Bankruptcy Mechanisms and Opportunities for Creditors

Since 2019, Ukraine has got the Code of Bankruptcy Procedures (the Code); it is considered to be a pro-creditor one and meant to protect the rights of creditors more than of the debtor.

Unfortunately, the russia's aggression has brought a heavy toll on the Ukrainian business. It destroyed numerous enterprises, logistical chains, caused labour outflows, etc.  Thus, an enterprise faces insolvency, and this is a problem, for its contract parties (creditors) as well.

The Code provides for several mechanisms to protect the infringed rights of creditors. They can be grouped into pre-trial and trial ones.

Recovery prior to initiation of the judicial proceedings in bankruptcy:

The recovery of the debtor prior to initiation of the judicial proceedings in bankruptcy is possible if the debtor participants, creditors and other entities are able to provide the debtor with financial assistance sufficient to cover the debtor's payables to the creditors and to restore the debtor's financial solvency.

Recent updates to the Code made the pre-trial recovery mechanism attractive and promising. Now, the pre-trial recovery procedure is not limited to 12 months, which makes it possible to use this mechanism for large enterprises and substantial debts that cannot be paid off in a short period of time.

An important detail is that it is the debtor who can initiate the pre-trial recovery, if they have prerequisites for this: additional financing or involvement of an investor.  However, for the creditor, this procedure may ensure the return of larger receivables than the bankruptcy procedure at court ,although it will need certain compromises.

The recovery plan is developed by the debtor and agreed with the creditors and subsequently approved by the court, and it becomes binding for all creditors involved.

The advantages of pre-trial recovery include: flexibility during the development and approval of the recovery plan and no deadlines for the plan development and implementation; speed, minimal court intervention and lower costs of the procedure; possible tax optimization.

The disadvantage is that the creditors participating in the recovery plan cannot initiate the bankruptcy proceedings against the debtor if the debtor is properly complying with the recovery plan.

Liquidation in a judicial proceeding:

The maximally simplified and quick procedure for opening the bankruptcy proceeding is the novelty to the Code. Currently, there is no need to obtain a judgement for debt recovery and confirmation from the enforcement service that the debtor has been failing to fulfil this judgement for more than 3 months, and no minimum debt amount. Now it is enough to confirm to the court that the due date has passed and there is no dispute about the right.  That is, time costs have decreased by 6-9 months, thus, reducing the financial costs.

The court proceedings start at the property administration stage, when it is complete the court decides if the recovery is possible, or proceeds to the liquidation stage if it is impossible to restore the debtor's solvency.

At the property administration stage, the enterprise continues its economic activities, if it can, the enterprise's managers continue to work in their positions but additional control by the in solvency practitioner is introduced. Although, under certain conditions, the entire management can be delegated to the insolvency practitioner.

At the liquidation stage, the economic activities are stopped, all employees are dismissed, and the insolvency practitioner takes over the control of the enterprise.

Quite often, the enterprise's debt is caused by intentional malpractice of the managers related to the siphoning-off money, unjustified disposal of assets, etc.

The toolkit of the Code provides for unique mechanisms that are not feasible in the normal judicial procedure.

Following the Code, the insolvency practitioner has received extended grounds for declaring such transactions invalid and for returning the lost assets to the ownership of the enterprise, they may be used to repay debts to creditors. Moreover, only the bankruptcy procedure makes it possible to pursue shared/subsidiary liability on both the compromised managers and compromised owners of the debtor, although, under theCivil Code of Ukraine, a participant of a legal entity shall not be held liable for commitments of a legal entity and vice versa.

The judicial practice of the Supreme Court began to develop in line with the pro-creditor Code. The vast majority of actions by insolvency practitioners to hold the managers and/or owners of the debtor liable are being satisfied. Moreover, the courts even obligate the insolvency practitioners to initiate such actions. That is to say the company's managers and owners will be liable for the company's debts, if their actions caused the company's bankruptcy.

Thus, the creditors got efficient mechanisms to increase the amount of returned payables and to redress infringed rights.

The advantages of liquidation include:controlling the debtor's manager and production process; a possibility to return alienated assets and their subsequent re-sale on favourable terms; pursuing shared/subsidiary liability on the manager/owner of the enterprise; satisfaction of the creditor claims.

Disadvantages of the liquidation procedure are the terms that may take over 12 months.

Both the recovery prior to initiation of the judicial proceedings in bankruptcy and the liquidation are regulated by theCode of Ukraine on Bankruptcy Procedures, and therefore the philosophy of theCode applies in both cases: the creditor shall be protected as much as possible, and the creditor's claims shall be satisfied to the maximum.

The bankruptcy procedure has quite efficient mechanisms that are able to protect the interests of creditors much better than the usual court proceeding

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Serhii SHTOHRYN

Insolvency Practitioner, Attorney at law, Partner Dictio

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