ALERT: Part II – New Bankruptcy Code of Ukraine – an Insight to Some Key Developments

While the Code of Ukraine on Bankruptcy Procedures (‘Bankruptcy Code of Ukraine’) is still awaiting the signature of the President of Ukraine, we continue analyzing the forthcoming changes and developments that will come with the launched bankruptcy law reform in Ukraine.

Among the key developments that were not touched upon in the pervious Legal Alert, but are subject to analysis today, are the following:

  1. The Future of Pending Bankruptcy Proceedings:Once the Bankruptcy Code of Ukraine is signed, it shall come into force six months as of the date of its official publication (except for the provisions on the electronic trading system – in three months) and will replace the Law of Ukraine “On Restoring Solvency of the Debtor or Declaring It Bankrupt” (hereinafter – “Law of Ukraine”). Importantly, any further hearing of a bankruptcy case, as of the date of entry of the Bankruptcy Code into force, shall be carried outin accordance with its provisions, regardless of the date of opening of the bankruptcy proceeding (except for a pending rescue procedure that shall be governed by the former Law of Ukraine). Furthermore, the subsequent court procedure shall be performed in accordance with the Bankruptcy Code of Ukraine.
  2. No Loss of Ranking for Unsecured Creditors:Previously, the creditors who either missed the deadline for submitting their pecuniary claims against the debtor within a set period of time or failed to do so that at all in the bankruptcy proceeding were bound to lose their 4th ranking position in the order of priority of claims, instead their claims were subject to satisfaction only in the 6th order of priority.The Bankruptcy Code of Ukraine cancelled this provision and equated the creditors in such a way that even though the unsecured creditors failed to submit their claims in time, they would still be ranked as if they had fulfilled the set requirement. No loss of the envisaged ranking shall take place.However, such ‘belated creditors’ shall be deprived of the right to be active participants in the bankruptcy case (they shall only hold the advisory vote instead of the decisive vote at the creditors’ meetings and committee).
  3. Extended Claw-Back Period in Avoidance Transaction Actions:Now the claw-back (“twilight”) period has been extended from 1 year to 3 years. It means that the transactions that were entered into by the debtor 3 years before or after the opening of the bankruptcy proceeding and caused damages to the debtor or creditors can be subject to avoidance actions within the bankruptcy proceeding upon trustee’s or creditor’s motion.
  4. Removal of a Non-Bona Fide Trustee by Secured Creditors:Previously, to remove a non-bona fide trustee was within the competence of the creditors’ committee (upon its motion) or at court’s own discretion (the secured creditor could only file complaints against trustee’s actions or failure to act). Given, that the secured creditor did not constitute the creditors’ committee, it was practically impossible for the former to dismiss the non-bona fide trustee without the creditors’ committee will.The Bankruptcy Code of Ukraine has filled this gap. Along with granting unlimited rights to the creditors’ committee to remove the trustee from exercising his/ her duties at any time, regardless of the grounds thereto, the Bankruptcy Code of Ukraine extended the possibility to initiate the removal of the trustee to the secured creditors upon their motion as the ‘participant’ in the bankruptcy case on the following grounds:
    1) Non-performance or undue performance of the duties as a trustee;
    2) Abuse of the rights as the trustee;
    3) Submitting to the court of false information;
    4) Refusal to grant access to the state secret or cancellation of the previously granted access;
    5) Termination of trustee’s activity;
    6) Conflict of interest.Should the case be, the commercial court shall within 14 days render its decision on the removal of the trustee from exercising his/ her duties.
  5. Clarified ‘Distribution of Proceeds’ Rules for Secured Creditors:Previously, there was a discrepancy between law and practice. The Law of Ukraine explicitly provided that the collateral of the secured creditor did not comprise the bankruptcy estate. Though, de facto it used to be included into one item (a lot) and the sale of debtor’s property as a unitary complex in the liquidation procedure. At the same time, no regulation as to how the proceeds from such a sale of one lot (comprising of the secured creditor’s collateral and the ordinary assets) at the auction be distributed was provided.The Bankruptcy Code of Ukraine fills this gap. Although now all the property of the debtor shall constitute the bankruptcy estate, and the proceeds from the sale of the collateral shall (as declared before) exclusively be used to repay to secured creditors (but now only after reimbursement of the costs incurred by maintenance, storage of such property and for the operator of the electronic system), the distribution of proceeds rules have been envisaged. Namely, should the collateral form part of the estate subject to sale along with the ordinary property, the initial price for each type of property shall be determined separately. Hence, the proceeds received from the sale of such one lot shall be distributed between the secured creditors and other creditors proportionately to the initial price of the property.
  6. Limited Challenging Possibilities:Previously, different court rulings and decisions were subject to challenge both at the appeal and cassation levels. However, the Bankruptcy Code of Ukraine limits such possibilities.With the newly adopted Bankruptcy Code of Ukraine most of the court decisions shall ‘stop’ at the appeal level, being final and binding. Namely, no more shall it be possible to review in the cassation the decision of the court of appeal regarding the ruling on avoidance transaction actions, removal of the trustee, pecuniary claims consideration, proceeding to the next court procedure and approval of the rescue plan.Only the rulings on the opening of the bankruptcy proceeding, and the decision on declaring the debtor bankrupt and opening of the liquidation proceeding shall be possible to review at the cassation level.Moreover, challenging of the court rulings shall not suspend the bankruptcy proceeding as per the Bankruptcy Code of Ukraine.
  7. Sale of Debtor’s Assets via an Electronic Auction:The sale of all debtor’s assets shall exclusively take place via an electronic auction. This measure should promote transparency of the sale procedure and eliminate (or reduce to the minimum) external intervention thereinto.


Only practice makes it perfect. Let us live and see how all these anticipated developments take root in Ukraine once the Bankruptcy Code of Ukraine is in its full effect.

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