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Insolvency-2020. «Chambers Global Guide»

03/ 02/ 2021
  Oleksandr Bondarchuk Acting Chairman of the “Ukrainian National Insolvency Trustee Association” (UNITA), Insolvency Trustee, Managing Partner of Law Agency “Absolute”, Lawyer Oleksandr Hladii Director of Law Agency “Absolute”, Lawyer, Insolvency Practitioner 1. Market Trends and Developments. 1.1 The State of the Restructuring Market A change in the political situation in Ukraine, a change of government, military operations in the east of the country, and a breakout of COVID-19 have all resulted in an increase in defence and medical spending, the destruction of production capacities, infrastructure, and transport, the loss of the ability to use land, and a decrease in the population, as well as a decrease in the workforce productivity. The above factors have a negative impact on the GDP indicator and the national economy as a whole, which, in turn, negatively impacted business entities with respect to which bankruptcy proceedings were initiated.   The adopted Bankruptcy Proceedings Code contains structural changes in bankruptcy proceedings and is aimed at increasing their efficiency and effectiveness. The entry of this Code into force has also launched a private bankruptcy mechanism, which is also important because it will make resolving various situations with the restructuring of mortgage loans denominated in foreign currency possible. No official statistics on the parameters of the status of the restructuring and insolvency market in Ukraine are presented. According to market participants, resolving insolvency indicators are at the following level: the average duration of a court case within which the debtor is financially rehabilitated or is declared bankrupt is 2.9 years; the cost of accompanying the bankruptcy proceedings is at least 40.5% of the value of the debtor’s property; the debt collection index lies within 9% according to various estimates. These modest indicators were reflected in the low Doing Business ranking. In terms of resolving insolvency, Ukraine has ranked 146th. 2. Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations 2.1. Overview of Laws and Statutory Regimes In Ukraine, the issues of restructuring, reorganization, insolvency, and liquidation are regulated by the following laws and regulations: The Civil Code of Ukraine; The Commercial Code of Ukraine; The Bankruptcy Procedures Code of Ukraine; The Commercial Procedural Code of Ukraine; The Law of Ukraine “On Financial Restructuring” 2.2. Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership A bankruptcy procedure initiated by the debtor’s director if the satisfaction of claims of one or more creditors leads to the impossibility of the debtor to fully fulfil its monetary obligations to other creditors is a voluntary judicial procedure within the framework of which the debtor is financially rehabilitated or declared bankrupt. Forced official reorganization refers to the reorganization of a monopolist legal entity by division in accordance with the decision of the Antimonopoly Committee of Ukraine in connection with violation of the current competition legislation. A bankruptcy procedure initiated by the debtor’s creditor is a forced judicial procedure within the framework of which the debtor is financially rehabilitated or declared bankrupt. 2.3. Obligation to Commence Formal Insolvency Proceedings The Bankruptcy Procedures Code of Ukraine obliges the company represented by its director to file a petition with the economic court seeking to initiate bankruptcy proceedings in case of a threat to the company’s solvency. The current legislation of Ukraine provides for a one-month period for filing a petition with the economic court seeking to initiate bankruptcy proceedings due to the threat of insolvency. The definition of the threat of insolvency is contained in two articles of the Code, in particular: the threat of insolvency arises when the satisfaction of claims of one or more creditors leads to the debtor’s inability to fulfil its monetary obligations to other creditors in full; and the threat of insolvency is defined as a situation in which there are other circumstances confirming that the debtor will not be able to fulfil its monetary obligations or to make ordinary current payments in the near future. The Code also establishes that if the debtor’s director violates these requirements and fails to file the corresponding petition with the court in a timely manner, he or she will be held jointly and severally liable for the failure to satisfy the claims of the creditors. 2.4 Commencing Involuntary Proceedings Under applicable provisions of the Bankruptcy Procedures Code of Ukraine, creditors are entitled to initiate bankruptcy proceedings with respect to the debtor along with the debtor, for whom this initiation is of an obligatory nature. In order to initiate bankruptcy proceedings, creditors have the right to file a corresponding petition with the economic court in the established procedural form. The grounds for filing the above petition is the debtor’s inability to fulfil its matured property obligations to the creditor. The new requirements of the Bankruptcy Procedures Code allow the creditor to combine any and all cash claims against the debtor that appeared on various legal grounds into a single petition. The legislation allows several creditors to combine their monetary claims and to file a joint petition on behalf of all the creditors. 2.5 Requirement for Insolvency Initiation of voluntary and compulsory insolvency procedures requires the fact of “the debtor’s insolvency,” which is confirmed by the debtor’s inability to perform its matured obligations to the creditor. The verification of the validity of the applicant’s claims, as well as the approval of the grounds for initiating bankruptcy proceedings, is carried out by the economic court in accordance with the procedure established by applicable provisions of the Bankruptcy Procedures Code of Ukraine. An application seeking the initiation of bankruptcy proceedings shall be submitted by a creditor or the debtor in writing and must contain the following information: the name of the economic court with which the application is filed; the name of the debtor, the debtor’s location, and the fiscal identification code of the legal entity; the full name or the corporate name of the creditor, the creditor’s location or place of residence, the fiscal identification code of the legal entity or the registration number of the taxpayer’s registration card or the series and the number of the passport (for private individuals who refuse to be issued a registration number of the taxpayer’s registration card due to their religious beliefs and have reported this to the appropriate supervisory authority and have the corresponding mark in their passport); a statement of the circumstances that constitute the grounds for legal recourse; a list of documents attached to the application. In the future, an analysis of the debtor’s financial and economic activities, investment situation, position in the markets is implemented in order to identify signs of fictitious bankruptcy, bringing to bankruptcy, concealing persistent financial insolvency, illegal actions in the event of bankruptcy, based on the results of which a decision is made to proceed to the next procedure. 2.6 Specific Statutory Restructuring and Insolvency Regimes The fundamental law of Ukraine that determines the bankruptcy regime (procedure) with respect to private individuals and legal entities is the Bankruptcy Procedures Code of Ukraine. Furthermore, the current legislation of Ukraine has established special legal rules applicable to financial institutions, insurance companies, and joint-stock companies that are regulated by applicable provisions of the Law of Ukraine “On Banks and Banking Activities,” the Law of Ukraine “On the System of Guaranteeing Deposits of Private Individuals,” the Law of Ukraine “On Joint-Stock Companies,” the Law of Ukraine “On Mortgage Bonds,” the Law of Ukraine “On Insurance,” as well as other laws and regulations that govern this area of activity. 3. Out-of-Court Restructurings and Consensual Workouts 3.1. Consensual and Other Out-of-Court Workouts and Restructurings The Bankruptcy Procedures Code of Ukraine provides for measures aimed at preventing bankruptcy of a corporate debtor and for extrajudicial procedures. In the event of occurrence of signs of bankruptcy, the debtor’s director is obligated to send information about the presence of signs of bankruptcy to the debtor’s founders (participants, shareholders) and to the owner of the property (the body authorized to manage the property) of the debtor. In turn, the debtor’s founders (participants, shareholders), the owners of the debtor’s property (the body authorized to manage the property), the debtor’s creditors, and other persons acting within the framework of measures aimed at preventing the debtor’s bankruptcy can provide the debtor with financial assistance in an amount sufficient to pay off the debtor’s monetary obligations to its creditors, including obligations to pay taxes and fees (mandatory payments), insurance contributions for compulsory state pension and other social insurance, and restoration of the debtor’s solvency (financial rehabilitation of the debtor before the commencement of bankruptcy proceedings). 3.2 Consensual Restructuring and Workout Processes In accordance with the current legislation of Ukraine, the following bankruptcy proceedings are applied to the debtor: disposal of the debtor’s property, financial rehabilitation of the debtor, and liquidation of the bankrupt. Depending on the category, the type of activities, and the availability of property of the debtor, the economic court applies a general or a special procedure for bankruptcy proceedings. It is important to note that it is the debtor’s financial rehabilitation that is the coordinated process of the debtor’s restructuring; prior to being approved by the court, this process requires that the interests of all the parties to the proceedings be respected. 3.3 New Money The current legislation of Ukraine does not establish any high-priority rights for investors who invest new funds in a debtor in bankruptcy proceedings. At the stage of implementation of the approved rehabilitation plan, the debtor is provided with the opportunity to obtain a loan to pay severance pay to its employees who are dismissed. The loan is repaid by using the funds obtained from the sale of the debtor’s property, which are sent for the purpose of repaying the loan out of turn. 3.4 Duties on Creditors Rights, obligations and the procedure for exercising the powers of creditors in bankruptcy proceedings are determined by applicable provisions of the Bankruptcy Procedures Code of Ukraine. To a greater extent, the above statutory instrument prescribes the rights of creditors that they can use. For example: creditors have the right to participate in the general meeting of creditors. Their status bears impact on decision-making when participating in the meeting of creditors: bankruptcy creditors can vote if their claims are declared on time and are recognized by the court; or secured creditors have only an advisory vote. At the meeting of creditors, a number of decisions are adopted, including the following: the determination of the quantitative composition and election of members of the creditors’ committee from among all creditors; the early termination of the powers of the creditors’ committee or its individual members; the approval of the debtor’s recovery plan and the approval of amendments thereto; legal recourse to the economic court with a petition seeking the introduction of the subsequent procedure in a bankruptcy case; the election of a new insolvency trustee in the event that the powers of the insolvency trustee are revoked; as well as all issues that may be decided by the creditors’ committee. The election of the creditors’ committee is held by open vote by a majority of the bankruptcy creditors present at the creditors’ meeting. The number of votes of bankruptcy creditors is proportional to the amount of creditors’ claims included in the register of creditors’ claims following the results of the preliminary session of the economic court and is a multiple of one thousand hryvnias. Creditors who have 25% or more votes are automatically included in the committee of creditors. The meeting of creditors during the debtor’s debt restructuring procedure has the main objectives in this procedure, namely: consideration of the report of the restructuring manager on the results of checking the declaration of the property of the debtor; consideration of a draft plan for restructuring the debtor’s debts; adoption of a decision on the approval of a plan for restructuring the debtor’s debts or on the submission of a petition to the economic court seeking the initiation of the debtor’s debts repayment procedure or on the closure of insolvency proceedings. The secured creditor has a special status, and the sale of the pledged property at an auction is impossible without such creditor’s consent. 3.5. Out-of-Court Financial Restructuring or Workout The Bankruptcy Procedures Code provides for an extrajudicial (pre-trial) debt financial restructuring or settlement, namely: the debtor’s financial rehabilitation prior to initiating bankruptcy proceedings. By the decision of the founders (participants, shareholders), the debtor has the right to initiate a financial rehabilitation procedure prior to initiating bankruptcy proceedings by drawing up a financial rehabilitation plan, which includes the amount, the repayment procedure, and the date of maturity of claims of creditors. 4. Secured Creditor Rights, Remedies and Priorities 4.1 Liens/Security Collateral is a way to secure obligations, unless otherwise provided by law. By virtue of the collateral, the creditor (the pledgee) has the right to have its claims satisfied at the expense of the value of the pledged property should the debtor (the pledgor) fail to perform the obligation secured by the collateral. The collateral arises on the basis of a contract, a law, or a court decision. The pledged property can be any property that can be foreclosed on or alienated, as well as future property that the pledgor will receive after the collateral has arisen (future harvest, livestock etc.). However, the pledged property cannot be claims of a personal nature for the pledgor, cultural values, monuments of cultural heritage, objects of state property whose privatization is prohibited by the current legislative acts, as well as property complexes of state enterprises and their structural divisions in the process of corporatization. At the expense of the pledged property, the pledgee has the right to satisfy its claims in full; the scope of satisfaction of claims is determined at the time of actual satisfaction, including interest, compensation for losses caused by delay in performance (and in cases stipulated by law or agreement, a penalty), the necessary costs of maintaining the pledged property, as well as expenses for the implementation of the claim secured by the collateral, unless otherwise provided for by the collateral agreement. 4.2 Rights and Remedies The current legislation of Ukraine that regulates the sphere of bankruptcy classifies secured creditors into a separate category, which includes creditors whose rights and claims are secured by a collateral of the debtor’s property. The pledgee acquires the right to foreclose on the pledged property if the obligation secured by the collateral is not fulfilled at the time of its maturity date, unless otherwise provided by a law or by a contract. In the event of the liquidation of a corporate pledgor, the pledgee acquires the right to foreclose on the pledged property, regardless of the maturity date of the obligation secured by the collateral. Funds received from the sale of the above collateral are allocated exclusively to repay the claims of the creditor whose claims are secured by this property. Secured creditors have the ability to block the process of approval of a financial rehabilitation plan. The financial rehabilitation plan must be approved by 2/3 of the votes of all the secured creditors involved in the financial rehabilitation. 4.3 Special Procedural Protections and Rights Secured creditors have the right to extraordinary repayment of their claims at the expense of the collateralized property of the bankrupt. Funds received from the sale of the secured property are used exclusively to repay the creditor’s claims secured by the property being sold. An important feature is that an arbitration director is obligated to agree the conditions for the sale of the collateralized property with the secured creditors. 5. Unsecured Creditor Rights, Remedies and Priorities 5.1. Differing Rights and Priorities The priority right of secured creditors in bankruptcy proceedings consists in the possibility of paying off their claims at the expense of the collateralized property of the bankrupt outside of the normal schedule. At the same time, the repayment to unsecured creditors is implemented in accordance with the priority procedure regulated by the Bankruptcy Procedures Code of Ukraine subject to availability of assets owned by the debtor. 5.2. Unsecured Trade Creditors Creditors whose claims are not secured by collateralized property participate in bankruptcy proceedings from the moment of recognition of their claims by the economic court and until the payment of such claims or the liquidation of the debtor. In case of insufficiency of funds received from the sale of the property of the bankrupt for the complete repayment of all claims of the same priority, claims will be satisfied in proportion to the amount of claims belonging to each creditor of the same priority. Claims that are not satisfied due to insufficiency of property will be deemed cancelled. 5.3. Rights and Remedies for Unsecured Creditors Creditors whose claims are not secured by a collateral are participants in all the processes of the bankruptcy procedure and are also endowed with rights that allow them (while acting as parties to the economic process) to appeal the procedural documents within the framework of the debtor’s bankruptcy case; to participate in a meeting of creditors; to be elected to the creditors’ committee; to apply to the economic court with motions, including the following: a petition seeking the closure of the debt restructuring procedure due to its failed or impossible implementation and the introduction of a debt settlement procedure, a petition seeking the cancelation of the powers of the insolvency trustee and proposing a new court-appointed insolvency trustee; as well as to adopt proposals for the economic court to continue or to shorten the term of the property disposal procedure. 5.4 Pre-judgment Attachments The current legislation of Ukraine provides for the possibility of seizing the debtor’s property pending adjudication as security for claims. 5.5 Priority Claims in Restructuring and Insolvency Proceedings In accordance with the current legislation of Ukraine, the following claims will first be applied towards repaying: claims relating to the payment of wage arrears to working and laid-off employees of the bankrupt, as well as other payments payable to employees; claims of creditors under insurance contracts; costs associated with bankruptcy proceedings in court and the work of the liquidation commission. Repayment of claims of secured creditors at the expense of bankrupt’s collateralized property in bankruptcy proceedings is implemented outside of the normal schedule. 6. Statutory Restructuring, Rehabilitation and Reorganisation Proceedings 6.1 Statutory Process for a Financial Restructuring/Reorganisation The current legislation of Ukraine (in particular, the Law of Ukraine “On Financial Restructuring”) provides for a procedure for voluntary financial restructuring of an enterprise if the debtor is in a critical financial condition and his economic activity can be recognized as promising, which is confirmed by the report on the inspection of financial and economic activities. The procedure is carried out using an approved restructuring plan. If the debtor has prepared a restructuring plan that was not approved by the involved creditors in accordance with the procedure established by this Law during the voluntary financial restructuring but was approved by the required number of creditors’ votes in accordance with applicable provisions of Article 5 of the Bankruptcy Procedures Code of Ukraine so as to approve the financial rehabilitation plan, the debtor has the right to attach such a restructuring plan as a financial rehabilitation plan to its application seeking approval of a financial rehabilitation plan without holding a meeting of creditors only if such a plan complies with applicable requirements of Article 5 of the Bankruptcy Procedures Code of Ukraine. 6.2 Position of the Company Upon the initiation of bankruptcy proceedings, a moratorium on satisfying creditors’ claims is introduced. The moratorium is terminated automatically upon the expiration of 170 calendar days from the date of the initiation of proceedings in the case concerning the debtor’s collateralized property unless the economic court issues a ruling on declaring the debtor bankrupt or a ruling on the introduction of a financial rehabilitation process during this time. The proceedings during which the debt is collected from the debtor are suspended pending consideration of the bankruptcy claims filed within the period provided for by the Bankruptcy Procedures Code of Ukraine. Upon the initiation of bankruptcy proceedings, the appointment of an assets manager does not constitute grounds for terminating the powers of the director or the management body of the debtor. The powers of the director or the management body of the debtor may be terminated if they do not apply measures to preserve the debtor’s property or create barriers to the assets manager or commit other violations of the Law. However, the powers of the debtor’s governing bodies cease from the moment of the introduction of procedures such as financial rehabilitation and liquidation. Within the scope of the procedure for disposing of property, private individuals and / or legal entities wishing to participate in the debtor’s financial rehabilitation (hereinafter referred to as “investors”) can file an application for participation in the debtor’s financial rehabilitation and their proposals for debtor’s financial rehabilitation (financial rehabilitation plan etc.) with the assets manager. 6.3 Roles of Creditors In accordance with applicable provisions of the Bankruptcy Procedures Code of Ukraine, the following categories of creditor claims exist: competitive, collateralized, and current claims. Within the framework of a bankruptcy case, creditors have procedural rights to influence the course of the bankruptcy proceedings by adopting appropriate decisions by the general meeting and by the creditors committee, participating in court hearings, and appealing against illegal actions of arbitration managers and procedural documents of the court. 6.4. Claims of Dissenting Creditors For the purpose of deciding on the approval or the rejection of the rehabilitation plan, all creditors are divided into classes. Each queue is formed by a separate class of creditors. The rehabilitation plan provides for an equivalent procedure for meeting the requirements of a single class. The decision to approve or to reject the financial rehabilitation plan is adopted by each class separately through voting. Conditions for creditors who did not participate in the vote on approval of the financial rehabilitation plan cannot be set at a level that is worse than the level set for the creditors who approved the financial rehabilitation plan provided their claims are assigned to the same class. A class of creditors does not participate in the vote on approval of the financial rehabilitation plan for which the claim amount and the satisfaction procedure under the financial rehabilitation plan differ from those which would have been applied if the liquidation procedure had been introduced. 6.5. Trading of Claims Against a Company The current legislation of Ukraine provides for the possibility of assignment of the right of claim from one creditor to another. Recognition of the transfer of the right of claim to a new creditor is carried out by the economic court by adopting an appropriate ruling. 6.6. Use of a Restructuring Procedure to Reorganise a Corporate Group There are currently no restructuring procedures in Ukraine aimed at reorganizing a corporate group and improving management efficiency. 6.7. Restrictions on a Company’s Use of its Assets The sale of the debtor’s property within the scope of bankruptcy proceedings is carried out in accordance with the procedure established by the Code through tendering in the form of an auction in an electronic trading system. The procedure for the operation of an electronic trading system, the organization and conduct of electronic auctions, the determination of the amount, payment, and return of guarantee fees and the payment of remuneration to site operators is approved by the Cabinet of Ministers of Ukraine. All types of the debtor’s property are subject to sale, with the exception of rights and obligations that cannot be transferred to other persons. 6.8. Asset Disposition and Related Procedures Upon initiation of bankruptcy proceedings, the debtor retains the right to dispose of its assets at the stage of disposal of the debtors property. It is important to take into account that such a right is exercised in accordance with the restrictions specified in applicable provisions of Article 44 of the Bankruptcy Procedures Code of Ukraine. At the stage of the debtor’s financial rehabilitation and liquidation procedures, the right to dispose of the assets is transferred to the insolvency trustee, who exercises the powers of a financial rehabilitation manager/ liquidator. The debtor’s creditors do not have the right to dispose of the debtor’s assets. 6.9. Secured Creditor Liens and Security Arrangements Secured creditors have the right to extraordinary repayment of their claims at the expense of the collateralized property of the bankrupt. The insolvency trustee must obtain approval of the conditions of the sale of the collateralized property of the debtor from the relevant secured creditor or the court. 6.10. Priority New Money Within a financial rehabilitation procedure, the presence of investors requires for the financial rehabilitation plan to ensure the attraction of new investments. Investors are persons who have decided to contribute their own, borrowed, and attracted property and intellectual values to investment instruments. The debtor and the owner of the property corporate rights of the debtor have the right to simultaneously satisfy all claims of bankruptcy creditors or to provide the debtor with funds to satisfy all claims at any time before the end of the liquidation procedure. 6.11. Determining the Value of Claims and Creditors Creditors have the right to file claims against the debtor in the amount expressed in monetary units in the national currency of Ukraine. If the debtor’s obligations are expressed in a foreign currency, the composition and the amount of such claims must be determined in the national currency at the rate of the National Bank of Ukraine set for the date of submission of a petition with claims to the debtor by the creditor. 6.12. Restructuring or Reorganisation Agreement In accordance with provisions of the Bankruptcy Procedures Code of Ukraine, the concept of a debtor’s financial rehabilitation procedure is applicable in Ukraine. The term “financial rehabilitation” refers to a system of measures that are adopted during bankruptcy proceedings in order to prevent the debtor from being declared bankrupt and liquidated and that are aimed at improving the debtor’s financial and economic situation, as well as at satisfying creditors’ claims in full or in part by restructuring the enterprise, debts and assets, and / or changes in the organizational, legal, and production structure of the debtor. The above measures are reflected in the financial rehabilitation plan approved by the creditors, which is subject to mandatory approval by the Economic Court. 6.13 Non-debtor Parties Parties to a bankruptcy case are bankruptcy creditors (a representative of the creditors’ committee), secured creditors, and the debtor (the bankrupt party). The debtor’s financial rehabilitation plan must provide for the repayment of creditors’ claims, taking into account the priority established by applicable provisions of the Bankruptcy Procedure Code of Ukraine, unless the creditors themselves have decided to worsen the conditions of their class. The financial rehabilitation plan does not affect the creditor’s claims against third parties if the creditor with such requirements has voted against the adoption of the financial rehabilitation plan. 6.14 Rights of Set-Off Repayment of creditor claims by offsetting homogeneous counterclaims is carried out with the presence of the creditor’s will thereto in cases where this does not violate the property rights of other creditors. 6.15. Failure to Observe the Terms of Agreements Not later than 15 days prior to the expiry of the period for the financial rehabilitation procedure determined by the financial rehabilitation plan, as well as subject to availability of grounds for terminating the financial rehabilitation procedure, the financial rehabilitation manager must submit a written report to the creditors’ meeting and notify the creditors of the time and the place of the creditors’ meeting. The report of the financial rehabilitation manager must be considered by the creditors’ meeting within 10 days from the date of its receipt and no later than the end of the period of the financial rehabilitation procedure specified in the financial rehabilitation plan. Based on the results of consideration of the financial rehabilitation manager’s report, the creditors’ meeting decides on application to the economic court with a petition seeking one of the following: termination of the proceedings in connection with the implementation of the financial rehabilitation plan and restoration of the debtor’s solvency; termination of the financial rehabilitation procedure, declaration of the debtor bankrupt, and initiation of the liquidation procedure; amendment of the financial rehabilitation plan and extension of the term of the financial rehabilitation procedure. In the event of occurrence of circumstances that constitute grounds for terminating the financial rehabilitation procedure, the creditors’ meeting may adopt an appropriate decision in the absence of a financial rehabilitation manager’s report. 6.16 Existing Equity Owners In the event of the debtor’s bankruptcy through the fault of its founders (participants, shareholders) or other persons (including the director of the debtor) who are entitled to give binding instructions to the debtor or have the ability to otherwise determine its actions, the founders (participants, shareholders) of the debtor that is a legal entity (or such other persons as listed above) may incur subsidiary liability for the debtor’s obligations in case of insufficiency of the debtor’s property. The recovered amounts are included in the liquidation estate and can be used only to satisfy the claims of creditors in the order of priority established by this Code. 7. Statutory Insolvency and Liquidation Proceedings 7.1 Types of Voluntary/Involuntary Proceedings The current legislation provides for voluntary proceedings measures aimed at preventing the bankruptcy of a corporate debtor and an extrajudicial procedure (financial rehabilitation of a debtor before the initiation of bankruptcy proceedings). By the decision of its founders (participants, shareholders), the debtor has the right to initiate a financial rehabilitation procedure prior to initiating bankruptcy proceedings. This procedure is carried out in accordance with the debtor’s financial rehabilitation plan prior to the initiation of bankruptcy proceedings; the plan is approved by each category of unsecured creditors who own more than 50 percent of the total amount of unsecured claims included in the financial rehabilitation plan in the category. At the same time, claims of unsecured creditors who are interested parties in relation to the debtor are not taken into account for voting purposes when adopting the financial rehabilitation plan. Furthermore, the financial rehabilitation plan provides for participation of secured creditors in the financial rehabilitation. Such a financial rehabilitation plan must be approved by each category of secured creditors who have 2/3 of the creditors’ votes of the total amount of secured claims included in the financial rehabilitation plan for that category. After approval of the financial rehabilitation plan, an application for approval of the financial rehabilitation plan is submitted to the economic court. The economic court posts a notice of acceptance of the application for approval of the financial rehabilitation plan for consideration on the official web portal of the judicial authority of Ukraine. Based on the results of consideration and after hearing each creditor present at the meeting who has objections to the financial rehabilitation plan, even if such a creditor has voted in favour of the financial rehabilitation plan, the economic court issues a ruling on approving the financial rehabilitation plan provided there are no grounds for refusal. The current legislation provides for the initiation of bankruptcy proceedings upon submission of the corresponding petition by either the debtor or the creditor. The economic court will issue a ruling on acceptance of the petition for consideration and shall appoint a preparatory meeting in which the applicant’s claims, as well as the existence of grounds for initiation a bankruptcy proceeding, are examined. The court will issue a ruling on the initiation of proceedings with an indication of recognized creditor claims and their amount; the introduction of a moratorium on satisfaction of creditors’ claims; the introduction of a property disposal procedure; and the appointment of an assets manager. In order to identify all the creditors who intend to participate in the proceedings, an announcement of the initiation of proceedings will be published on the official web portal of the judicial authority of Ukraine. 7.2 Distressed Disposals The sale of bankrupt’s property is carried out at an auction by the insolvency trustee after carrying out an inventory and valuation of the property. The terms of contracts concluded for the sale of bankrupt’s property must not provide for instalments or deferred payments for the acquired property. The ownership right to the property sold within the scope of bankruptcy proceedings is acquired by the buyer (the winning bidder at an auction) after performance of all obligations stipulated by the contract and the Code. 7.3 Organisation of Creditors or Committees Only bankruptcy creditors recognized by the economic court and entered into the register of creditors’ claims may participate in creditor meetings. The number of votes held by bankruptcy creditors is proportional to the amount of their recognized claims and is a multiple of one thousand hryvnias (excluding court fees, forfeits, fines, penalties, and other financial sanctions). Furthermore, creditors whose claims are secured by a collateral of the debtor’s property, creditors with claims for the payment of wages, royalties, alimony, as well as compensation for harm caused to the life and health of citizens, bankruptcy creditors whose claims are declared after the expiry of the period established for their submission to the court, a representative of the debtor’s employees, an authorized person of the founders (participants, shareholders) of the debtor, a representative of the body authorized to manage state property, and an insolvency trustee may participate in the meeting of the debtor’s creditors with an advisory vote. The first creditors’ meeting is deemed authorized if creditors with at least two-thirds of the votes are present. If the first meeting is not held due to the absence of creditors with the required number of votes, a repeated first meeting is held within two weeks; this repeated meeting is deemed authorized if creditors with more than one half of the votes are present. If this meeting is not held either due to the absence of creditors with the required number of votes, a repeated first meeting is held within two weeks; this repeated meeting is deemed authorized if creditors with more than one fourth of the votes are present. Within the bankruptcy proceedings, the meeting of creditors will elect a committee of creditors, which must not include more than seven creditors. Creditors who have 25% or more votes are automatically included in the committee of creditors. During bankruptcy proceedings, the interests of all the creditors are represented by the committee of creditors. 8. International/Cross-Border Issues and Processes 8.1. Recognition or Relief in Connection with Overseas Proceedings Bankruptcy proceedings related to foreign proceedings are applied on a reciprocity basis. Reciprocity is considered to exist if the possibility of cooperation between a foreign state and Ukraine is provided for by an international treaty of Ukraine accepted as binding by the Verkhovna Rada of Ukraine. 8.2. Co-ordination in Cross-Border Cases In the case of cross-border cooperation, the economic court will render judicial assistance provided that the foreign bankruptcy proceedings and the bankruptcy proceedings opened in accordance with applicable provisions of the current legislation of Ukraine are interconnected. 8.3 Rules, Standards and Guidelines Bankruptcy proceedings are regulated by applicable provisions of the Bankruptcy Procedures Code of Ukraine, as well as international treaties of Ukraine accepted as binding by the Verkhovna Rada of Ukraine. The enforcement of decisions of foreign courts in bankruptcy cases in Ukraine is determined by international treaties of Ukraine accepted as binding by the Verkhovna Rada of Ukraine. Bankruptcy proceedings related to foreign proceedings are applied on a reciprocity basis. The implementation of this principle is provided for by an international treaty of Ukraine accepted as binding by the Verkhovna Rada of Ukraine. When deciding on the provision of judicial assistance, the refusal to provide the same, or the termination of the provision of the same, the economic court must make sure that property rights and other property rights of creditors and other interested parties, including the debtor, are not violated. The economic court will refuse to apply international aspects of bankruptcy if the application of such aspects is contrary to the public policy, sovereignty, and the basic principles of the current legislation of Ukraine. 8.4 Foreign Creditors The current legislation of Ukraine determines that foreign persons have the same procedural rights and duties as citizens of Ukraine and legal entities established under the current legislation of Ukraine, except as required by the Law or an international treaty accepted as binding by the Verhovna Rada of Ukraine. 9. Trustees/Receivers/Statutory Officers 9.1. Types of Statutory Officers Within the scope of bankruptcy proceedings, an assets manager is appointed during the debtor’s property disposal stage; a financial rehabilitation manager is appointed during the debtor financial rehabilitation stage; a liquidator is appointed during the debtor liquidation stage. Only insolvency trustees can carry out this activity. The appointment of the insolvency trustee is carried out by the economic court from among the persons who have received the relevant certificate and have been entered in the Unified Register of Insolvency Trustee of Ukraine. 9.2. Statutory Roles, Rights and Responsibilities of Officers Applicable provisions of the current legislation of Ukraine determine the rights and obligations of an insolvency trustee, who, in particular, enjoys all the rights of an assets manager, a financial rehabilitation manager, and a liquidator under the current legislation. The insolvency trustee is obligated to strictly observe the requirements of the current legislation, to adopt measures aimed at protecting the debtors property, to analyse the financial, economic, investment, and other activities of the debtor etc. During the exercise of his or her authority, the insolvency trustee is independent. 9.3 Selection of Officers The candidacy of an insolvency trustee who will exercise the powers of an assets manager or a restructuring manager is determined by the court through a process of automated selection from among insolvency trustee included in the Unified Register of Insolvency Trustee of Ukraine, on the basis of random selection, using the Unified Judicial Information and Telecommunication System. When accepting an application seeking the initiation of proceedings in a case, the court invites three insolvency trustees to be selected automatically to submit an application to participate in this case. If the application for participation in the case is received from only one insolvency trustee, the economic court appoints such a person as the assets manager / restructuring administrator; if the application for participation in the case is received from two or three insolvency trustee, the court appoints the candidacy of the first bankruptcy administrator from the automated selection system. If not a single application is filed, the court appoints the assets manager / restructuring manager on its own initiative. The revocation of the powers of an insolvency trustee is carried out by the economic court following a motion filed by a participant in the proceedings or on its own initiative for a number of reasons: failed or improper performance of the obligations assigned to the insolvency trustee; abuse of the rights of an insolvency trustee; submission of false information to the court; refusal to grant the insolvency trustee with access to state secrets or cancellation of a previously granted access; termination of the activities of an insolvency trustee; the presence of a conflict of interest. The creditors’ committee has the right to apply to the economic court at any time with a motion seeking the revocation of the powers of the insolvency trustee regardless of the existence of grounds. The economic court shall issue a ruling on the revocation of the powers of the insolvency trustee within 14 days subject to availability of grounds for the revocation of the powers of the insolvency trustee or at the request of the creditors’ committee. If the powers of the insolvency trustee are revoked, the economic court appoints a new insolvency trustee at the request of the creditors’ committee. Within the scope of the procedure for disposing of the debtor’s property, the assets manager does not have the right to interfere with the operational and economic activities of the debtor, with the exception of the cases provided for by this Code. The director or the management body of the debtor can adopt a number of decisions solely by agreement with the assets manager: on the participation of the debtor in alliances, associations, unions, holding companies, industrial and financial groups, or other associations of legal entities; on the transfer of real estate for rent; on obtaining loans (credits). Within the scope of the financial rehabilitation and liquidation procedure, the powers of the management bodies are exercised by the insolvency trustee. The status of an insolvency trustee can be obtained by a citizen of Ukraine who has a higher legal or economic education at the second (master’s) level with a total work experience in the specialty of at least three years or at least one year after receiving the relevant higher education in managerial positions, has completed training and internship for six months in accordance with the procedure established by the state bankruptcy body, and who speaks the official language and has passed the qualification exam. However, the status of an insolvency trustee cannot be vested on the following individuals: persons who have been recognized as legally incompetent or limited in capacity by the court; persons who have an unexpunged or an outstanding conviction in accordance with applicable provisions of the current legislation; persons who are incapable of performing the obligations of an insolvency trustee for health reasons; persons who are prohibited from holding management positions. There are also a number of reasons under which an insolvency trustee cannot be appointed as an assets manager, a restructuring manager, a financial rehabilitation manager, a liquidator, or a disposal manager, in particular: persons who are interested parties in this case; persons who previously managed this corporate debtor, except for cases when at least three years have passed since the date of removal of such person from the management of the debtor; persons who are denied admission to state secrets if such admission is necessary to perform the obligations specified by this Code; persons who have a conflict of interest; persons who have previously exercised the powers of a private enforcement officer with respect to court decisions or decisions of other bodies (officials) in which the debtor was a party to enforcement proceedings; persons who are connected person of the debtor who is a private individual. 10. Duties and Personal Liability of Directors and Officers of Financially Troubled Companies 10.1. Duties of Directors In case of occurrence of signs of bankruptcy, the director of the enterprise is obligated to send this information to the founders (participants, shareholders). If the general meeting of the founders determines the signs of a threat to the solvency of the enterprise, the founders may oblige the director to file a petition with the economic court seeking the initiation of bankruptcy proceedings. If the director of the debtor interferes with the performance of the powers of the assets manager, as well as if the director of the debtor performs actions that violate the rights and legitimate interests of the debtor or its creditors, the economic court has the right to dismiss the director of the debtor from the occupied position upon reasoned petition of participants in the bankruptcy proceedings. 10.2 Direct Fiduciary Breach Claims When exercising his or her powers, the liquidator has the right to declare claims against third parties who bear subsidiary responsibility under the debtor’s obligations in accordance with the current legislation in connection with bringing the debtor to bankruptcy. The amount of these claims is determined on the basis of the difference between the amount of creditors’ claims and the liquidation estate. In the event of the debtor’s bankruptcy through the fault of its founders (participants, shareholders) or other persons (including the director of the debtor) who are entitled to give binding instructions to the debtor or have the ability to otherwise determine its actions, the founders (participants, shareholders) of the debtor that is a legal entity (or such other persons as listed above) may incur subsidiary liability for the debtor’s obligations in case of insufficiency of the debtor’s property. The recovered amounts are included in the liquidation estate and can be used only to satisfy the claims of creditors in the order of priority established by this Code. 11. Transfers/Transactions That May Be Set Aside 11.1. Historical Transactions The current legislation of Ukraine on bankruptcy provides grounds for invalidating a transaction (a contract) or property actions of the debtor by the economic court, in particular if the debtor has alienated the property free of charge, has assumed obligations without any other property actions, has refused its own property claims; if the debtor had assumed obligations before the bankruptcy proceedings were initiated, which resulted in the insolvency of the debtor or the impossibility for the debtor to perform its monetary obligations to other creditors; if the debtor has alienated or acquired property at prices lower / higher than market prices; and others. 11.2. Look-Back Period Within the framework of bankruptcy proceedings, the economic court may invalidate transactions made by the debtor after the commencement of bankruptcy proceedings or within three years preceding the commencement of bankruptcy proceedings if such transactions have resulted in damage to the debtor or to the creditors based on the following grounds: the debtor has performed property obligations earlier than the established date; the debtor has assumed obligations, as a result of which the debtor has become insolvent or the performance of the debtor’s monetary obligations to other creditors has become completely or partially impossible, prior to the initiation of bankruptcy proceedings; the debtor has alienated or acquired property at prices that are, respectively, lower or higher than market prices provided that the debtor’s property was (became) insufficient to satisfy the creditors’ claims at the time of assumption of the obligation or as a result of performance of the obligation; the debtor has paid the creditor or has accepted the property against the performance of monetary claims on the day when the amount of creditors’ claims against the debtor exceeded the value of the property; the debtor has assumed collateral obligations to ensure the performance of monetary claims. Also, the economic court may invalidate transactions made by the debtor during the three years preceding the initiation of bankruptcy proceedings within the framework of the bankruptcy proceedings based on the following grounds: the debtor has carried out the alienation of property free of charge, has assumed obligations without the corresponding property actions of the other party, or has renounced own property claims of the debtor; the debtor has entered into an agreement with an interested person; the debtor has entered into a gift agreement. 11.3. Claims to Set Aside or Annul Transactions Applications seeking the invalidation of transactions made by the debtor after the initiation of bankruptcy proceedings or within three years preceding the initiation of bankruptcy proceedings must be filed with the court by the insolvency trustee or the creditor.
Oleksandr Bondarchuk
Acting Chairman of the “Ukrainian National Insolvency Trustee Association” (UNITA), Insolvency Trustee, Managing Partner of Law Agency “Absolute”, Lawyer
Oleksandr Hladii
Director of Law Agency “Absolute”, Lawyer, Insolvency Practitioner
1. Market Trends and Developments.

1.1 The State of the Restructuring Market

A change in the political situation in Ukraine, a change of government, military operations in the east of the country, and a breakout of COVID-19 have all resulted in an increase in defence and medical spending, the destruction of production capacities, infrastructure, and transport, the loss of the ability to use land, and a decrease in the population, as well as a decrease in the workforce productivity. The above factors have a negative impact on the GDP indicator and the national economy as a whole, which, in turn, negatively impacted business entities with respect to which bankruptcy proceedings were initiated.  

The adopted Bankruptcy Proceedings Code contains structural changes in bankruptcy proceedings and is aimed at increasing their efficiency and effectiveness. The entry of this Code into force has also launched a private bankruptcy mechanism, which is also important because it will make resolving various situations with the restructuring of mortgage loans denominated in foreign currency possible.

No official statistics on the parameters of the status of the restructuring and insolvency market in Ukraine are presented.

According to market participants, resolving insolvency indicators are at the following level:

  • the average duration of a court case within which the debtor is financially rehabilitated or is declared bankrupt is 2.9 years;
  • the cost of accompanying the bankruptcy proceedings is at least 40.5% of the value of the debtor’s property;
  • the debt collection index lies within 9% according to various estimates.

These modest indicators were reflected in the low Doing Business ranking. In terms of resolving insolvency, Ukraine has ranked 146th.

2. Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations

2.1. Overview of Laws and Statutory Regimes

In Ukraine, the issues of restructuring, reorganization, insolvency, and liquidation are regulated by the following laws and regulations:

  • The Civil Code of Ukraine;
  • The Commercial Code of Ukraine;
  • The Bankruptcy Procedures Code of Ukraine;
  • The Commercial Procedural Code of Ukraine;
  • The Law of Ukraine “On Financial Restructuring”

2.2. Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership

A bankruptcy procedure initiated by the debtor’s director if the satisfaction of claims of one or more creditors leads to the impossibility of the debtor to fully fulfil its monetary obligations to other creditors is a voluntary judicial procedure within the framework of which the debtor is financially rehabilitated or declared bankrupt.

Forced official reorganization refers to the reorganization of a monopolist legal entity by division in accordance with the decision of the Antimonopoly Committee of Ukraine in connection with violation of the current competition legislation.

A bankruptcy procedure initiated by the debtor’s creditor is a forced judicial procedure within the framework of which the debtor is financially rehabilitated or declared bankrupt.

2.3. Obligation to Commence Formal Insolvency Proceedings

The Bankruptcy Procedures Code of Ukraine obliges the company represented by its director to file a petition with the economic court seeking to initiate bankruptcy proceedings in case of a threat to the company’s solvency.

The current legislation of Ukraine provides for a one-month period for filing a petition with the economic court seeking to initiate bankruptcy proceedings due to the threat of insolvency.

The definition of the threat of insolvency is contained in two articles of the Code, in particular: the threat of insolvency arises when the satisfaction of claims of one or more creditors leads to the debtor’s inability to fulfil its monetary obligations to other creditors in full; and the threat of insolvency is defined as a situation in which there are other circumstances confirming that the debtor will not be able to fulfil its monetary obligations or to make ordinary current payments in the near future.

The Code also establishes that if the debtor’s director violates these requirements and fails to file the corresponding petition with the court in a timely manner, he or she will be held jointly and severally liable for the failure to satisfy the claims of the creditors.

2.4 Commencing Involuntary Proceedings

Under applicable provisions of the Bankruptcy Procedures Code of Ukraine, creditors are entitled to initiate bankruptcy proceedings with respect to the debtor along with the debtor, for whom this initiation is of an obligatory nature.

In order to initiate bankruptcy proceedings, creditors have the right to file a corresponding petition with the economic court in the established procedural form. The grounds for filing the above petition is the debtor’s inability to fulfil its matured property obligations to the creditor.

The new requirements of the Bankruptcy Procedures Code allow the creditor to combine any and all cash claims against the debtor that appeared on various legal grounds into a single petition. The legislation allows several creditors to combine their monetary claims and to file a joint petition on behalf of all the creditors.

2.5 Requirement for Insolvency

Initiation of voluntary and compulsory insolvency procedures requires the fact of “the debtor’s insolvency,” which is confirmed by the debtor’s inability to perform its matured obligations to the creditor. The verification of the validity of the applicant’s claims, as well as the approval of the grounds for initiating bankruptcy proceedings, is carried out by the economic court in accordance with the procedure established by applicable provisions of the Bankruptcy Procedures Code of Ukraine.

An application seeking the initiation of bankruptcy proceedings shall be submitted by a creditor or the debtor in writing and must contain the following information:

  • the name of the economic court with which the application is filed;
  • the name of the debtor, the debtor’s location, and the fiscal identification code of the legal entity;
  • the full name or the corporate name of the creditor, the creditor’s location or place of residence, the fiscal identification code of the legal entity or the registration number of the taxpayer’s registration card or the series and the number of the passport (for private individuals who refuse to be issued a registration number of the taxpayer’s registration card due to their religious beliefs and have reported this to the appropriate supervisory authority and have the corresponding mark in their passport);
  • a statement of the circumstances that constitute the grounds for legal recourse;
  • a list of documents attached to the application.

In the future, an analysis of the debtor’s financial and economic activities, investment situation, position in the markets is implemented in order to identify signs of fictitious bankruptcy, bringing to bankruptcy, concealing persistent financial insolvency, illegal actions in the event of bankruptcy, based on the results of which a decision is made to proceed to the next procedure.

2.6 Specific Statutory Restructuring and Insolvency Regimes

The fundamental law of Ukraine that determines the bankruptcy regime (procedure) with respect to private individuals and legal entities is the Bankruptcy Procedures Code of Ukraine.

Furthermore, the current legislation of Ukraine has established special legal rules applicable to financial institutions, insurance companies, and joint-stock companies that are regulated by applicable provisions of the Law of Ukraine “On Banks and Banking Activities,” the Law of Ukraine “On the System of Guaranteeing Deposits of Private Individuals,” the Law of Ukraine “On Joint-Stock Companies,” the Law of Ukraine “On Mortgage Bonds,” the Law of Ukraine “On Insurance,” as well as other laws and regulations that govern this area of activity.

3. Out-of-Court Restructurings and Consensual Workouts

3.1. Consensual and Other Out-of-Court Workouts and Restructurings

The Bankruptcy Procedures Code of Ukraine provides for measures aimed at preventing bankruptcy of a corporate debtor and for extrajudicial procedures.

In the event of occurrence of signs of bankruptcy, the debtor’s director is obligated to send information about the presence of signs of bankruptcy to the debtor’s founders (participants, shareholders) and to the owner of the property (the body authorized to manage the property) of the debtor.

In turn, the debtor’s founders (participants, shareholders), the owners of the debtor’s property (the body authorized to manage the property), the debtor’s creditors, and other persons acting within the framework of measures aimed at preventing the debtor’s bankruptcy can provide the debtor with financial assistance in an amount sufficient to pay off the debtor’s monetary obligations to its creditors, including obligations to pay taxes and fees (mandatory payments), insurance contributions for compulsory state pension and other social insurance, and restoration of the debtor’s solvency (financial rehabilitation of the debtor before the commencement of bankruptcy proceedings).

3.2 Consensual Restructuring and Workout Processes

In accordance with the current legislation of Ukraine, the following bankruptcy proceedings are applied to the debtor: disposal of the debtor’s property, financial rehabilitation of the debtor, and liquidation of the bankrupt. Depending on the category, the type of activities, and the availability of property of the debtor, the economic court applies a general or a special procedure for bankruptcy proceedings.

It is important to note that it is the debtor’s financial rehabilitation that is the coordinated process of the debtor’s restructuring; prior to being approved by the court, this process requires that the interests of all the parties to the proceedings be respected.

3.3 New Money

The current legislation of Ukraine does not establish any high-priority rights for investors who invest new funds in a debtor in bankruptcy proceedings. At the stage of implementation of the approved rehabilitation plan, the debtor is provided with the opportunity to obtain a loan to pay severance pay to its employees who are dismissed. The loan is repaid by using the funds obtained from the sale of the debtor’s property, which are sent for the purpose of repaying the loan out of turn.

3.4 Duties on Creditors

Rights, obligations and the procedure for exercising the powers of creditors in bankruptcy proceedings are determined by applicable provisions of the Bankruptcy Procedures Code of Ukraine.

To a greater extent, the above statutory instrument prescribes the rights of creditors that they can use.

For example: creditors have the right to participate in the general meeting of creditors. Their status bears impact on decision-making when participating in the meeting of creditors: bankruptcy creditors can vote if their claims are declared on time and are recognized by the court; or secured creditors have only an advisory vote.

At the meeting of creditors, a number of decisions are adopted, including the following: the determination of the quantitative composition and election of members of the creditors’ committee from among all creditors; the early termination of the powers of the creditors’ committee or its individual members; the approval of the debtor’s recovery plan and the approval of amendments thereto; legal recourse to the economic court with a petition seeking the introduction of the subsequent procedure in a bankruptcy case; the election of a new insolvency trustee in the event that the powers of the insolvency trustee are revoked; as well as all issues that may be decided by the creditors’ committee.

The election of the creditors’ committee is held by open vote by a majority of the bankruptcy creditors present at the creditors’ meeting. The number of votes of bankruptcy creditors is proportional to the amount of creditors’ claims included in the register of creditors’ claims following the results of the preliminary session of the economic court and is a multiple of one thousand hryvnias.

Creditors who have 25% or more votes are automatically included in the committee of creditors.

The meeting of creditors during the debtor’s debt restructuring procedure has the main objectives in this procedure, namely:

  • consideration of the report of the restructuring manager on the results of checking the declaration of the property of the debtor;
  • consideration of a draft plan for restructuring the debtor’s debts;
  • adoption of a decision on the approval of a plan for restructuring the debtor’s debts or on the submission of a petition to the economic court seeking the initiation of the debtor’s debts repayment procedure or on the closure of insolvency proceedings.

The secured creditor has a special status, and the sale of the pledged property at an auction is impossible without such creditor’s consent.

3.5. Out-of-Court Financial Restructuring or Workout

The Bankruptcy Procedures Code provides for an extrajudicial (pre-trial) debt financial restructuring or settlement, namely: the debtor’s financial rehabilitation prior to initiating bankruptcy proceedings.

By the decision of the founders (participants, shareholders), the debtor has the right to initiate a financial rehabilitation procedure prior to initiating bankruptcy proceedings by drawing up a financial rehabilitation plan, which includes the amount, the repayment procedure, and the date of maturity of claims of creditors.

4. Secured Creditor Rights, Remedies and Priorities

4.1 Liens/Security

Collateral is a way to secure obligations, unless otherwise provided by law.

By virtue of the collateral, the creditor (the pledgee) has the right to have its claims satisfied at the expense of the value of the pledged property should the debtor (the pledgor) fail to perform the obligation secured by the collateral. The collateral arises on the basis of a contract, a law, or a court decision.

The pledged property can be any property that can be foreclosed on or alienated, as well as future property that the pledgor will receive after the collateral has arisen (future harvest, livestock etc.). However, the pledged property cannot be claims of a personal nature for the pledgor, cultural values, monuments of cultural heritage, objects of state property whose privatization is prohibited by the current legislative acts, as well as property complexes of state enterprises and their structural divisions in the process of corporatization.

At the expense of the pledged property, the pledgee has the right to satisfy its claims in full; the scope of satisfaction of claims is determined at the time of actual satisfaction, including interest, compensation for losses caused by delay in performance (and in cases stipulated by law or agreement, a penalty), the necessary costs of maintaining the pledged property, as well as expenses for the implementation of the claim secured by the collateral, unless otherwise provided for by the collateral agreement.

4.2 Rights and Remedies

The current legislation of Ukraine that regulates the sphere of bankruptcy classifies secured creditors into a separate category, which includes creditors whose rights and claims are secured by a collateral of the debtor’s property.

The pledgee acquires the right to foreclose on the pledged property if the obligation secured by the collateral is not fulfilled at the time of its maturity date, unless otherwise provided by a law or by a contract.

In the event of the liquidation of a corporate pledgor, the pledgee acquires the right to foreclose on the pledged property, regardless of the maturity date of the obligation secured by the collateral.

Funds received from the sale of the above collateral are allocated exclusively to repay the claims of the creditor whose claims are secured by this property.

Secured creditors have the ability to block the process of approval of a financial rehabilitation plan. The financial rehabilitation plan must be approved by 2/3 of the votes of all the secured creditors involved in the financial rehabilitation.

4.3 Special Procedural Protections and Rights

Secured creditors have the right to extraordinary repayment of their claims at the expense of the collateralized property of the bankrupt. Funds received from the sale of the secured property are used exclusively to repay the creditor’s claims secured by the property being sold.

An important feature is that an arbitration director is obligated to agree the conditions for the sale of the collateralized property with the secured creditors.

5. Unsecured Creditor Rights, Remedies and Priorities

5.1. Differing Rights and Priorities

The priority right of secured creditors in bankruptcy proceedings consists in the possibility of paying off their claims at the expense of the collateralized property of the bankrupt outside of the normal schedule. At the same time, the repayment to unsecured creditors is implemented in accordance with the priority procedure regulated by the Bankruptcy Procedures Code of Ukraine subject to availability of assets owned by the debtor.

5.2. Unsecured Trade Creditors

Creditors whose claims are not secured by collateralized property participate in bankruptcy proceedings from the moment of recognition of their claims by the economic court and until the payment of such claims or the liquidation of the debtor.

In case of insufficiency of funds received from the sale of the property of the bankrupt for the complete repayment of all claims of the same priority, claims will be satisfied in proportion to the amount of claims belonging to each creditor of the same priority.

Claims that are not satisfied due to insufficiency of property will be deemed cancelled.

5.3. Rights and Remedies for Unsecured Creditors

Creditors whose claims are not secured by a collateral are participants in all the processes of the bankruptcy procedure and are also endowed with rights that allow them (while acting as parties to the economic process) to appeal the procedural documents within the framework of the debtor’s bankruptcy case; to participate in a meeting of creditors; to be elected to the creditors’ committee; to apply to the economic court with motions, including the following: a petition seeking the closure of the debt restructuring procedure due to its failed or impossible implementation and the introduction of a debt settlement procedure, a petition seeking the cancelation of the powers of the insolvency trustee and proposing a new court-appointed insolvency trustee; as well as to adopt proposals for the economic court to continue or to shorten the term of the property disposal procedure.

5.4 Pre-judgment Attachments

The current legislation of Ukraine provides for the possibility of seizing the debtor’s property pending adjudication as security for claims.

5.5 Priority Claims in Restructuring and Insolvency Proceedings

In accordance with the current legislation of Ukraine, the following claims will first be applied towards repaying: claims relating to the payment of wage arrears to working and laid-off employees of the bankrupt, as well as other payments payable to employees; claims of creditors under insurance contracts; costs associated with bankruptcy proceedings in court and the work of the liquidation commission.

Repayment of claims of secured creditors at the expense of bankrupt’s collateralized property in bankruptcy proceedings is implemented outside of the normal schedule.

6. Statutory Restructuring, Rehabilitation and Reorganisation Proceedings

6.1 Statutory Process for a Financial Restructuring/Reorganisation

The current legislation of Ukraine (in particular, the Law of Ukraine “On Financial Restructuring”) provides for a procedure for voluntary financial restructuring of an enterprise if the debtor is in a critical financial condition and his economic activity can be recognized as promising, which is confirmed by the report on the inspection of financial and economic activities. The procedure is carried out using an approved restructuring plan.

If the debtor has prepared a restructuring plan that was not approved by the involved creditors in accordance with the procedure established by this Law during the voluntary financial restructuring but was approved by the required number of creditors’ votes in accordance with applicable provisions of Article 5 of the Bankruptcy Procedures Code of Ukraine so as to approve the financial rehabilitation plan, the debtor has the right to attach such a restructuring plan as a financial rehabilitation plan to its application seeking approval of a financial rehabilitation plan without holding a meeting of creditors only if such a plan complies with applicable requirements of Article 5 of the Bankruptcy Procedures Code of Ukraine.

6.2 Position of the Company

Upon the initiation of bankruptcy proceedings, a moratorium on satisfying creditors’ claims is introduced. The moratorium is terminated automatically upon the expiration of 170 calendar days from the date of the initiation of proceedings in the case concerning the debtor’s collateralized property unless the economic court issues a ruling on declaring the debtor bankrupt or a ruling on the introduction of a financial rehabilitation process during this time. The proceedings during which the debt is collected from the debtor are suspended pending consideration of the bankruptcy claims filed within the period provided for by the Bankruptcy Procedures Code of Ukraine.

Upon the initiation of bankruptcy proceedings, the appointment of an assets manager does not constitute grounds for terminating the powers of the director or the management body of the debtor. The powers of the director or the management body of the debtor may be terminated if they do not apply measures to preserve the debtor’s property or create barriers to the assets manager or commit other violations of the Law. However, the powers of the debtor’s governing bodies cease from the moment of the introduction of procedures such as financial rehabilitation and liquidation.

Within the scope of the procedure for disposing of property, private individuals and / or legal entities wishing to participate in the debtor’s financial rehabilitation (hereinafter referred to as “investors”) can file an application for participation in the debtor’s financial rehabilitation and their proposals for debtor’s financial rehabilitation (financial rehabilitation plan etc.) with the assets manager.

6.3 Roles of Creditors

In accordance with applicable provisions of the Bankruptcy Procedures Code of Ukraine, the following categories of creditor claims exist: competitive, collateralized, and current claims.

Within the framework of a bankruptcy case, creditors have procedural rights to influence the course of the bankruptcy proceedings by adopting appropriate decisions by the general meeting and by the creditors committee, participating in court hearings, and appealing against illegal actions of arbitration managers and procedural documents of the court.

6.4. Claims of Dissenting Creditors

For the purpose of deciding on the approval or the rejection of the rehabilitation plan, all creditors are divided into classes. Each queue is formed by a separate class of creditors.

The rehabilitation plan provides for an equivalent procedure for meeting the requirements of a single class. The decision to approve or to reject the financial rehabilitation plan is adopted by each class separately through voting.

Conditions for creditors who did not participate in the vote on approval of the financial rehabilitation plan cannot be set at a level that is worse than the level set for the creditors who approved the financial rehabilitation plan provided their claims are assigned to the same class.

A class of creditors does not participate in the vote on approval of the financial rehabilitation plan for which the claim amount and the satisfaction procedure under the financial rehabilitation plan differ from those which would have been applied if the liquidation procedure had been introduced.

6.5. Trading of Claims Against a Company

The current legislation of Ukraine provides for the possibility of assignment of the right of claim from one creditor to another. Recognition of the transfer of the right of claim to a new creditor is carried out by the economic court by adopting an appropriate ruling.

6.6. Use of a Restructuring Procedure to Reorganise a Corporate Group

There are currently no restructuring procedures in Ukraine aimed at reorganizing a corporate group and improving management efficiency.

6.7. Restrictions on a Company’s Use of its Assets

The sale of the debtor’s property within the scope of bankruptcy proceedings is carried out in accordance with the procedure established by the Code through tendering in the form of an auction in an electronic trading system. The procedure for the operation of an electronic trading system, the organization and conduct of electronic auctions, the determination of the amount, payment, and return of guarantee fees and the payment of remuneration to site operators is approved by the Cabinet of Ministers of Ukraine.

All types of the debtor’s property are subject to sale, with the exception of rights and obligations that cannot be transferred to other persons.

6.8. Asset Disposition and Related Procedures

Upon initiation of bankruptcy proceedings, the debtor retains the right to dispose of its assets at the stage of disposal of the debtor’s property. It is important to take into account that such a right is exercised in accordance with the restrictions specified in applicable provisions of Article 44 of the Bankruptcy Procedures Code of Ukraine.

At the stage of the debtor’s financial rehabilitation and liquidation procedures, the right to dispose of the assets is transferred to the insolvency trustee, who exercises the powers of a financial rehabilitation manager/ liquidator.

The debtor’s creditors do not have the right to dispose of the debtor’s assets.

6.9. Secured Creditor Liens and Security Arrangements

Secured creditors have the right to extraordinary repayment of their claims at the expense of the collateralized property of the bankrupt. The insolvency trustee must obtain approval of the conditions of the sale of the collateralized property of the debtor from the relevant secured creditor or the court.

6.10. Priority New Money

Within a financial rehabilitation procedure, the presence of investors requires for the financial rehabilitation plan to ensure the attraction of new investments. Investors are persons who have decided to contribute their own, borrowed, and attracted property and intellectual values to investment instruments.

The debtor and the owner of the property corporate rights of the debtor have the right to simultaneously satisfy all claims of bankruptcy creditors or to provide the debtor with funds to satisfy all claims at any time before the end of the liquidation procedure.

6.11. Determining the Value of Claims and Creditors

Creditors have the right to file claims against the debtor in the amount expressed in monetary units in the national currency of Ukraine. If the debtor’s obligations are expressed in a foreign currency, the composition and the amount of such claims must be determined in the national currency at the rate of the National Bank of Ukraine set for the date of submission of a petition with claims to the debtor by the creditor.

6.12. Restructuring or Reorganisation Agreement

In accordance with provisions of the Bankruptcy Procedures Code of Ukraine, the concept of a debtor’s financial rehabilitation procedure is applicable in Ukraine.

The term “financial rehabilitation” refers to a system of measures that are adopted during bankruptcy proceedings in order to prevent the debtor from being declared bankrupt and liquidated and that are aimed at improving the debtor’s financial and economic situation, as well as at satisfying creditors’ claims in full or in part by restructuring the enterprise, debts and assets, and / or changes in the organizational, legal, and production structure of the debtor.

The above measures are reflected in the financial rehabilitation plan approved by the creditors, which is subject to mandatory approval by the Economic Court.

6.13 Non-debtor Parties

Parties to a bankruptcy case are bankruptcy creditors (a representative of the creditors’ committee), secured creditors, and the debtor (the bankrupt party).

The debtor’s financial rehabilitation plan must provide for the repayment of creditors’ claims, taking into account the priority established by applicable provisions of the Bankruptcy Procedure Code of Ukraine, unless the creditors themselves have decided to worsen the conditions of their class.

The financial rehabilitation plan does not affect the creditor’s claims against third parties if the creditor with such requirements has voted against the adoption of the financial rehabilitation plan.

6.14 Rights of Set-Off

Repayment of creditor claims by offsetting homogeneous counterclaims is carried out with the presence of the creditor’s will thereto in cases where this does not violate the property rights of other creditors.

6.15. Failure to Observe the Terms of Agreements

Not later than 15 days prior to the expiry of the period for the financial rehabilitation procedure determined by the financial rehabilitation plan, as well as subject to availability of grounds for terminating the financial rehabilitation procedure, the financial rehabilitation manager must submit a written report to the creditors’ meeting and notify the creditors of the time and the place of the creditors’ meeting.

The report of the financial rehabilitation manager must be considered by the creditors’ meeting within 10 days from the date of its receipt and no later than the end of the period of the financial rehabilitation procedure specified in the financial rehabilitation plan.

Based on the results of consideration of the financial rehabilitation manager’s report, the creditors’ meeting decides on application to the economic court with a petition seeking one of the following:

  • termination of the proceedings in connection with the implementation of the financial rehabilitation plan and restoration of the debtor’s solvency;
  • termination of the financial rehabilitation procedure, declaration of the debtor bankrupt, and initiation of the liquidation procedure;
  • amendment of the financial rehabilitation plan and extension of the term of the financial rehabilitation procedure.

In the event of occurrence of circumstances that constitute grounds for terminating the financial rehabilitation procedure, the creditors’ meeting may adopt an appropriate decision in the absence of a financial rehabilitation manager’s report.

6.16 Existing Equity Owners

In the event of the debtor’s bankruptcy through the fault of its founders (participants, shareholders) or other persons (including the director of the debtor) who are entitled to give binding instructions to the debtor or have the ability to otherwise determine its actions, the founders (participants, shareholders) of the debtor that is a legal entity (or such other persons as listed above) may incur subsidiary liability for the debtor’s obligations in case of insufficiency of the debtor’s property.

The recovered amounts are included in the liquidation estate and can be used only to satisfy the claims of creditors in the order of priority established by this Code.

7. Statutory Insolvency and Liquidation Proceedings

7.1 Types of Voluntary/Involuntary Proceedings

The current legislation provides for voluntary proceedings measures aimed at preventing the bankruptcy of a corporate debtor and an extrajudicial procedure (financial rehabilitation of a debtor before the initiation of bankruptcy proceedings). By the decision of its founders (participants, shareholders), the debtor has the right to initiate a financial rehabilitation procedure prior to initiating bankruptcy proceedings.

This procedure is carried out in accordance with the debtor’s financial rehabilitation plan prior to the initiation of bankruptcy proceedings; the plan is approved by each category of unsecured creditors who own more than 50 percent of the total amount of unsecured claims included in the financial rehabilitation plan in the category. At the same time, claims of unsecured creditors who are interested parties in relation to the debtor are not taken into account for voting purposes when adopting the financial rehabilitation plan.

Furthermore, the financial rehabilitation plan provides for participation of secured creditors in the financial rehabilitation. Such a financial rehabilitation plan must be approved by each category of secured creditors who have 2/3 of the creditors’ votes of the total amount of secured claims included in the financial rehabilitation plan for that category.

After approval of the financial rehabilitation plan, an application for approval of the financial rehabilitation plan is submitted to the economic court. The economic court posts a notice of acceptance of the application for approval of the financial rehabilitation plan for consideration on the official web portal of the judicial authority of Ukraine.

Based on the results of consideration and after hearing each creditor present at the meeting who has objections to the financial rehabilitation plan, even if such a creditor has voted in favour of the financial rehabilitation plan, the economic court issues a ruling on approving the financial rehabilitation plan provided there are no grounds for refusal.

The current legislation provides for the initiation of bankruptcy proceedings upon submission of the corresponding petition by either the debtor or the creditor.

The economic court will issue a ruling on acceptance of the petition for consideration and shall appoint a preparatory meeting in which the applicant’s claims, as well as the existence of grounds for initiation a bankruptcy proceeding, are examined.

The court will issue a ruling on the initiation of proceedings with an indication of recognized creditor claims and their amount; the introduction of a moratorium on satisfaction of creditors’ claims; the introduction of a property disposal procedure; and the appointment of an assets manager. In order to identify all the creditors who intend to participate in the proceedings, an announcement of the initiation of proceedings will be published on the official web portal of the judicial authority of Ukraine.

7.2 Distressed Disposals

The sale of bankrupt’s property is carried out at an auction by the insolvency trustee after carrying out an inventory and valuation of the property. The terms of contracts concluded for the sale of bankrupt’s property must not provide for instalments or deferred payments for the acquired property. The ownership right to the property sold within the scope of bankruptcy proceedings is acquired by the buyer (the winning bidder at an auction) after performance of all obligations stipulated by the contract and the Code.

7.3 Organisation of Creditors or Committees

Only bankruptcy creditors recognized by the economic court and entered into the register of creditors’ claims may participate in creditor meetings. The number of votes held by bankruptcy creditors is proportional to the amount of their recognized claims and is a multiple of one thousand hryvnias (excluding court fees, forfeits, fines, penalties, and other financial sanctions).

Furthermore, creditors whose claims are secured by a collateral of the debtor’s property, creditors with claims for the payment of wages, royalties, alimony, as well as compensation for harm caused to the life and health of citizens, bankruptcy creditors whose claims are declared after the expiry of the period established for their submission to the court, a representative of the debtor’s employees, an authorized person of the founders (participants, shareholders) of the debtor, a representative of the body authorized to manage state property, and an insolvency trustee may participate in the meeting of the debtor’s creditors with an advisory vote.

The first creditors’ meeting is deemed authorized if creditors with at least two-thirds of the votes are present. If the first meeting is not held due to the absence of creditors with the required number of votes, a repeated first meeting is held within two weeks; this repeated meeting is deemed authorized if creditors with more than one half of the votes are present. If this meeting is not held either due to the absence of creditors with the required number of votes, a repeated first meeting is held within two weeks; this repeated meeting is deemed authorized if creditors with more than one fourth of the votes are present.

Within the bankruptcy proceedings, the meeting of creditors will elect a committee of creditors, which must not include more than seven creditors. Creditors who have 25% or more votes are automatically included in the committee of creditors. During bankruptcy proceedings, the interests of all the creditors are represented by the committee of creditors.

8. International/Cross-Border Issues and Processes

8.1. Recognition or Relief in Connection with Overseas Proceedings

Bankruptcy proceedings related to foreign proceedings are applied on a reciprocity basis. Reciprocity is considered to exist if the possibility of cooperation between a foreign state and Ukraine is provided for by an international treaty of Ukraine accepted as binding by the Verkhovna Rada of Ukraine.

8.2. Co-ordination in Cross-Border Cases

In the case of cross-border cooperation, the economic court will render judicial assistance provided that the foreign bankruptcy proceedings and the bankruptcy proceedings opened in accordance with applicable provisions of the current legislation of Ukraine are interconnected.

8.3 Rules, Standards and Guidelines

Bankruptcy proceedings are regulated by applicable provisions of the Bankruptcy Procedures Code of Ukraine, as well as international treaties of Ukraine accepted as binding by the Verkhovna Rada of Ukraine.

The enforcement of decisions of foreign courts in bankruptcy cases in Ukraine is determined by international treaties of Ukraine accepted as binding by the Verkhovna Rada of Ukraine.

Bankruptcy proceedings related to foreign proceedings are applied on a reciprocity basis.

The implementation of this principle is provided for by an international treaty of Ukraine accepted as binding by the Verkhovna Rada of Ukraine.

When deciding on the provision of judicial assistance, the refusal to provide the same, or the termination of the provision of the same, the economic court must make sure that property rights and other property rights of creditors and other interested parties, including the debtor, are not violated.

The economic court will refuse to apply international aspects of bankruptcy if the application of such aspects is contrary to the public policy, sovereignty, and the basic principles of the current legislation of Ukraine.

8.4 Foreign Creditors

The current legislation of Ukraine determines that foreign persons have the same procedural rights and duties as citizens of Ukraine and legal entities established under the current legislation of Ukraine, except as required by the Law or an international treaty accepted as binding by the Verhovna Rada of Ukraine.

9. Trustees/Receivers/Statutory Officers

9.1. Types of Statutory Officers

Within the scope of bankruptcy proceedings, an assets manager is appointed during the debtor’s property disposal stage; a financial rehabilitation manager is appointed during the debtor financial rehabilitation stage; a liquidator is appointed during the debtor liquidation stage. Only insolvency trustees can carry out this activity. The appointment of the insolvency trustee is carried out by the economic court from among the persons who have received the relevant certificate and have been entered in the Unified Register of Insolvency Trustee of Ukraine.

9.2. Statutory Roles, Rights and Responsibilities of Officers

Applicable provisions of the current legislation of Ukraine determine the rights and obligations of an insolvency trustee, who, in particular, enjoys all the rights of an assets manager, a financial rehabilitation manager, and a liquidator under the current legislation. The insolvency trustee is obligated to strictly observe the requirements of the current legislation, to adopt measures aimed at protecting the debtor’s property, to analyse the financial, economic, investment, and other activities of the debtor etc. During the exercise of his or her authority, the insolvency trustee is independent.

9.3 Selection of Officers

The candidacy of an insolvency trustee who will exercise the powers of an assets manager or a restructuring manager is determined by the court through a process of automated selection from among insolvency trustee included in the Unified Register of Insolvency Trustee of Ukraine, on the basis of random selection, using the Unified Judicial Information and Telecommunication System.

When accepting an application seeking the initiation of proceedings in a case, the court invites three insolvency trustees to be selected automatically to submit an application to participate in this case. If the application for participation in the case is received from only one insolvency trustee, the economic court appoints such a person as the assets manager / restructuring administrator; if the application for participation in the case is received from two or three insolvency trustee, the court appoints the candidacy of the first bankruptcy administrator from the automated selection system. If not a single application is filed, the court appoints the assets manager / restructuring manager on its own initiative.

The revocation of the powers of an insolvency trustee is carried out by the economic court following a motion filed by a participant in the proceedings or on its own initiative for a number of reasons:

  • failed or improper performance of the obligations assigned to the insolvency trustee;
  • abuse of the rights of an insolvency trustee;
  • submission of false information to the court;
  • refusal to grant the insolvency trustee with access to state secrets or cancellation of a previously granted access;
  • termination of the activities of an insolvency trustee;
  • the presence of a conflict of interest.

The creditors’ committee has the right to apply to the economic court at any time with a motion seeking the revocation of the powers of the insolvency trustee regardless of the existence of grounds.

The economic court shall issue a ruling on the revocation of the powers of the insolvency trustee within 14 days subject to availability of grounds for the revocation of the powers of the insolvency trustee or at the request of the creditors’ committee.

If the powers of the insolvency trustee are revoked, the economic court appoints a new insolvency trustee at the request of the creditors’ committee.

Within the scope of the procedure for disposing of the debtor’s property, the assets manager does not have the right to interfere with the operational and economic activities of the debtor, with the exception of the cases provided for by this Code.

The director or the management body of the debtor can adopt a number of decisions solely by agreement with the assets manager: on the participation of the debtor in alliances, associations, unions, holding companies, industrial and financial groups, or other associations of legal entities; on the transfer of real estate for rent; on obtaining loans (credits).

Within the scope of the financial rehabilitation and liquidation procedure, the powers of the management bodies are exercised by the insolvency trustee.

The status of an insolvency trustee can be obtained by a citizen of Ukraine who has a higher legal or economic education at the second (master’s) level with a total work experience in the specialty of at least three years or at least one year after receiving the relevant higher education in managerial positions, has completed training and internship for six months in accordance with the procedure established by the state bankruptcy body, and who speaks the official language and has passed the qualification exam.

However, the status of an insolvency trustee cannot be vested on the following individuals:

  • persons who have been recognized as legally incompetent or limited in capacity by the court;
  • persons who have an unexpunged or an outstanding conviction in accordance with applicable provisions of the current legislation;
  • persons who are incapable of performing the obligations of an insolvency trustee for health reasons;
  • persons who are prohibited from holding management positions.

There are also a number of reasons under which an insolvency trustee cannot be appointed as an assets manager, a restructuring manager, a financial rehabilitation manager, a liquidator, or a disposal manager, in particular:

  • persons who are interested parties in this case;
  • persons who previously managed this corporate debtor, except for cases when at least three years have passed since the date of removal of such person from the management of the debtor;
  • persons who are denied admission to state secrets if such admission is necessary to perform the obligations specified by this Code;
  • persons who have a conflict of interest;
  • persons who have previously exercised the powers of a private enforcement officer with respect to court decisions or decisions of other bodies (officials) in which the debtor was a party to enforcement proceedings;
  • persons who are connected person of the debtor who is a private individual.
10. Duties and Personal Liability of Directors and Officers of Financially Troubled Companies

10.1. Duties of Directors

In case of occurrence of signs of bankruptcy, the director of the enterprise is obligated to send this information to the founders (participants, shareholders). If the general meeting of the founders determines the signs of a threat to the solvency of the enterprise, the founders may oblige the director to file a petition with the economic court seeking the initiation of bankruptcy proceedings.

If the director of the debtor interferes with the performance of the powers of the assets manager, as well as if the director of the debtor performs actions that violate the rights and legitimate interests of the debtor or its creditors, the economic court has the right to dismiss the director of the debtor from the occupied position upon reasoned petition of participants in the bankruptcy proceedings.

10.2 Direct Fiduciary Breach Claims

When exercising his or her powers, the liquidator has the right to declare claims against third parties who bear subsidiary responsibility under the debtor’s obligations in accordance with the current legislation in connection with bringing the debtor to bankruptcy. The amount of these claims is determined on the basis of the difference between the amount of creditors’ claims and the liquidation estate.

In the event of the debtor’s bankruptcy through the fault of its founders (participants, shareholders) or other persons (including the director of the debtor) who are entitled to give binding instructions to the debtor or have the ability to otherwise determine its actions, the founders (participants, shareholders) of the debtor that is a legal entity (or such other persons as listed above) may incur subsidiary liability for the debtor’s obligations in case of insufficiency of the debtor’s property.

The recovered amounts are included in the liquidation estate and can be used only to satisfy the claims of creditors in the order of priority established by this Code.

11. Transfers/Transactions That May Be Set Aside

11.1. Historical Transactions

The current legislation of Ukraine on bankruptcy provides grounds for invalidating a transaction (a contract) or property actions of the debtor by the economic court, in particular if the debtor has alienated the property free of charge, has assumed obligations without any other property actions, has refused its own property claims; if the debtor had assumed obligations before the bankruptcy proceedings were initiated, which resulted in the insolvency of the debtor or the impossibility for the debtor to perform its monetary obligations to other creditors; if the debtor has alienated or acquired property at prices lower / higher than market prices; and others.

11.2. Look-Back Period

Within the framework of bankruptcy proceedings, the economic court may invalidate transactions made by the debtor after the commencement of bankruptcy proceedings or within three years preceding the commencement of bankruptcy proceedings if such transactions have resulted in damage to the debtor or to the creditors based on the following grounds:

  • the debtor has performed property obligations earlier than the established date;
  • the debtor has assumed obligations, as a result of which the debtor has become insolvent or the performance of the debtor’s monetary obligations to other creditors has become completely or partially impossible, prior to the initiation of bankruptcy proceedings;
  • the debtor has alienated or acquired property at prices that are, respectively, lower or higher than market prices provided that the debtor’s property was (became) insufficient to satisfy the creditors’ claims at the time of assumption of the obligation or as a result of performance of the obligation;
  • the debtor has paid the creditor or has accepted the property against the performance of monetary claims on the day when the amount of creditors’ claims against the debtor exceeded the value of the property;
  • the debtor has assumed collateral obligations to ensure the performance of monetary claims.

Also, the economic court may invalidate transactions made by the debtor during the three years preceding the initiation of bankruptcy proceedings within the framework of the bankruptcy proceedings based on the following grounds:

  • the debtor has carried out the alienation of property free of charge, has assumed obligations without the corresponding property actions of the other party, or has renounced own property claims of the debtor;
  • the debtor has entered into an agreement with an interested person;
  • the debtor has entered into a gift agreement.

11.3. Claims to Set Aside or Annul Transactions

Applications seeking the invalidation of transactions made by the debtor after the initiation of bankruptcy proceedings or within three years preceding the initiation of bankruptcy proceedings must be filed with the court by the insolvency trustee or the creditor.

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