Bankruptcy in Ukraine

Russia’s full-scale scale invasion of Ukraine has negatively affected Ukraine’s economy. Traditionally, during times of economic downturn, the practice of bankruptcy becomes significantly more popular.

The current situation in Ukraine is no exception. Lawyers practicing in this field are increasingly observing how the bankruptcy tool is used by creditors as a means of recovering problematic debts and by debtors as a way to avoid responsibility for breaching payment deadlines on financial obligations. This trend persists for both legal entities and individuals.

Legislative Changes

In the second year of the full-scale invasion, it became evident that the war is not a crisis or force majeure, but a new reality that will persist for a long time. This understanding has also reached Ukrainian legislators, who have turned their attention to regulating the peculiarities of the bankruptcy procedure in wartime.

In 2023, the Verkhovna Rada of Ukraine adopted two laws that introduced systemic changes to the competitive process. These are the Law of Ukraine On Amendments to Certain Legislative Acts of 20 March 2023, and the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine on Certain Issues of Conducting and Applying Bankruptcy Procedures During Martial Law of 13 July  2023.

The On Amendments to Certain Legislative Acts Law of Ukraine

This law is quite extensive, and describing all the changes introduced would require a separate study. However, the key aspect of this law, in my opinion, is the following:

“Bankruptcy in a Smartphone”

Even before the full-scale invasion, the country embarked on a path toward digitalization. In the Ukrainian judiciary system, the launch of the Unified Information and Telecommunication System and the electronic court system was implemented under the auspices of digitalization.

In 2023, it was the turn of the bankruptcy procedure. Specifically, the Law of Ukraine On Amendments to Certain Legislative Acts of 20 March  2023, introduces an automated system called “Bankruptcy and Insolvency.” This system is designed to collect, store, account, search, summarize, and provide information about the progress of bankruptcy cases.

It is expected that this system will have both open and closed parts, accessible to insolvency practitioners and creditors. Ideally, any participant in a bankruptcy case will have access to all case materials and can monitor the bankruptcy case online.

Additionally, the launch of the automated system “Bankruptcy and Insolvency” is expected to lay the foundation for the launch of the Unified Information and Telecommunication Module “Bankruptcy.”

It is premature to speak about the full operation of the “Bankruptcy and Insolvency” system with the functionality provided by the Law of Ukraine On Amendments to Certain Legislative Acts (as of the time of  writing of this article, the automated system “Bankruptcy and Insolvency” operates in test mode for the submission of reports by insolvency practitioners). It is evident that the full implementation of the automated “Bankruptcy and Insolvency” system will take years. However, this is a significant first step toward the complete digitalization of the bankruptcy procedure.

Compliance with Case Review Deadlines

The timing of the bankruptcy procedure in Ukraine has always been the Achilles’ heel of the competitive process. Often, the length of the procedure deterred creditors from initiating bankruptcy proceedings against problematic debtors. Appeals and cassations of court decisions were commonly used as a proven method to delay the bankruptcy process, as the case materials were sent to the appellate or cassation courts upon filing of the respective complaint.

One factor influencing the duration of the bankruptcy procedure is the appeals and cassations of rulings, which required all case materials to be sent to the appellate court, effectively halting the case review in the court of first instance.

The changes introduced by the Law of Ukraine On Amendments to Certain Legislative Acts of 20 March 2023, aim to address this issue. According to the amendments, only the materials of the case requested by the court are sent to the appellate or cassation court. The appellate and cassation courts have the authority to request all materials. In such cases, the court of first instance produces properly certified copies of the case to continue the bankruptcy proceedings.

Thus, the legislation has eliminated the abuse of procedural rights through “technical” appeals of court decisions.

Case Closure Without Identifying and Realizing All Assets

There are often situations where a debtor owns significant assets “on paper,” but such assets cannot be identified during the liquidation procedure (a classic example is vehicles registered to the debtor that no longer exist). This situation resulted in “eternal” bankruptcies, where creditors did not allow the procedure to conclude, hoping that the debtor’s assets would eventually be discovered.

The changes introduced by the Law address this issue. Specifically, if the liquidator does not identify any assets to be included in the liquidation mass, they are obliged to separately indicate such assets on the liquidation balance sheet and submit it to the commercial court, certifying the absence of assets.

Discovering assets sufficient to cover the case-related expenses after the closure of the bankruptcy proceedings is grounds for the commercial court to resume the proceedings upon a party’s motion.

If bankruptcy proceedings are not resumed, such assets will be transferred to the ownership of the respective territorial community or state ownership if the debtor is a state enterprise or a business entity with more than 50% of shares (stakes) owned by the state, based on a commercial court decision.

Thus, the changes introduced by the Law resolve the issue of “eternal” bankruptcies by allowing the closure of proceedings without the sale of these assets and providing the possibility to resume proceedings if the assets are discovered at a later date.

Possibility of Concluding a Settlement Agreement

Bankruptcy relations involve financial and property matters, and it is evident that the principle of dispositivity should prevail in this procedure. However, the legislators strangely excluded the possibility of concluding a settlement agreement in the bankruptcy procedure. The already mentioned Law of Ukraine On Amendments to Certain Legislative Acts of 20 March 2023, which permits creditors and the debtor to independently resolve property issues.

The Law On Amendments to Certain Legislative Acts of Ukraine on Certain Issues of Conducting and Applying Bankruptcy Procedures During Martial Law

This law is also referred to as the law on wartime bankruptcies, as it regulates the specifics of the bankruptcy procedure during martial law. Notably, it closely resembles the law that regulated the “COVID-19” changes to the bankruptcy procedure.

The changes introduced by this law can be divided into two categories. Procedural peculiarities, specifically during martial law and for six months after its termination or cancellation, include:

• Creditor meetings (committees) can be held via video conference;
• Creditor meetings (committees) can be conducted through polling;
• The insolvency practitioner is not held disciplinarily liable for actions or inactions if they were impossible to carry out due to combat activities.

The second category effectively introduces a “moratorium” on bankruptcy in wartime. Specifically, during martial law and for six months after its termination, the commercial court will refuse to initiate bankruptcy proceedings at the creditor’s request if the debtor proves to the commercial court before the preliminary hearing that they are included in the electronic register of participants and executors of state contracts and have an active contract with state customers in the defense sector, or if the creditor’s claims have not been satisfied due to armed aggression carried out against Ukraine, including because the Relevance of Bankruptcy Procedures for Creditors and Debtors

The institution of bankruptcy is becoming increasingly attractive to creditors with each year. A significant factor contributing to this trend is the evolving judicial practice, which, in my subjective opinion, is becoming more creditor-friendly. The Supreme Court’s jurisprudence, in particular, has been developing concepts such as “subsidiary liability,” “joint liability,” and “fraudulent transactions.”

It is now difficult to imagine a bankruptcy case without the application of Article 42 of the Bankruptcy Code of Ukraine or without addressing the issues of subsidiary/joint liability of managers or property owners, which are becoming increasingly challenging to evade.

On the other hand, for debtors, using bankruptcy procedures to avoid fulfilling monetary obligations is becoming increasingly difficult. The only positive news for debtors in 2023 was the introduction of a “moratorium” on bankruptcy during martial law.

However, unlike the “COVID moratorium,” the current prohibition on initiating bankruptcy proceedings is not absolute. The court will verify the presence or absence of grounds for its application.

Judicial Practice

The Supreme Court’s judicial practice in bankruptcy cases was not extensive in 2023. However, some notable decisions include:

Recognition of Tax Authorities’ Claims Without Waiting for Tax Obligations to be Agreed Upon

In case No. 904/5743/20, the Bankruptcy Chamber of the Cassation Economic Court fundamentally changed its approach to considering creditor claims from the tax authorities. Previously, for tax authorities’ claims to be recognized and their creditor status (whether competitive or current) to be established, the corresponding tax obligation had to be agreed upon under the Tax Code of Ukraine.

The Supreme Courttof Ukraine stated that the economic court must consider all claims and objections based on the documents submitted by the creditor and debtor, assessing the validity of these claims regardless of the existence of a dispute regarding the unagreed tax obligation in the administrative court.

Therefore, the tax authorities’ claims as creditors may remain not agreed upon under the Tax Code of Ukraine, but the economic court can still recognize them in bankruptcy proceedings.

Invalidating Auctions for the Sale of Property as an Inappropriate Method of Protection

In its ruling on July 4, 2023, in case No. 233/4365/18, the Grand Chamber of the Supreme Court changed the long-standing practice regarding challenging auctions for the sale of a debtor’s property. The Grand Chamber stated that invalidating an auction for the sale of a debtor’s property is an inappropriate method of protection in this category of disputes. If the plaintiff was not a party to the sale contract concluded in the electronic auction and, for instance, believes that the auction winner acted in bad faith and did not acquire ownership of the purchased hotel premises, the plaintiff can use the directly specified legal method for such disputed legal relationships. There is no need to challenge the electronic auction (the corresponding sale transaction), the protocol and act of the conducted electronic auction, or the sale contract recorded in a separate document to apply the requirement to reclaim property from someone else’s possession.

Satisfaction of Claims to Seize Collateral after Initiation of Bankruptcy Proceedings as an Inappropriate Method of Protection

In its ruling on October 4, 2023, in case No. 910/20057/16, the Supreme Court of Ukraine stated that after the initiation of bankruptcy proceedings, satisfying claims to seize collateral is an inappropriate method of protection. Since after the initiation of bankruptcy proceedings, seizing collateral should occur exclusively in the manner prescribed by the Bankruptcy Code of Ukraine.

Noteworthy Cases

Pre-trial Rehabilitation of Eldorado

Eldorado is a chain of electronics and household appliance supermarkets, established in 1991 as the Ukrainian branch of this eponymous Russian chain. Since 2013, it has positioned itself exclusively as a Ukrainian company. Before the full-scale invasion, the network had about 100 stores. Economic problems for LLC “Diesa” (TM Eldorado) began even before 24 February 2022, as evidenced by information from the Unified State Register of Court Decisions.

In the summer of 2023, several creditors of LLC “Diesa” filed petitions to initiate bankruptcy proceedings. Simultaneously, LLC “Diesa” initiated a pre-trial rehabilitation procedure.

Cases for the approval of pre-trial rehabilitation plans are rare in Ukraine. The case regarding the approval of LLC “Diesa’s” pre-trial rehabilitation plan has garnered attention from the professional community, as it involves a significant retailer with a debt exceeding 2 billion UAH. Consequently, its consideration may shape the development of judicial practice in this category for years to come.

Bankruptcy of PJSC “Azovstal Iron and Steel Works”

The mentioned metallurgical plant became one of the symbols of Ukrainian resistance at the start of russia’s full-scale invasion. It is a well-known fact that the plant was completely destroyed, and Mariupol is temporarily occupied.

The initiation of bankruptcy proceedings for PJSC “Azovstal Iron and Steel Works,” which began in late December 2022 and effectively started in 2023, symbolizes the impact of the full-scale invasion on Ukraine’s economic situation.