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Senior Partner, Ario Law Firm Co-developer of the Bankruptcy Procedure Code, Member of the Board of the Ukrainian Bar Association
Bankruptcy procedures (with a certain absurdity of such a conclusion) will remain as an effective tool for creditors (for collecting debts) and for debtors (as an option for protection against creditors). With the evolution of the legal base there will be an increase in business appeals on professional legal assistance. At the same time, business should take into account the situation prevailing in the system of execution of court decisions.
“Creditors have Better Memories than Debtors” (Benjamin Franklin)
The changes taking place in the area of insolvency are, without exaggeration, the most tectonic among all other practices on the Ukrainian legal market. First of all, it should be noted that unlike practically the entire period of bankruptcy in Ukraine we can talk of the unity of judicial practice at the Supreme Court. Thanks to the relevant Chamber of the Supreme Court (one of the most progressive, in my opinion) and personally the Chairman of the Supreme Court, Valentyna Danishevska (she remains one of the key figures in this area in recent years). Over the last year the Supreme Court of Ukraine formulated somewhat unambiguous conclusions about a significant number of problem issues that disturbed the legal market. It gave the opportunity for market participants to formulate consistent and long-term strategies in cases involving their clients. However, the specified state of affairs does not cause all market participants to be optimistic. This is because the current law itself is a “debtor” one, or even “anti-banking”.
It’s worth noting that the question of impossibility of using the sanation procedure was discussed, including this edition, in previous periods, so we will not stop there. Thus, the only procedure essentially applied was the liquidation procedure, directly related to the sale of property.
In turn, the greatest influence on the implementation procedure is the lack of a civilized market for selling property. Taking into account the constant legal positions of the Supreme Court, in the right hands, it gives debtors the opportunity to avoid liability to security creditors. It’s evident from even one figure of unofficial statistics that the cost of selling property in the previous year was less than 25%. And the percentage of creditor claims repayment is on average 8 cents in every dollar.
Of course, this situation has a rather significant impact on investment attractiveness and in this regard Ukraine was obliged to change the legal regulation of this sphere in 2018. In this connection 2018 was noted for work on a new law — the Bankruptcy Procedure Code. This work, unlike the previous versions of the Bankruptcy Law, united and considered the vision of banks, business, lawyers, academics, international experts and the court. As a result, in October 2018, the Ukrainian Parliament adopted the Bankruptcy Procedure Code. The Code brought Ukraine closer to best world practices and gave the chance to radically change the situation in this area.
The above changes can be divided into two conditional categories. The first is the introduction of a completely new institute of individual insolvency. The second is elimination of material and procedural factors that prevented the effectiveness of bankruptcy procedures of legal entities.
Regarding the first. In fact, the effect of the Code coming into force will be the appearance of a new sub-sector of bankruptcy practices on the Ukrainian legal market — that of solving individual insolvency (bankruptcy). This area will be developed to solve the problems of more than 60,000 borrowers. Taking into account such a significant social impact, one of the main issues for the Code’s developers was to ensure a real balance of interests between individual debtors and creditors. The main elements of such a balance are the possibility of opening insolvency proceedings only at the request of the debtor, as well as maximum focus on the restructuring of individual debts. In addition, the consequences of an individual being recognized as a bankrupt are the most liberal among European countries. However, at the same time, the subject of individual bankruptcy is used by many «opinion leaders» for political purposes, giving this institution a negative connotation and distorting reality. Perhaps this was one of the reasons why this Code, despite being approved in October 2018, remained unsigned by President P. Poroshenko until April, after the results of the presidential election became obvious.
As for the second category of changes stipulated by the Code, let’s highlight the main points. These would be the elimination of obstacles for opening bankruptcy proceedings, facilitating access to pre-trial sanation, strengthening the influence of the creditors committee on the appointment and removal of the arbitration manager, introduction of effective guarantees of the arbitration manager’s independence by significantly increasing the salary of the arbitration manager, introduction of effective mechanisms of judicial reorganization, transfer of all property sales into an electronic format on the basis of ProZorro, standardization of procedural issues in case, increases in role of security creditors during the procedure, abolition of the 30-day barrier on creditors’ claims, introduction of mechanisms to prevent abuse of procedural rights by participants of bankruptcy proceedings, etc.
The changes noted above are the most noticeable ones for the general public. However, in fact, there are more changes and they have an effect on practically every element: from preparation to opening a case on approval of the liquidation balance. However, it is premature to state that these progressive changes will have a positive effect in Ukrainian realities. However, the arbitration manager, debtors and creditors will obtain a broad range of instruments to protect their own rights in the bankruptcy procedure. The above, in itself, should be reflected in the principle of competition in bankruptcy procedures.
In particular, the excessive barriers in place for opening bankruptcy proceedings have been removed. Thus, creditors received the right to choose how to collect a debt from an unscrupulous or insolvent debtor — through enforcement or bankruptcy proceedings.
In this regard the requirements were eliminated according to the sum of minimum debt needed to open a case, the term (during which the debtor is not calculated) and the obligation to have open enforcement proceedings against the debtor. The possibility of opening bankruptcy proceedings, as suggested by the Code will, in my opinion, unequivocally stimulate debtors and creditors, at least, towards dialogue. Debtors who are experiencing financial difficulties and couldn’t use the protection under the current Law will be able and, in some cases, be obliged to apply for judicial protection in the procedure for restoring solvency.
The next important point is reducing the term of a case. The current version of the Law contains declarative terms during which bankruptcy proceedings should be considered. Due to the absence of incentives and responsibility for violating the terms, these terms have now become fiction.
The terms established by the Code are associated with clear incentives for compliance. And, therefore, the party of the case that has an influence on prolonging the procedure will quite possibly receive unfavorable consequences for itself. For example, lifting of the moratorium on satisfaction of creditors’ claims.
Furthermore, the Code more clearly regulates all algorithms of bankruptcy procedures which, in itself, should leave in the past a significant number of schemes used by unscrupulous debtors or creditors to delay a case.
The Code introduces new incentives for restoring the solvency of debtors. Restrictions on continuation of the sanation procedure have been removed. From now on a debtor will, with the consent of the creditor, have as much time to restore the solvency as he or she needs. And in the case of the sale of a debtor’s single property complex, the buyer will not only receive the property but also other rights belonging to the debtor. For example, land lease, special permits (for developming minerals deposits, for example), etc.
The liquidation procedure has also undergone significant changes (although I have an objective hope that there will be fewer liquidation procedures). The liquidation procedure eliminated schemes that were used in recent times practically by all bankruptcies to “fleece” creditors.
One of the most important achievements of the Code is the transfer of all sales of property belonging to debtors exclusively to electronic trading on the principles of the ProZorro sales system. The above-mentioned should prevent the sale of excess liquid assets for no avail.
Besides, the role of creditors in bankruptcy procedures has increased considerably. Creditors have real influence on the arbitration manager, his or her appointment and removal. The fight to appoint the ‘correct’ arbitration manager via attempts to corrupt arbitration managers, judges or other participants to the process will, I hope, now end.
The arbitration manager, in turn, provides clear payment guarantees of services. Firstly, the court won’t be able to open case proceedings without an advance payment by the party bringing the case to the arbitration manager. Secondly, the arbitration manager will receive clear and understandable incentives for the proper performance of powers in the form of 3 or 5% (5 — in case of illegally alienated property returning to the debtor) from each hryvnia for repayment of the creditors’ claims. Arbitration managers are waiting for another story in the form of self-regulation of the profession and real, not declarative empowerment towards self-regulatory organization.
“It Always Takes Longer Than you Expect” (Douglas Hofstadter’s Law)
In the end, we can dwell on issues of executive proceedings that are traditionally part of review of this sphere. “In the end” because, unfortunately, in 2018 and according to many forecasts made by experts, we will not feel any significant changes in this area in 2019. In this period we’re forced to note the stable problem of the efficiency and corruption of the State Executive Service (Bailiffs). Despite all the slogans, the effectiveness of implementation of decisions by the State Executive Service remains at less than 3%. An alternative to it, namely private bailiffs, did not work at the anticipated scale in 2017, despite the high hopes. In 2018 the number of private executors rose by about 20 people, a figure that would not lead to any systemic changes in the execution of decisions adopted by court. Of course, private executors display efficiency that is ten times higher than that of the State Executive Service, showing a performance rate of 70-80%. However, if we take into consideration the number of working private executors and the limitation of the amounts they can charge, it cannot have a critical influence on either general statistics and Ukraine’s deprivation of its status as a country where the right to a fair trial, as guaranteed by Article 6 of the European Convention on Human Rights, is grossly violated.
And as long as the Ministry of Justice does not dare to take real steps to overcome corruption and open up access to the profession of private executor, real changes in this area will only be in vain.