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Insolvency and Restructuring

According to the most recent Doing Business rating, in 2015 Ukraine lagged behind in the “resolving insolvency” category, qualifying as 141st out of out of 189 economies considered. This rating reflects the sad reality Ukrainian businesses have been facing for years.

In practice, bankruptcy procedures have often been used for the undue enrichment of a company’s shareholders and management, who would transfer the assets of the company on the verge of insolvency to other companies controlled by them in order to prevent recovery by the company’s real creditors.

Although Ukraine’s Law on Bankruptcy was repeatedly amended and restated from 1993 to 2015, it still has inefficient mechanisms. 

Although envisaged by law, pre-judicial rehabilitation is rarely used because it is burdened procedurally by legislative requirements to collect a large volume of information. Thus, directors of insolvent companies (even those acting in good faith with respect to the creditors and the company) are often unable to apply to the court for pre-judicial rehabilitation. The only way out of the situation is the deregulation of pre-trial rehabilitation of the company and the incentivization of trustees in bankruptcy (insolvency officers) to use rehabilitation. 

A commercial court may initiate bankruptcy proceedings should the undisputed claims to the debtor collectively amount to 300 times the minimum wage and not have been satisfied by the debtor within 3 months after the deadline for their repayment. Creditors’ claims are recognized as undisputed if they are supported by a court decision which has come into force and which has been followed by a resolution on the be¬ginning of enforcement proceedings. One of the problems that occurs in practice is the suspension of enfor¬cement proceedings. Also, Ukrainian judges often arbitrarily require other proof for recognizing a creditor’s demands as indisputable, such as banking documents that have not been executed due to a lack of funds in the debtor’s account, and so on. These additional documents are not required by any legislative acts and can be, in practice, difficult to collect, leading to courts refusing to initiate bankruptcy proceedings. 

In order to identify all creditors and others who wish to participate in the debtor’s reorganization, an official publication of the commencement of bankruptcy proceedings is made by the commercial court on the website of the Supreme Commercial Court of Ukraine. Internet publication is a step forward in comparison to the hard-copy newspaper publication that was required in the past. Online searches have simplified the monitoring of bad-faith counterparties, in comparison to the flipping through newspaper announcements by an in-house lawyer in order to check the names of announced insolvent companies and comparing them to the list of the company’s counterparties that used to be required.

Creditors with claims arising before the date of initiation of bankruptcy proceedings must submit a written statement of the requirements to the debtor to the relevant commercial court, as well as confirmation documents 30 days from the date of the announcement’s publication. This time limit is not subject to renewal. In our view, 30 days is an extremely short period and it is discriminatory, especially with respect to foreign creditors of a Ukrainian company.

In our view, certain legislative provisions still encumber the procedure and should be amended. For instance, insolvency officers should be provided with full access to relevant information by state authorities in order to discover the assets of an insolvent entity, and the authorities should be obliged to provide the information at no cost, and promptly. Also, the obligation imposed on a company that is declared bankrupt to continue financial reporting to state authorities (although legally the entity is prohibited from continuing commercial activity any longer) is in our view inefficient and should be abolished.

Not only the legal framework but also court proceedings impede the normal functioning of bankruptcy proceedings. The major problem of the implementation of the law in this sphere is that bankruptcy cases are litigated in Ukrainian courts for years, and the deadlines prescribed by the law are constantly being extended, which is often a result of the abuse of rights by parties to the bankruptcy proceedings and often makes it impossible for unsecured creditors to recover any assets from a debtor involved in bankruptcy proceedings.

By Tatiana Timchenko, Partner and Director, Peterka & Partners Ukraine

This Article was originally published in Issue 3.1 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Last modified onThursday, 28 April 2016 09:46
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