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What Is Wrong with the Law on Financial Restructuring

Date of publication: 25 July 2016

Oleksandr Denysenko, Attorney at Law
Source: Ekonomichna Pravda

Does everyone remember the draft Law “On financial restructuring”?

It was introduced by the Government to the Verkhovna Rada in late autumn last year, and the parliament approved it only on June 14, 2016.

The document was drafted “to overcome the negative effects in the financial sector caused by the financial crisis processes in Ukraine’s economy and for performance by the Ukrainian party of its obligations to the international financial organizations”.

The people’s deputies voted for the draft law having positive and negative conclusions of the legal and scientific and expert departments.

The draft law is indeed ambiguous. There are several points of concern that can be applied with a completely different purpose than stated in the law.

Thus, it appears that the draft law applies only to the companies that experience problems with repayment of loans and performance of other monetary obligations – it is called “critical financial condition” in the law.

The creditors of the debtor company should include at least one bank or other financial institution not related to the debtor by joint founders. The financial restructuring can only be initiated by the debtor.

Application of financial restructuring will be possible only if the banks or other financial institutions in which the debtor took at least half of all loans give consent to it.

The debtor has the right to involve in the restructuring any other persons whom the debtor owes the money, but only with their consent – they are called “the creditors involved” in the law.

In addition, the debtor should not be in a state of bankruptcy or pretrial rehabilitation.

The purpose of financial restructuring is approval and conclusion of the agreement on restructuring between the debtor, the creditors involved and investors, if any. Such agreement should include: conditions of participation of investors, amounts and terms of repayment by the debtor to all creditors, including to the involved and non-involved creditors and the budget.

The restructuring plan may envisage installments, discharge of a part of debt, transfer to the lenders of ownership right to the debtor’s property, attraction of investments, reorganization of the debtor, replacement of the debtor’s management and other activities.

If the debtor meets the above criteria and has the appropriate desire, he files to the Secretariat, a special public agency, which will be established pursuant to the Law, with the appropriate application.

The application should be supplemented by: consent of the creditors involved, which, as mentioned above, should include at least one bank; and the list of creditors with which the debtor’s property was pledged; the list of actual founders (owners) of the debtor; the list of existing litigations and enforcement proceedings against the debtor initiated by the creditors.

After receiving the set of documents, the Secretariat shall analyze them and, if they comply with the law, decide on initiation of the financial restructuring procedure.

What are the legal consequences of such decision of the Secretariat?

Firstly, for the period of financial restructuring the creditors of the debtor will actually not be able to initiate the bankruptcy case of the debtor without consent of the latter.

Secondly, from the date of financial restructuring a moratorium is introduced, which is valid for 90 days with the possibility of extension for another 90 days.

For the period of moratorium the debtor is released from the obligation to repay debts to the creditors involved, including through the sale of the debtor’s property at auction. It is also not allowed to transfer the debtor’s property in pledge or under control of other persons, make set offs and sell by tender the debtor’s real estate, equipment, motor vehicles, machinery, used in the economic activity of the debtor.

The prohibition of sale of the debtor’s fixed assets applies to all creditors of the debtor regardless of their participation in the financial restructuring.

The above rules prove that the financial restructuring mechanism may be used by unscrupulous debtors to prevent sale of personal property for debts.

To do this, the debtor will be required to find an acquaintance in any bank or other financial institution, to take a loan of at least fifty percent of all credits or loans previously obtained from other banks, to obtain the consent of “its” bank to act as the creditor involved and apply to the Secretariat for a decision on initiation of financial restructuring procedure.

Such decision will protect the debtor from initiation of bankruptcy proceedings and sale of its property, such as fixed assets, for 180 days.

However, the rights of all other non-involved creditors will be violated, even with the court decision on recovery of debt in hand such creditors will not be able to sell the debtor’s property, or initiate a bankruptcy case.

Therefore, the Law needs to be improved, in particular, to prevent abuses by unscrupulous debtors that using this Law will be able not to return credits and other debts.