Lawyers say the newest version of the insolvency law, which came into effect in January this year, creates a more streamlined and efficient insolvency process, especially compared to the previous version that focused on liquidating business entities.
While experts say it’s still too early to determine all of the law’s implications because of the protracted time for bankruptcy proceedings, a number of provisions signal this could be a significant step forward.
The biggest change is the focus on restoring a debtor’s insolvency through a multitude of tools. The law provides debtors and creditors more opportunities to make settlements prior to court proceedings, which is helpful given the typically high costs and low chances of full debt repayment. Some provisions furthermore reduce the likelihood of corruption and generally facilitate the entire bankruptcy process.
This “is an attempt to… remedy some of the real and perceived defects in the current law,” Clifford Chance law firm commented on the development in a statement.
Associate Vasyl Yurmanovych at the international law firm Beiten Burkhardt added that “generally the new law became less pro-debtor and provides new mechanisms for protecting the interests of creditors.”
For example, the new law enables any creditor that holds 25 percent or more of claims to be included in the creditor’s committee.
One the other hand, according to some lawyers, the status of a secured creditor in bankruptcy proceedings is diminishing. Associate Julia Kylchynska at Sayenko Kharenko said that creditors whose claims are secured by a property pledge by the debtor only have an advisory role in the creditor’s committee.
Additionally, partner Alex Frishberg at Frishberg & Partners highlights another issue where a secured creditor’s first priority status for compensation can be displaced by that of an unsecured creditor. Primarily, any creditor that has a claim against a debtor as a result of their transaction being invalidated will obtain first priority status irrespective of whether or not they had security.
Frishberg adamantly believes “this would in effect move an unsecured creditor onto an equal priority level with secured creditors.”
One of the major issues resolved by the new law concerns notifying foreign creditors of bankruptcy proceedings. According to Frishberg, Ukrainian corporations were allowed to file their bankruptcy only in local Ukrainian newspapers, which meant that their international investors may not be aware of their company’s situation. As a result, if the investor learned of the bankruptcy belatedly, a Ukrainian court would rule that the creditor had sufficient warning and their claims would become invalid in a future hearing. This oversight can be negated with a provision that allows parties to make a pre-bankruptcy rehabilitation procedure mandatory in the initial agreement, such that bankruptcy proceedings could not be initiated without their knowledge.
Another provision introduced to inform foreign investors is the required publication of a corporation’s information on the website of the Supreme Economic Court. This requirement must occur throughout the entire procedure, which further ensures the likelihood of invested individuals to become aware of the situation. Kylchynska of Sayenko Kharenko believes that “it will provide creditors with prompt access to the information on bankruptcy cases and timely file claims to the debtors.”
And since bankruptcy-related proceedings could become quite long, the new law has shortened or introduced “hardening periods” with specific dates. For example, previously, the rehabilitation phase lasted 12 months with the possibility of an additional six months. Now the rehabilitation phase is only six months with the possibility of an additional six months. In theory, most law firms see this as a positive change because it will speed up the process.
Also, according to Clifford Chance, the law “allows both shareholders and directors of the debtor to be liable in certain circumstances to creditors of the insolvent director.” There’s also an “any other person” which has control over a business clause, presumably to extend liability to those acting as nominal directors.
Stricter conditions and automated selection services for positions like the arbitration administrator should reduce corruption. Frishberg states that “these new requirements for 2013 were surely included to provide incentive for the arbitration administrator to perform their functions to the maximum extent.”
Nevertheless, Yurmanovych said a loop hole still exists since a judge first determines the degree of difficulty of a case before a judge is randomly selected, allowing for a particular person to be chosen for a bankruptcy case.
While the new law has provided clarity in some areas, Yurmanovych states that “the procedures related to the sale of assets are not clear.” Primarily he is concerned with the fact that assets of the bankrupt entity must be sold by a licensed auctioneer, but currently there is no licensing for that position under the law. Consequently, this position needs further definition in order to be applied to the process accurately.
Kyiv Post intern Jesse Fleck can be reached at [email protected].
