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New Bankruptcy Act sets timescales for bankruptcy proceedings, defines creditor’s rights and regulates the profession of insolvency practitioner

News date: 18 April 2013

The new version of the Bankruptcy Act enacted on January 19, 2013 has introduced a number of changes to bankruptcy proceedings. More details were reported by Vadym Kizlenko, an insolvency practitioner* and trial attorney with Ilyashev and Partners Law Firm, in a round table discussion entitled «Bankruptcy Proceedings under New Bankruptcy Act».

Cases heard under new and old rules. According to the expert, bankruptcy** cases initiated after the new version of the Act came into effect will be heard under the new rules, and, accordingly, cases opened before the effective date will use older rules. The only exception is the sale of bankrupt’s property, where new rules will be applied no matter when the case was brought to court.

Web announcements. The Act provides that official announcements of bankruptcy or commencement of formal bankruptcy proceedings will be posted on the website of the Supreme Commercial Court rather than in official gazettes as it was before. This provision will take effect on January 19, 2014, a year after the Act is signed into law.

All cases heard by one court. According to the new Act, all cases and disputes related to the same debtor, including labour, tax and corporate disputes, etc., will be heard by the court trying that debtor’s bankruptcy case. «This leaves a number or questions, namely, how commercial courts are expected to try administrative and civil cases, and how exactly applicable court fees will be paid. And I am afraid the Act doesn’t have it», Mr. Kizlenko said.

Procedure deadlines set. The Act sets strict timescales for bankruptcy proceedings which formerly could last for decades. New rules provide that receivership* is appointed for 115 days and may be extended by 2 more months. Resolutions will take 6 month and may be extended for the next 12 month, while liquidation can take no more than 12 month and is non-extendable».

Along with that, the Act has introduced a bunch of new obligations. Namely, receivers* now will have to complete an inventory of debtor’s assets within two months. «For small and medium-sized businesses this can be done well in a week, but in case of larger companies the entire process may require more than 2 months to complete, since there are a number of steps to be taken other than mere inventory», the expert commented.

Court decision required to open bankruptcy proceedings. According to the new Act, the claims of a creditor filing bankruptcy petition must be substantiated by court decision and by an «enforcement document», i.e., a court order to institute enforcement proceedings. Formerly, a creditor’s claim (if agreed by the debtor) would suffice giving way to fraud and abuse by the debtors and linked creditors: there were numerous cases of fraudulent bankruptcy petitions where a court would ultimately issue a moratorium and no more money could be claimed from the debtor.

New rules for opening bankruptcy proceedings. Formerly, a bankruptcy petition in the prescribed form would suffice for a court to initiate formal bankruptcy proceedings and impose a moratorium. Now, the court receiving a bankruptcy petition will issue an order setting the date of preliminary hearing and appointing an insolvency practitioner chosen automatically by the system. In preliminary hearing the court will verify if there is enough merit behind creditor’s claims and ask the insolvency practitioner if he agrees to act as the receiver in the case. And only after that the court will issue an order to institute enforcement proceedings.

«Until now, one could simply file a bankruptcy petition with the court and have a moratorium on the assets, leaving the creditors no chance to enforce their claims. Now they’ve put an end to these practices», Mr. Kizlenko said commenting on the issue.

Secured creditors. The Act introduces the concept of a «secured creditor», i.e., a creditor with the benefit of a security interest over some or all of the debtor’s assets. From now on, all eligible creditors (i.e., creditors whose claims have been recognized by the court) are entitled to check the status of other creditors’ claims by sending an inquiry to the receiver and, more importantly, are granted the right to protest against money claims presented by other creditors. This will enable them to protect their rights and minimize debtors’ bad faith obligations under sham deals.

Creditor relations addressed. As soon as the register of creditors is approved, the receiver must notify all creditors in writing of the date and time of all meetings to be held in the case. The first meeting is duly constituted and quorate if two thirds of all creditors are represented whose claims have been put on the register.

Creditors with claims of 25% and over of the total debt will be automatically included on the Creditors Committee. This is an important leverage over the bankruptcy procedure, since each creditor seeks to be on the Committee to have influence on the process and to stay informed.

Secured creditors will have no vote in the meetings of creditors since they can enforce security against the assets of the debtor and avoid competing for a distribution with the unsecured creditors. The rest of the creditors, i.e. unsecured creditors, will be entitled to vote and determine any further developments in the case.

However, the new act has brought more rights to the secured creditors. These include automatic placement on the register of creditors by the receiver, listing on a separate register and preference in enforcement of their claims. Likewise, the property against which a mortgage or a lien is held is not included in the liquidation balance and can not be sold unless a secured creditor consents to do so. In practice, this means that secured creditors now can bargain the sale price and other terms and conditions of sale.

No deadlines on money claims. Now, even claims raised later than a month after the announcement was made in the official gazette will be accepted as sixth priority claims. However, this means that such claims can not compete for distribution. «From anecdotal evidence, sixth priority claims hardly, if ever, live to take any priority at all – pardon the pun», Mr. Kizlenko commented.

More powers for insolvency practitioners. The new Act has granted wider powers to insolvency practitioners in terms of disputed contracts made before or during the bankruptcy procedure. Formerly, administrator* was the only entity entitled to void contracts and repossess the property conveyed to the debtor thereunder to be further included in the liquidation estate. Creditors have also been granted the right to move the court for invalidating transactions. The Act also indicates the legal criteria a contract must meet to be held void.

Amendments to the register of creditors. The Act clearly sets the procedure for amending the register of creditors – now any changes must be sought through the court of appeal and/or court of cassation on the grounds of discovery of new facts or due to the legal succession of an eligible creditor (i.e., a creditor whose claims had been placed on the register).

New rules governing auctions. The new Act devotes a whole section to the sale of bankrupt’s property, clearly defining the requirements to sale-and-purchase contracts made at an auction. It also provides that from now on, an auction shall be the primary way to sell debtor’s property. However, the liquidator* is now entitled by law to sell the assets directly to any third party subject to the approval of the Creditors Committee and given that the sale price is as high as the hammer price might be.

Further, the Act has spelled out the procedure of auctioning off debtor’s assets, introduced electronic auctions and clearly defined cases when the auction can be aborted or waived. It also enables a creditor or liquidator to move to the court to void the auction or a contract made at the same.

No bankruptcy proceedings unless debtor is duly served. «Five years ago or so, a courier’s statement that the debtor was not at the registered office would be enough to institute formal bankruptcy proceedings. And the debtor who might not be aware of that would one day learn, to its surprise, that it had been liquidated», Mr. Kizlenko said.

Raised requirements to insolvency practitioners. Now an insolvency practitioner must speak the official language, have a degree in law or economics and either 3 years of professional experience or 1 year of experience as en executive. To become an insolvency practitioner, one will also have to complete a 6-month internship and sit for the qualification exam.

No licenses for insolvency practitioners. The new Act abolishes insolvency practitioner «licences» and introduces «certificates» enabling persons to act as insolvency practitioners. Certificates must be renewed biennially by completing professional development training. Under new rules, insolvency practitioners are treated as self-employed for tax purposed. This means they must register with tax authorities and file tax reporting, have a registered office and a seal and keep separate records for each debtor.

Automated appointments. There is mo more risk of insolvency practitioner being linked to the debtor and the creditors. Upon receipt of the bankruptcy petition, the court will file an inquiry with the automated system and enter the parameters of debtor’s business. The system will than suggest the best suitable insolvency practitioner who will be appointed a receiver in the preliminary hearing (if he consents to the appointment).

«The Act has also introduced a concept of a «self-regulatory organization of insolvency practitioners» aimed at reducing the influence of the government on the profession. SROs will protect the rights of insolvency practitioners», Mr. Kizlenko said.

* 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).

** In this publication, «insolvency» means a state of being and «bankruptcy» means a matter of law. Recent UK practices to limit the term «bankruptcy» to natural persons are not taken into account.