Innovations in Bankruptcy Procedures in Ukraine

The current legislation in Ukraine in the sphere of restoration of the debtor’s solvency and its recognition as bankrupt is already outdated, because the law regulating the procedure for such actions was adopted as far back as 1993. The principles of this process remain morally “outdated” and irrelevant for the modern state, which is moving to the European direction.

Practice shows that the institution of bankruptcy in Ukraine is often used in bad faith as an instrument of illegal enrichment, as an element of misleading in criminal schemes, or as a means of hiding illegal actions, for example, stealing property, fraud etc. This conclusion follows from the fact that the current version of the Law of Ukraine “On the restoration of the debtor’s solvency or its recognition as bankrupt” has a big amount of contradictory and double-valued norms, such as the rules of jurisdiction of disputes with property claims against the debtor, disputes on invalidation of the debtor’s transactions and other conflict norms. The Parliament of Ukraine adopted the draft Code on bankruptcy procedures under No. 8060 (hereinafter referred to as “the Code”) in order to resolve mentioned problems and harmonize legislation with European requirements.

The future Code consists of two books – corporate bankruptcy, that is, bankruptcy procedures for legal entities (Book 1) and a book on restoring the solvency of individuals, recognizing individuals as bankrupt in case of their inability to fulfill their property obligations (Book 2). The Code provides two types of procedures – pre-trial and judicial, eliminates existing conflicts and regulates the issue of jurisdiction “bankruptcy / non-bankruptcy” as much as possible, other problems in delimitation of jurisdictions that arise not only in property disputes but also in non-property disputes, disputes on invalidating transactions etc.

Thus the previous version of the Law established that the lawsuits with property claims against the debtor, including the recognition of the debtor’s transactions as invalid, shall be considered by the court, in the proceedings of which the bankruptcy case of the debtor is already located. This rule indicates that the court, which is examining the bankruptcy case, also takes part in disputes in which the debtor acts as a defendant. Despite this the practice of the courts taking different ways. Some courts without a clear normative justification, refer to the jurisdiction of such a court not only disputes with claims to the debtor, but also disputes with the claims of the debtor to other persons within the boundaries of one liquidation mass. But there is also an opposite position of the courts: disputes over the claims of the debtor to other persons, even if these disputes concern the formation of one liquidation mass, should be considered by the court at the location of the property or under other jurisdictional rules, and not within the framework of the bankruptcy proceedings of the debtor. The draft of the new Code solves this issue. So, if the part 4 of Art. 10 of the Code will be adopted in the existing form, all cases concerning the formation of the liquidation mass will be considered within the framework of the bankruptcy case, which will help to avoid problems of unresolved jurisdiction and simplify the process of resolving the case.

The participation and expansion of the powers of arbitration manager is one of the important innovations in bankruptcy procedures as well. In particular, it provides the possibility of admitting an arbitration manager to state secrets, what is forbidden to the debtor, without the consent of the arbitration manager, to carry out transactions (to sign contracts). Also the arbitration manager determines the conditions for the sale of property at the auction, provides for the obligatory participation of the arbitration manager in bankruptcy cases of individuals etc.

Despite of this he can be authorized with some additional powers by the court if such actions will help to preserve the debtor’s property and protect the rights of creditors.

Even considering the obvious advantages of these innovations, the above list of powers is not exclusive, which, in fact, asserts the monopoly of the arbitration leader in cases of bankruptcy in courts and gives the arbitration leader virtually unlimited powers, creating preconditions for possible abuses, and therefore violations of rights and legitimate interests both debtors and creditors.

Among the obvious disadvantages of the Code in the part of legal entities (Book 1), we can also mention the fact that the amount of unconditional debt for legal entities that is the basis for initiating the bankruptcy procedure has not been established. In fact, this can lead to manipulation by small creditors with insignificant amounts of credit claims, which by way of submitting relevant applications to the court can paralyze the activities of the debtor. That is, such uncertainty of the Code can create grounds for the proliferation of raider seizures of generally solvent debtors who had the imprudence to allow a small stitching in the performance of even small monetary obligations.

But the new norms about the bankruptcy of the physical entities are supposed to be the most interesting. Thus the case about the bankruptcy of the physical entity can be initiated by court if the indisputable claims of the creditor (creditors) to the debtor are not less than one hundred minimum wages (as for 2018 this is 372,300 UAH or about 14,000 USD), and to the debtor to an individual entrepreneur – at least three hundred minimum wages (as for 2018, this is 1116000 UAH or about 43,000 USD), which were not satisfied by the debtor within two months after the period established for their repayment, unless otherwise provided by the Code.

The natural person, as a result of the proceedings for the recognition of bankruptcy, is not released from further performance of the creditors’ claims and the obligation to return outstanding debts for compensation of damage caused to the life and health of citizens, recovery of alimony and other claims inextricably linked with the identity of the individual. In addition, the Code provides for restrictions and prohibitions for individuals who have been declared bankrupt: in particular, it prohibits, within five years after the completion of the bankruptcy procedure, to assume obligations under loan agreements, loan agreements, contract of guarantee, transfer property as a bailment Besides, the Code obliges the bankrupt to indicate this fact at registration as an individual entrepreneur and prohibits performing an independent professional activity (as a lawyer, notary, arbitration administrator, private performer, etc.).

The procedure for the bankruptcy of an individual after his death seems both interesting, and controversial. According to Ukrainian legislation, the inheritance includes all rights and obligations that belonged to the testator at the time of opening of the inheritance and did not cease due to his death, and the heir must execute the testator’s duties only within the inherited property. However, there can be several heirs, as a consequence – there is a division of the heredities mass into the corresponding shares. That is why the replacement of the defendant in the bankruptcy case against the heir or heirs, as it proposed in article 153 of the Code, is not legally correct, and actually seeks to regulate relations in the sphere of inheritance law in a new way, despite of modern qualified regulation in a part of debts and assets of the testator.

The idea the institute of an individual’s bankruptcy procedure is relevant to our realities. However, the legal regulations in the draft of the new Code remains imperfect, first of all because the Code provides a number of reasons when the debtor has the right or obliged to apply to the Court with an Statement to open proceedings in the bankruptcy case. In particular, these are the situations of the loss of a single source of income, a serious illness which influences performing of his professional or other activities, and other circumstances that may materially affect the performance of monetary obligations, the availability of outstanding loans and other debts. The loss of a single incoming source is widely spread among Ukrainians in a current economic situation, when an individual may be dismissed from work, etc. Therefore, in order to avoid unreasonable Statements to the Court for judicial protection, clearer criteria should be established. For these reasons, for example, we can add the criteria for the period of the individual’s staying under the influence of a certain circumstance, other subjective criteria. There is a risk of abuse of the rights for applying to the court by the physical persons in order to avoid the fulfillment of monetary obligations or to delay the execution of such obligations; additionally a congestion of the courts comes as well.

Still there are some other contradictory points in the procedure for bankruptcy of physical persons. So, according to a majority opinion of the legal experts, the rule according to which the court, at the request of the creditor, the arbitration administrator, or by its own initiative, can decide the issue of a temporary ban to go abroad for the period of consideration of the case in a court without permission of the court seems suspicious. After all, this trip is carried out, in most cases, temporarily, the reasons for the departure are different (yes, it can be as like travelling, as an urgent treatment, escorting children, etc.), and it takes a long time to get permission from the court, because The Code does not establish terms for consideration of the relevant applications of the debtor. It would be advisable to exclude from the Code the phrase “reasonable term” and establish a clear time frame for considering such applications, after which, if the court did not grant a refusal to leave, having of such permit supposed imperatively. In the context of this issue, the Code also does not regulate the procedure and terms for the exchange of relevant information between the courts and the Border Guard Service of Ukraine, which can both neutralize the essence of this incentive for the debtor of the Code’s norm, and lead to violations of its rights when delayed with the transfer of information between the mentioned bodies.

The rule that debts for loans received by the debtor for rest, entertainment, acquisition of luxury goods, as well as debts that arose out of participation are not subject to restructuring or forgiveness (write-off) debtor in gambling, betting etc tells about the unprofessional and rather superficial preparation of the Code in the part of the bankruptcy of individuals. Taking into consideration our opinion and the opinion of other lawyers, the purpose of the loan does not affect its legal nature, so the bounding in restructuring is unjustifiable from a legal point of view. Many questions are raised by the rule that the court, based on a motivated claim of the debtor and other participants in the bankruptcy proceedings, can exclude the debtor’s property from the liquidation mass if it is necessary for the urgent needs of the debtor and his family. At the same time, there are no objective criteria for such “urgent” needs, which can lead to violations of creditors’ rights (when there are unjustifiably many items left to the debtor and his family to satisfy “urgent” needs), and debtors (when such property remains for the debtor and his family too few).

Thus, the considered changes which are mentioned in the draft Code on the bankruptcy procedure are very relevant and necessary for Ukraine, what leads us closer to the European legal space. However, in addition to positive innovations, the Code contains many unreasoned new norms and therefore a recommendation for those who want to do business in Ukraine is obvious: while choosing a business partners and opponents, please carefully research their reputation, take into account the current financial situation and prospects of cooperation. And in all incomprehensible situations it is necessary to apply for advice to specialists who will help to solve qualitatively any difficulties and avoid problems in building your business.

Author: Kydalov Igor

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