Preventive Restructuring: A Second Chance for Businesses

Since 2019, Ukrainian bankruptcy legislation has undergone significant changes. One of the key drivers behind the latest reforms has been the alignment with European Union standards. In September 2024, the Verkhovna Rada adopted Law No. 3985-IX, designed to implement EU Directive 2019/1023 on preventive restructuring frameworks. This step was part of Ukraine’s commitments under the Ukraine Facility program, which conditions macro-financial assistance from the EU. The Memorandum of Understanding dated January 16, 2023, explicitly stated that improving insolvency procedures in line with the principles of Directive 2019/1023 would help build a more robust system and align national legislation with the EU acquis. Introducing a preventive restructuring mechanism was one of the program’s requirements necessary for continued financial support from the EU.

A New Legal Framework: Essence and Features

Preventive restructuring is a relatively new procedure, introduced for the first time into the Ukrainian Bankruptcy Procedure Code by Law No. 3985-IX. This law added a separate Book 3 titled “Preventive Restructuring” to the Code. The mechanism came into force on January 1, 2025, and is aimed at providing solvent (but financially distressed) debtors with tools to recover without initiating formal bankruptcy proceedings.

The core idea of this procedure is to give companies a “second chance” at an early stage. Preventive restructuring allows a debtor to take measures to restore financial stability before becoming insolvent. Essentially, it is a system of organizational, managerial, financial, legal, and other measures designed to prevent insolvency, implemented in accordance with a preventive restructuring plan.

Key features of the new legal tool include:

Voluntary and debtor-initiated. Only the debtor—a legal entity or individual entrepreneur (except for categories where bankruptcy is not allowed, such as banks, credit unions, insurers, etc.)—can initiate the procedure. Creditors cannot trigger preventive restructuring without the debtor’s consent. This approach contrasts with classic bankruptcy proceedings, where creditors can initiate cases. Voluntary participation enables business owners to maintain greater control over the situation and independently develop a crisis-exit strategy. For legal entities, the decision to begin restructuring is made by the highest governing body or the owner of the debtor’s assets.

Early intervention in case of insolvency risk. Unlike traditional bankruptcy, which starts after actual default, preventive restructuring can be initiated when signs of insolvency or its threat appear. The new concept of “threat of insolvency” refers to a condition in which there are indications that the debtor will be unable to fulfill monetary obligations within the next 12 months. Thus, the law encourages early action, in line with the EU directive’s emphasis that the earlier a debtor detects financial difficulty and acts, the higher the chances of avoiding insolvency. The law also introduces early warning elements: auditors or accountants who detect signs of financial risk during reporting must notify the debtor within 10 days. The company’s manager, upon receiving such a notification or identifying warning signs independently, must inform the owners (founders) within 30 days. These provisions place a duty on management to closely monitor the financial condition and respond in time to benefit from restructuring options.

Flexible negotiation process. Preventive restructuring is a consensual procedure (as far as possible). The law provides for active creditor involvement in discussing the restructuring plan and debt terms. Debtors and creditors can jointly develop solutions to overcome the crisis—rescheduling payments, reducing interest rates, partial debt forgiveness, business reorganization, and more.

Creditor protection moratorium. Once the application for the procedure is filed, the court may grant the debtor temporary protection by suspending enforcement proceedings, prohibiting creditors from collecting debts, or freezing assets during the restructuring period. This moratorium (similar to a “cooling-off period” in EU practice) relieves pressure on the debtor and provides space for constructive negotiations with all creditors at once. According to European experts, this tool has proven effective: for example, in the Netherlands, courts grant such protective periods in over 80% of cases during plan preparation. In Ukraine, similar efficiency is expected if the court finds it serves the overall interests of the creditors.

Plan approval and cram-down. The result of negotiations is a preventive restructuring plan—a document outlining all measures, revised obligations, payment schedules, investment involvement, etc. The plan must be approved by creditors and confirmed by the commercial court. The law sets flexible voting rules by creditor class, similar to those in Directive 2019/1023. If certain creditors or entire classes oppose the plan but most others support it, the court may still approve it through a “cross-class cram-down.” In such cases, the plan becomes binding on all involved creditors, even those who voted against it. Requirements for such approval include fairness and economic feasibility: no creditor should be worse off than in liquidation, and the business must have a viable recovery prospect.

Opportunity for additional financing. During the restructuring process, the debtor may obtain new financing to maintain operations (so-called bridge financing or DIP loans). The law explicitly permits the attraction of funds needed to implement the plan and provides protections for such financing: for example, the court can lift asset freezes or restrictions if they hinder plan execution or investment attraction. This is crucial, as even a viable business cannot survive the transition period without capital.