s claims (not supported by a court decision) indicate a dispute over the right, which is subject to resolution by action proceedings^[2]. Logically, such provisions of the law created a wide range of speculations with interpretation by both the creditor and the debtor. As a result, in 2020 the Supreme Court formulated a number of legal positions that, to some extent, put law-enforcement in such situations in order.

First, the Supreme Court explicitly stated^[3] that the lack of evidence of taking measures to recover the amount of the debt from the debtor doesn’t indicate prematureness in making a decision to commence bankruptcy proceedings, as the possibility of applying the procedures stipulated by CUoBP to the debtor is an alternative way to satisfy the monetary claims of the creditor if there is no dispute over the creditor’s right of claim. That is, the presence of an undisputed debt and the circumstances of its non-repayment are sufficient to initiate bankruptcy proceedings.

Secondly, in its decree of 13 August 2020 in case No. 910/4658/20, the Supreme Court explained what is meant by the indisputability of the claims under the CUoBP. Thus, in terms of bankruptcy proceedings, the absence of a dispute over the right is the lack of ambiguity with regard to resolving issues concerning the parties to the obligation, the essence (subject) of the obligation, the grounds for the obligation, the amount of the obligation and the debt structure, as well as the term of fulfillment of the obligation, etc.

The Supreme Court also noted that the debtor’s objection to the applicant’s claims in the form of an action (the subject of which is the debtor’s challenge to the circumstances on which the creditor’s claims are based) filed before the creditor’s application for commencement of the bankruptcy proceeding implicitly indicate the presence of the dispute over the right within the meaning of the provisions of part 6, Article 39 of the CUoBP. At the same time, the court of final instance does not have the opportunity to resolve such a dispute over the right during the preliminary case hearing.

A similar position is expressed in the rulings of the Supreme Court of 3 September 2020 in case No. 910/16413/19, of 16 September 2020 in case No. 911/593/20 and of 24 September 2020 in case No. 916/3619/19.

Thus, it clearly follows from the above-mentioned legal positions and provisions of the specialized law that although the ­creditor may initiate the commencement of bankruptcy proceeding in the presence of any outstanding debt, regardless of its size and measures taken for its recovery, at the stage of preliminary case hearing the court determines whether such debt obligations are disputable, whether the debtor has the opportunity to repay the debt, and whether it has repaid it before the preliminary case hearing. In other words, even if it is possible to repay the debt, but in the absence of repayment at the stage of the preliminary case hearing, there is every reason to commence the bankruptcy proceeding. In this case, the court reserves the right to close the proceeding if in the course of the bankruptcy proceedings no signs of the debtor’s insolvency are established. In particular, as noted by the Supreme Court in the ruling of 3 June 2020 in case No. 905/2030/19, filing of the debtor’s financial condition analysis in the commercial court, which handles the bankruptcy case, by the executor of the debtor’s property is an obligation defined by clause 5, part 3, Article 44 of the CUoBP, and will allow the court to establish the presence or absence of circumstances for the closure of bankruptcy proceedings on the grounds specified in clause 8, part 1, Article 90 of the CUoBP. Thus, there is currently a fairly effective mechanism tried out in practice, which encourages the debtor to repay the debt as an alternative to the application of classical enforcement proceedings.

Also noteworthy are the conclusions of the Supreme Court, set out in the ruling of 11 February 2020 in case No. 10/5026/995/2012, which ruled out speculation on the suspension of the statute of limitations outside the disputes over creditors’ money claims. In particular, the Supreme Court clarified that the statute of limitations in case of commencement of the bankruptcy proceedings shall be suspended only in the context of creditors’ claims, and not, for example, when disputes over the disposal of the debtor’s property are contested (see additionally ruling of the Supreme Court of 30 April 2020 in case No. 16/137б/83б/22б on this issue).

Despite a number of positive legal opinions of the Supreme Court and temporary measures taken by the legislator to prevent the flow of spontaneous bankruptcies during quarantine restrictions, the specialized law still contains a significant number of dubious, controversial (conflicting) and untested provisions.

In particular, the absolutely unreasonable redistribution of forces in a bankruptcy case. Thus, previously the provisions of the Law of Ukraine On Restoring Debtor’s Solvency or Declaring a Debtor Bankrupt allowed in practice the possibility of participating creditors with a casting vote at the general meetings with current claims, i.e. claims included in the register of creditors’ claims at the stage of liquidation. Instead, the CUoBP has resolved this issue radically, and at the moment such creditors have only an advisory voice. Moreover, the new counting rules have reformatted existing creditors’ committees in cases dating back to the 1990s.

It should also be noted that the decision of the legislator to provide the creditors’ committee with non-appealable powers at all stages of the proceedings is quite controversial.

Thus, the creditors’ committee has the right to suspend the insolvency receiver from his/her duties without any justification (see part 8, Article 28 of the CUoBP). Moreover, part 2 of Article 28 of the CUoBP provides for full control by the creditors’ committee over the appointment of candidates for the executor (in case of his removal by the court), as well as the liquidator. Therefore, it is not clear what is the point for the initiating creditor to advance the payment for the insolvency receiver, and to propose his candidacy to the court taking into account the amendments introduced by the Law of Ukraine of 5 June 2020 No. 686-IX. The problem is especially exacerbated when the sale of pledged property in liquidation proceedings is possible only at the will of the liquidator, who, logically, is wholly controlled by the committee under such a model. Thus, this delays at least the satisfaction of the pledge creditor’s claims. In other words, the pledge creditor becomes hostage to the will of the bankruptcy creditors who formed the committee.

In addition, in practice, in fact, the simplified mechanism for satisfying the claims of the pledge creditors in the procedure of property disposal has been leveled. Thus, ideally, the legislator provided for in part 8, Article 41 of the CUoBP that the moratorium on satisfaction of secured creditors’ claims at the expense of the debtor’s property, which is the subject of pledge, shall be terminated automatically after the expiry of 170 calendar days from the date of the commencement of the property disposition procedure, unless the commercial court makes a ruling on declaring a debtor bankrupt or introduction of the financial rehabilitation procedure during this period. On the other hand, the satisfaction of creditors’ secured claims at the expense of the debtor’s property, which is the subject of collateral, shall be carried out only as part of the bankruptcy proceedings (part 6, Article 41 of the CUoBP). That is, on the one hand, the moratorium is terminated, but the sale of property is still possible only as part of the bankruptcy proceedings. Thus, the opportunity for the creditor to apply out-of-court settlement as provided for, in particular, in Article 37 of the Law of Ukraine On Mortgage, is not yet clear. In this regard, there is also no practice at the level of higher courts.

It should also be noted that the lack of proper transitional and final provisions in the CUoBP creates practical problems in the application of the new specialized law to legal relations that arose before its entry into force. In particular, invalidation of the debtor’s transactions on the grounds specified in Article 42 of the CUoBP is ambiguous in practice, if they were committed before the introduction of the CUoBP. It should be noted that this article of the specialized law expands the grounds for invalidation of transactions, and increases the disputed period of their commission to three years. As a result, the Supreme Court in its ruling of 12 November 2020 in case No. 911/956/17 draws attention to the fact that the Final and Transitional Provisions of the CUoBP do not provide for retroactive effect of the provisions of Article 42 of the CUoBP, as well as any other provisions of the CUoBP. In view of this, the general or special substantive law provisions that determine the grounds for invalidity of these agreements and which existed at the moment of concluding the agreement (transaction) are applied to agreements concluded before the effective date of the CUoBP. On the other hand, the application of Article 20 of the Law of Ukraine On Restoring Debtor’s Solvency or Declaring a Debtor Bankrupt, which contained similar grounds for contesting the debtor’s transactions before the entry into force of the CUoBP, is blocked by part 4 of the Final and Transitional Provisions of the CUoBP, which establishes that from the effective date of the CUoBP the further consideration of bankruptcy cases shall be carried out in accordance with the provisions of the CUoBP, regardless of the date of commencement of the bankruptcy proceeding.

Summing up the achievements of 2020 in the field of bankruptcy, it must be acknowledged that it has proved to be rather productive in terms of practical adaptation of the new progressive provisions of the CUoBP, and a number of shortcomings that clearly need to be urgently improved were found. At the same time, the global economic trends caused by COVID-19 will certainly provoke positive statistics on bankruptcy proceedings after quarantine without appropriate measures taken at the legislative level to protect businesses that continue to suffer from “sanitary restrictions”. It should be understood that at the moment new bankruptcies have merely been postponed, while the problem of potential insolvency and its prevention needs a comprehensive approach and solution.

^[1] https://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=70179

^[2] Indent 2, part 6, Art. 39 of the CUoBP

^[3] See decree dated 03.06.2020 in case No. 905/2030/19