Author: the Law Agency “Absolute”
New requirements for the sale of the debtor’s property in bankruptcy cases are a progressive measure, but its effectiveness depends on the formation of a unified position of the Supreme Court in conducting such auctions.
In January 2013, a new edition of the Law of Ukraine “On restoring the debtor’s solvency or declaring it bankrupt” came into force and introduced many changes to outdated bankruptcy mechanisms. In particular, the procedure for selling the debtor’s property was radically changed – the sale was only by auction, the features of which are regulated by the Law.
For 5 years of work of the new edition of the Bankruptcy Law, the judicial practice of appealing against the results of auctions diametrically changed its direction: the position on a particular issue often depended on the specific composition of the board of the Supreme Economic Court. But, in 2018, the situation changed. The Supreme Court has formed several new positions governing the grounds for cancellation of auctions, which we will consider.
Reasons for cancellation of auction results can be divided into three main elements:
1) Violation of the rules for the preparation of the auction: the formation of the liquidation mass, obtaining the consent of the secured creditor, attracting the auction organizer, property valuation, publication of the announcement of the sale, admission to participate in the auction;
2) Violation of the rules of the auction: approval of the composition of the property with the creditors’ committee (in case of sale of property in parts), admission to the place of the auction, lowering the initial value, the procedure for holding the auction;
3) Violation of the rules for the design of auction results: filling in the protocol for the auction, payment of property, the procedure for transferring property to the buyer, registration of real estate (a contract of sale and / or a certificate of acquisition of real estate at auction).
It is important to understand that the violation of any of these elements entails invalidation of the results of the auction as a whole. At the same time, the position of the Supreme Court is repeatedly encountered, according to which the violation should affect the auction results, i.e. violation of the rules of the auction itself is not an unconditional basis for canceling its results (resolution of the Supreme Court on 07/19/2018 in case No. 914/3461/14, resolution of the Supreme Court on 05/31/2018 in case No. 904/7433/15).
Limits of flexibility
New position was also formulated with regard to the conditions of the auction. Thus, in the opinion of the Supreme Court, the rules for conducting an auction are divided into two categories: imperative and dispositive.
Imperative rules are the rules of the auction, peremptorily established by law. For example, such rules include the determination of the initial value of the total property complex of the debtor as the sum of all creditor claims recognized by the court.
Dispositive rules are rules for which the legislator has applied the wording “unless otherwise provided by the agreement on the organization of the auction”. These rules include: the percentage of lowering the initial value at the second and second repeated auctions, the date of the next auction, the possibility of lowering the initial value during the auction. Such conditions must be provided by the agreement on the organization of the auction.
For example, the rule about lowering the initial cost of an auction at each next auction by 20% is not imperative and the parties to the contract on organizing an auction (liquidator and organizer) may provide for reducing the initial value at a second auction not by 20%, but by 50% – such an auction will not contradict the law.
We welcome this approach to the rules of the auction, because it reduces the excessive formalism of the procedure and encourages the arbitration of the arbitration manager, which, in our opinion, contributes to both reducing the time of the procedure and increasing its effectiveness.
Efficiency of the sale
The liquidator independently (after the 1st auction for the sale of the integral property complex) chooses the method of the subsequent sale of the property. You can continue to sell the integral property complex (repeated, 2nd repeated auction) if the liquidator deems that this method will allow realizing the property at the highest price possible, or go to the sale of property in parts. But, in any case, the method of implementation chosen by the liquidator must be effective – such that it will sell at the maximum cost based on the characteristics of the property. The following logic works: even in the worst case, selling the debtor’s property as a CMC, at the minimum cost (for 1 UAH) – less effective than the sale of the same property in parts, each of which will be sold at the lowest cost (for example, three lots for 1 UAH each).
This position was expressed by the Supreme Court in the decisions of 06/21/2018 in case number 914/701/17 and from 08/05/2018 in case number 904/6275/15.
What is written by the pen ...
It is worth special attention and the contract on the organization of the auction. Its conditions, and more often their absence (and this is important), serve as the basis for canceling the auction results.
The contract must contain all the conditions of the future auction, including:
- a list of the property that is being sold;
- the initial value of the property at each of the auctions;
- auction pitch;
- terms of lowering the initial cost, etc.
Considering the above, it seems quite logical position of the Supreme Court from 07.03.2018 in case No. 24/5005/10848/2012: obtaining the consent of the secured creditor for the sale of the pledged property should precede the choice of the auction organizer. This is due to the fact that the terms of the sale of the pledge agreed with the secured creditor must be stipulated in the contract on the organization of the auction. And in this case, the numerous conclusions of the Supreme Court on the framework and the number of necessary permits of the secured creditor seem to be even more logical – one consent to the sale is sufficient, without imposing conditions on such sale.
It is worth noting that the judicial practice of cancellation of auctions for reasons of the absence of a contract in the case, or the absence of “inalienable” conditions in it is very common, therefore, this issue should be given special attention when preparing for the auction.
Better less yes more
The interesting situation is also developing with the position of the Supreme Court regarding the value of the property. In this matter, the Supreme Court decided not to deviate from the traditions of the Supreme Economic Court of Ukraine and did not formulate a single position. In the judgments of 05/17/2018 in case No. 905/3594/15 and 12.06.2018 in case No. 905/1084/16, the Supreme Court expressed a progressive position that the value of the property is based on the condition of the property, supply and demand for which the liquidator does not affect. But, in the ruling dated 08.05.2018 in case No. 22 / 63b, a diametrically opposite position was described: the sale of property at “meager” cost, which makes it impossible at least partial repayment of the secured creditor’s claims – violation of the auction rules. At the same time, the court did not proceed from specific violations, which led to an underestimation of the real value, but from violation of the general principles and objectives of the liquidation procedure – satisfaction of creditors’ claims.
We are confident that, despite the adoption of the Bankruptcy Code of Ukraine, this article will not lose its relevance in the foreseeable future. Although the Code provides for a new procedure for selling the property of a debtor, which is based on the principles of transparency and efficiency, however, the burden of accumulated practice is unlikely to affect the formation of the new position of the Supreme Court. The sale of property “in a new way” will be carried out in the framework of a bankruptcy case, which implies a greater number of participants who rarely agree on the sale of the debtor’s property (especially in terms of the cost of such sale). Such disagreements will inevitably lead to disputes, the consideration of which, at the first stage, will be carried out with an eye to the accumulated practice.