On April 15, 2019, President Petro Poroshenko signed the Code on Bankruptcy Proceedings. The text of the law was officially published on April 20 and is available in Ukrainian. The new law aims to strengthen the rights of creditors, improve the procedure of debtors’ assets sale at bankruptcy auctions, provide clear mechanisms for restoring solvency of debtors, and enhance the overall efficiency of bankruptcy proceedings.
The Code introduces the concepts of personal bankruptcy, simplifies corporate bankruptcy and defines the procedure for restoring debtors’ solvency. Below, we focus on some of the most important features of the new Code.
Bankruptcy of individuals (personal bankruptcy)
- The Code introduces a new procedure that enables individual debtors to commence personal bankruptcy proceedings by filing an application with a commercial court at the place of the debtor’s domicile. The debtor must also attach detailed evidence of his/her financial and real estate transactions covering the period of one year preceding the date of the claim.
- The right to initiate personal bankruptcy proceedings vests exclusively on the individual debtor concerned and may be exercised if:
- the amount of debt exceeds the equivalent of 30 minimum wages (as of the date of this publication, UAH125,190 or roughly USD4,700);
- the debtor ceased making payments of more than 50% of the monthly amount required for two consecutive months;
- in the course of enforcement proceedings, a resolution is adopted confirming the absence of assets subject to seizure; and
- there are other circumstances confirming a short-term risk of insolvency.
- The Code provides for two types of judicial procedures to restore the solvency of such an individual: (i) debt restructuring, and (ii) settlement of creditor’s claims.
- Courts will be able to ban a debtor from leaving the territory of Ukraine for the duration of bankruptcy proceedings, if the debtor acts so as to obstruct any actions imposed against the debtor.
- The Code places the following restrictions on individuals that are deemed to be bankrupt: (i) the bankrupt individual may not initiate any new bankruptcy proceedings for five years after the bankruptcy, unless all debt has been duly paid off; (ii) the bankrupt individual shall notify in writing all other parties to a loan, credit, surety or security agreement, prior to entering into the agreement, about his/her bankruptcy for five years after bankruptcy; (iii) the bankrupt individual cannot be deemed to have an impeccable business reputation.
- The Code eases the procedure for initiating bankruptcy proceedings. The requirements as to the minimum amount of debt and the requirement of a court judgment ordering debt collection and initiating enforcement proceedings are lifted. Instead, bankruptcy proceedings may be initiated if there is an outstanding obligation that the debtor cannot fulfil.
- Unlike in the case of personal bankruptcy, the commencement of corporate bankruptcy proceedings can be initiated by both creditors and debtors. This right arises as soon as signs of the debtor’s insolvency become noticeable.
- The time period for transactions that may be recognized as invalid by the court in the case they caused damage to the debtor or creditors has been extended from one to three years. That means that dubious transactions, if performed up to three years prior to the date of commencement of bankruptcy proceedings, can now be invalidated by the court. Moreover, the list of grounds for such invalidation has also been extended.
- The Code establishes a framework for selling off property at the highest price. This may be done by means of auction, including online auction. This should help lower corruption risks, such as selling off at a fraction of the market price.
- The Code also places an obligation on CEOs of companies to notify the shareholders of a company, and the owners of property being used by the company, about the evidence of a potential bankruptcy. CEOs also have a direct obligation to file for bankruptcy with a court if settling obligations owed to one or more debtors will make it impossible to settle obligations owed to other debtors (threat of insolvency). Failing to file for bankruptcy in such cases will result in the CEO being jointly and severally liable for the obligations owed by the company. The question and the amount of the CEO’s actual liability will then be determined by the courts.
- The Code imposes shorter timeframes for appealing court rulings passed during bankruptcy proceedings. Bankruptcy procedures shall be carried out within a set of specific deadlines. This should reduce the time for bankruptcy proceedings.
When will the Code enter into force?
The Code on Bankruptcy Proceedings enters into force after six months of its publication, save for provisions regulating establishment of electronic auctions, which enter into force three months earlier. The law currently regulating the bankruptcy procedure will lose its effect on the same day as the Code on Bankruptcy Proceedings becomes effective.
The Code on Bankruptcy Proceedings makes it easier and faster to initiate bankruptcy proceedings, enhances the legal position and protection of creditors, ensures transparency and maximum asset recovery for creditors through the procedure of debtor’s assets sale at a bankruptcy e-auction, and improves the overall efficiency of bankruptcy proceedings. The simplified bankruptcy procedure will allow banks to mitigate the problem of non-performing loans. This should benefit the overall health of the banking system and contribute to its development. More clear and unequivocal bankruptcy rules will enhance commercial certainty and, expectedly, encourage investments. Effective implementation of the new bankruptcy procedure is also expected to improve Ukraine's rating in the Doing Business rankings.