Making Bankruptcy Simpler: Ukraine Prepares Another EU-Aligned Modernization of Its Insolvency Framework

Draft Law No. 15024, which seeks to introduce simplified proceedings in bankruptcy and insolvency cases involving micro and small businesses, has been submitted to the Verkhovna Rada of Ukraine for consideration. How will this new EU-aligned insolvency model affect the Ukrainian market?

This year’s article once again looks at changes in the field of restructuring and insolvency. For Ukraine’s insolvency market, change has effectively become its natural rhythm: just as the professional community begins to get used to one new instrument, another one appears on the horizon. This is, in my view, a good sign. The insolvency sector has traditionally been among the first to respond to political and economic challenges, shifts in creditor behavior, the state of the judiciary, access to funding for businesses, and the overall “temperature” of the market.

Last year, one of the key developments in this field was preventive restructuring. It was introduced in Ukraine as part of the implementation of Directive (EU) 2019/1023 and came into effect on 1 January, 2025. At the time, many approached the new mechanism with caution: would it remain merely a polished EU-aligned legal construct on paper? Today, the answer can be given with greater confidence. Preventive restructuring has begun to work. In the first year and a half since its launch, more preventive restructuring proceedings have been opened than in the eight years during which the mechanism of debtor rehabilitation before the opening of bankruptcy proceedings had been in place. This is a telling trend for the market.

I was involved in drafting the preventive restructuring draft bill and, later, our team became the first in Ukraine to apply this mechanism in practice in the case involving the Gulliver mixed-use retail and office complex. The proceedings proved to be a difficult but a highly valuable test for the new instrument. It revealed not only the potential of preventive restructuring, but also the pressure points that cannot be fully anticipated at the drafting stage: the conduct of major creditors, the procedural tactics of the parties, the role of the court, the limits of negotiation, and the impact of the political context. This is how genuine practice is formed: when each party has its own economic interest, its own strategy, and its own view of what constitutes a fair outcome.

Yet the insolvency market does not exist in a static environment. Its development is often as dynamic as the proceedings themselves. Therefore, while preventive restructuring is being tested in practice, Ukraine continues to implement Directive (EU) 2019/1023 and to fulfill its commitments under the Ukraine Facility, the European Union’s four-year EUR 50 billion financial support programme for Ukraine. Its key objective is to ensure macro-financial stability, support economic recovery, and implement the core reforms required for EU membership. For the insolvency sector, this means continued legislative renewal in line with the EU approach: restructuring where possible, or an orderly exit from the market where necessary.

The next step in the implementation of Directive (EU) 2019/1023 is Draft Law No. 15024, which concerns simplified bankruptcy and insolvency proceedings for micro and small enterprises. As with preventive restructuring, I had the opportunity to work on this draft law. I would like to thank the working group for its vision, comments and ideas. It brought together representatives of the Kyiv Council of Insolvency Practitioners, the financial sector, the legal community and the judiciary. The legislative initiative has now been endorsed by the relevant committee of the Verkhovna Rada and is awaiting a parliamentary vote at first reading.

It should be noted that this isn’t the only possible approach to implementing the relevant part of Directive (EU) 2019/1023. Draft Law No. 15024, as endorsed by the sectoral parliamentary committee, deliberately focuses on a simplified liquidation procedure for micro and small businesses, an approach that is also reflected in the UNCITRAL recommendations.

At the same time, there was also a government draft bill that proposed a somewhat different model for simplifying insolvency proceedings. In particular, the Cabinet of Ministers’ concept envisaged, among other things, the introduction of a new type of procedure and certain elements of simplified debtor rehabilitation.

At first glance, the idea of simplifying not only liquidation but also rehabilitation may seem logical. However, this approach was consciously rejected during work on the parliamentary draft bill. Not because micro and small businesses do not need tools for restoring solvency. Quite the opposite: such businesses should also have access to restructuring tools. But these tools already exist: debtor rehabilitation within bankruptcy proceedings, debt restructuring for individuals in personal insolvency proceedings, and preventive restructuring. Adding yet another separate “simplified rehabilitation” procedure might not make life easier for small businesses. It could instead make the choice of procedure even more confusing.

This is particularly important for micro and small enterprises. Large companies usually have the resources to engage financial advisers, lawyers and analysts, and to hold lengthy consultations on the optimal procedure. Small businesses often do not. If they are offered several instruments that look similar at first glance, each with its own timelines, consequences, risks and requirements, they may simply fail to find the right way out.

The logic of Draft Law No. 15024 is, therefore, different: rather than creating yet another procedure for restoring solvency, it draws a clear line between the options that are available. If a business has a realistic prospect of recovery, it may use the mechanisms that already exist, first and foremost preventive restructuring. For micro and small enterprises, this draft law also provides for certain additional relief within that procedure. If recovery is no longer realistic, what is needed is a fast, less costly and clear mechanism for liquidation and debt discharge.

This is why the parliamentary draft law endorsed by the committee focuses on simplified liquidation rather than simplified debtor rehabilitation.

Another fundamental difference in the parliamentary approach is the involvement of an insolvency practitioner. Under the government model, such involvement could have been selective. Under Draft Law No. 15024, an insolvency practitioner is involved in every case. For micro and small businesses, this is undoubtedly an additional procedural and financial burden. However, in a procedure that provides for accelerated debt discharge and shortened time-frames, dispensing with professional oversight altogether would create far greater risks for creditors and for confidence in the mechanism itself.

And here I must disappoint law firms that specialize in insolvency: simplified bankruptcy proceedings are not about creating a major new revenue stream. At least not in the traditional sense of legal business. Simplified liquidation for micro and small enterprises does not involve large budgets, complex financial models or years of legal support. Its real value lies elsewhere: it gives good-faith entrepreneurs a way out of debt, while allowing the national economy to gradually clear itself of non-performing entities that have formally remained on the registers for years, but in reality no longer operate, continue to accumulate debt and have no genuine prospect of recovery.

This is precisely the logic reflected in the UNCITRAL recommendations, which served as one of the key reference points in the work on this draft bill.

When it comes to micro and small enterprises, UNCITRAL starts from a very practical premise: traditional insolvency proceedings are often too lengthy, costly and complex for such debtors. What may be perfectly manageable for a large company with financial advisers, legal teams, a complex asset structure and dozens of creditors may simply be out of reach for a small entrepreneur.

Nor is this a uniquely Ukrainian problem. Small businesses in many jurisdictions tend to share similar vulnerabilities: limited access to professional assistance, modest asset bases, a small number of creditors, weak financial records and, in some cases, a close overlap between business debts and the owner’s personal liabilities. If such debtors are subjected to a full-scale, expensive and lengthy procedure, the result is often that access to insolvency relief exists on paper, but is practically impossible to exercise.

This is why the UNCITRAL recommendations emphasize the need for simplified mechanisms.

How the Simplified Procedure Works

Who May Use the Procedure

The draft bill sets out a fairly narrow eligibility test for debtors seeking access to simplified proceedings.

In particular, a debtor must meet several criteria at the same time: it must qualify as a micro or small enterprise; have been registered for at least one year; have a limited amount of outstanding debt to creditors – not exceeding 2,000 times the statutory minimum wage for legal entities, based on the latest financial statements, and not exceeding 1,000 times the statutory minimum wage for individual entrepreneurs, also based on the latest financial statements; have no wage arrears; and not be party to any pending litigation that could affect the course of bankruptcy proceedings.

The last criterion is one of the most important. If there is already an active dispute between the debtor and its creditors over assets, debt, transactions or other matters, the case is unlikely to be suitable for an expedited procedure. In such circumstances, the parties should either resolve those disputes first or proceed under the general bankruptcy procedure. Simplified proceedings should not become a shortcut through a complex conflict.

Application to Commence Proceedings

An application to commence simplified proceedings may be filed by the debtor. A creditor may also file such an application, but subject to an important qualification: proceedings on a creditor’s application may be opened only with the debtor’s consent.

This is consistent with the very nature of the procedure. If the debtor objects and there is a dispute between the parties, the case is no longer one for which a fast-track liquidation mechanism is intended. It should then proceed under the general rules.

Together with the application, the debtor must disclose to the court, at the outset, the basic information needed to promptly assess whether the case is suitable for simplified proceedings: its assets, any encumbrances, the list of creditors, bank accounts, receivables, pending litigation, material transactions entered into during the preceding period, as well as evidence of insolvency or the likelihood of insolvency and compliance with the eligibility criteria for the procedure.

Duration of the Procedure

The maximum duration of simplified proceedings is 180 days. This is one of the draft law’s key ideas. The procedure should not drag on for years, as often happens in traditional bankruptcy cases. To that end, the draft law shortens the period for filing creditors’ claims, simplifies their review, effectively removes the traditional preliminary hearing model, does not provide for the establishment of a creditors’ committee, and gives the creditors’ meeting a significantly narrower remit.

However, it should be understood from the outset that a six-month time-frame is realistic only where the procedure is not burdened by parallel disputes, complex conflicts among creditors, or the need to spend years determining who actually owns the debtor’s assets. This is precisely why the eligibility criteria for the procedure are so important.

Role of the Insolvency Practitioner

Despite the simplified nature of the proceedings, an insolvency practitioner is involved in every case. The insolvency practitioner must assess the debtor’s good faith, analyze the causes of insolvency or the likelihood of insolvency, identify the assets making up the liquidation estate, review creditors’ claims, prepare a liquidation plan, organize the sale of assets, and submit the final documents to the court for the completion of the proceedings.

The draft law also deals separately with the insolvency practitioner’s remuneration. It must be advanced at the outset of the procedure for the entire six-month period. For the debtor, this is undoubtedly an additional financial burden. However, in a fast-track procedure, it is important to deal with the issue of the insolvency practitioner’s remuneration upfront, so that the procedure itself does not give rise to new disputes over fees.

Liquidation Plan

One of the innovations introduced by the draft law is the liquidation plan. In essence, it is a document designed to structure the entire procedure: the register of creditors’ claims, the composition of the liquidation estate, information on the debtor’s assets, the terms of their sale, the timing of the auction, and the submission of the liquidator’s report. The idea is simple: if the procedure is limited to six months, all the key steps must be set out from the outset in a clear and workable plan. This also allows creditors to see not only the overall objective of the procedure, but also how it will unfold in practice.

In my view, this innovation is relevant beyond simplified proceedings alone. The need for clearer planning of the liquidation process has long been discussed in the context of general bankruptcy proceedings as well. If this tool proves effective in simplified proceedings, it is quite possible that, over time, the idea of a liquidation plan will also be introduced into general bankruptcy proceedings.

Sale of Assets

The draft law proposes that assets should not be valued automatically in every case. The starting price of unencumbered assets would be determined by their book value, while the starting price of assets subject to security would be determined by their collateral value. This approach is driven by the need to preserve the two key resources in the procedure: time and money. If every small case begins with a valuation of all assets, the procedure will quickly cease to be either inexpensive or fast. At the same time, this model was not created from scratch. In this respect, we were guided to a significant extent by the practice applied to state-owned assets in small-scale privatization procedures, where the starting price is also set by reference to the asset’s book value.

In practice, this does not mean selling assets for next to nothing. On the contrary, the experience of small-scale privatization has shown that, where there is a competitive auction, the starting book value is merely the entry point, not the actual market sale price. If an asset is attractive to the market, competition between bidders can significantly increase the final price. For this reason, dispensing with mandatory valuation in every case does not, in itself, create an automatic risk of assets being sold too cheaply.

At the same time, the draft law retains safeguards. If encumbered and unencumbered assets need to be sold as a single lot, or if creditors disagree with the starting price, the court may order a valuation. Here, however, it was also important to address from the outset the question of who pays for it. The proposed model provides that the valuation is paid for by the secured creditor, who in effect advances the relevant costs. These amounts are then to be reimbursed to that creditor on a priority basis from the proceeds of the asset sale.

As expected, this idea prompted discussion with representatives of the banking sector. Banks were not particularly enthusiastic about the prospect of providing additional funding for a valuation in the debtor’s procedure. Yet, viewed pragmatically, this is not about imposing the costs on the bank permanently, but about requiring it to advance costs incurred primarily in the interests of the secured creditor, with those costs to be repaid after the asset is realized (sold).

Discharge of Debt

Another important element of the draft law deserves separate attention: the debtor’s discharge of debt. In a broader sense, this is precisely why the simplified procedure is being created: not merely to carry out liquidation more quickly, but to give a good-faith entrepreneur a way out of debt, without having to carry old liabilities for years.

In the case of a legal entity, the logic is clear. If the business no longer has any prospect of recovery, the procedure should allow it to be wound up in an orderly manner, its assets to be realized, creditors to be paid to the extent possible, and an entity that is no longer actually operating to be removed from the market.

For individual entrepreneurs, the issue is more sensitive, as business debts are often closely intertwined with the individual’s personal financial history. This is why Directive (EU) 2019/1023 provides for an approach under which, after completing the relevant procedure, an entrepreneur should be able to obtain a discharge of debt and, in effect, start new economic activity without the burden of old debt. The draft law proposes to move in precisely this direction. At the same time, discharge of debt should not be an automatic reward for the mere fact of entering the procedure. It must be linked to the debtor’s good faith, proper disclosure of information, completion of the procedure, and the absence of abuse.

However, attention should also be paid to certain issues that may give rise to debate where the repayment process for an individual entrepreneur lasts more than three years. In line with the European approach, the draft law provides for the possibility of granting such a debtor a discharge of debt, with the exception of secured claims and categories of debt that, by their nature, cannot be discharged, such as maintenance obligations. At the same time, this issue is already generating debate, as there is a risk that bad-faith debtors may attempt to artificially prolong the procedure in order to obtain a discharge of debt merely through the passage of time.

In my view, this is precisely where an additional safeguard may be needed before the second reading of this draft bill. The court should have sufficient discretion to distinguish between a debtor who has objectively gone through a lengthy procedure and is entitled to a discharge of debt, and a debtor who has deliberately delayed the process, concealed information or otherwise abused the procedure.

Debtor’s Good Faith

The debtor’s good faith should serve as the key filter in this procedure. In my view, this is one of the most important innovations introduced by the draft law. The Supreme Court of Ukraine has long applied the concept of good faith in disputes arising in bankruptcy proceedings, but the draft law seeks to set out its criteria expressly for the purposes of the simplified procedure. Inaccurate information, concealment of assets, fraudulent transactions, actions obstructing the proceedings, and signs of conduct leading to insolvency are all relevant to determining whether a particular debtor should be allowed access to the simplified mechanism.

This is a matter of principle. Simplified bankruptcy cannot be a procedure for those who first strip assets, create artificial debts or conceal their true financial position, and then come to court seeking a fast discharge of liabilities. If the debtor is acting in bad faith, the proceedings should either be terminated or transferred to the general procedure. Moreover, in certain cases, the draft law provides that the debtor and its officers may be held liable for costs incurred by creditors in the procedure.

This is why the mechanics of the draft law are built around several core elements: narrow eligibility criteria, a short time-frame, mandatory involvement of an insolvency practitioner, a liquidation plan, simplified sale of assets, and a test for good faith. All of these elements must operate together. If even one of them is removed, the model will either become too complex for small businesses or too risky for creditors.

Safeguards Against Bad-Faith Use

Those who have worked in insolvency for many years will probably remember how certain mechanisms were used in the past. The previous legislation contained procedures that, on paper, were meant to solve practical problems quickly and without unnecessary cost, but in practice often became tools for bad-faith or even fraudulent use.

This is why, in preparing Draft Law No. 15024, the task was not simply to design a fast procedure. It was far more important to ensure that bad-faith debtors would not be able to access it.

In fact, the main safeguards are built into the very mechanics of the draft law: narrow eligibility criteria, the debtor’s consent where proceedings are initiated by a creditor, the mandatory involvement of an insolvency practitioner, disclosure of key information at the outset, and a test of the debtor’s good faith. Together, these elements should filter out cases where, under the guise of a “small” bankruptcy, there is in fact a complex dispute, an attempt to obtain a quick discharge of debt through bad-faith conduct, or an effort to use the procedure for purposes for which it was not intended.

At the same time, it would be misleading to suggest that these criteria will make it impossible to circumvent the law. Ukrainian corporate reality is far more complex: large businesses are often structured through dozens of legal entities that may formally appear to qualify as micro or small enterprises. For this reason, these safeguards should be carefully discussed before the second reading, so as not to undermine the very idea of a fast procedure for good-faith small businesses, while also ensuring that it is not opened up to fraudulent or bad-faith use.

Concluding Remarks

Draft Law No. 15024 is certainly not a definitive solution that resolves all issues in the area of bankruptcy and insolvency for micro and small businesses. Some of its provisions, especially those regarding safeguards against bad-faith use, will still require professional discussion before the second reading. And that is normal. In my view, legislative solutions adopted without difficult debate rarely stand the test of time.

At the same time, this draft bill does contain clear overall logic. Micro and small businesses should not be treated as scaled-down versions of large companies. They have different resources, different debt structures, different consequences when a legal mistake is made, and a very different level of access to professional assistance. If bankruptcy proceedings remain too expensive, lengthy and complex for such businesses, they effectively cease to be a real instrument.

This is why simplified proceedings are needed not as an easy way to shed debt, but as an orderly mechanism for winding down a business where recovery is no longer possible. If, before the second reading, it is possible to preserve this balance between accessibility for good-faith debtors and protection of creditors against bad-faith use, Ukraine will gain a genuinely necessary new procedure in the Bankruptcy Procedures Code of Ukraine.