Last week Verkhovna Rada approved, in principle, the Draft Law No. 3555 which introduces special procedure of voluntary financial restructuring of corporate debtors.

In contrast with the procedures, stipulated by the Law of Ukraine “On restoration of solvency of the debtor or declaring him bankrupt” of 1992 (hereinafter – the Law “On bankruptcy”), the procedure of financial restructuring shall be based on the agreement between the debtor and the creditors engaged. The disputes arising in this context shall be resolved under the arbitration procedure within special arbitration rules.

Only the financial organizations which have the status of the debtor’s creditors have the right to participate in the process of financial restructuring. Coordination of their actions must be accompanied with execution of a frame agreement which is subject to approval by the National Bank of Ukraine.

To take part in the voluntary restructuring the borrower must file an application to the secretariat of the supervisory board which is a coordination authority on the matters of organization and execution of the procedure of financial restructuring. To start the procedure it is required to receive consent of, at least, three creditors who are the parties to the framework agreement or of a one creditor who has the right for more than 25% of the debt.

Essentially, the question is about the procedure of alternative rehabilitation of the debtor prior to commencement of the bankruptcy proceedings which is stipulated by Article 6 of the Law “On bankruptcy”. As a matter of fact commencement of the procedure of financial restructuring is the possibility for the debtor to ensure suspension of the bankruptcy proceedings by the court (if as of that moment the bankruptcy request has already been filed).

In addition, it is a possibility to take advantage of the benefits of the moratorium to be introduced. Within such a moratorium it is forbidden to enforce recovery onto the debtor’s property, fulfill the creditors’ requirements, and apply penalties and other financial sanctions. However, the moratorium shall be applied only to the concerned creditors.

Among the positive moments is the fact that the draft law stipulates for the special tax regime applied in the process of taxation of a number of operations related to performance of the procedure in question.

At the same time the draft law is far from being ready to be applied within Ukrainian legal framework.

Firstly, the unscrupulous debtor may take advantage of the aforementioned benefits to deliberately drag the commenced bankruptcy procedure because the draft law does not mention any particular criteria performance of which will provide the debtor with the right for restructuring.

At the same time such definitions mentioned in the draft law as “critical financial condition” and “perspective economic activities” are vague and confusing.

Secondly, at the stage of discussion of this draft law the experts substantiated their critical remarks towards the provisions according to which the cases on pre-trial rehabilitation must be considered by Kyiv Economic Court of Appeal as by the first instance court.

Such radical change of principles of jurisdiction of the court cases and simplification of the procedure of their consideration (appeal) bears a potential threat of legalization of corruption activities. The status of arbitration is not adequately regulated as well which may result in future problems with acknowledgement and enforcement of arbitration awards.

At the same time the period of validity of the Law of Ukraine “On financial restructuring” is planned to be established for three years from its enactment. Such period will allow carrying out the analysis of successfulness of financial restructuring in Ukraine and comparing the results of other countries. If the results are positive the term of validity of the law may be extended. Otherwise, it will cease to be valid for good.