The new version of the Law of Ukraine “On Restoring the Solvency of the Debtor or Recognizing It as a Bankrupt”, which came into force on January 19, 2013, introduced a number of logical (and not very logical) changes, concerning not only the very procedure of bankruptcy, but also the jurisdiction of disputes, directly or indirectly related to such a procedure. For example, Article 10 of the specified Law, as well as Articles 12, 16 of the Code of Commercial Procedure of Ukraine (as amended after January 19, 2013) containing the similar norms, introduce a rule according to which the court, in which production the bankruptcy case is, considers all the property disputes with claims to the debtor. Such disputes, in the legislator’s opinion, include, among other things, disputes on invalidating any contracts concluded by the debtor, collecting wages, reinstatement of employment of the debtor’s officials. Exceptions to this rule shall be only the disputes related to payment (withholding) of monetary obligations (tax debt) determined according to the Tax Code of Ukraine.
Ex facto, this is a very convenient and logical rule that shall unify and systematize the process of considering bankruptcy disputes. However, as it turned out in the process of development of judicial practice on the application of these norms – it is not all as easy as it sounds. The main problem for the national courts was the phrase “the court, in which production the bankruptcy case is” that was not explained in detail either by the Law “On Bankruptcy” itself, or the information letter of the Supreme Economic Court published in March 2013. Therefore, national courts set their hands to the “interpretation”, and, as is customary, they could not come to a consensus.
During the period of 2013 – 2016, the judicial benches of the Supreme Economic Court were divided on how to deal with such disputes: from consideration of such disputes within the framework of the bankruptcy case without opening of separate productions (or with opening of separate productions – the opinions also differed there), ending with consideration of only selected disputes (expressly provided by the law) within the framework of the bankruptcy case, and not the selected ones – in separate lawsuits, but by the same economic court, in which the bankruptcy case is being considered.
Such diversified approaches to the application of the norms of the Law “On Bankruptcy” often led to absurd situations. For example, in the middle of 2016 the Supreme Economic Court of Ukraine (consisting of 3 different judicial benches) came to the three interesting but mutually exclusive conclusions in three absolutely similar cases (disputes on invalidation of 3 loan agreements, where the party was a legal entity in respect of which the proceedings were opened in the bankruptcy case), where the participant was a large Austrian company ACTIV Solar Gmbh:
- the 1st judicial bench came to the conclusion that it was necessary to consider a dispute within the framework of the bankruptcy case of the company being a party to the loan agreement;
- the 2nd judicial bench agreed with the legality of considering such a dispute in a separate lawsuit proceeding;
- the 3rd judicial bench agreed with the conclusion of the first instance court on the need to terminate the proceedings in connection with the fact that the dispute was not subject to consideration by the courts of Ukraine (an arbitration clause was provided for in all the contested agreements).
The Supreme Court of Ukraine also made a significant contribution to the development of the practice of considering disputes related to bankruptcy, which, in its resolution as of April 13, 2016 (case No. 3-304гс16), expressed a somewhat expanded interpretation of the said provisions of the Law “On Bankruptcy”.
Thus, according to the position of the Supreme Court of Ukraine, from the moment of opening a bankruptcy case against the debtor, it remains in a special legal regime that replaces the entire complex of legal jural relations of the debtor, and special norms of the Law “On Bankruptcy” shall have a higher priority. One of the peculiarities of such a regime is the concentration of all disputes in the bankruptcy case with a view to controlling, in the framework of this proceeding, the activities of the debtor, including all the debtor’s property in the liquidation mass and carrying out other activities which purpose is full or partial satisfaction of creditors’ claims …
In the same decree, the Supreme Court of Ukraine concluded that such disputes should be considered and resolved within the framework of an already open bankruptcy case, without opening new proceedings.
It would seem that the Supreme Court put an end to the 3-year conflict between the positions of the Supreme Economic Court and rather broadly explained what disputes should be considered within the framework of the bankruptcy case, but as it turned out, the “end” is more like “endless”.
The position of the Supreme Court of Ukraine served as an impetus for a new round of judicial practice development – from the second half of 2016 courts began to actively use the described position of the Supreme Court, while applying it in very unexpected situations.
So, the consideration of claims for property disputes of the debtor itself to third parties within the framework of the bankruptcy case is a popular court practice to date. For example, the Supreme Economic Court of Ukraine in its decision in case No. 920/360/16 as of February 22, 2017 concluded that it was necessary to consider the debtor’s claim for recovery of accounts receivable within the framework of the bankruptcy case. At the same time, the court motivated its position by the fact that the dispute concerned the issue of the liquidation mass formation in the bankruptcy case, therefore, it was directly related to the proceedings in the bankruptcy case. On similar grounds, the practice of considering claims for the invalidation of contracts concluded by a non-debtor (but related to the proceedings in a bankruptcy case), vindication claims, various non-property claims to both the debtor and its creditors is often found within the bankruptcy case.
This vector of judicial practice development has a number of positive aspects: the concentration of all the disputes in the bankruptcy case; greater involvement and competence of the court (regarding the specifics of the proceedings in the bankruptcy case) when considering disputes indirectly related to bankruptcy; certain promptness in the resolution of disputes (consideration of all the disputes within the framework of a bankruptcy case ends with rendering of ruling that comes into force at the time of its rendering). But, as a rule, positive moments closely border on openly negative – since the dispute is considered within the framework of the bankruptcy case, any procedural “sabotage” aimed at delaying the case will automatically entail a prolongation of the time for the dispute consideration. In addition, most often, the concentration of all the disputes in the bankruptcy case is convenient only for participants of such bankruptcy (creditors, the arbitration manager), but it is not very convenient for third parties for which such jurisdiction may become a complete surprise.
For the sake of justice, it is worth noting that the described negative aspects are mostly related to the imperfection of the current procedural legislation, which allows unscrupulous participants in such a process to abuse their rights and sufficiently delay the time for consideration of key issues in the bankruptcy case. At the same time, it is difficult to underestimate the forthcoming changes in the procedural legislation, which, among other things, provide mechanisms for countering the abuse of procedural rights. We hope that the new editions of the procedural codes will put an end to the ambiguous application of the law and allow Senior Courts to formulate a single law enforcement practice in relation to the issues raised above.