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How to Sell Your Debt. An Arbitral Award Will Help

15.08.2019

Roman Protsyshyn, Attorney at Law

Source: NV

From now on there is no need for a creditor to seek enforcement of the arbitral award, it is enough to assign the claims thereunder

Ukraine has opened up the possibility of early repayment of debts awarded by the international commercial arbitration. From now on there is no need for a creditor to seek enforcement of the arbitral award, it is enough to assign the claims thereunder.

The Ukrainian courts took a new look at the recognition and enforcement of arbitral awards in Ukraine, the debt under which was assigned to the third parties.

It is commonly known that the business looks at winning the court/arbitration proceedings in a way different from its lawyer: the received award does not mean that the company has de facto received the money, because it still needs to be collected. Not to get involved in the lengthy process of searching for the debtor’s assets and the subsequent collection procedure, the business often decides to sell the awarded debt with a discount at a price much higher than the value of the same asset before litigation/arbitration. Other reasons include the sale of such an asset in the bankruptcy proceedings to fill the common pool of the bankrupt company with cash for further settlements with its creditors.

How it works

If we talk about the sale of debt awarded by the decision of the state court at the stage prior to the enforcement proceedings, then the mechanism is quite simple. The new creditor must apply to the court that issued the decision with a petition to replace the party. After considering such petition, the court will issue a decision to replace creditor A with creditor B. The court checks the eligibility of grounds for the assignment of claims (the availability of the assignment agreement, evidence of notification of the debtor that he now owes money to a new creditor, etc.).

The arbitration proceedings are quite different from the court proceedings. After issuing the final arbitral award, the tribunal terminates its powers, which simply means that there is no longer a body that would make a decision to replace company A with company B inasmuch as the former sold the debt to the latter.

Ukrainian practice

For quite a long time, the major stumbling block was the position of Ukrainian courts presented in the case of Euler Hermes Services Schweiz AG v. PJSC Odessa Fat and Oil Plant (2012-2015), where Euler Hermes (new creditor) tried to recognize and enforce the FOSFA arbitration award issued in favor of another company, Pontus Trade SA (initial creditor). The Ukrainian courts in this case have adopted an unequivocal negative approach for the whole arbitration community, under which it is only a creditor directly specified in the arbitral award which has the right to seek recognition and enforcement of the award in Ukraine. This precedent became a procedural obstacle to the recognition in Ukraine of arbitral awards, the rights under which were assigned. Yet, however, in one case the court did satisfy the new creditor’s petition for recognition of the arbitral award, which was made in favor of another person, although the issue of procedural succession was not resolved. In other words, it was risky to sell debts granted by the arbitral awards against the Ukrainian debtors.

In order to circumvent this procedural restriction, it was previously necessary to initiate the process of recognition of the arbitral award by the creditor in whose favor it was issued, and later to assign the right of claim and ask the court to replace the party in the action. Such a procedure was costly and quite risky in terms of the debtor’s ability to delay the process.

The 2017 judicial reform has further strengthened the approach on that front: the petition for recognition of the arbitral award must be signed by the person in whose favor it was issued, i.e. only by the company that is directly named in the arbitral award.

New precedents

The formalism of the Ukrainian courts, as you no doubt understand, adversely affects the country’s investment climate. Yet, a fresh pro-arbitration approach has finally allowed those who have acquired the rights to claim under the arbitral award to enforce them in Ukraine.

Two already existing precedents

In the case of Solution Finance, the initial creditor, Trading House of the Armavir Heavy Machine Building Plant OJSC, assigned its rights under the arbitration award issued by the Interregional Arbitration Court against the Ukrainian debtor, PJSC Azovzagalmash, to a new creditor, namely, Solution Finance. The new creditor applied to the court for recognition of the arbitral award and simultaneous replacement of the party (claimant). The court replaced the original creditor with a new one and issued a writ of execution to the company, which was not named in the arbitral award.

In the case of MetMash Ufaley, the ICAC at the CCI of the Russian Federation issued an arbitral award in a dispute between Ufaley Metalware Plant LLC and Donbastekhnologiya LLC in favor of the claimant. Later, by the chain of agreements, the debt under arbitral award was transferred twice to the new creditors. The last creditor secured the recognition of the arbitral award against the debtor in court by using a mechanism to replace a party in the proceedings that is similar to the one described in the first case.

The buyers of debts granted by the awards of the international commercial arbitrations require the same amount of rights as the buyers of debts granted by the decisions of the national courts. Another interpretation of this issue limits the ability of creditors to dispose of their substantive rights and procedural remedies.

Thus, the companies that received the right to claim under arbitration awards, received the right to recover the debts in Ukraine. As demonstrated by these two examples, the Ukrainian courts are moving away from the literal, formal interpretation of the letter of the law, increasingly applying the modern trends of the world practice and adhering to the spirit of the law.

 
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