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Senior Partner, L.I.Group, Arbitration Manager, Attorney
Artur Megeria graduated from NTUU Igor Sikorsky Kyiv Polytechnic Institute, major in Law, 2008. Clients accompanied by Artur Megeria: OTP Bank JSC, UkrSibbank JSC (BNP Paribas), Bank Credit Dnipro PJSC, as well as TAS Group, Svarog West Group Corporation, DCH, ALFA SMART AGRO LLC, Vitagro Group, Investohills Vesta LLC, Helios Financial Company LLC and many others.
Senior Partner, L.I.Group, Arbitration Manager, Attorney, Doctor of Philosophy in Law
Mykola Kovalchuk graduated from the National Aviation University, major in Law, Aviation and Electronic Devices, Finance, 2006. Law practices: bankruptcy, debt restructuring, litigation, corporate disputes, protection of honor, dignity and business reputation, business protection, sports law. Provides legal support to world-class athletes. Mykola is currently the personal lawyer to professional boxers: Oleksandr Hvozdyk, Serhiy Derevyanchenko, Denys Berynchyk, Vladyslav Sirenko, Oleh Malinovskiy and many others. Twice awarded by the international rating agency The Best Lawyers in the category Judicial Practice, in 2021 and 2022.
Recovery of Debtor’s Assets Located in Ukraine and Overseas
The Role of the Liquidator in the Formation of the Liquidation Estate
The procedure on liquidation of a debtor’s property is the most radical in bankruptcy proceedings. The key figure at this stage of the bankruptcy proceedings is the liquidator, who organizes the entire liquidation procedure and, in fact, replaces the bankruptcy authorities.
The main purpose of the arbitration trustee during the liquidation procedure is not just the sale of all the debtor’s property. Both in the reorganization procedure and in the liquidation procedure the arbitration manager is entrusted not only with the powers of the authorized person of the bankrupt, but also with special powers aimed at forming the liquidation estate of the bankrupt, measures aimed at finding, identifying and returning the property of the bankrupt, which is being held by third parties, the sale of the bankrupt’s property and settlements with creditors as prescribed by the Bankruptcy Proceedings Code.
The powers of the liquidator under Article 61 of the Bankruptcy Proceedings Code of Ukraine are aimed at preserving the property of the bankrupt and at replenishing the liquidation estate in order to maximize satisfaction of creditors’ claims.
In the liquidation procedure, the key actions are aimed at forming the liquidation estate and disposing of the bankrupt’s property in order to convert the bankrupt’s property into funds, as well as the proportional and equitable distribution of funds received from the sale of this property to creditors.
The composition of the liquidation estate and, accordingly, the satisfaction of the creditors’ claims depend on the actions of the liquidator in identifying the assets of the bankrupt. The Bankruptcy Proceedings Code of Ukraine defines the actions of the arbitration manager as follows:
- conducting an inventory reconciliation and valuation of the bankrupt’s property;
- filing claims against third parties for the return of amounts of receivables to the bankrupt;
- submission of applications to the court on recognition of transactions (agreements) of the debtor as invalid;
- application of measures aimed at finding, identifying and returning the property of the bankrupt, which is in the possession of third parties.
The Bankruptcy Proceedings Code of Ukraine foresees three grounds for including the bankrupt’s property in the liquidation estate: property belonging under the right of ownership, property belonging under the right of economic management and detection of property during the liquidation procedure.
If everything is clear with the first two grounds, then the third (detection during the liquidation procedure) is a broad concept, and it includes conducting reconciliation of inventory. The Code provides for cases not only when the bankrupt has documents for individually identified property, but also when the bankrupt has property in the form of stock, accounted for a long time on a company balance sheet, but there are no documents confirming ownership of such property. Such a situation is typical for enterprises that have been established for a long time and which have not been properly documented.
We are convinced that in this case the liquidator must include all the property on the balance sheet of the bankrupt in the liquidation estate, and if certain individuals believe that the property does not belong to the bankrupt, they are entitled to challenge the liquidator’s actions in court.
It is also important to assess the property of the bankrupt, which aims to determine the initial value of the property of the bankrupt for subsequent sale. Both the bankrupt and creditors are interested in determining the highest possible price of the bankrupt’s property.
In order to identify the property of the bankrupt, the liquidator sends inquiries to the authorities that carry out registration of property. The Code does not contain a list of these bodies, in connection with which the participants of the process are assisted by court practice. Until recently, it was considered sufficient for the purpose of approval of the liquidation balance to send inquiries to the registrar of property rights to movable and immovable property, the State Automobile Inspectorate, the State Inspectorate for Agriculture, credit institutions and bodies that keep records of land rights and more.
In the liquidation procedure, the liquidator’s task is not a simple statement of the fact of absence of property, but an effective and proper search for the bankrupt’s property, so the liquidator must prove in the report that his actions were aimed at finding and identifying the bankrupt’s property. In addition, the liquidator must perform reasonable and logical actions, as well as make inquiries to the relevant authorities, taking into account the past activities of the bankrupt. In this case, the number of requests is not a criterion for the quality of the liquidator, as this criterion is the actual filing of the liquidation estate.
Collection of Financial Information
It’s important to identify and recover any lost financial and primary accounting records so as to identify assets and confirm their withdrawal.
In the absence of documents on the financial and economic activities of the bankrupt enterprise, as well as in the event of it being impossible to obtain these documents, the liquidator of the bankrupt is obliged, in order to fulfill the obligation under Article 61 of the Code on the analysis of the financial situation of the bankrupt, to take all measures aimed at identifying the assets of the debtor, to investigate the movement of funds in the bankrupt’s accounts for the period before the opening of bankruptcy proceedings and after the decision in the form of recognition of the debtor as bankrupt.
Therefore, measures on obtaining from the former management and recovering lost documentation on bankruptcy (primary, accounting, financial documentation, agreements and contracts) are mandatory, as is an analysis of the financial condition of the bankrupt with written evidence of this analysis. It is the debtor’s primary documentation that should contain information about property assets, including receivables, alienated property, securities, cash, and so on.
The liquidator must analyze any contracts and other transactions of the bankrupt, indicating a list of them in order to determine their legality (especially for movable and immovable property). In addition, the liquidator identifies and applies for invalidation of bankruptcy agreements on property under Article 42 of the Code and on other grounds provided by civil legislation of Ukraine.
It is worth noting a separate set of actions to identify receivables and recover them, as it is also an asset that can cover the costs of liquidation proceedings.
After the liquidator of the bankrupt has identified all the assets, conducted reconciliation of inventory, analyzed financial and primary accounting documents, he must conclude whether the bankrupt’s property is owned by third parties and whether the bankrupt’s property was illegally expropriated before the opening of bankruptcy proceedings or during it.
If the bankruptcy of the property of third parties or illegal alienation of such property were identified, the liquidator must take measures to return property by sending appropriate appeals to persons who have such property or address a court with a lawsuit, which is a more effective mechanism.
Key Difficulties in Recovering Assets of Bankrupt
The following are among the problem issues in returning assets of a bankrupt to the liquidation estate:
- imposing such a duty on the arbitration manager alone (the liquidator may lack the physical and material resources to carry out the set of measures);
- repeated alienation of property in favor of third parties (systematic change of owners in order to complicate the return process in the future);
- lack of title and other supporting documents for the property;
- expiry of the statute of limitations;
- lack of funds to pay the court fee for filing relevant applications to a court;
- obstruction of individual creditors or the creditors’ committee in the process of returning assets;
- lengthy litigation with regard to the issue of return of assets of the bankrupt (entails depreciation and even reduction of assets).
A clear example of the return of assets in a bankruptcy case is the case of the state-owned shipping company Black Sea Shipping Company.
There were a huge number of real estate objects in Odesa belonging to the Black Sea Shipping Company. The arbitration manager managed to return part of the debtor’s assets and draw up title deeds for property to the total estimated value of UAH 130 million. These included: car depots, radio broadcasting centers, real estate in the city, a yacht club, restaurant building, two office buildings in the city center.
But the big surprise awaited the arbitration manager when he was searching for the company’s assets abroad. The documents for an asset owned by the Black Sea Shipping Company in Vietnam were found in the shipping company’s archives. These were brief snippets. In Ukraine, the arbitration manager learned the Black Sea Shipping Company owns corporate rights in the amount of a 33.7% stake in a joint venture called Lotus.
The joint venture owns a small port in Vietnam, the history of which dates back to Soviet times. “In Soviet times, Vietnam allocated 80 m of berth wall to create a port. The Black Sea Shipping Company had invested USD 3.3 million in this joint venture.”
As a result of the return of ownership of corporate rights in Lotus, the Black Sea Shipping Company receives dividends, which are assets from which to pay off debts owed to creditors.
In each individual bankruptcy case, the arbitration manager chooses the means and methods for filing the liquidation estate. However, the arbitration manager should not forget that his/her actions are monitored by a court, the creditors’ committee, the state bankruptcy authority and other participants in the bankruptcy proceedings, as well as by law-enforcement agencies.