Bankruptcy as a Remedy against Debt Recovery
Debt recovery became issue No.1 in Ukraine for the past year. In particular, it is of special concern for Ukrainian banks. Due to non-repayment of loans the banks have to apply to courts and start lawsuits to ensure the return of their funds and recover debts from pledged property. However, even when a court grants a decision in favor of a bank, there is no any guarantee that the said decision will be executed.
This is because debtors quite often try to take advantage of the bankruptcy procedure, which gives them the opportunity to block for a rather long period enforcement of court decisions on debt recovery.
In accordance with the On Restoration of the Debtor’s Solvency or Recognition as a Bankrupt Act of Ukraine (hereinafter — Bankruptcy Act) a court, when adopting a decision to launch a bankruptcy lawsuit simultaneously imposes a moratorium on debt recovery. From that moment a debtor is prohibited from paying any debts, taxes or duties which arose before the moratorium was set. In addition, any collaterals (pledge, surety, etc.) used to secure the debtor’s obligations expire after the date of the moratorium and any fines are not charged either.
Pursuant to the On Enforcement Procedure Act of Ukraine, an enforcement officer is obliged to stop enforcement of all court decisions against a debtor which come under the purview of the moratorium. The enforcement officer is also obliged to stop any actions aimed at recovery from pledged property for the bank’s benefit.
Thus, a creditor that obtained a court decision on debt recovery has no possibility to return its funds as long as a moratorium is in force, and the debtor may not worry about its property and continue its activity.
It should be said that the moratorium was introduced by legislation not to protect debtors against their creditors but to ensure repayment of debts. For the moratorium period all the assets of a debtor must be revealed and the appropriate measures must be taken to prevent any increase in the debtor’s debts.
Unfortunately, the current moratorium is not always helpful for creditors. A debtor enjoying the right provided for by Article 6 of the Bankruptcy Act may file to a commercial court an application to start a bankruptcy procedure in respect of itself.
Furthermore, the debtor is not required to file along with the application any evidence of insolvency. The debtor’s decision is sufficient to make a bankruptcy filing.
When the commercial court receives the debtor’s bankruptcy application, it must start bankruptcy proceedings and impose a moratorium. Simultaneously, the court decides on the date of the preliminary session. During that session the court considers the documents presented by the debtor and whether there are grounds to continue bankruptcy proceedings.
And this is the stage where it gets very interesting.
The debtor, with any means available, tries to delay consideration of the case about its bankruptcy. For instance, the debtor may challenge in the High Commercial Court the decision of the court of first instance to start bankruptcy procedures even though such a decision cannot be challenged. Following Article 109 of the Commercial Procedure Code of Ukraine the commercial court is obliged to forward the cassation and the case materials to the High Commercial Court. As a result the bankruptcy proceeding is halted. By using methods like this the debtor may delay consideration of the case for half a year or even longer. In the meantime the moratorium will remain in effect.
The worst thing is that the creditor has no possibility to influence these measures undertaken by the debtor. The only way out in such a case is to file a letter to the commercial court considering the debtor’s case. This letter must contain information about the unlawful actions of the debtor aimed at delaying consideration of the case and non-payment of debts. It must also be specially stressed in the letter that commercial courts have the right not to forward cassations of such a nature to higher courts. The Supreme Court of Ukraine in its letter of 10 September 2009, No.3.2.-2008 recommended commercial courts and courts of appeal to reject complaints against decisions which cannot be contested and not to forward these complaints and case materials to higher courts.
Unfortunately, the letter is just a recommendation and the courts are not obliged to strictly comply with it.
The other method commonly used to delay consideration of a bankruptcy case is through an expertise. In accordance with Article 11 (7) of the Bankruptcy Act the debtor has, during the preliminary session of a court, the right to file a motion to schedule a financial and economic expertise. In most cases courts satisfy such motions for the purposes of detailed consideration of the case. As a result consideration of the case is halted. The maximum length of the expertise can be up to three months. If we add the time needed for forwarding case materials from the court to an expert institution, consideration of a case can be delayed for approximately half a year. Unfortunately for creditors they have no means to resist these actions of a debtor.
It sometimes happens that bankruptcy cases are delayed for a year or even more. Meanwhile, debtors attempt to hide their assets and leave only illiquid property which creditors may recover from.
After all the methods to delay consideration of the case have been used, the debtor may continue the proceedings whilst already a real bankrupt or may terminate the proceedings. Because of this the creditors should permanently oversee the debtor’s bankruptcy proceedings and pay special attention to its actions.
In the event of termination of proceedings, it is necessary to apply to the State Enforcement (Bailiff) Service as soon as possible so as to enforce the court decision on recovery of the debt.
Nevertheless, that is not all that a sophisticated debtor may undertake to avoid its liabilities. The debtor may come to an arrangement with one of the creditors. Under such an arrangement that creditor will apply to the commercial court and initiate a bankruptcy procedure in respect of the debtor. And this in its turn will result in the moratorium being set again.
The creditor has the right to apply to the commercial court and initiate bankruptcy proceedings provided that the debtor owes to the creditor an amount which is not less than 300 minimum salaries (at present, this sum is UAH 195,000), and that debt is indisputable and payable for at least three months. In compliance with Article 7 (8) of the Bankruptcy Act the creditor is obliged, along with the application, to file the copy of an accounting document which was not paid, the enforcement documents, and any other documents confirming that the debtor acknowledged the debt.
Sometimes creditors, when initiating a bankruptcy procedure, lodge with the commercial court only an application and the debtor’s recognition of the claim which is meant to confirm the acknowledgement of the debt. However, this evidence is not sufficient to start bankruptcy proceedings because it does not prove the debtor’s insolvency.
The High Commercial Court of Ukraine, after considering the creditors’ complaints against the decisions of the lower courts, rules out that the bankruptcy proceedings were started without reason. Therefore, the proceedings were terminated (case No. Á-19/194–08, ruling of 15 September 2009; case No. Á-19/196–08, ruling of 15 September 2009).
The above is the latest court practice which can be used by creditors to resist unfair actions on the part of debtors.
If a debtor seeks to dissolve its business through bankruptcy, it is necessary for creditors to apply in a timely manner to the court for acknowledgement of their monetary claims. Pursuant to Article 14 of the Bankruptcy Act such an application must be submitted within 30 days starting from the moment the notification that the bankruptcy proceedings have been started was published.
However, it may well be the case that the debtor’s property is not sufficient to satisfy all the claims of the creditors. Thus, some of the debts may remain outstanding.
In the second half of 2009 about 40% of small businesses in Ukraine were declared bankrupt and dissolved. This figure does not sound optimistic. However, it should be taken into consideration that most of them were liquidated at their own request in order to avoid repayment of debts.
In 2009 it became quite popular to undergo so-called “quick bankruptcy”, the procedure of which is specified in Article 51 of the Bankruptcy Act. Under that procedure a company can be wound up in approximately three months as it does not imply assets administration and a search of creditors. During the first hearing the court is entitled to declare the debtor bankrupt and start the liquidation procedure.
The main feature of the quick bankruptcy is that this procedure can be applied to only those companies which started liquidation at the decision of their owners and in the course of liquidation it appeared that their assets were not sufficient to satisfy all the claims of creditors.
Thus, the application for a bankruptcy procedure in this case must follow the owner’s decision about the company’s dissolution and appraisal of the company’s assets. In addition, a notice on company dissolution must be published for the purpose of a creditors search.
Therefore, application under Article 51 of the Bankruptcy Act is possible after all of the above actions are taken and expiry of the period of two months set by the law for creditors to file their claims to the company being dissolved. Violation of any of these requirements serves as an absolute reason for reverse of the court decision about recognition of bankrupt, and for termination of the proceedings. This is frequently used by creditors to protect their interests.
To sum up, it should be said that debtors and commercial courts, when starting bankruptcy proceedings, quite often make mistakes which can be used by creditors. And that is why it is recommended to challenge the decisions made by a court in the course of the proceedings. Existing practice proves that these actions may give positive results and the debt may be returned.