In credit relations, collateral (mortgage) is one of the proper ways to ensure that the debtor fulfils his obligations. Unfortunately, there is a common practice when a debtor uses bankruptcy procedures in order to avoid its debt obligations. One of the advantages of bankruptcy for a debtor is an opportunity to establish a moratorium on satisfaction of creditors’ claims and the inability to enforce the foreclosure on the collateral by mortgagee.
In credit relations, collateral (mortgage) is one of the proper ways to ensure that the debtor fulfils his obligations. Unfortunately, there is a common practice when a debtor uses bankruptcy procedures in order to avoid its debt obligations. One of the advantages of bankruptcy for a debtor is an opportunity to establish a moratorium on satisfaction of creditors' claims and the inability to enforce the foreclosure on the collateral by mortgagee.
Therefore, very often creditors and mortgagees object to the bankruptcy of the debtor/mortgagor. At the same time, until recently, the courts have not upheld the mortgagee's right to challenge the debtor's bankruptcy because of the incomprehensibility of the latter's procedural status.
Finally, the issue was settled in favour of the mortgagees and the Supreme Court of Ukraine formally affirmed their right to appeal against the commencement of bankruptcy proceedings of the debtor.
In Case No. 910/11946/18 on Bankruptcy of a Limited Liability Company, the Finance company's objections to the commencement of bankruptcy proceedings were rejected by the court due to the lack of any legal status of the Finance company in this case.
The Court of Appeal reversed the decision; the Supreme Court also agreed with the appellate court and referred the case for a new trial, stating in the decision of 22 October 2019 in the case No. 910/11946/18 that the Finance company has the right to appeal against the decision on opening bankruptcy proceedings.
The consequences, provided for by the law and occurring from the moment of initiation of the bankruptcy case, imply a restriction of the rights of the mortgagee to freely choose the methods and procedure of the foreclosure on the collateral (mortgage), as well as the peculiarities of satisfaction of the secured creditors' claims against the debtor – only in order provided for by law and in the context of bankruptcy proceedings.
Therefore, the decision on opening bankruptcy proceedings entails a change in the order of satisfying the claims of the mortgagee. Pursuant thereto, it is a court decision that has been made about the rights and interests of a particular person, which gives the mortgagee the right to object in the preparatory meeting against the opening of the proceedings in the case of bankruptcy of the debtor with the granting the mortgagee, in such event, the procedural rights of the participant in the bankruptcy case (regarding the filing of petitions, submission of evidence etc.) and accordingly the procedural right to appeal the decision on opening bankruptcy proceedings within the meaning of Part 1 of Article 254 of the Commercial and Procedural Code of Ukraine.
Partner, Head of Tax practice, Restructuring, Claims and Recoveries practice, Attorney at law
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