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Bringing More Order to Bankruptcy Procedure

Date of publication: 14 March 2013

Vadym Kizlenko, Attorney at Law

Source: The Companion

Insolvency is a regulated profession

The new Bankruptcy Act raises qualification requirements for insolvency practitioners*. Now, anyone who wishes to practise as an insolvency practitioner must speak Ukrainian, have a degree in law or economics and needs to pass the official exam and complete an internship. It is also necessary to meet the authorising body’s experience requirements: a candidate must have either 3 years of professional experience or 1 year experience as an executive. Authorizations will have to be confirmed every 2 years.

Insolvency practitioners are now entitled to hire assistants as contract employees. To recap, until recently, insolvency practitioners could only appoint assistants by power of attorney certified by a notary public. From now on, assistants to insolvency practitioners are recognized by law. Formerly, insolvency practitioners were also authorized to issue powers of attorney which gave rise to discussions on whether such appointments were made in due course of law.

Under new rules, insolvency practitioners are treated as self-employed which means they will not be required to register as sole traders for tax purposes**.

Tighter deadlines and transparency

One of the novelties is a substantial reduction of timescales for bankruptcy proceedings. The benefits of this move are, however, a matter of dispute. On one hand, it is fair enough that receivership, administration or liquidation* should not last for years. On the other, it is doubtful whether insolvency practitioners will be able to meet new deadlines, particularly in case of large and complex businesses. As a rule, they would be required to take a number of steps in the framework of insolvency proceedings, including the inventory of company’s entire assets (counting hundreds or thousands of items), financial analysis of company’s trade and reviewing all claims submitted by the creditors.

It is not unlikely that tighter deadlines will compromise the quality of procedure, with creditors affected.

Creditors’ interests

The authors of the new act took to afford some security to those creditors who, for some reasons, have missed the 30-day claim deadline. By contrast, the older version of the Act treated any such claims as discharged. Under new rules, these claims will be accepted as sixth priority claims.

A point is that “sixth priority” is merely a declarative provision, as the proceeds of bankruptcy would anecdotally suffice to repay only first four priority groups. The percentage of fifth and sixth priority claims that ever get to the point of repayment is very low.

Such claims are therefore guaranteed to be acknowledged but very unlikely to be enforced. However, the sixth priority claims provision was demanded by the European Union and the European Bank.

One of the strong points is undisputedly the right of veto on the administration plan vested in secured creditors and automatic inclusion on the Creditors Committee for creditors with claims of 25% and more of the total debt.

Fraud prevention

One of the obvious benefits offered by the new Bankruptcy Act is that it substantially improves the course of bankruptcy proceedings.

Formerly, an bankruptcy petition / application filed by the creditor or by the debtor would suffice to open bankruptcy proceedings. Having satisfied that the bankruptcy petition was duly accomplished and filed, the court would make an order to open bankruptcy proceedings and issue a moratorium releasing the debtor of its financial obligations before the creditors. Remarkably, insolvency practitioner would be nominated by the creditors who initiated the bankruptcy proceedings.

Today, things have changed. Upon receipt of a bankruptcy petition submitted by the creditor or by the debtor, the court will order to note the petition and set the date of preliminary hearing. An insolvency practitioner is appointed by an automated system. However, if there is no consent from the receiver nominated by the system, the court is entitled to appoint an insolvency practitioner from the Register of Insolvency Practitioners. In the preliminary hearing, the court will verify if there is enough merit behind creditor’s claims and good legal grounds for instituting bankruptcy proceedings. If the claim is eligible, the court will then open bankruptcy proceedings, issue a moratorium and appoint a receiver.

It is remarkable that some experts link the new version of the Bankruptcy Act with government’s ambition to sell the assets of publicly owned corporations and parastatals. In fact, imposing bankruptcy on public corporations is not new and was de jure allowed by the old version of the Act. However, there was a moratorium prohibiting the sale of their assets. It meant that creditors were unable to enforce their claims against the assets of a defaulted public corporation. State-owned companies were facing a Catch-22 situation where they had to realize their assets to pay the creditors and wind-up but could not do so. The new version of the Act takes this issue off the table.

* TN: In Ukraine, there are no “official receivers” as far as public servants and officers of the court are meant. Instead, there are private sector “insolvency practitioners” appointed by commercial courts (same as arbitrazh courts in Russia). In Ukraine, insolvency practitioners can act in 3 functions corresponding to 3 stages of the bankruptcy procedure: as a receiver (lit. “property manager”; debtor’s directors are retained), as an “administrator” (lit. “rehabilitation manager”; debtor’s directors are dismissed) or as a liquidator (a trustee in bankruptcy appointed after a court makes a bankruptcy order).

** Under Ukrainian laws, the term “self-employed” covers both sole traders (SPD) and “independent professional practitioners” (trial attorneys, private-sector notaries, doctors, artists, etc.) who are not treated as “enterprise”. Apparently, “independent professional practitioners” is what’s meant here. The general idea, however, remains that self-employed means “not a hired employee”.