Can a Debtor Nominate Its Own Insolvency Practitioner?

The Code of Ukraine on Bankruptcy Procedures is based on the principle that an insolvency practitioner is an independent participant in insolvency proceedings whose procedural powers arise exclusively upon appointment by the court. Accordingly, the traditional model of bankruptcy proceedings in Ukraine has always relied on judicial appointment rather than contractual engagement of an insolvency practitioner.

However, the practical application of the Code has demonstrated that this rule is not absolute. Initially, the Supreme Court acknowledged the possibility of concluding an agreement between a debtor and an insolvency practitioner regarding deferred remuneration. Subsequently, the legislature introduced provisions under which such an agreement may serve as a sufficient basis for the court to appoint a specific insolvency practitioner.

This does not mean that contractual arrangements have replaced judicial appointment or the statutory selection procedure. Rather, these mechanisms constitute narrowly defined exceptions established either by legislation or by the case law of the Supreme Court.

The Supreme Court's Approach

One of the first decisions that effectively shaped the contractual model was the ruling of the Commercial Cassation Court within the Supreme Court dated 19 November 2020 in Case No. 910/726/20. The case concerned the commencement of insolvency proceedings against an individual debtor. The lower courts returned the application without consideration because the debtor had failed to provide evidence of advance payment of the restructuring administrator's remuneration to the court's deposit account.

While upholding those decisions, the Supreme Court emphasized another important aspect. The Court held that the law does not prevent a debtor from concluding an agreement with an insolvency practitioner who agrees to perform the functions of a restructuring administrator on the basis that payment of remuneration will be deferred until the debtor's assets are realised.

A similar approach had previously been expressed in the Supreme Court's judgment of 24 September 2020 in Case No. 910/2629/20. Accordingly, the Court recognised that an agreement between the debtor and an insolvency practitioner is not, in itself, inconsistent with the Bankruptcy Code, provided that it does not alter the statutory procedure for appointment or compromise the practitioner's independence.

The Temporary Wartime Model

The contractual approach subsequently received explicit legislative recognition through Law No. 3249-IX. Paragraph 1-6 of the Final and Transitional Provisions of the Bankruptcy Code provides that, during martial law and for six months after its termination or cancellation, an applicant may commence insolvency proceedings without making an advance payment of the insolvency practitioner's remuneration to the court's deposit account.

Instead, the application must include an agreement concluded with a selected insolvency practitioner regarding the performance of duties until the closure of the proceedings. This provision constitutes an exception to the general procedure for selecting an insolvency practitioner. Subject to compliance with the statutory requirements, the court appoints the practitioner designated in the agreement.

Nevertheless, the legislation establishes several important limitations. First, the remuneration agreed by the parties may not exceed the limits established by Article 30 of the Bankruptcy Code. Second, the mechanism applies to both individual insolvency proceedings and corporate bankruptcy proceedings. Accordingly, the agreement serves as procedural evidence that the selected insolvency practitioner has consented to perform the relevant duties without prior advance payment of remuneration.

Contractual Appointment in Preventive Restructuring

A separate contractual model has been introduced for preventive restructuring proceedings. Pursuant to Article 33-2 of the Bankruptcy Code, the candidate for the position of preventive restructuring administrator is proposed by the debtor or by the creditors' meeting. The application for appointment must include a copy of the agreement concluded with the insolvency practitioner specifying the terms of engagement and remuneration.

A distinctive feature of this procedure is that the Bankruptcy Code expressly requires the competent state authority for bankruptcy matters to approve a standard form of such agreement.

However, even under this model the agreement does not independently determine the practitioner's remuneration.

The legislation also safeguards the administrator's independence. In particular, an insolvency practitioner who has maintained contractual relations with either the debtor or a creditor during the preceding three years is not eligible for appointment as a preventive restructuring administrator.

Essential Terms of the Agreement

In practice, the agreement should clearly define the scope of the parties' arrangements. It is advisable to specify the procedural capacity in which the insolvency practitioner will act, the relevant stage of the proceedings, and the duration of the agreement. The remuneration mechanism should also be expressly regulated, including payment terms and confirmation that the agreed remuneration complies with the statutory limits established by Article 30 of the Bankruptcy Code.

The agreement should further address the reimbursement of the practitioner's expenses. Where the parties agree that ordinary expenses are included within the remuneration, this should be expressly stated. At the same time, expenses that are recoverable from the debtor's estate or relate to the engagement of external specialists remain subject to the relevant provisions of the Bankruptcy Code. Although professional liability insurance is not mandatory under the Code, the parties may agree contractually that such insurance shall be maintained throughout the engagement.

Importantly, the agreement itself does not confer procedural authority upon the insolvency practitioner. Such authority arises solely upon appointment by the court.

Limitations of the Contractual Model

The existence of an agreement does not guarantee that the same insolvency practitioner will remain involved throughout the entire bankruptcy procedure. Once the proceedings move to subsequent stages, including rehabilitation, liquidation or asset realisation, the Bankruptcy Code establishes separate appointment procedures involving the creditors' meeting or creditors' committee together with the court.

The temporary wartime mechanism is likewise limited in duration. Six months after the termination or cancellation of martial law, the general rule requiring advance payment of remuneration will again apply unless the legislature adopts further amendments.

Finally, any contractual arrangement must comply with Article 13 of the Bankruptcy Code concerning the independence of the insolvency practitioner and the absence of conflicts of interest.