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Changes in bankruptcy procedure: key points

Contents

  1. Secured from liquidation
  2. Proposal of a receiver
  3. Features of the quarantine period set for preventing the spread of COVID-19

Amendments to the Code on Bankruptcy Proceedings introduced by Laws No. 686-ІХ and No. 728-IX came into force on October 17, 2020. According to the legislator, it is to eliminate the shortcomings of the Code and prevent abuses in the bankruptcy sphere during the quarantine. Let us review the key novelties to be paid attention to.

Secured from liquidation

Thus, a moratorium on the bankruptcy of budgetary institutions has been introduced.

Earlier, provisions of the Code contained no clear restrictions to filing the application for commencing bankruptcy proceedings in respect of state authorities and local self-government bodies, budgetary institutions, and organizations.

From now on, it is explicitly determined in the Code on Bankruptcy Proceedings that no bankruptcy proceedings in respect of debtors — public enterprises and budgetary institutions, as well as receivership of such debtors before commencing the bankruptcy proceedings shall be allowed.

By the way, experts had paid attention to this gap even before the Code on Bankruptcy Proceedings came into force (refer to “Case of Potential Liquidation”, No. 23/2019, ZiB). However, now the legislator has finally completed it.

Proposal of a receiver

New rules for determining a receiver have been established. The Code provides that the candidate for a receiver “shall be determined by a court through automated selection using the Unified Court Information and Telecommunication System… based on the random choice principle” (part 1 Art. 28). However, since the Unified Court Information and Telecommunication System is not functioning yet, the Code on Bankruptcy Proceedings provides for temporary rules of determining a receiver to be effective until this system starts functioning.

From now on, an application filed by a creditor or individual debtor for commencing the bankruptcy proceedings must contain a proposal of the candidate for a receiver. The creditor’s application must also be accompanied by the application of a receiver for participation in a case.

In its turn, a commercial court shall appoint as asset manager or restructuring manager the receiver who filed the application for participation in a case and is specified in the initiating creditor’s application.

Unless the initiating creditor’s application contains a proposal of the candidate for a receiver, in case there is no receiver’s application or if the application for commencing bankruptcy proceedings was filed by the corporate debtor, a court shall appoint the receiver at its own discretion from among the persons included in the Unified Register of Receivers of Ukraine in accordance with the procedure as in force before the Code on Bankruptcy Proceedings came into force by applying the automated system.

Features of the quarantine period set for preventing the spread of COVID-19

Measures in the bankruptcy sphere for the period of quarantine and after it is over have also been determined. Thus, Law No. 728-IX provides that temporarily, for the period of quarantine, meetings of creditors and creditors’ committee may be held remotely in the form of video conference or survey, provided that proper identification and verification of powers of creditors’ representatives are ensured.

Furthermore, a receiver shall be released from liability for failure to perform actions stipulated by the Code unless they may be performed under quarantine conditions. Proving by the receiver that such actions cannot be actually performed under quarantine conditions, as well as sending of a notice thereof to the creditors’ committee and pledge creditors is are a mandatory condition for releasing the receiver from liability.

Terms of the preliminary court hearing on the bankruptcy case, applying, within the bankruptcy proceedings, for recognizing transactions conducted by a debtor as invalid, the validity of the moratorium on satisfying the creditors’ claims, announcing the first re-auction and/or second re-auction, implementing the receivership plan or restructuring of debtor’s debts, the  procedure for managing the assets, liquidation, restructuring of debtor’s debts and repaying debtor’s debts shall be extended.

Law No. 728-IX also provides that temporarily, for the period of quarantine and within 90 days after it is cancelled, it shall not be allowed to commence bankruptcy proceedings in respect of corporate debtors following an application of the creditors concerning claims to a debtor, which emerged before 12/03/2020.

In addition, the one-month period determined for a debtor to file an application with a commercial court for commencing the proceedings in a case shall be extended if the debtor proves that failure to comply with this term was caused by the spread of COVID-19 coronavirus disease and/or measures on combating the spread of this disease.

In turn, the creditors’ committee and secured creditor (in respect of the property, which is the collateral) may decide to terminate holding of auctions for selling the debtor’s property. If such a decision is approved, expenses on keeping and maintaining the bankrupt’s property and all the risks of loss of property or reducing its value shall be borne by creditors, who adopted such a decision.

Finally, interest on debtor’s obligations to the creditors restructured through receivership or restructuring of debtor’s debts shall no longer be charged. No penalties for the debtor’s failure to perform such obligations shall be charged. Overdue obligation stipulated by the receivership plan or restructuring of the debtor’s debts shall be deferred for the period of implementing the receivership plan or restructuring of the debtor’s debts.

Kateryna Tsvetkova

Kateryna Tsvetkova

Counsel, Attorney at law

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