Customisation of court proceedings
Pre-trial sanation
Permission to join ongoing bankruptcy proceedings
Secured creditors' claims
High Commercial Court of Ukraine guidelines
Other issues


On January 19 2013 amendments to the Law on Restoring Debtor Solvency or Declaring a Debtor Bankrupt became effective. These amendments introduce several positive changes to bankruptcy proceedings in Ukraine.

Customisation of court proceedings

Pursuant to the amended law, the commercial court can opt for either general, special or summary bankruptcy procedures. This individual approach optimises the effectiveness of the proceedings in accordance with their expense and duration. However, the criteria for determining the applicable procedure have not yet been clearly specified in the amended law or in court practice.

Pre-trial sanation

The amended law also establishes the rules governing a debtor's pre-trial sanation (ie, financial rehabilitation). Both the debtor and the creditor interested in the debtor's survival can initiate the pre-trial sanation. The agreement between the debtor and the creditor to undertake such a procedure may be reached before or after the debtor becomes indebted. In this respect, the debtor and creditor can foresee and include a provision for pre-trial sanation in the initial credit agreement.

The law requires that the detailed plan of action for the debtor's sanation must be drafted and approved at a general creditors' meeting and submitted to the court for final approval before commencement of bankruptcy proceedings. The sanation must not exceed 12 months. Bankruptcy proceedings cannot be initiated during this term.

Permission to join ongoing bankruptcy proceedings

The amendments abolish restrictions to joining the proceedings for unsecured creditors that failed to file claims within 30 days of official publication of the bankruptcy notice; this can be considered a positive innovation. Thus, the courts are now obliged to accept the claims of such late creditors. However, late creditors' claims will be given lowest priority and will subsequently be subject to the court's consideration only after the claims of other creditors have been satisfied. Despite this priority nuance, it is nonetheless a chance for a late creditor to get its money back.

Secured creditors' claims

The amended law has changed the status of the secured creditor (ie, a creditor party to a valid pledge or mortgage agreement). Secured creditors no longer have voting rights in the creditors' committee. In addition, they have limited rights with respect to determination of the terms and conditions of the auction at which collateral property will be sold. These functions are performed by the court-appointed administrator.

Despite these changes, the status of secured creditor has gained greater protection due to several innovations – namely, the pledged or mortgaged debtor's assets are exempted from the main asset (liquidation) pool. The amended law also stipulates that such assets will be reserved to satisfy the secured creditor's obligation. Furthermore, creditors with secured claims have the right to veto the debtor's sanation plan and any out-of-court voluntary settlement. The secured creditor can thus satisfy its claims in the early stages of the bankruptcy procedure, either through auction sales of collateral property or by passing its secured claim to other creditors.

However, as a matter of practice, the secured creditor should be aware of several issues. First, in order to benefit from the status of secured creditor, the creditor's secured interest must be registered with the relevant public register in Ukraine. Second, the creditor should take into account that the debtor still has the potential ability to free secured assets by challenging the validity of transactions of secured property entered into by the debtor within a year of the commencement of the bankruptcy proceedings (the debtor may act through 'friendly' unsecured creditors, which are permitted to do so under the law).

High Commercial Court of Ukraine guidelines

With respect to these recent developments in bankruptcy legislation, the High Commercial Court of Ukraine has provided guidelines for lower courts in order to establish a unanimous application of the amended law. The court highlighted that the suspension of a bankruptcy proceeding is no longer permitted. Further, the amended law specifies new terms of duration for court bankruptcy proceedings, which are comparatively shorter and should be observed.

The court also considered the question of application of amendments to proceedings that commenced before the amendments entered into force. The amended law will in general comply with the non-retroactivity rule; however, there are several exceptions. The new rules will govern the auction sale of a debtor's property in pending proceedings. The new rules governing liquidation will also apply to already commenced court proceedings, provided that there has been no court ruling to declare the debtor bankrupt.

The amended law abolished the requirement for an expert opinion regarding the financial status of the debtor. This innovation will help to shorten the duration of court proceedings.

Other issues

If a creditor files a claim in a foreign currency, the value of the claim must be specified in Ukrainian hyrvna, according to the National Bank of Ukraine's official exchange rate as of the date of claim filing.

Amendments to the Law on Restoring Debtor Solvency or Declaring a Debtor Bankrupt make the regulation of proceedings more detailed and logical. However, their application by courts is yet to be established.

For further information on this topic please contact Andriy Pozhidayev or Anna Tkachova at Asters by telephone (+380 44 230 6000), fax (+380 44 230 6001) or email (andriy.pozhidayev@asterslaw.com or anna.tkachova@asterslaw.com).

 

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