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Bankruptcy Liability: How to Punish those Responsible

24.06.2019

Andriy Konoplya, Counsel, Attorney at Law, Insolvency Receiver

Source:Yurydychna gazeta

Responsibility for the solvency (insolvency) of an enterprise must be laid down onto the persons who, by virtue of the Charter, are empowered to make decisions regarding the economic activities of a legal person. In particular, such persons may be represented by the director and/or participants (shareholders) of the company or the owner of the property (a body authorized to manage the property).

The provisions of the Law of Ukraine “On Restoration of the Debtor’s Solvency or Recognizing it Bankrupt” (hereinafter – the Law) stipulates that in case of occurrence of signs of bankruptcy, the debtor’s director is obliged to serve the debtor’s founders (participants, shareholders), the owner of the property (body, authorized person) with the information about the presence of such signs.

The debtor is obliged to apply to lodge a claim the economic court asking to commence the bankruptcy proceedings should the following circumstances be revealed: the satisfaction of the claims of one or more creditors will lead to the impossibility of fulfilling the debtor’s monetary obligations in full towards other creditors (threat of insolvency); during the liquidation of the debtor not due to the reason of bankruptcy, the debtor’s inability to satisfy the requirements of the creditors in full is established.

The receiver (liquidation committee) is obliged to lodge a claim to the economic court asking to commence the bankruptcy case as regards to such legal entity if the value of the property of the debtor – namely, the legal entity the decision about liquidation of which is made, is not sufficient to satisfy the creditors’ claims.

Thus, the Law establishes an obligation to lodge insolvency claim should any signs of insolvency be revealed, but in practice, the persons listed above are not always interested in fulfilling of this obligation and, accordingly, ignore this requirement.

This is probably due to the fact that the Law does not provide for liability for failure to fulfill obligations to lodge a claim on the commencement of the bankruptcy proceedings.

If a debtor timely lodges a bankruptcy claim, the creditors would have more chances to have their claims satisfied. However, it is not uncommon for a creditor (or the debtor itself) to lodge a claim to court when the debtor lacks the assets sufficient to satisfy the creditors’ claims.

Pursuant to Article 164-15 of the Code of Administrative Offenses, “Concealment of sustainable financial insolvency” results in the responsibility for intentional concealment by a person – founder (participant) or a company official of the company’s stable financial insolvency by submitting false information or failure to lodge a claim on commencement of the bankruptcy proceedings in relation to a company to economic court in cases provided by law, if it caused great material damage inflicted to the creditor.

The question arises about the application of this article in practice. In particular, the protocols on administrative offenses provided for in Article 164-15 of the Code of Administrative Offenses are to be drawn up by the law enforcement bodies (the National Police). However, it is difficult to understand how a representative of the law-enforcement body (National Police) would reveal an administrative offense, which is, in particular, represented by the failure to submit a claim on commencement of the bankruptcy proceedings in relation to a company to economic court.

Given the problems associated with identifying an offense under Article 164-15 of the Code of Administrative Offenses, it is unlikely for a guilty party to be held administratively liable for concealing sustainable financial insolvency.

However, the Order for bringing a person to administrative responsibility for concealment of sustainable financial insolvency could serve as a proof base for imposing subsidiary responsibility on the founders (participants, shareholders), or the director of the debtor.

After all, the Law provides that in case of the debtor’s bankruptcy due to the fault of its founders (participants, shareholders) or other persons, including through the fault of the debtor’s director, who have the powers to give mandatory instructions to the debtor or have the opportunity to determine its actions in another way, in case of insufficiency of the debtor’s property, the subsidiary responsibility for the debtor’s obligations may be laid upon the founders (participants, shareholders) of the debtor – legal entity or other persons. The recoverable amounts are included in the liquidation mass and can only be used to satisfy creditors’ claims in the order established by this Law.

It should be noted that in practice there are rare instances when the claims are lodged against persons who have the right to give mandatory instructions to the debtor or are able to otherwise determine its actions.

Such inactiveness can be explained by the following facts.

The interpretation of the term “subsidiary liability” is defined in Article 619 of the Civil Code of Ukraine, which states that, along with the liability of the debtor, the contract or the law may stipulate for additional (subsidiary) liability of another person. Prior to filing a claim with a subsidiary, the creditor must file a claim against the principal debtor. If the principal debtor refuses to satisfy the creditor’s claim or the creditor has not received from him within a reasonable time to respond to the claim, the creditor may bring the claim in full to the person who bears subsidiary responsibility.

Thus, it is only possible to lodge a claim against the debtor’s founders (participants, shareholders), or its director, after the moment when the liquidator has performed the legally stipulated actions, which are aimed at identifying and selling the debtor’s assets. In case of insufficiency of monetary assets received a result of the sale of such assets to satisfy the creditors’ claims – the liquidator has the right to lodge a subsidiary claim.

In other words, to lodge a claim against the debtor’s founders (participants, shareholders), or debtor’s director, shall only be possible after “going through” the entire bankruptcy procedure, starting with the initiation of proceedings in the case and ending with the formation of the liquidation estate and the sale of the debtor’s assets. As a matter of actual practice this may take years, therefor, the receiver and creditors are reluctant to incur additional costs.

It should be noted that at the expense of the funds received from the debtor’s founders (participants, shareholders), or the debtor’s director, by virtue of the Law, only the creditors’ claims are subject to satisfaction, and therefore the question arises who is going to cover the remuneration of the receiver and reimburse his expenses.

In addition, the receiver needs to prove the guilt and the presence of unlawful behavior of persons who may bear the subsidiary responsibility. Of course, should there be a verdict of conviction on bringing a guilty party to responsibility under Article 219 of the Criminal Code of Ukraine “Causing the bankruptcy” or at least administrative liability under Articles 164-15 “Concealment of sustainable financial insolvency”, 166-16 “Unlawful actions in case of bankruptcy”, 166-17 “Fictitious Bankruptcy” stipulated by the Code of Administrative Offenses it will be easier to prove the guilt. However, the receiver usually fails to have the verdicts of conviction convictions and/or orders on bringing the guilty persons to administrative liability.

In spite of the above problems, I believe that it is possible to prove the guilt and unlawful behavior of persons who may bear subsidiary responsibility on the basis of analysis of the debtor financial and economic activities, as well as of other documents, and therefore I recommend that the creditors ask the receivers to perform the corresponding actions.

On 21 October 2019 the Bankruptcy Code of Ukraine will enter into force. The provisions of the Code contain similar provisions on the subsidiary liability of the debtor’s founders (participants, shareholders), or the debtor’s director, so the problems related to the practical application of these provisions will save their relevance.

The Code also contains provisions on the debtor’s obligation to lodge a claim to the economic court on the commencement of the proceedings in the case within a month, if the satisfaction of the claims of one or more creditors will lead to the impossibility of fulfilling the debtor’s monetary obligations towards other creditors in full (insolvency threat).

I would like point out that, unlike the Law, the Code establishes a one-month term and responsibility for failure to fulfill such obligations, namely, if the debtor’s director has committed a breach of these requirements, he bears joint and several liability for failure to meet the creditors’ claims. The issue of violation by the debtor’s director of the said requirements is subject to consideration by the economic court in the course of the proceedings. Should such violation be revealed, it will be mentioned in the judgment issued by the economic court, which will constitute the basis for subsequent lodging by the lenders of their claims against the mentioned person.

These amendments raise a number of issues that will, of course, be settled by case law. In particular, it is not specified which of the parties to the process or the court, has the right, on its own initiative, to initiate the bringing the director to joint liability; how and at what stage the creditors’ claims will be satisfied at the expense of funds received from the debtor’s director; whether the assets of the debtor’s director will be included to the liquidation estate.

However, in any case, the threat of applying foreclosure to the property of the debtor’s director will better discipline the latter and give additional chances to the creditors to have their claims satisfied.

 
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