ALERT: New Bankruptcy Code of Ukraine – an Insight to Some Key Developments
Global tendencies and intensively developing restructuring & bankruptcy legal environment across the globe make it impossible to stay aside from such processes. Ukraine is not an exception.
In this connection on 18 October 2018 the Parliament of Ukraine finally adopted the first ever Code of Ukraine on bankruptcy proceedings (“Bankruptcy Code of Ukraine”), which was drafted with the assistance of the IMF and the World Bank. It purports to uplift Ukraine in the Doing Business ranking by 80 positions in “Resolving Insolvency” and by 9 positions in the general Ease of Doing Business rank. In essence, however,
the real indicator of a success of enacting of the Bankruptcy Code of Ukraine will ultimately be defined by the increased number of rescued viable businesses and the flow of foreign investment in the country, should national restructuring and bankruptcy frameworks be found more transparent, stable and effective than before.
While the Bankruptcy Code of Ukraine is still awaiting its signature by the President of Ukraine, it is suggested to analyze some key forthcoming changes and developments that shall come in effect upon the entry of the Bankruptcy Code of Ukraine into force, i.e.:
1. Improved Preventive Restructuring Framework:
The former national preventive restructuring framework (a so-called ‘rescue procedure of the debtor before the opening of the bankruptcy proceeding’), envisaged by the Law of Ukraine “On Restoring Solvency of the Debtor or Declaring It Bankrupt” (“Law of Ukraine”), had no real prospect of practical implementation, mostly due to the all-secured creditors’ consent requirement for the approval of the rescue plan, which was almost impossible to obtain.
With the adoption of the Bankruptcy Code of Ukraine the former ‘dead’ provisions have been perfected, inter alia, by lowering of the voting threshold for the affected secured creditors (from 100 % reducing to 2/3 of those voting in the class).
In practice, the introduction of a within-class cram-down of the dissentient secured creditors mechanism opens the door for preventing them from impeding the approval of the rescue plan and should promote the within-country preventive restructurings.
2. Specified Debtor’s Obligations in a Mere Zone of Insolvency & Imposed Joint Liability on Debtor’s Director:
Previously, the Law of Ukraine set a general obligation of the debtor in case of a mere likelihood of insolvency (when repaying to one creditor will result in inability to repay to the others in full) to file an application for the opening of the bankruptcy proceeding.
However, now under the Bankruptcy Code of Ukraine the debtor shall be bound by a strict time-limit, i.e. to do it within 1 month as of the date of appearing of such circumstances.
Should the director of the debtor fail to comply with the above-mentioned obligation in the zone of insolvency and the bankruptcy court hold that, the former shall bear a joint liability before the creditors. Moreover, the ruling of the bankruptcy court holding the infringement shall alone suffice to expose the debtor’s director to the joint liability, without the need to prove his/ her ‘fault’ in a separate criminal proceeding.
3. Easy “Entry” into the Bankruptcy Case:
The grounds for the opening of a bankruptcy proceeding have been simplified. No longer is the initiation of the bankruptcy case linked to the burdensome and time-consuming requirements. Namely, the creditor is no more dependent on the existence of following: a) a debt threshold (i.e. the outstanding uncontested claim in the amount of 300 minimal wages(*) (approximately EUR 40 000,00)); b) the collection of debt proofs via the court and enforcement authorities (i.e. obtaining of the final court decision and the ruling on the opening of enforcement procedure) and c) the debtor’s failure to repay the debt within a three-month period as of the set date for its settlement.
Instead, to initiate a bankruptcy case under the newly enacted Bankruptcy Code of Ukraine the creditor is to provide the information on the amount of debt owed to it by the debtor, along with laying down the circumstances of the case as a ground for opening of the bankruptcy proceeding in its application. Moreover, along with submitting the application for the opening of the bankruptcy proceeding, the creditor or the debtor (depending who files) is to secure a trustee’s advance payment of 3 minimal wages (approximately EUR 404,00) for three months of him exercising his duties, together with paying of the court fee in the amount of 10 living minimums (**) (approximately EUR 620,00).
4. Introduction of the Automatic Lifting of a Moratorium (a Stay) for Secured Creditors:
Generally, the opening of the court bankruptcy proceeding in Ukraine automatically triggers a moratorium (a stay) to protect the debtor and its property from claims and enforcement, foreclosure actions.
However, such a general bar on foreclosure actions for secured creditors has been circumvented by new provisions of the Bankruptcy Code of Ukraine. Namely, provided no court ruling on the opening of the rescue procedure or Decision on declaring the debtor bankrupt is rendered, the moratorium should automatically be lifted for the secured creditors upon the lapse of 170 calendar days as of the date of opening of administration procedure. In practice, that should mean that the secured creditor shall have a chance to foreclose on the collateral just after the administration procedure and before other rescue or liquidation procedure starts, should the abovementioned conditions meet.
(*) One Minimal Wage amount as of 1 January 2019 = 4 173,00 Hryvnia; 300 minimal wages = 1 251 900, 00 Hryvnia; 1 EUR = UAH 30.6 (January 2019);
(**) One Living Minimum as of 1 January 2019 = 1 921,00 Hryvnia.
5. Introduction of the Relief from the General Moratorium (a Stay) in the Rescue Procedure:
Not only the automatic lifting of a moratorium (a stay) is possible for the secured creditors (as described in item 4 above), but another option is also available at a later stage. Namely, the secured creditor can file a motion before the court in the rescue procedure, requesting lifting of the general moratorium, should the court find that such a collateral is not involved in the rescue plan or is subject to fast deterioration or degeneration.
The Bankruptcy Code of Ukraine envisages that the rescue plan may entitle one or more secured creditors to foreclose on the collateral after the approval of the rescue plan by the commercial court, and in this case such secured creditors do not take part in voting on the rescue plan.
6. Not Only ‘Against’ the Debtor, but ‘By’ the Debtor Claims Allowed:
Now, not only the pecuniary claims ‘against’ the debtor, but also all claims where the debtor is a ‘party to’, and cases with adversarial claims against the debtor and its property, and those invalidating the results of the auction, avoidance transaction claims executed by the debtor or other claims against the debtor, vindication of debtor’s property or reimbursement of its price, recovery of unpaid wages, renewal at work – all these claims shall be possible to hear within the bankruptcy case without opening by the debtor of a separate adversarial proceeding against third parties.
The effectiveness and deficiencies of the adopted Bankruptcy Code of Ukraine shall be possible to detect only via its practical application. In any case, it is deemed that the vector that is being pushed forward corresponds to the global tendencies towards facilitating the rescue of viable businesses in the zone of insolvency and increase of the efficiency of bankruptcy procedures.
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