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Code of Ukraine on Bankruptcy Proceedings: a New Life for Creditors and Debtors

22/ 01/ 2019
  Oleg Kachmar, attorney-at-law, partner at Vasil Kisil & Partners. For more than 12 years, Oleg has been specializing in litigation disputes dealing with lending and insurance, real estate and construction Yuriy Kolos, attorney-at-law, counsel at Vasil Kisil & Partners Senior Associate. 7 years of experience in litigation and insurance disputes, representation of interests of creditors and borrowers in bankruptcy cases Adopted in October last year, the new Code of Ukraine on Bankruptcy Proceedings is the next step in reforming an insolvency sector. The reform of this sector is long overdue as evidenced by disappointing statistics: Ukrainian economy ranking 143rd in the Doing Business ranking in the ‘resolving insolvency’ indicator and poor statistics of debt collection in bankruptcy proceedings (only 6-7% of debts). Having examined the new provisions of the Code and analyzed the changes in the bankruptcy procedure, we have identified some directions (trends) of the new legislative regulation of the bankruptcy procedure. First, in terms of legislative technique, the very idea of developing the code instead of the law is debatable. The adoption of a codified act provides, among other things, for systematization and generalization of legislation in the area concerned, in particular, the replacement of a large number of legislative acts on the same issue by a single (codified) act. The Tax Code, which has replaced and systematized a significant number of legislative acts in the taxation area, can serve as an example of such codification. Instead, the Code on Bankruptcy Proceedings does not meet the requirements for legislative acts in the form of codes. In particular, the Code does not generalize and systematize the provisions of the Law of Ukraine “On Restoring Debtor’s Solvency or Declaring a Debtor Bankrupt”, but only artificially codifies the provisions of the said Law, the Commercial Code of Ukraine and the Commercial Procedure Code, increasing the number of relevant provisions. In other words, instead of one old law, we now have a new, extended law, but in the form of a code. Second, in our opinion, the most revolutionary novelty of the Code is the introduction of an ‘easy entry’ principle for bankruptcy proceedings. The Code does not require a creditor who files a petition in bankruptcy to provide any evidence of the indisputability of creditor’s claims and does not set a lower threshold for such claims. It should be reminded that, pursuant to the applicable Law, a bankruptcy petition can be filed only if there is evidence of indisputability of creditor’s claims for the amount exceeding 300 times the minimum wage. Such evidence is a court decision that has entered into force and a resolution on commencement of enforcement proceedings, provided that no court decision has been executed within 3 months after the commencement of proceedings. The Code lifts these ‘barriers’ and allows to initiate a debtor’s bankruptcy if there is a debt for any amount that actually makes the bankruptcy proceedings alternative to enforcement proceedings. Will this novelty lead to abuses by creditors or to strengthening the discipline of debt payment by debtors? We’ll see in practice. In any case, the debtor is entitled to repay its debt to the initiating creditor prior to the commencement of bankruptcy proceedings or at any time within the bankruptcy proceedings. Third, the Code introduces a personal bankruptcy procedure, which is a completely new concept for Ukraine. This procedure is similar to the corporate bankruptcy procedure, but it also has certain specific features. In particular, personal bankruptcy can be initiated by the debtor himself/herself only. Besides, a personal bankruptcy procedure does not necessarily need to have a ‘happy end’ and end up with the write-off of debts: if the debtor conceals any property or supplies incorrect information about the property, proceedings in the personal bankruptcy shall be terminated at the request of the party, the meeting of creditors or at the court’s own initiative. Thus, the personal bankruptcy procedure enabling an individual to write off his/her debts (become free from their debts) will have a slightly different scenario than the corporate bankruptcy procedure. Fourth, the Code aims to speed up the bankruptcy process. This goal is achieved not by reducing the timeline of court proceedings (receivership, rehabilitation, liquidation), which was rarely met by commercial courts, but by limiting the right to appeal against court decisions within a bankruptcy case (most of the court rulings are not subject to appeal in cassation) and by tightening requirements for the transition to the next court procedure. The latter means that the rehabilitation procedure can be introduced only if there is a rehabilitation plan approved by a creditors’ meeting. If such plan is not available, the court “automatically” introduces a liquidation procedure. Such rules speed up “intermediate” stages between court proceedings, as the Code does not allow time for developing and approving a rehabilitation plan. Thus, the new Code must make the bankruptcy procedure faster and more efficient. Whether such expectations will be met will remain to be seen after the Code comes into force and is applied in practice for some time.
Oleg Kachmar, attorney-at-law, partner at Vasil Kisil & Partners. For more than 12 years, Oleg has been specializing in litigation disputes dealing with lending and insurance, real estate and construction Yuriy Kolos, attorney-at-law, counsel at Vasil Kisil & Partners Senior Associate. 7 years of experience in litigation and insurance disputes, representation of interests of creditors and borrowers in bankruptcy cases

Adopted in October last year, the new Code of Ukraine on Bankruptcy Proceedings is the next step in reforming an insolvency sector. The reform of this sector is long overdue as evidenced by disappointing statistics: Ukrainian economy ranking 143rd in the Doing Business ranking in the ‘resolving insolvency’ indicator and poor statistics of debt collection in bankruptcy proceedings (only 6-7% of debts).

Having examined the new provisions of the Code and analyzed the changes in the bankruptcy procedure, we have identified some directions (trends) of the new legislative regulation of the bankruptcy procedure.

First, in terms of legislative technique, the very idea of developing the code instead of the law is debatable. The adoption of a codified act provides, among other things, for systematization and generalization of legislation in the area concerned, in particular, the replacement of a large number of legislative acts on the same issue by a single (codified) act. The Tax Code, which has replaced and systematized a significant number of legislative acts in the taxation area, can serve as an example of such codification. Instead, the Code on Bankruptcy Proceedings does not meet the requirements for legislative acts in the form of codes. In particular, the Code does not generalize and systematize the provisions of the Law of Ukraine “On Restoring Debtor’s Solvency or Declaring a Debtor Bankrupt”, but only artificially codifies the provisions of the said Law, the Commercial Code of Ukraine and the Commercial Procedure Code, increasing the number of relevant provisions. In other words, instead of one old law, we now have a new, extended law, but in the form of a code.

Second, in our opinion, the most revolutionary novelty of the Code is the introduction of an ‘easy entry’ principle for bankruptcy proceedings. The Code does not require a creditor who files a petition in bankruptcy to provide any evidence of the indisputability of creditor’s claims and does not set a lower threshold for such claims. It should be reminded that, pursuant to the applicable Law, a bankruptcy petition can be filed only if there is evidence of indisputability of creditor’s claims for the amount exceeding 300 times the minimum wage. Such evidence is a court decision that has entered into force and a resolution on commencement of enforcement proceedings, provided that no court decision has been executed within 3 months after the commencement of proceedings. The Code lifts these ‘barriers’ and allows to initiate a debtor’s bankruptcy if there is a debt for any amount that actually makes the bankruptcy proceedings alternative to enforcement proceedings. Will this novelty lead to abuses by creditors or to strengthening the discipline of debt payment by debtors? We’ll see in practice. In any case, the debtor is entitled to repay its debt to the initiating creditor prior to the commencement of bankruptcy proceedings or at any time within the bankruptcy proceedings.

Third, the Code introduces a personal bankruptcy procedure, which is a completely new concept for Ukraine. This procedure is similar to the corporate bankruptcy procedure, but it also has certain specific features. In particular, personal bankruptcy can be initiated by the debtor himself/herself only. Besides, a personal bankruptcy procedure does not necessarily need to have a ‘happy end’ and end up with the write-off of debts: if the debtor conceals any property or supplies incorrect information about the property, proceedings in the personal bankruptcy shall be terminated at the request of the party, the meeting of creditors or at the court’s own initiative. Thus, the personal bankruptcy procedure enabling an individual to write off his/her debts (become free from their debts) will have a slightly different scenario than the corporate bankruptcy procedure.

Fourth, the Code aims to speed up the bankruptcy process. This goal is achieved not by reducing the timeline of court proceedings (receivership, rehabilitation, liquidation), which was rarely met by commercial courts, but by limiting the right to appeal against court decisions within a bankruptcy case (most of the court rulings are not subject to appeal in cassation) and by tightening requirements for the transition to the next court procedure. The latter means that the rehabilitation procedure can be introduced only if there is a rehabilitation plan approved by a creditors’ meeting. If such plan is not available, the court “automatically” introduces a liquidation procedure. Such rules speed up “intermediate” stages between court proceedings, as the Code does not allow time for developing and approving a rehabilitation plan.

Thus, the new Code must make the bankruptcy procedure faster and more efficient. Whether such expectations will be met will remain to be seen after the Code comes into force and is applied in practice for some time.

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