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Senior Partner, Ario Law Firm
Co-developer of Bankruptcy Proceedings Code of Ukraine, Member of Board of UBA
The year 2020 could boldly be called the year of “new bankruptcy” in Ukraine, but the general “epidemiological” trends have imposed their adjustments. Additionally, the internal factors in the insolvency sphere, ones like legislative initiatives, political populism of some parliamentarians and the instability of judicial practice also played a huge role.
СOVID-19 vs. Bankruptcy in Ukraine
I have good news and bad news.
Let me start with the bad news. The impact of quarantine measures has led to significant delays in bankruptcy proceedings.
Consideration of such cases was delayed both for objective reasons and due to the abuse of rights by certain participants of cases. While in the first few months of quarantine, against the background of general panic, the postponement of cases still seemed justified, after the state “adapted” Ukraine to the epidemic, such postponements were already unequivocal in nature. For example, the consideration of elementary petitions in individual cases took more than 6-7 months, while this should not exceed 2-3 weeks.
For example, in one of our cases, where we represent the creditor, in February 2020, an application was filed to open bankruptcy proceedings. It is quite natural that the preparatory hearing in a case was postponed during strict quarantine restrictions, when the transport system was halted. However, the adjournment of court hearings at the request of the debtor, which were filed after the expiry of such restrictions, was nothing more than an abuse of rights by the debtor. Only after we proved this fact to the court with the provision of evidence of the debtor’s movement through the territory of Ukraine and his participation in other court cases did we finally manage to open proceedings in September 2020.
The good news is that quarantine measures have not become a kind of “engine” for mass bankruptcies. Despite the absence of official statistics, we have not experienced any boom. In our opinion, there are several reasons for this. The main one is that entire industries are in a difficult position and large-scale bankruptcies would not meet, first, the interests of creditors and the interests of the Ukrainian economy as a whole. All this is due to the fact that an effective solvency recovery procedure requires funds, investors or asset buyers.
Under conditions of general uncertainty and economic crisis, none of these three components existed. Thus, the business sector chose a strategy for out-of-court settlement of problems.
At the same time, I cannot fail to mention the unfortunate fact that Ukrainian business was forced, among other things, to rely solely on its own resources, due to the lack of effective assistance from the state. The only thing the state has managed to do in the field of bankruptcy was to introduce a moratorium on the opening of new cases at the request of creditors, which have arisen since the introduction of quarantine. However, this measure was taken with a significant delay — in the second half of the year, when the relevance of such a moratorium disappeared as such. As a result, we received an additional “temporary” moratorium on the opening of cases.
In the current reality this moratorium does not comply with the interests of either debtors or creditors, as it is tied to a quarantine period which cannot be completed. In addition, such an event does not take into account the nuance that the world has learned to live, coexist and develop in the face of anti-epidemiological measures.
On the other hand, the absence of a moratorium in the most critical period of last year confirmed the conclusion that bankruptcy is not the optimal solution to the problems of creditors.
The bill which cancels the above-mentioned moratorium is currently registered at the Verkhovna Rada of Ukraine. Of eloquence is the very fact that the President of Ukraine has adopted and signed a law which has not been fully thought out and the fact of almost simultaneous introduction by the President of the law in draft form which repeals the law signed before.
And this, by the way, is the second factor that influenced the bankruptcy field last year. We are talking about legislative spam.
Thus, 5 laws on amendments to the Bankruptcy Proceedings Code of Ukraine came into force in 2020. In addition, 8 more draft bills have been registered and are being considered by the Verkhovna Rada, which have already introduced or extended 4 moratoriums on the opening of bankruptcy proceedings. Two more moratoriums are under consideration by Parliament. This will certainly have a negative impact on the bankruptcy field and the country’s economy.
The law on the moratorium on foreign currency mortgages foreclosure is a case that depicts the effects of such spam. The authors of this draft, trying to please foreign currency borrowers, voted for a populist law in such a way that could actually lead to a complete cessation of penalties on bank loans for all categories of borrowers. This was prevented only by the implication of the President’s veto on the adopted law. This case clearly demonstrates the low quality of the processing of problem issues and the systematic neglect by the Verkhovna Rada of the procedures for considering draft bills.
A positive exception to the above list is draft bill No. 4409, which was developed by a working group consisting of numerous organizations, government officials, and so on. These include, in particular, Ukrainian MPs, representatives of the Ministry of Justice, the State Property Fund of Ukraine, Oboronprom, judges of courts of all titles, as well as the professional community: lawyers, insolvency practitioners, bankers and others.
First, this draft bill addresses the shortcomings of the Bankruptcy Proceedings Code of Ukraine and clarifies certain provisions in connection with initial monitoring of application of the Code.
In particular, the procedure for consideration of claim proceedings, the status of the insolvency practitioner, disciplinary procedures are detailed, and the provisions for consideration of creditors’ claims are specified. Given the development of the electronic auction system, the bill also clarifies and facilitates the procedure for their conduct. The draft also simplifies access for individuals to the insolvency proceedings of individuals, etc. It is expected that this bill will be considered by Parliament in its first reading.
Judicial Practice: Territory of Uncertainty
Given the change in philosophy in bankruptcy proceedings due to the Code coming into force, the introduction of certain amendments to the Code and the resolution of certain issues in the procedures was, as in previous periods, expected to rely on the formation of a single case law. First, the Supreme Court. However, the Code and the Cassation Filters of the Commercial Procedure Code significantly restrict access to the Supreme Court. Consequently, the formation of relevant case law is quite time-consuming.
In accordance with the provisions of Article 9 of the Bankruptcy Proceedings Code of Ukraine, only decisions on opening bankruptcy proceedings, decisions on the results of consideration of monetary claims of creditors, decisions on closing bankruptcy proceedings, as well as decisions on recognition of the debtor may be appealed in a court of cassation, as well as bankruptcy and the opening of liquidation proceedings. In addition, with the cassation filters, decisions by the courts of claim may be appealed against at the Supreme Court of Ukraine.
A striking example of such a restriction is the practice of application by the court of Article 28 of the Bankruptcy Proceedings Code of Ukraine regarding the termination of the powers of the insolvency practitioner at the request of the creditors’ committee without the need for the insolvency practitioner to establish signs of violations. The respective petitions are satisfied by separate commercial courts of appeal in the order determined by the Code. Other courts form the opposite practice regarding the impossibility of terminating the powers of the insolvency practitioner without the court establishing objective grounds for his removal. Thus, the lack of legal positions of the Supreme Court leads to legal uncertainty regarding the actions of participants in proceedings.
In addition, aspects that will require additional resolution and time include issues related to the transition of legal regulation from the Law of Ukraine On Restoration of Debtor’s Solvency or Recognition of Debtor’s Bankruptcy to the Bankruptcy Proceedings Code of Ukraine.
At the same time, I cannot fail to note the serious work that has already been carried out by the Supreme Court on the formation of legal positions on the application of the Code, especially in the part of decisions in cases adopted by the entire Chamber of Bankruptcy Cases.
Recent legal positions of importance include:
- the position on the subsidiary liability of owners of bankrupt enterprises in the event of detection of a debtor being brought to bankruptcy;
- introduction of the principle of verification by the court of the completeness of the actions of the insolvency practitioner and the principle of procedural economy;
- determining the amount of claims of the mortgagee to the property guarantor, etc.
It is also impossible not to note the positive impact of the introduction of electronic auctions for the sale of bankrupt property via the ProZorro.Sales system. Thus, in 2020, almost 2,600 auctions were held and property worth UAH 1.47 billion was sold. This led to a significant reduction in the number of litigations following auctions, which has had a positive impact on both the repayment of creditors’ claims and the timing of bankruptcy proceedings.
Bankruptcy of Individuals: Not Everything at Once
It was only recently that individuals in Ukraine received the opportunity to declare themselves “bankrupt” — with the coming into force of the Bankruptcy Proceedings Code, namely in October 2019.
Given that the institution of restoring the solvency of individuals-debtors appeared in our country for the first time, the project “Financial Sector Transformation” was implemented at the initiative of the Ukrainian Bar Association and with the support of the USAID last year. It was a large-scale social project which provides free advice to individuals who are debtors. I was invited to lead the project “Providing advice on restoring the solvency of individuals” as one of the developers of the Bankruptcy Proceedings Code.
The aim of this initiative was to finally close the “gestalt” of the past financial crises, which the country’s banking system and thousands of foreign currency mortgage borrowers still cannot deal with. Thus, individuals who had debts on foreign currency loans received from banks before June 7, 2014, could seek free legal advice from leading experts and effectively and “painlessly” restructure their debts.
As part of the project, we selected consultants in several regions of Ukraine, developed convenient mechanisms for calculating debt restructuring, and conducted a large-scale communication campaign to involve Ukrainians in solving long-standing problems with creditor banks. We wanted to show to all the participants of the process that transparent and clear rules for all parties have now appeared in Ukraine and that these rules are in no way aimed at depriving citizens of their only mortgaged housing. In addition, we aimed to analyze the practical aspects of the Bankruptcy Proceedings Code in terms of insolvency of individuals to further address the shortcomings and improve these processes.
With the last task, I think we coped “perfectly”. Thanks to this project we really identified a number of problems in the legislative sphere, which we will correct. In addition, on the basis of experience already gained, we have prepared guidelines for individuals, covering all the actions that need to be taken in order to settle their debt to creditor banks. For example, how to behave in negotiations with banks, how to prepare for litigation if a financial institution refuses to seek compromises with the debtor, what to look out for, how to properly prepare documents, how long it will take, how much it will cost to resolve the issue in court, etc.
The positive results of the project include the fact that dozens of Ukrainian families were able to receive qualified assistance and the opportunity to solve long-standing problems with banks without the risk of losing their only home.
Among the negative conclusions we recorded, on the basis of the results of the project, are the low interest in negotiations with creditors on the part of individuals. Last but not least, this is facilitated by the moratorium on foreclosure. Neither did we see any special desire on the part of the banks to enter the situation and make concessions to the borrower.
But I believe that later, when the process of restoring the solvency of individuals acquires a more mass nature and, therefore, gets to be understood by all participants, and the moratorium is finally terminated, the situation will gradually level off and both sides will be more active in seeking compromises. After all, this falls within the scope of interests of the financial market as a whole, and directly troubled borrowers.
In general, according to the results of 2020, it is too early to say that we now have completely transparent and civilized bankruptcy proceedings, though the trends are seen as quite positive. Thus, to be continued…