Utilization of Medicinal Products in Ukraine: What to do if Owner of Medicinal Products is in a Winding up Process and has Scarce Resources for their Utilization?

12/ 04/ 2018

Analysing the provisions of the Law Ukraine On Restoring a Debtor Solvency or Declaring a Debtor Bankrupt Act of Ukraine (hereinafter – the “Law”) two main goals of liquidation procedure may be highlighted: 1) sale of the bankrupt’s estate and upholding the adjudicated creditors’ claims at the expense of the assets received after the sale of property; 2) bankrupt’s liquidation itself. Article 42 (1) of the Law stipulates that all (with some exceptions) types of proprietary assets of the bankrupt beneficially owned by him or held by virtue of full economic jurisdiction as of the date of opening the liquidation procedure, and revealed in the course of the liquidation procedure, shall be included into the liquidation estate. All types of the debtor’s property which is intended for the performance of economic activities (except for the rights and obligations which may be transferred to other persons) shall be subject to sale (Article 49 (2) of the Law). The matter of sale of the bankrupt’s liquid assets is fully understandable and does not “promise” any major problems on practice. The most widespread problem in the process of sale of such property is lifting arrests and other encumbrances from it. It needs to be pointed out that the court will not be able to uphold a judgment on liquidation of a legal entity-bankrupt if, under the results of the liquidation procedure and after satisfying the creditors’ claims, such legal entity has any property left (Article 46 (2) of the Law). However, in his ownership (on the balance sheet) the bankrupt may have the property which has certain value and may be subject to sale (liquid property), as well as the property which does not only have any value and not subject to sale at all (i.e. cannot be withdrawn from the circulation), but, what’s more, is subject to utilization. Such property, for example, will include the medicinal products with past due date and products which are subject to utilization under the legislatively stipulated procedure. The procedure of utilization of the medicinal products with past due date is established in the “Rules for utilization and destruction of the medicinal products” approved by the Order No. 242 as of April 24, 2015 issued by the Ministry of Health Protection of Ukraine (hereinafter – the “Rules”). In such way, the medicinal products, which are not subject to further use, among others, are represented by poor-quality medicines, including those with past due date (Section 1 (4) (2) of the Rules). Consequently, the medicinal products with past due date are considered to be defective. The presence in the circulation of the medicinal products which are not subject to further use is established by the bodies of the state control and/or public (authorized) officials of the economic entities in the sphere of circulation of medicinal products. Such medicinal products are withdrawn from the circulation and the fact of their presence is registered on the basis of the act (Section 2 (1) of the Rules). By virtue of Article 41 (2) of the Law a liquidator shall act as the director (managerial body) of a bankrupt, i.e. performs obligations of an official. This is why if a company-bankrupt holds the medicinal products which are not subject to further use the liquidator must confirm the fact of their existence on the basis of a corresponding act. However, the establishment of the fact of ownership by the bankrupt of the medicinal products, which are not subject to further use, is of no practical use for the liquidation procedure which is aimed at full or partial satisfaction of the creditors’ claims and at the liquidation of the bankrupt. Pursuant to Section 2 (5) of the Rules the medicinal products, which are not subject to further use, receive the status of “wastes” and are transferred for utilization or disposal to the economic entities holding corresponding licenses for conducting economic activities in the sphere of circulation of dangerous wastes, individually or via suppliers, if this is stipulated by corresponding contractual terms. Economic entities possessing the medicinal products not subject to further use shall file the information about transfer of such medicinal products for utilization or destruction to the bodies of the state control under the place of performance of the corresponding activities (Section 2 (6) of the Rules). However, the services on utilization of medicinal products, which are rendered by corresponding economic subjects, are fee-based and may be quite expensive. Here is a question arises: what should a bankrupt’s liquidator do when a company-bankrupt has no money for the utilization of the medicinal products? Utilization of the medicinal products at the expense of the creditors’ costs Among the possible solutions to this problem may be the utilization of the medicinal products at the expense of the assets of the advance monetary remuneration fund and compensation of the expenses of the court-appointed administrator, which may be established by the creditors within the bankruptcy case on the basis of Article 115 (6) of the Law. However, such a solution for settlement of the matter on utilization of the medicinal products is unlikely because the creditor will not be willing to cover the expenses of the court-appointed administrator for the utilization without corresponding guarantees of reimbursement of such expenses. In particular, such guarantee may be represented by the liquid property (mortgaged as well) owned by the company-bankrupt the cost of which must exceed or equal the amount of funding. At the same time, in the process of determination of the probability of reimbursement of the mentioned monetary assets it needs to be taken into consideration that the money received from the sale of the bankrupt’s property is distributed between the creditors in the sequence stipulated by Article 45 of the Law. There may be other (theoretical, but currently unlikely) solutions for the mentioned problem. Utilization at the expense of the budget funds Utilization of medicinal products may be carried out, among other things, at the expense of local budgets, environment protection funds, voluntary contributions of the companies, enterprises, organizations, citizens and their unions, as well as the funds of the state budget of Ukraine stipulated for implementation of corresponding measures (based on Article 41 of the Law of Ukraine On Wastes). Pursuant to Article 20 (3) of the Law of Ukraine On Wastes in the process of preparation of budget estimates local state administrations introduce proposals for attraction of monetary resources required for performance of measures in the sphere of wastes treatment. Pursuant to Article 21 (1) (d) of the Law of Ukraine On Wastes local self-governance bodies in the sphere of wastes treatment ensure approval of local and regional programs of wastes treatment and exercise control over their execution. Within the scope of their competence the executive bodies of village, community, and town councils in the region in the sphere of protection of the environment: organize collection, recycling, utilization and disposal of wastes in their territory, as well as compile and use the local nature protection funds within the local budgets (Article 19 (f) and (g) of the Law of Ukraine On Protection of the Natural Environment). Pursuant to Article 68 (1) of the Law of Ukraine On Local Self-Governance of Ukraine the local self-governance authorities may create specialized funds which form a component of the specialized fund of a corresponding local budget. In theory such specialized funds may be created, among other things, to solve the problems related to waste treatment. However, for the realization of the mentioned legislative provisions local budgets must stipulate expenses intended for wastes treatment in the corresponding year, in particular – expenses directly stipulated for wastes utilization which, in theory, is possible, but unlikely in view of “chronic” underfunding. More importantly, the aforesaid legislative provisions are, above all, directed at solving the “problems” with wastes whose owner is unknown. Wastes held by a certain owner create an additional barrier in front of their utilization at the expense of local budgets and calls for performance of measures for “promotion” of the issue of their utilization. An additional argument in favor of the “promotion” of this issue may be the proof of inflicting harm by such wasted both to the environment, as well as to people’s health. Transfer of the medicinal products to third persons into storage The problem of the company-bankrupt possessing medicinal products subjected to utilization in theory may be resolved by transferring such products (until the question of their utilization is resolved) into storage by the corresponding state or communal authorities, companies, enterprises or organizations which, among other things, constitute a part of the structure if the State Emergency Service of Ukraine, the Ministry of Health Protection of Ukraine or the Ministry of Ecology and Natural Resources of Ukraine. In such way, if among its assets the bankrupt has assets withdrawn from the circulation the liquidator is obliged to transfer such assets to corresponding persons under the established procedure (Article 45 (5) of the Law). However, there is no effective current procedure of free-of-charge transfer of medicinal products, which are subject to utilization, to corresponding bodies or persons. Based on the aforementioned we may conclude that if among bankrupt’s having certain assets which are subject to utilization may pose a great problem during the procedure of bankrupt’s liquidation completion. The legislative provisions governing the mentioned problematic issue are mainly of referential and declarative nature and do not provide concrete instructions in relation to the procedure of its resolution. This is why we only have to wait for the corresponding clarifications of the state authorities which will be able to shed light onto the solutions of the said problem … Additional notes For further information on the topic please contact Stanislav Koptilin, Attorney at Law, by telephone +380 44 494-1919 or via email.

Article 42 (1) of the Law stipulates that all (with some exceptions) types of proprietary assets of the bankrupt beneficially owned by him or held by virtue of full economic jurisdiction as of the date of opening the liquidation procedure, and revealed in the course of the liquidation procedure, shall be included into the liquidation estate.

All types of the debtor’s property which is intended for the performance of economic activities (except for the rights and obligations which may be transferred to other persons) shall be subject to sale (Article 49 (2) of the Law).

The matter of sale of the bankrupt’s liquid assets is fully understandable and does not “promise” any major problems on practice. The most widespread problem in the process of sale of such property is lifting arrests and other encumbrances from it.

It needs to be pointed out that the court will not be able to uphold a judgment on liquidation of a legal entity-bankrupt if, under the results of the liquidation procedure and after satisfying the creditors’ claims, such legal entity has any property left (Article 46 (2) of the Law).

However, in his ownership (on the balance sheet) the bankrupt may have the property which has certain value and may be subject to sale (liquid property), as well as the property which does not only have any value and not subject to sale at all (i.e. cannot be withdrawn from the circulation), but, what’s more, is subject to utilization.

Such property, for example, will include the medicinal products with past due date and products which are subject to utilization under the legislatively stipulated procedure.

The procedure of utilization of the medicinal products with past due date is established in the “Rules for utilization and destruction of the medicinal products” approved by the Order No. 242 as of April 24, 2015 issued by the Ministry of Health Protection of Ukraine (hereinafter – the “Rules”).

In such way, the medicinal products, which are not subject to further use, among others, are represented by poor-quality medicines, including those with past due date (Section 1 (4) (2) of the Rules).

Consequently, the medicinal products with past due date are considered to be defective.

The presence in the circulation of the medicinal products which are not subject to further use is established by the bodies of the state control and/or public (authorized) officials of the economic entities in the sphere of circulation of medicinal products. Such medicinal products are withdrawn from the circulation and the fact of their presence is registered on the basis of the act (Section 2 (1) of the Rules).

By virtue of Article 41 (2) of the Law a liquidator shall act as the director (managerial body) of a bankrupt, i.e. performs obligations of an official. This is why if a company-bankrupt holds the medicinal products which are not subject to further use the liquidator must confirm the fact of their existence on the basis of a corresponding act.

However, the establishment of the fact of ownership by the bankrupt of the medicinal products, which are not subject to further use, is of no practical use for the liquidation procedure which is aimed at full or partial satisfaction of the creditors’ claims and at the liquidation of the bankrupt.

Pursuant to Section 2 (5) of the Rules the medicinal products, which are not subject to further use, receive the status of “wastes” and are transferred for utilization or disposal to the economic entities holding corresponding licenses for conducting economic activities in the sphere of circulation of dangerous wastes, individually or via suppliers, if this is stipulated by corresponding contractual terms.

Economic entities possessing the medicinal products not subject to further use shall file the information about transfer of such medicinal products for utilization or destruction to the bodies of the state control under the place of performance of the corresponding activities (Section 2 (6) of the Rules).

However, the services on utilization of medicinal products, which are rendered by corresponding economic subjects, are fee-based and may be quite expensive.

Here is a question arises: what should a bankrupt’s liquidator do when a company-bankrupt has no money for the utilization of the medicinal products?

Utilization of the medicinal products at the expense of the creditors’ costs

Among the possible solutions to this problem may be the utilization of the medicinal products at the expense of the assets of the advance monetary remuneration fund and compensation of the expenses of the court-appointed administrator, which may be established by the creditors within the bankruptcy case on the basis of Article 115 (6) of the Law.

However, such a solution for settlement of the matter on utilization of the medicinal products is unlikely because the creditor will not be willing to cover the expenses of the court-appointed administrator for the utilization without corresponding guarantees of reimbursement of such expenses. In particular, such guarantee may be represented by the liquid property (mortgaged as well) owned by the company-bankrupt the cost of which must exceed or equal the amount of funding. At the same time, in the process of determination of the probability of reimbursement of the mentioned monetary assets it needs to be taken into consideration that the money received from the sale of the bankrupt’s property is distributed between the creditors in the sequence stipulated by Article 45 of the Law.

There may be other (theoretical, but currently unlikely) solutions for the mentioned problem.

Utilization at the expense of the budget funds

Utilization of medicinal products may be carried out, among other things, at the expense of local budgets, environment protection funds, voluntary contributions of the companies, enterprises, organizations, citizens and their unions, as well as the funds of the state budget of Ukraine stipulated for implementation of corresponding measures (based on Article 41 of the Law of Ukraine On Wastes).

Pursuant to Article 20 (3) of the Law of Ukraine On Wastes in the process of preparation of budget estimates local state administrations introduce proposals for attraction of monetary resources required for performance of measures in the sphere of wastes treatment.

Pursuant to Article 21 (1) (d) of the Law of Ukraine On Wastes local self-governance bodies in the sphere of wastes treatment ensure approval of local and regional programs of wastes treatment and exercise control over their execution.

Within the scope of their competence the executive bodies of village, community, and town councils in the region in the sphere of protection of the environment: organize collection, recycling, utilization and disposal of wastes in their territory, as well as compile and use the local nature protection funds within the local budgets (Article 19 (f) and (g) of the Law of Ukraine On Protection of the Natural Environment).

Pursuant to Article 68 (1) of the Law of Ukraine On Local Self-Governance of Ukraine the local self-governance authorities may create specialized funds which form a component of the specialized fund of a corresponding local budget.

In theory such specialized funds may be created, among other things, to solve the problems related to waste treatment.

However, for the realization of the mentioned legislative provisions local budgets must stipulate expenses intended for wastes treatment in the corresponding year, in particular – expenses directly stipulated for wastes utilization which, in theory, is possible, but unlikely in view of “chronic” underfunding.

More importantly, the aforesaid legislative provisions are, above all, directed at solving the “problems” with wastes whose owner is unknown.

Wastes held by a certain owner create an additional barrier in front of their utilization at the expense of local budgets and calls for performance of measures for “promotion” of the issue of their utilization.

An additional argument in favor of the “promotion” of this issue may be the proof of inflicting harm by such wasted both to the environment, as well as to people’s health.

Transfer of the medicinal products to third persons into storage

The problem of the company-bankrupt possessing medicinal products subjected to utilization in theory may be resolved by transferring such products (until the question of their utilization is resolved) into storage by the corresponding state or communal authorities, companies, enterprises or organizations which, among other things, constitute a part of the structure if the State Emergency Service of Ukraine, the Ministry of Health Protection of Ukraine or the Ministry of Ecology and Natural Resources of Ukraine.

In such way, if among its assets the bankrupt has assets withdrawn from the circulation the liquidator is obliged to transfer such assets to corresponding persons under the established procedure (Article 45 (5) of the Law).

However, there is no effective current procedure of free-of-charge transfer of medicinal products, which are subject to utilization, to corresponding bodies or persons.

Based on the aforementioned we may conclude that if among bankrupt’s having certain assets which are subject to utilization may pose a great problem during the procedure of bankrupt’s liquidation completion.

The legislative provisions governing the mentioned problematic issue are mainly of referential and declarative nature and do not provide concrete instructions in relation to the procedure of its resolution. This is why we only have to wait for the corresponding clarifications of the state authorities which will be able to shed light onto the solutions of the said problem …

Additional notes

For further information on the topic please contact Stanislav Koptilin, Attorney at Law, by telephone +380 44 494-1919 or via email.