Bankruptcy in Ukraine

2016 was quite an eventful year with regard to finding solutions to the problem of bad debts. Thus, the main trends of the year included adoption and entry into force of the Laws of Ukraine On Financial Restructuring, On Bodies and Persons Engaged in Judgments and other Bodies Decisions Execution and the new Law of Ukraine On Enforcement Proceedings. It is also worth noting repeated attempts to push through Parliament Draft Law No. 3132 On Amendments to Some Laws of Ukraine On Increase of Efficiency of Bankruptcy Procedures, Significant Changes to Procedures for Withdrawal of Insolvent Banks From the Market, Especially in Part of Asset Disposal of Such Banks, as well as launching the formation of a new composition of the Supreme Court.

Let’s start with the latter, because all but the most important expectations in this and other legal practices are related precisely to reform of the judicial system. Significant expectations that a good deal of candidates not from within the judicial system will agree to take part in competition for positions in Supreme Court fell short. One of main reasons for this were, in my opinion, the restrictions regarding candidates established by the Law of Ukraine On the Judicial System and Status of Judges, namely, that only attorneys-at-law can be candidates. This is due primarily to the fact that lawyers practicing criminal law pursuant to legal requirements were for quite a long time required to have the status of an attorney-at-law, and for lawyers practicing commercial law such an obligation has never been established and most of them began obtaining certificates for the right to advocacy activities only in recent years, when establishment of “attorney-at-law monopoly” for representation in courts loomed on the horizon.

In this regard, a large number of experienced economic lawyers, who have extensive experience (over 10 years), are deprived of the opportunity to take part in competition for positions in the Supreme Court because of the said Law.

However, in any case, formation of a new Supreme Court composition, which must take place during 2017, should have a positive effect on the entire legal system of Ukraine.

On Enforcement Proceedings

Another key shift in finding a solution to the bad debt problem is adoption and coming into force of the Laws of Ukraine On Bodies and Persons Engaged in Judgments and other Bodies Decisions Execution, On Enforcement Proceedings, which launched reform enforcement of judgments.

Both the pushing of draft laws through Parliament and further implementation of reforms can be described as “per aspera ad astra”.

The said laws changed enforcement procedure by removing unnecessary bureaucratic obstacles, improved the whole process of enforcement of judgments and disposal of seized property, automated the majority of actions of enforcers, introduced open Unified registry of debtors, significantly reduced the corruption component.

In the plane of reform of the Executive Service (Bailiffs), a mixed system of judgments enforcement was introduced by institute of private enforcers establishing.
To avoid risks of abuse by private enforcers, multistage control over their activities was introduced, which, at the same time, should not interfere with their activities, so the institution of private enforcers’ self-government was established.

Of course it is important to establish an adequate level for remunerating private enforcers in the amount of 10% of the amounts collected, and for state enforcers (bailiffs) — a bonus payment for actual enforcement of judgments that should encourage enforcers (both state and private ones) to use all available legal tools for the effective and prompt performance of executive actions aimed at full enforcement of judgments.

Thus, effective implementation of the described reform must leave behind shameful for the state practice of European political and judicial institutions as to violation of the European Convention on Human Rights by Ukraine in the part of virtual assistance by the state in tolerating non-performance of final and binding judgments.

However, in late 2016 the Verkhovna Rada of Ukraine adopted the Law of Ukraine On the High Council of Justice, which among other things amended the laws of Ukraine that implemented reform of the judgment enforcement system in the part on further narrowing the remit of private bailiffs.

Thus, the said Law stipulates that in 2017 a private enforcer shall have the right to take on for execution enforcement documents, under which the sum of recovery does not exceed UAH 6 million. Moreover, a limit was set that during the first three years of a private enforcer carrying out his/her activities, and such private enforcer does not have the right to take on for execution enforcement documents under which the sum of recovery exceeds UAH 20 million. Given these changes and other already existing limitations on a private enforcer’s remit, full-fledged launch of reform in the near future should not be expected.

Bankruptcy Sphere

In 2016 bankruptcy from the regulatory point of view was characterized by repeated attempts to amend the Law of Ukraine
On Restoring a Debtor’s Solvency or Declaring it Bankrupt. All of this was not in the least due to relevant requirements by the IMF. Namely, to correct errors and to improve the current version of the Law of Ukraine
On Restoring a Debtor’s Solvency or Declaring it Bankrupt.

There are a lot of reasons for this. One of the first is non-availability of improvements in the legislative environment. Since 2012, when a new version of the Law of Ukraine On Restoring Debtor’s Solvency or Declaring it Bankrupt (hereinafter — the Law) was adopted, most industry experts pointed out that the Law was unbalanced and needed revision. Instead, the Parliamentary Committee on Economic Policy prepared Draft Law No. 3132 On Amendments to Some Laws of Ukraine (regarding increasing efficiency of bankruptcy procedures), which after its return by  Parliament for its additional first reading underwent significant changes and which, in the view of many experts, will have a tremendous negative impact on the bankruptcy sphere.

It is true that besides its positive sides, the main ones of which are introduction of ProZorro principles on the disposal of property in bankruptcy proceedings, legalization of the insolvency officer’s income (remuneration in the amount of 5% of redeemed creditors’ claims is set, which is paid out as a priority), elimination of obvious errors, some positive changes in financial rehabilitation procedure, etc., the project contains very high risks. Thus, it is proposed to provide for automatic termination of the moratorium on satisfaction of creditors’ claims in 130 days after commencement of bankruptcy proceedings, to reduce the unreal term for property disposal procedure to 130 days, to remove preventive 30-days period for filing applications with monetary claims by creditors that unbalance a debtor’s liabilities, to delegate all key powers of the creditors’ committee to a meeting of creditors, significantly complicate the procedure of approval of financial rehabilitation plan by creditors, but problems of property disposal are almost disregarded, such stage of bankruptcy proceedings as settlement agreement is removed, state and municipal residential properties, which are listed on the debtor’s balance sheet, are allowed to be sold, etc.; taking into account changes suggested by the draft law. If this law were to be adopted, the opposite aim of improving bankruptcy procedures could well be attained.

Moreover, some precedent decisions of the Supreme Court of Ukraine, primarily due to lack of practice unity at the Supreme Court of Ukraine, had a significant impact on bankruptcy proceedings this year. Indeed, there were cases when the Supreme Court of Ukraine adopted decisions with diametrically opposing legal positions in the space of one month. Namely, regarding extrajudicial mechanisms on a levy of execution upon mortgage property, transfer of mortgage to the buyer of mortgaged property in case of acknowledgment of the auction as such that it did not take place, setting the jurisdiction in insolvent banks cases as being economic one day and under administrative legal procedures on another day.