The Code of Bankruptcy Procedure in Ukraine: positives and negatives of the new document

Recently, the Verkhovna Rada of Ukraine adopted the Draft Code of Ukraine on Bankruptcy Procedures (No. 8060) in the first reading.Both the project developers and the entire legal community agree that the document is necessary, but needs further improvement and is only a first step towards the future creation and implementation of a single codified act in the area of bankruptcy.

Let’s try to elaborate in more detail whether the initiative corresponds to the saying “bold start brings bold victory”, whether there is a need to amend the wording adopted in the first reading and what these changes might be.

The first thing you pay attention to when processing a project is its division into two parts: “Book one. Corporate Bankruptcy” (regulates bankruptcy of legal entities) and “Book two. Restoration of solvency of an individual” (concerns bankruptcy of citizens who are not engaged in business activities).

As for the bankruptcy of individuals, today in Ukraine there are rules that regulate only bankruptcy of individuals-entrepreneurs.

At the same time, the issue of the need to introduce in Ukraine an institute for bankruptcy of individuals who are not engaged in entrepreneurial activities has been discussed for years and the draft law No. 8060 is not the first one aimed at solving this issue. However, right now we are closest to the introduction of such an institution.
It cannot go unmentioned that the bankruptcy of individuals is not new to the world community, but has been long and effectively functioning and is popular in many countries.

Therefore, experts are almost unanimous in that the resolution of the issue of bankruptcy of individuals in Ukraine is a step forward. At the same time, everyone expresses the hope that the specified institute will indeed become a compromise in our realia and will be able to protect the rights and interests of both the debtor-individual and the creditor.

Significant changes have also affected the indisputability of creditors’ claims. It should be reminded that the current wording of the law provides that a bankruptcy case is violated if the creditor’s indisputable claims are confirmed by a court decision and a resolution to start an enforcement proceeding, collectively equate to at least 300 minimum wages and were not satisfied by the debtor within 3 months after the date of setting the term for their settlement.
The bill greatly simplifies the approach to the indisputabiliy of the claims of creditors. Thus, with regard to legal entities, it is stipulated that such claims may be confirmed by the debtor himself, or by a court decision, or a decision to start an enforcement proceeding.

It is important to pay careful attention to the fact that the draft cancels the requirement for a three-month period for debt settlement and the minimum amount for the starting the proceeding.

As for the individuals, the proceedings may be commenced if the indisputable claims to the debtor-individual collectively amount to no less than 100 minimum wages, and to the debtor that is an individual entrepreneur – no less than 300 minimum wages, which were not satisfied by the debtor within two months after the deadline set for their settlement. At the same time, such indisputable claims must be confirmed by a court decision, which has come into force.

Experts unanimously agree that such a simplification of the approach to determining the indisputability of claims of creditors will lead to a significant increase in the number of bankruptcy proceedings instituted in courts.

Regarding the bankruptcy proceedings. It is an open secret that bankruptcy proceedings in Ukraine can be considered for a very long time, and often this procedure can last for years.

One of the reasons is the legislatively provided possibility for unscrupulous debtors to abuse their procedural rights by filing appeals and cassation complaints. So, quite often at first the decision on commencing bankruptcy proceedings in all instances is challenged by the debtor, after which the baton is handed over to its shareholders (participants), resulting in the transition to the next procedure being delayed for years.

The new draft law aims to reduce the timing of bankruptcy cases, including by at the expense of reducing the number of cases of such an appeal, which can certainly have positive consequences.

The changes have also touched upon the procedures for the insolvency officer appointment to execute the powers of the asset manager. Thus, it is assumed that in the decision to accept the statement on commencing bankruptcy proceedings the court offers to apply for participation in the case not to one, as it currently functions, but to three insolvency officers determined by automated selection.

With that, if the consent to participate in the case is provided by only one insolvency officer, the procedure becomes more or less clear.

However, if such consent comes from two or three insolvency officers, the most interesting things may occur. In such case, the court assigns the person to be the asset manager if that person is elected by the three creditors who, according to the information provided by the debtor, have the highest monetary claims against the debtor on the date of acceptance of the statement on commencing the bankruptcy proceeding.

The specified innovation immediately raises questions. It can be assumed that the wording “according to the information provided by the debtor” may lead to abuse and, in general, the reason for the complication of the existing procedure for the appointment of the insolvency officer is not understood.

Still, many of the provisions stipulated in the draft law are controversial and require further elaboration: remuneration and extension of powers of insolvency officers, procedure for realization of debtor’s property, terms of invalidation of transactions entered into by the debtor before the commencement of bankruptcy proceeding, issues arising from labor relations, mechanisms for the prevention of the use of bankruptcy by unscrupulous debtors-individuals in order to evade performance of their obligations, restrictions for individuals declared to be bankrupt etc..

However, despite the fact that the project needs to be substantially and reasonably reworked, the majority agrees that this is a positive initiative, which, if properly regulated, can manage to lead to improvement of bankruptcy procedures, ensuring equal rights and opportunities for the identical protection of all lawful interests of the debtors’ creditors, reducing abuses in bankruptcy procedures and, consequently, improving business conditions in Ukraine.

The article was published in the specialised newspaper “Law and Buisness”