Bankruptcy code of Ukraine: 2 years in force

Ukraine's business climate has long repelled potential investors with its dramatic level of debt repayment. Correction of this situation was entrusted to the newly created Code of Bankruptcy Procedures, which entered into force two years ago. It should be noted that this term is too short to speak about the effectiveness of the new regulation and the achievement of the set goals. In addition, the effectiveness of the Code has been affected by the ongoing coronavirus pandemic and the resulting restrictions and moratoriums on the opening of bankruptcy proceedings. However, two years of practical application of the new legislation have clearly confirmed that bankruptcy proceedings have made a significant step forward in their development and the process of further improvement will traditionally never end.

STRONG SIDES

The main merit of the new Code is that it provided safeguards against the use of bankruptcy proceedings in favor of a debtor who evaded paying debts. Previously, the liquidation of the devastated enterprise by the debtor did not bring any benefit to creditors, so they practically did not participate in the proceedings. Now it is impossible to liquidate your own company and get forgiveness of debts.

Moreover, if it is proved by the court that the company was brought to bankruptcy by concluding fraudulent transactions and alienation of property in violation of the rights of creditors - the owners and managers of the company will have to pay with their own property. The Code provided an opportunity to conduct a more thorough analysis of the financial and economic condition of the debtor before the opening of bankruptcy proceedings. If in the previous law the financial condition of the property does not lead to the specific objectives of this procedure.

The sanation procedure is organised in the same way. For example, earlier the court introduced this procedure, and only after that the actual rehabilitation plan was developed. There were examples that the reorganization procedure lasted up to six years without a plan. The Code clearly defined the sequence: first the plan and then the purpose of the procedure.

An equally good idea which was implemented in the Code and continues to develop was the establishment of a mechanism to satisfy the claims of any creditors, including secured, exclusively in bankruptcy proceedings through the issuance of appropriate court decisions.

Another important positive achievement of the Code is the sale of all the bankrupt's property exclusively at electronic auctions according to the procedures of the Prozorro.Sales system. The sale of property now takes place through a two-tier open source electronic trading system that ensures the transparency of auction data, public control over the course of auctions, prevents the influence and manipulation by excluding the human factor. All interaction of the buyer with the bidding system takes place through commercial platforms, the administrator does not know who is participating in the bidding until the end of the auction and cannot affect the admission of participants or the course of bidding.

WEAK SIDES

Despite its progressive nature, the Bankruptcy Code is still a product of social compromise between different market participants, so there are still many controversial issues regarding procedural and substantive rules. In addition, some amendments to the Code did not lead to the result expected by the legislator.

Most of the unresolved issues concern the person of the arbitration trustee. The very procedure of appointing an arbitration trustee turned out to be problematic. Prior to the Code, there was an automatic distribution. This norm was transferred to the Code by linking it to the UJITS (Unified Judicial debtor was studied only a year before the opening, now this term has been extended up to three years. The procedure for appealing and invalidating the debtor's transactions which are aimed at harming creditors has also been improved.

The application of the institution of joint and several liability is generally a fresh rule (Article 34 of the Code of Civil Procedure), which had no precedent in corporate law until 2019. This institution is applied to the head of the debtor, if he did not apply to the commercial court in time in case of threat of insolvency of the company. In this way, the Code changed the attitude of creditors and gave them the opportunity to become more involved in bankruptcy cases and to understand whether they will be able to repay their money and to what extent their obligations will be met. On the other hand, unscrupulous debtors are no longer so active in bankruptcy proceedings because they are afraid that they will be held financially liable.

The Code also regulated the timing of certain procedures. In particular, the procedure for disposing of property. It may not last more than 170 calendar days (Part 2 of Article 44 of the Code of Civil Procedure). Then the court should make a decision about the transition to the procedure of reorganization, or recognition of the debtor bankrupt and its liquidation. Nine years ago, property management was a real practice. Today, judges are willing to use the new provisions of the Code, and even close the case if the disposal of  Information and Telecommunication System). However, there was a technical problem - the UJITS did not work, and it is unknown when it will work. Now, as a temporary rule, the initiating creditor can apply for the appointment of the trustee of the arbitration trustee whom he deems necessary and whom he trusts more. This norm is now enshrined into the Transitional Provisions of the Code, however, the Draft Law No. 4409 which the Parliament is going to consider in the second reading provides the translation of this norm into the body of the Code itself. Some people say that this is the only way out in our reality because the other does not work and opponents of these changes point to the possible monopolization of the market by part of the arbitration trustees because there will be no equal access to cases any more.

The issue of guaranteed remuneration of arbitration trustees is also hotly debated. Previously, there were no guarantees of payment at all, which led to numerous abuses. The Code has somewhat rectified this situation by allowing the remuneration of the arbitration trustee to be advanced paid for three months. This works in the rehabilitation process because it is aimed at restoring solvency in which everyone is interested - both creditors and the debtor. But in the liquidation procedure again there are problems with payment when the duration of the procedure exceeds three months and the bankrupt has not found property. In this case the courts (there is already a relevant practice) charge the creditors to pay the arbitration trustee a fee for exercising his powers as a liquidator in the liquidation proceedings. Of course, they do not like it and there is already a long search for opportunities to change this practice at the legislative level.

For example, the banking community, as the most common creditor, proposes to introduce financing of the arbitral trustee in the absence of the debtor's property from the founders of the debtor-legal entity because they receive real benefits from the procedure and may be blamed for the debtor's lack of sufficient assets for the procedures of termination of a legal entity created by them. Or pay for these services from the state budget with the subsequent recovery of these funds in favor of the state from the participants of the legal entity, if they do not voluntarily reimburse them. As for the individual, it is proposed to use as an analogy of the existing institution of free legal aid, however, these funds should be included in the state budget, and the state is unlikely to be interested in such a mechanism. So the question remains open.

And the weakest one in the implementation was the institution of insolvency of an individual. A separate book in the Code is devoted to the debt restructuring and debt repayment. This is a novelty. However, the new rules, in their most, are not clear neither to lawyers nor arbitrators, especially in the application of these rules. Also, there is no single approach to how to deal with foreign currency loans secured by mortgages. In particular, it is not clear how to calculate the payments to be paid by the debtor in the case of reaching an agreement with the creditor. It turned out that the amount of liabilities can be determined in different ways and it may not be liable for the debtor.

There are also questions about the debtor's only housing. The Code provides the debtor to keep a house or apartment, if their area does not exceed 120 or 60 square meters respectively. But in practice it happens that the debtor has children and the area of housing exceeds the mentioned above norms. According to the Code his housing must be sold and the debtor receives nothing for it.

However, it is obvious that disputes over the Code are a normal process, in the heart of which there will be really working norms, a real balance of interests will be created and everything contrived and artificial will be eliminated. And the Code will be the harbinger of change which will convince the market to trust the bankruptcy procedure more and not to forget that the issue of insolvency is not only liquidation but also rehabilitation, and therefore, the life after bankruptcy exists!

Andrii Spektor, LB Senior Partner (Laboratory of Bankruptcy)