Accounts Burden

Roman Marchenko, Attorney at Law, Senior Partner

Source: Yurydychna Praktyka

Roman Marchenko, Senior Partner at Ilyashev & Partners, speaks on the national and international development trends of the institution of bankruptcy.

– Are bankruptcy support services in demand now and, if so, to what extend?

– I have been doing legal business for 20 years, was among the first to obtain a license of insolvency officer. And I can say that every my second Ukrainian client at least once got through bankruptcy. This is a way, especially taking into account our, to put it mildly, a non-ideal legal system, to clear of past problems (including tax), to “reset” the business. In general, the country needs to significantly simplify the company liquidation procedure. Business does not have to look for some quite ugly schemes involving Moldovans and Georgians as “founding directors” or, alternatively, resort to bankruptcy. There must be a real opportunity to liquidate business quickly and efficiently. Bankruptcy procedure shall be applied to really insolvent companies. This is the right approach also for improving the investment climate of the state: a serious businessman studies both prospects of entry into the market and exit options. If he realizes that to close a business he may have to go through bankruptcy proceedings, he is not ready for it, also because of the reputational risks.

The situation in Ukraine is strategically deteriorating: Crimea has been occupied, military operations in the east are conducted. The number of bankruptcies is not decreasing: more than 10 thousand applications are filed a year, and taking into account their long-term consideration, the untried cases only accumulate. This is traced in the practice of Ilyashev & Partners. We even consider the possibility of increasing personnel of insolvency officers, and even now the firm has six of them! I personally am a property manager in two fairly complex and resonant bankruptcies: the State Feodosia Shipbuilding Company “More” and “Sumykhimprom”.

– Recently, the Supreme Court of Ukraine when considering the bankruptcy case of Sumykhimprom ruled on the powers of insolvency officer. How can you comment on it?

– It without exaggeration is a very interesting, precedent decision in terms of law enforcement practice. Indeed, also at my initiative, external administrator decided to waive some loan agreements that drove the company into a dead end, because rates at 40% per annum may pay probably only the business of drug trafficking, but not fertilizer production business. The whole chain of commercial courts confirmed the validity of our position, but the SCU decided otherwise and currently such actions are recognized inconsistent with law. After declaration of such decision more than 300 million hryvnias additional interest on loans were accrued on the enterprise that I represented. To liquidate and destroy, as they say, a bad thing is simple enough. The creditors’ committee of Sumykhimprom could proceed directly to the liquidation and sell the plant in parts long ago. However, the challenge is to preserve the complex for the state, the Sumy community and families of five thousand employees. Surely, we suspect corruption in the above enslaving loans and assume that the legislator envisaged the possibility of waiver of agreements exactly for such cases. The SCU took a different position, which is not “in the spirit of the law”, but we are obliged to respect the viewpoint of the SCU. At present, the only way to change the situation is to amend the legislation. It is not just a problem of Sumykhimprom, the whole branches of economy were made bankrupt in such a way. The Parliament has to find a balance between the interests of banks, which, obviously, must be protected, and the interests of other creditors and the debtor itself. It is impossible to divert the company from crisis without giving it the chance to get rid of the bondage of debt load. That is why I am confident that these changes to the legislation would be useful and timely.

– What other legislative changes “time is ripe for”?

– Ideally, Ukraine should create special courts for bankruptcy, as was done in many countries. Unfortunately, we are bucking the trend, and even liquidation of specialized courts in general is discussed. This is fundamentally wrong. We need to improve the quality of judicial proceedings, and not to ruin the right idea, because specialization is obviously necessary. Bankruptcy is a very narrow field, which requires focused specialists. If the state is not ready to create special courts, it is necessary to strengthen the panels of judges considering bankruptcy cases. It is also difficult to overestimate the impact of the plenum resolutions and practice overviews.

Speaking of legislative changes, I would note the need to review the payment of work of insolvency officers. Considering the current situation with the official salaries (often like pocket change), insolvency officer can only count on the premium for the sale of property and asset recovery. The premium is set at a decent level. However, the legislator determined that insolvency officer will receive it only after satisfaction of claims of fourth-priority creditors. Though claims of fifth-priority creditors are almost never satisfied, thus, creating conditions for a variety of violations and tricks from the insolvency officers. It is obviously bad for the profession, and the situation certainly requires changes.

– How justified was the transfer of the institution of bankruptcy under the supervision of the Ministry of Justice of Ukraine?

– No sweeping changes for the profession followed. There are several approaches to management of the institute of insolvency officers: in some countries it is the responsibility of ministries (as a rule, the ministry of economy or justice), in other − special agencies (earlier, it was the same in Ukraine), in the third − there is no government regulation, and in the fourths − profession-related issues are settled by self-regulating organizations of insolvency officers.

– Why self-regulation of insolvency officers does not work in Ukraine?

– Some self-regulating organizations (SROs) have already been created. However, we must understand that in most cases insolvency officers do not need them. The interests of the profession can be lobbied more effectively in private, e.g. for me it is easier to convey my ideas through my clients and friends − deputies and officials − rather that through the SROs. The only possible interest in the SROs is advanced training, but it is also relative, because you can directly visit the seminars organized by the Ministry of Justice. For a self-regulating organization to achieve results, it shall be an exclusive provider of useful services for insolvency officers. Meanwhile, it is not.

– What world experience related to bankruptcy of enterprises is applicable in Ukraine?

– The European Bank for Reconstruction and Development performed a comparative analysis of regulation of the profession of insolvency officers in 27 countries. Results of this study were presented at a special conference in London. I made a report on the situation in Ukraine and was the only participant from our country. Unfortunately, none of the officials of the Ministry of Justice visited it. Compare: the Ministry of Justice of a small Latvia was represented by five employees. It evidences desire of our officials to improve the situation with regulation of the institute of insolvency officers. We hope that the Ministry of Justice, which will be renewed after the election, will be more enthusiastic about changes.

It was interesting to learn the experiences of other countries, where activity of insolvency officers is organized in a different way. For example, in Hungary only legal entities having certain personnel, expertise and access to financial resources may act as insolvency officers. It is presumed that an insolvency officer must be able to invest in bankruptcy in order to effectively perform his tasks during the procedure. Further, the licenses of insolvency officers are quite expensive and their issuance ensures budget replenishment. It seems that the Ukrainian Ministry of Justice could pay attention to such organization of the professional activity in this field.

Another example. In many countries, a sufficiently large part of bankruptcies are not bankruptcies in fact. It is just a quick way of liquidation of an enterprise. Surely, there are enough of real bankruptcies without assets. Because of the automated distribution system, insolvency officers regularly have to deal with dummy bankruptcies. Although such work does not bring profit, it also must be done efficiently. To solve this problem, a special fund for payment of work of an insolvency officer (in the amount of EUR 500 per case) in bankruptcies without assets was created in Romania. This is a small amount of money, but it allows the insolvency officer to work until he is assigned with a “true” bankruptcy case and can apply his knowledge and experience to the fullest.

– What are development areas of international cooperation in the field of bankruptcy, except for experience sharing?

– For us as a young state, indeed, the experience of colleagues is of primary interest, we have to adopt their best practices, to improve our legislation and practice. However, the opportunities for cooperation are not limited. They imply access to information and access to resources, including financial resources − insolvency officers abroad have long-existing agreements with the banks. The European insolvency officers have much more opportunities and need to cooperate with each other, in particular in cross-border bankruptcies or during change of domicile of companies (which has not been set forth by the Ukrainian legislation yet).