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New Bankruptcy Code: Overview of Novelties

New Bankruptcy Code: Overview of Novelties

Ukraine
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Starting from October 21, 2019 a new bankruptcy code entered into force in Ukraine substituting the law that had been in effect since 1992 (the «Law»). New legislation is aimed at making the procedure more efficient and expedient, as well as at granting the creditors more control over the insolvency process.

As the insolvency proceedings are usually quite lengthy, no insolvencies have yet been completed pursuant to the new law and it might be too soon to talk about vivid effects of the new legislation. Meanwhile the Ministry of Justice believes that new insolvency rules will bring Ukraine closer to the world’s best practices and have a positive impact on economy and investment climate1.

Below is the brief summary of major changes introduced by the new code (the «Code»).

INSOLVENCY OF INDIVIDUALS

Another major change introduced by the Code is the insolvency procedure for individuals (previously the insolvency procedure was possible for individual entrepreneurs only). The procedure is quite similar to the insolvency procedure for legal entities, however, it has certain particularities.

It should be noted, that only the debtor is allowed to apply for initiation of insolvency proceeding with respect to his or her existing debts in the following exhaustive cases:

  • an amount of the debtor’s indebtedness towards the creditor (creditors) equals at least 30 minimum wages (approximately USD 5,700), or
  • the debtor has stopped repaying the loans or other scheduled payments in an amount of more than 50% of the monthly payments under each of the loans and other obligations for 2 consecutive months, or
  • it has been concluded within the enforcement proceeding that the individual does not own any property that could be subject to foreclosure, or
  • there is a threat of insolvency (i.e. there are other circumstances that can entail the debtor`s failure to perform his or her obligations).

Together with the submission to initiate the insolvency proceeding the Code obliges the debtor to submit a debt restructuring plan. The debt restructuring plan (and any amendments thereto) shall be deemed approved if all of secured creditors and at least 50% of the unsecured creditors have supported it.

The prohibition to dispose the debtor`s assets (moratorium) shall be imposed by the commercial court for 120 calendar days starting from the date of initiation of the insolvency proceeding.

ARCHITECTURE OF INSOLVENCY PROCEDURE

>> Initiation of insolvency has been simplified

The Code now allows a creditor to initiate insolvency against a debtor irrespectively of an amount of its debt. Previously, the Law allowed to claim insolvency provided that the creditor was able to evidence existence of an undisputable debt in the amount equal to at least 300 minimum wages (approximately USD 58 400). This not only required such creditor to obtain a court decision against the debtor, but also to put such decision into enforcement and await until the claims have not been satisfied for at least three months thereupon.

>> Obligation to report insolvency and liability of debtors’ managers

The Code imposed an obligation on a troubled company to apply to the court for insolvency within one month in case satisfaction of one or several creditors` claims will lead to inability to perform the debtor’s monetary obligations towards other creditors. At that, the manager of the company shall bear joint and several liability for breach of this obligation and the company’s subsequent failure to satisfy the creditors’ claims.

>> Changes in approval of sanation plan

The sanation plan was to be approved by the general creditors’ meeting and all secured creditors of the debtor according to the Law. Under the new rules set forth in the Code, each item of sanation plan shall be separately approved by at least 50% of unsecured creditors holding claims in respective category (excluding creditors who are interested parties in relation to the debtor). In case secured creditors participate in the sanation plan, at least two-thirds of votes of such secured creditors should be casted for each respective item.

>> Settlement agreement procedure has been abolished

The Code has excluded the settlement agreement procedure from the list of judicial procedures applied to the debtor. This step is expected to enhance the efficiency of insolvency procedures, since, in practice, violation of settlement agreement resulted in its termination and reinstitution of insolvency proceeding, which significantly delayed the insolvency proceeding.

>> Restrictions as to contesting some court decisions were introduced

The majority of appeal court`s decisions will not be subject to cassation appeal, except for the decision on initiating the insolvency proceeding, the decision upon the review of the creditor`s monetary claims, the decision on closing the insolvency proceeding and the decision on recognition of a bankrupt and initiating the liquidation proceeding.

In addition, the Code stipulates that insolvency proceedings cannot be suspended (despite provisions to that effect in the commercial procedural code).

>> New procedure for sale of property

The Code has released the liquidator from the mandatory obligation to sell the property of a bankrupt company as an integral property complex – it shall be sold based on the creditors’ committee approval at an auction (previously the liquidator had a discretion to choose whether to sell the property at an auction or directly to a purchaser). Closed biddings (zakryti torhy) have been removed in the Code.

The Code has introduced an obligation to sell the property of the bankrupt only by means of the electronic trading system, namely a State entity “Prozorro.Sale” which is entitled to administer such electronic trading system2. It is expected that the usage of electronic trading system will reduce potential corruption risks, bring more transparency into the bidding procedure and help to sell the property of bankrupts for the most competitive price.

The liquidator shall determine the terms and conditions of sale, subject to approval by the creditors` committee or the secured creditor (with respect to the secured assets), namely (1) the list of property subject to bidding (lot), (2) starting price, (3) bidding steps.

>> Liability for violation of bidding procedure

The fine in amount of either the security payment or 10% of the purchase price, whichever is higher (the Law only operated with the former), is envisaged for violation of the prescribed bidding procedure, provided that such violation has prevented other parties from participating or winning the bidding.

Interestingly, the operator of the authorized electronic trading platform and its management shall bear joint and several liability for violation the bidding procedure.

CREDITORS’ RIGHTS

>> New rights for general creditors’ meetings and creditors’ committees

Several important competences have been granted by the Code to creditors` committees, namely:

  • to demand from the court removal of insolvency officer at any time without justifying the grounds. Note that other participants of the proceedings are entitled to request the same only in case there are particular grounds envisaged by the Code (e.g. conflict of interest);
  • to approve material transactions with the debtor`s assets within the asset disposal procedure;
  • to approve the sale of the debtor’s property (the secured creditors shall provide a consent with respect to secured assets), as well as the terms and conditions of such sale (including the list of property, starting price, bidding steps) during the liquidation and sanation procedures. Previously the creditors` committee could only determine the list of property subject to sale.

Moreover, general creditors’ meetings have been vested with the right to request the court to transfer to further stage of the insolvency proceeding.

>> Changes in treatment of submission of creditor claims will not entail any changes in the creditors ranking

The Law used to deprive the creditors who failed to submit their claims in time (that is within 30 days upon the official announcement of the initiation of insolvency proceeding) of the right to participate in decision-making. Unlike the Law, the Code expressly recognizes such creditors as pre-bankruptcy (konkursni) creditors, however, such creditors will not have the voting right at the general creditors’ meetings and the committees of creditors of the debtor.

Unlike the Law, the Code expressly allows satisfaction of creditor’s claims by way of set-off of reciprocal mutual claims (moratorium shall not extend on it), but only subject to the creditor’s consent and provided that this does not violate property rights of other creditors.

>> The secured creditors’ rights have been expanded

Unlike the Law, which gave the secured creditors almost no voting rights, the Code vested secured creditors with the status of a party to insolvency proceedings, thus, granting the right to apply for invalidation of the debtor’s agreements.

Also, it has been expressly regulated that the secured creditor may choose to surrender its collateral in full or in part and to become an unsecured creditor in such part with respective voting rights.

>> The automatic stay period for the moratorium was established

The moratorium on asset disposal does not apply in case of foreclosure of collateral and shall automatically terminate with respect to secured assets upon expiration of 170 calendar days from the day of introduction of asset disposal (pre-liquidation) procedure, unless the commercial court by its decision recognizes the debtor a bankrupt and introduces a sanation procedure.

The court is now allowed to terminate the moratorium with respect to secured assets based on the secured creditor`s request within the sanation procedure, if such assets are not subject to sanation plan or are perishable.

>> Changes in the definition of material transactions

According to the Code, material transaction is a transaction with the property, works or services, the market value of which at the date of the transaction is equal to 10% or more of the value of the debtor’s assets according to the latest annual financial statements. To recap, the Law defined a material transaction as a transaction for disposal of the debtor’s property, the book value of which exceeds 1% of the book value of the debtor’s assets as of the date of the transaction. Moreover, in case instead of conducting several transactions the debtor could have entered into one material transaction, then each of such transactions will be considered as material.

This provision is aimed at preserving the potential liquidation estate and, accordingly, at protection of the rights of creditors who should receive their satisfaction at its expense.

>> More possibilities for invalidation of the debtor’s agreements

The list of grounds for invalidation of the debtor’s agreements has been supplemented with the following:

  • the debtor has entered into an agreement with the interested party;
  • the debtor has concluded a gift agreement.

It should be noted that the debtor’s agreements concluded within 3 years (as compared to 1 year, pursuant to the Law) preceding the initiation of the insolvency proceeding can be subject to invalidation, provided that these agreements have caused the losses to the debtor or the creditors. While only pre-bankruptcy (konkursni) creditors could previously claim invalidation of the debtor’s agreements, the Code now does not restrict the types of creditors who have the right to claim invalidation.

>> Secured creditors’ right to buy out the unsold assets

Secured creditor have been granted the right to buy out the secured assets, provided that they were not sold at the additional bidding and the second additional bidding. The liquidator shall sell such assets for the initial price of the additional or second additional bidding.


https://minjust.gov.ua/news/ministry/valeriya-kolomiets-ministerstvo-yustitsii-stvorilo-peredumovi-dlya-zapusku-kodeksu-z-protsedur-bankrutstva

2 The bidding procedure of the bankrupt`s property disposal has been approved by the Regulation of the Cabinet of Ministers of Ukraine No. 865 dated October 2, 2019.

By Igor Krasovskiy, Partner, and Olena Savchuk, Senior Associate, Integrites

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