Effective bankruptcy system is vital, especially at the time of the economic crisis, when companies lack cash and, as a result, cannot discharge their obligations towards creditors. Unfortunately, Ukrainian bankruptcy laws currently in effect fail to ensure quick and effective liquidation of insolvent companies or rehabilitation of potentially solvent ones. Given this, Ukraine should reform existing bankruptcy system, create incentives for rehabilitation of insolvent companies, and enhance protection of creditors and investors to ensure further economic development and speed up country’s turnaround.
To discuss priorities of future reform of bankruptcy system in Ukraine and best bankruptcy practices in other countries, late last year the Ministry of Economy of Ukraine jointly with the World Bank held international conference Ways to optimize bankruptcy system in Ukraine. The conference participants considered bankruptcy of state-owned companies and ways to create effective regulatory system for court-appointed trustees.
Current status
Making an opening speech, First Deputy Minister of Economy Anatoliy Maksyuta (see picture 1) stressed that bankruptcy procedure in Ukraine is used to expand business and distribute assets rather than restore solvency of a company.
Director of State Department for Bankruptcy at the Ministry of Economy of Ukraine Yulian Khorunzhiy (see picture 2) pointed out that despite all forecasts number of bankruptcy cases during the crisis went down. Between January and November 2009 bankruptcy cases of commercial companies in Ukraine went down by 25%, from 3245 to 2611. For the period under review a number of bankruptcy cases initiated against state-owned companies fell by 83%, from 192 to 105. Fraudulent bankruptcies initiated to redistribute assets, evade taxes or repayment of credits also decreased. Mr Khorunzhiy said it happened because companies lacked available cash, so in such cases creditors eagerly agree to restructure debts. Another reason is a debtor consciousness raising. “Debtors realize jeopardy of bankruptcy during the crisis, so they agree to negotiate restructuring with major creditors,” Yulian Khorunzhiy explained.
Nevertheless, for many companies that failed to cope with the crisis, bankruptcy is inevitable. “In this situation we should put transparent and quick bankruptcy procedure in place. It will give a chance to restore debtor’s solvency, protect creditors’ rights and prevent fraudulent transfers,” noted Andrei Lobach, Senior Project Manager, Foundation for Effective Governance.
Drawbacks of existing bankruptcy procedure
Domestic bankruptcy procedure is extremely ineffective, very expensive and a way too long. Ukraine shows a very low rate of creditors’ claim payout. It makes 9% on average against 28% in the Eastern Europe and Central Asia. Bankruptcy-related procedures absorb 42% of the entire business value. Compare that with 13% in the Eastern Europe and Central Asia. Also, restoration of debtor’s solvency and/or declaring him a bankrupt lasts 3 years on average. In the meantime, the procedure results in liquidation of the company in 90% of cases. That is why a dramatic change in the bankruptcy procedure must be a priority for the government in 2010, he explained.
According to Yuriy Voropayev (MP) (see picture 3), one of the biggest drawbacks in existing bankruptcy law is consolidation of two contradicting functions in hands of the government. “Protecting interests of the government as the owner and overseeing activity of court-appointed trustees are the functions concentrated today in the Ministry of Economy of Ukraine. As a result, one mala fide official can control almost the entire bankruptcy process. These functions must be disintegrated and set as wide as possible,” he stressed. According to Mr Voropayev, the country must increase demands to court-appointed trustees, create conditions for development of self-regulating organizations of court-appointed trustees, reduce the duration of bankruptcy procedure, review the mechanism of notifying creditors of bankruptcy case initiation, etc.
According to Partner of Kyiv Office of international law firm CMS Cameron McKenna Daniel Bilak, development of bankruptcy proceedings in Ukraine is hindered by corruption in the courts; lack of responsibility; weak restructuring regime; poor debtor-initiated bankruptcy mechanism; lack of procedures regulating individuals’ bankruptcy, etc. To address those issues, Mr Bilak proposed to introduce several procedural changes to the Ukrainian legislation regarding filing for bankruptcy, strengthen parties’ responsibility and balance debtor’s and creditor’s positions.
Priorities of future reform
Most provisions of Ukrainian bankruptcy law are outdated and not in line with current economic situation in the country. So, hardly anybody doubts a need to introduce comprehensive changes to the law regulating bankruptcy procedures.
State Department for Bankruptcy at the Ministry of Economy of Ukraine has made the first steps on this way. It developed a draft law On Amending the Existing Law of Ukraine On Restoring Solvency or Declaring Debtor Bankrupt. Moreover, a task group working under the guidance of the Foundation for Effective Governance and consisting of judges, court-appointed trustees, practicing lawyers and representatives of respective ministries is developing a new legislation On Bankruptcy designed to substitute the existing law.
“In the law draft we substantially review conditions for application of the moratorium on satisfaction of creditors’ claims, specify reasons for contesting agreements, which should stop transferring the assets before a bankruptcy case is initiated, suggest a number of mechanisms for debt restructuring, regulate liquidation procedures, etc.,” said Aleksey Soshenko, a legal advisor of law company Clifford Chance and a member of the said task group.
Well, we cannot but hope that 2010 will be the year of the new Law On Bankruptcy, which will encourage investment into Ukrainian.
Participant’s comments
Foreign Investors Have Concerns about Unpredictability of Bankruptcy Procedure in Ukraine
Legal advisor of international law company Clifford Chance Aleksey SOSHENKO:
“Our clients have concerns that Law of Ukraine On Restoring Solvency or Declaring Debtor Bankrupt (hereinafter referred to the Law) that is currently in effect fails to fully protect their rights.
“Creditors may face difficulties arising from some provisions of the Law. According to these provisions creditors’ claims are deemed satisfied and may not be restored if creditors missed 30 days’ period to file a petition with the court following official publication of information in Ukrainian print media about initiation of a respective bankruptcy case. We did not find such wording of bankruptcy provisions in most foreign laws that we’ve analyzed. Foreign investors find such provisions problematic as they do not have an opportunity to monitor daily such publications in official Ukrainian print media and simply can miss the filing period. This problem is relevant to Ukrainian banks as well, since every bank has thousands of clients and very often it is impossible to monitor information about initiation of insolvency cases.
“Moreover, the Law fails to clearly define content of moratorium on satisfaction of creditors’ claims. For example, the moratorium covers money obligations that come due before initiation of the bankruptcy case. If money obligations become due after initiation of the bankruptcy case, the moratorium does not cover them despite the fact that the obligations had arisen before bankruptcy proceedings began. As a result, on the one hand, claims of some creditors are not satisfied because of the moratorium, on the other hand, the debtor has a right to pay money to other creditors. We consider this situation is discriminating some creditors.
“Another problem is that the bankruptcy law fails to fix a mechanism against fraudulent transfer. Today any business that is a potential debtor in a bankruptcy case and aware of its financial problems can transfer practically with impunity its assets to its related persons well in advance so that such assets do not go to creditors under the bankruptcy case. Any progressive bankruptcy law clearly defines mechanisms to contest asset transfer agreements effected by a debtor during certain period before the bankruptcy case is initiated.”