In a turning point for Ukrainian bankruptcy law reform, on 18 October 2018 the Ukrainian parliament adopted the Code of Bankruptcy Proceedings, which will replace the existing Law on Restoring Solvency of Debtors or Recognition of Debtors’ Bankruptcy that has been in force since 1992.

The main goal of the Bankruptcy Code is to establish more transparent and efficient bankruptcy procedures and introduce a completely new legal concept in Ukrainian legal framework – personal bankruptcy or the bankruptcy of private individuals. In addition to providing better protection of creditor rights, the Bankruptcy Code should have a positive impact on the Ukrainian debt market, which has been significantly affected by the recent crisis in Ukraine.

The new procedures are expected to reduce the high ratio of non-performing loans through the financial restoration of individual debtors or the liquidation of their assets.

Personal Bankruptcy

Thanks to the Bankruptcy Code, individuals who are insolvent or face looming insolvency can initiate a bankruptcy procedure to clear their debts. Personal bankruptcy procedures follow the fundamental principles and logic of corporate bankruptcy procedures and include:

• debt restructuring, and if this is not possible, declaration of bankruptcy and the satisfaction of creditors’ claims through the sale of the debtor’s assets;
• moratoriums on the satisfaction of creditors’ claims;
• engaging commercial courts, creditors and asset managers as key stakeholders in the procedure and providing the creditors with the right to decide on crucial matters, such as restructuring plans, initiation of debt repayment procedures, etc.

As personal bankruptcy is a completely new concept for Ukraine, it remains to be seen how these procedures will work in practice.

Corporate bankruptcy

The Bankruptcy Code introduces a number of important changes to regulate bankruptcy procedures for legal entities, including:

• Simplifying the grounds for a bankruptcy procedure: initiating bankruptcy is no longer linked to the minimum amount of outstanding claims. Courts can now refuse to start bankruptcy proceedings only if a creditor’s claims are disputable and must be resolved in court, or a debtor has satisfied claims prior to the preliminary hearing of a bankruptcy case. In practice, the new rules make it easier and faster to begin bankruptcy proceedings. They ensure the right of a creditor to step in at the first sign of a debtor’s insolvency, and they increase the chances of preventing insolvency. At the same time, simplifying procedures may increase the amount of unfounded bankruptcy claims.
• More power to creditors: although creditors appoint a committee to manage the decision-making process during bankruptcy proceedings, they can now adopt the decisions that are within the creditors’ committee competence at the creditors meeting instead. Also, creditors can participate in choosing the bankruptcy administrator and are entitled to decide the starting prices of debtor assets at auction and other matters regarding asset sales. These changes ensure the involvement of all creditors in the decision-making process throughout the procedure.
• Improving the legal status of secured creditors: secured creditors are now parties to the bankruptcy proceedings, and powerful players in the decision-making process. They have the right to initiate bankruptcy proceedings, challenge court rulings adopted during a bankruptcy procedure, initiate invalidation of debtor’s transactions, etc.
• Transparent sales procedures: a debtor’s assets are to be sold through online auctions performed on freely accessible web portals that offer equal access to all potential investors.
• Limited impact of affiliated persons: the Bankruptcy Code introduces a definition for affiliated persons of a debtor and asset managers, which limit their role in the decision-making process. This new rule prevents undue influence by owners, controllers, subsidiaries and the relatives of a debtor during bankruptcy proceedings.
• Expediting procedures: the Bankruptcy Code limits the range of appeal for court rulings during bankruptcy proceedings, and establishes specific deadlines for bankruptcy procedures. Based on these new rules, bankruptcy proceedings are expected to take no more than one year to complete.

Abolishment of the moratorium on residential real estate

The Bankruptcy Code abolishes a temporary moratorium (in force since 2014) on enforcing residential real estate mortgaged as a security under consumer loans in foreign currency provided by local banks.

Instead, the new rules provide for restructuring all FX debts that accrued before the Bankruptcy Code entered into force. This restructuring is to be made on the following terms:

• the amount of indebtedness is to be converted into UAH at the NBU exchange rate as of the day the court opens the debtor’s bankruptcy proceedings;
• the debtor is to fulfil obligations for 100% of the estimated market value of the mortgaged property determined by the creditor-appointed appraiser (subject to amounts already paid). The law does not set the term for repayment, which is subject to agreement between parties;
• the interest rate is set according to Ukrainian Index of Retail Deposit rates (based on 12-month deposits) plus 1% or 3% depending on the location of the mortgaged property;
• the remaining debt is written off.

Such restructuring terms are only available to debtors five years after the Bankruptcy Code enters into force.

While the law awaits the signature of the President, its final text is not available on the parliament’s website. The law will officially enter into force six months after the date of its official publication, except for the provisions establishing an electronic trading system, which will be effective after three months.

Legislation: The Code of Ukraine on Bankruptcy Proceedings dated 18 October 2018

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Authors:

Vitaliy Radchenko, Partner, vitaliy.radchenko@cms-cmno.com

Kateryna Chechulina, Senior Associate, kateryna.chechulina@cms-cmno.com

Khrystyna Korpan, Associate, khrystyna.korpan@cms-cmno.com 

Anna Pogrebna, Partner, anna.pogrebna@cms-rrh.com

Oleksand Protsiuk, Associate, oleksandr.protsiuk@cms-rrh.com