Debtor’s period

In our opinion, the most noteworthy amendments to the Bankruptcy Code of Ukraine (the “Code”) introduced by Law of Ukraine No. 3249-IX dated 13.07.2023, which, among other things, supplemented the section “Final and Transitional Provisions” of the Code with a new paragraph 1-6.

This clause has become a real controversial issue in the professional community, leaving many open questions.

In particular, this clause of the Code introduced the possibility for a commercial court to refuse to open bankruptcy proceedings to a creditor if the debtor proves to the court that the creditor’s claims are not satisfied due to armed aggression against Ukraine, including as a result of the location of the debtor’s integral property complex in the territories where military operations are (were) conducted or in the temporarily occupied territories.

The analysis of this provision allows us to conclude that the commercial court may refuse to open bankruptcy proceedings if:

• before the preparatory hearing, the creditor’s or creditors claims remain unsatisfied due to armed aggression against Ukraine;

• the failure to satisfy the creditors’ claims is due, among other things, to the location of the debtor’s integral property complex in the territories where military operations are (were) conducted or in the territories temporarily occupied by the Russian Federation.

That is, if, as a result of the russian aggression  or the location of the debtor’s property complex in the combat zone or in the occupied territories, the creditor’s claims remain unsatisfied, the commercial court may refuse to open bankruptcy proceedings.

Undoubtedly, by introducing this provision to the Code, the legislator pursued the right goal – to provide debtors affected by the armed russian aggression with the opportunity to continue their business activities.

However, in practice, unscrupulous debtors have begun to use this provision to prevent the initiation of bankruptcy proceedings and to avoid fulfilling their obligations to creditors.

In particular, such abuses are caused by the fact that this provision does not clearly regulate a number of issues, namely:

• what should be the direct impact of russian armed aggression on the debtor in order to justify the failure to satisfy the creditor’s claims?

• from what point does this provision apply?  From the moment it was introduced into the Code, the beginning of the russian full-scale invasion, or from the moment of the russian initial invasion of Ukraine in 2014 and the annexation of the Autonomous Republic of Crimea?

• is the mere presence of the property complex in the temporarily occupied territory of Ukraine (or in the territories where hostilities are ongoing) sufficient grounds to refuse to open bankruptcy proceedings?

The Supreme Court, in turn, has already provided answers to some of these questions, reaching the following conclusions:

• the said provision applies to all legal relations that arose before the introduction of this provision into the Code, but after the beginning of the full-scale invasion of the Russian Federation (the Supreme Court in its resolutions of 29.08.2024 in case No. 910/2423/23, of 13.02.2024 in case No. 910/3561/23, of 05.03.2024 in case No. 911/414/23;

• the fact that the debtor’s property complex is located in the temporarily occupied territory of Ukraine is recognized as insufficient to refuse to open bankruptcy proceedings – the Supreme Court indicates that the debtor must also have a creditor (creditors) whose claims have not been satisfied (the Supreme Court in its decision of 12.03.2024 in case No. 908/2344/23).

For example, in case No. 910/2423/23, the debtor claimed that the commercial court had grounds to refuse to initiate bankruptcy proceedings due to the presence of the debtor’s integral property complex in the occupied territories of Ukraine, as well as due to insolvency caused by f armed aggression. It is important to note that the debtor in this case had previously sold its property complex to a Russian business.

Instead, the Supreme Court in its decision of 29.08.2024 in case No. 910/2423/23 concluded that the circumstances established by the courts of previous instances in this case make it impossible to apply paragraphs 1-6 of the Code:

• the debtor continued business activities (production and sale of goods) in the temporarily occupied territories even after the occupation of the territories of Ukraine where the debtor’s facilities were located;

• failure to relocate the debtor’s production from the occupied territory of Ukraine to the territory free from occupation;

• before the full-scale invasion, the debtor alienated its property complex, which was located in the occupied territories of Ukraine;

• the debtor possesses  assets in the territories of Ukraine that are free from occupation.

To summarize, it should be noted that under martial law, when a creditor initiates a bankruptcy proceedings, it is essential to consider the provisions of paragraphs 1-6 of the Code and determine whether the debtor’s property complex is located in the temporarily occupied territories, as well as to find out why the debtor was unable to fulfill its obligations to the creditor and whether such failure was genuinely caused by the russian armed aggression and not by other reasons.

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