Date of publication: 29 July 2024
Vadym Kizlenko, Attorney at Law, Counsel, Insolvency Receiver, Co-Head of Insolvency and Financial Restructuring
Andrii Konoplia, Attorney at Law, Counsel, Insolvency Receiver, Co-Head of Insolvency and Financial Restructuring
Source: Ukrainian Law Firms 2023-2024
After the events which began on 24 February 2024, numerous participants of the bankruptcy market found themselves grappling with the dilemma of how to handle creditors with ties to Russia. The issue of determining the procedural status of creditors affiliated with the Russian Federation in bankruptcy proceedings calls for immediate legislative action.
Legislative framework
Resolution No. 187 issued by the Cabinet of Ministers of Ukraine on 3 March 2022, titled On Ensuring the Protection of National Interests in Future Lawsuits of the State of Ukraine in Connection with the Military Aggression of the Russian Federation has introduced a moratorium, effectively prohibiting the enforcement of monetary and other obligations, including through enforcement, by creditors (collectors) who are either directly the Russian Federation or persons/entities associated with the aggressor state.
Individuals associated with the Russian Federation include citizens of the Russian Federation (with the exception of those legally residing within the territory of Ukraine); legal entities established and registered in compliance with legislation of the Russian Federation; legal entities established and registered in accordance with Ukrainian legislation or the legislation of a foreign state (in cases where obligations are fulfilled at the expense of funds allocated from the state budget), where the ultimate beneficial owner, member, or participant (shareholder) possessing a stake of 10% or more is either the Russian Federation, a citizen of the Russian Federation (excluding those legally residing within the territory of Ukraine), or a legal entity established and registered in accordance with the legislation of the Russian Federation.
As outlined in Article 1 of the Code of Ukraine on Bankruptcy Procedures, the term creditor refers to a legal entity holding claims for monetary obligations against the debtor, substantiated by documentation in the prescribed manner; monetary obligation denotes the debtor’s commitment to pay a specific monetary sum to the creditor.
Upon systematic examination of the aforementioned regulations, it becomes apparent that a party involved in a bankruptcy proceeding can be a legal entity that has the right to seek repayment from the debtor, while the debtor is under obligation to settle the debt owed to the creditor.
Resolution No. 187 delineates no exceptions regarding the imposition of a moratorium on the fulfillment of monetary obligations in bankruptcy scenarios. Consequently, in the event that the Russian Federation or an entity associated with the aggressor state emerge as a creditor in a bankruptcy case, Resolution No.187 explicitly prohibits the satisfaction of such creditor’s claims.
Hence, at the regulatory level, a ban on fulfilling monetary obligations to creditors associated with the aggressor state is instituted, rendering such legal entities ineligible to hold creditor status in bankruptcy cases.
However, a practical challenge arises, as this prohibition is established through subordinate regulation, lacking specific repercussions within the legislation of the Criminal Code of Ukraine and the Code of Civil Procedure of Ukraine, including procedural consequences.
At present the only measure outlined in the Code of Ukraine on Bankruptcy Procedures pertains to the deprivation of the creditor’s voting rights if special economic or other restrictive measures (sanctions) involving asset freezing are imposed on the said creditor or any interested party affiliated with the creditor.
Thus, in bankruptcy proceedings, the legislator has restricted the rights solely of those creditors subject to asset-blocking sanctions, while creditors subjected to other forms of sanctions remain entirely unrestricted in their rights.
One might expect that the normative prohibition of monetary settlements with creditors in a bankruptcy case will be the basis of refusing to acknowledge monetary claims or closing proceedings in the part of the claims of such creditors due to the absence of dispute. However, neither the Code of Ukraine on Bankruptcy Procedures nor the Economic Procedure Code of Ukraine explicitly address this matter. Nonetheless, such conclusions can be deduced from a systematic analysis of the aforementioned codes.
From our perspective, the concept of “creditors associated with the Russian Federation” encompasses a broader scope than “creditors (interested parties in relation to the creditor) that are subjected to sanctions”. At present, sanctions do not extend to all individuals linked with the Russian Federation.
In this context, it is crucial to address issues regarding creditors associated with the Russian Federation during the initial stages of taking into consideration the creditor’s claim, including the initiating creditor. Furthermore, if their claims have already been acknowledged, action should be taken immediately upon receiving evidence of their connection to the Russian Federation.
In simple terms, it is preferable to prevent such creditors from participating in the case altogether than to later rectify the consequences associated with their involvement in the bankruptcy proceedings, such as having their petitions granted by a court or exercising voting rights at creditors’ meetings.
The involvement of creditors associated with the Russian Federation prior to the imposition of sanctions on them may lead to consequences that will prove exceedingly difficult or even impossible to rectify once sanctions are enforced, such as the recognition of their monetary claims followed by subsequent repayment or the liquidation of the debtor.
Court precedents
Despite the legislative gaps, recent judicial practices have shown a cautious approach towards investigating the connection of creditors with the Russian Federation. Judges are now compelling the parties involved in the case to furnish details with regard to whether the party in question is a legal entity established and registered in accordance with Ukrainian legislation, with the ultimate beneficial owner, member, or participant (shareholder) holding a stake of 10 percent or more being either the Russian Federation or a citizen of the Russian Federation, excluding those legally residing within Ukraine’s territory, or a legal entity that is established and registered in accordance with the legislation of the Russian Federation.
The practice exists of courts seeking assistance from the Ministry of Justice through court orders to obtain information regarding the beneficial owners of a particular creditor.
This approach likely ensures a more objective means of verifying or refuting specific information. After all, if the creditor has ties to the Russian Federation, there is a significant likelihood of attempts to conceal such information.
Hence, the matter of establishing appropriate and permissible evidence to substantiate or refute a person’s association with the Russian Federation, alongside the defining clear procedural ramifications of a creditor’s association with the Russian Federation or the imposition of sanctions against them or related individuals, necessitates normative clarification. It is imperative to outline a precise procedure for the court’s actions in the following scenarios: issuing a distinct decision and transmitting it to the relevant authorities, concluding proceedings regarding such a creditor’s claims, or declining to entertain an application, whether monetary or procedural, from such a creditor.
In our assessment, case No. 925/1248/21 serves as an instructive example, as the subject matter of consideration of which was represented, particularly by the claims of a creditor registered in the Russian Federation.
The court of first instance left the creditor’s claim without consideration. The court of appeal upheld this part of the ruling, citing the lack of grounds for substantive review (satisfaction or dismissal) due to the imposed moratorium on fulfilling monetary obligations to the said creditor. The creditor, established and registered in accordance with the legislation of the Russian Federation, remains subject to potential substantive review of its claims following the annulment of the specified moratorium.
The Supreme Court of Ukraine invalidated the decisions of both the first-instance and appellate courts and rendered a new decision to dismiss the motion seeking recognition of monetary claims.
Upon review, the Court of Cassation determined that although formal grounds existed for dismissing the request with monetary claims against the debtor, as per Article 202(4) and Article 226(1)(4) of the Civil Code of Ukraine, the circumstances surrounding the creditor’s registration in Moscow, as established by the courts. That is, the establishment and registration of a legal entity in accordance with legislation of the Russian Federation, preclude the recognition of the relevant monetary claims of the subject (or subjects) against the debtor in the bankruptcy case under the provisions of national legislation — the Code of Ukraine on Bankruptcy Procedures.
In the mentioned judgment, the Supreme Court did not specify the particular provisions of the Code of Ukraine on Bankruptcy Procedures or the Code of Civil Procedure that would be applicable in such legal relationships, nor did it indicate the basis on which courts should reject requests from creditors associated with the Russian Federation.
In line with the Supreme Court’s established practice, notably outlined in Resolution No. 21/146/06 dated 3 April 2018, the procedural possibility exists to terminate proceedings at the stage of asset disposal, provided that there is no dispute.
It is worth mentioning that it is quite common to terminate proceedings in cases of bankruptcy involving state-owned enterprises, given the legislative provisions provided for in paragraph 2 of Chapter III, Final and Transitional Provisions, of Law No. 145-IX On Recognizing as Repealed the Law of Ukraine On the List of Objects of State Ownership that are not Subject to Privatization.
In presenting their argument, the courts highlighted that while the provisions outlined in Article 90(1)(9) of the Code of Ukraine on Bankruptcy Procedures and Article 231(1)(2) of the Economic Procedure Code of Ukraine (absence of subject matter) do not expressly mandate the closure of bankruptcy proceedings due to limitations on subsequent rehabilitation/liquidation procedures (following the property disposal process), their application as a basis for closing bankruptcy proceedings is consistent with the option provided by the legislator in Article 49(1) of the Code of Ukraine on Bankruptcy Procedures to close bankruptcy proceedings in the property disposal procedure through restrictions on the application of further (after the property disposal procedure) court procedures (Article 49 of the Code) established in Clause 2 of Chapter III Final and Transitional Provisions of Law No. 145-IX.
A comparable legal standpoint regarding the potential closure of proceedings by courts in the bankruptcy cases of state-owned enterprises is evidenced in the ruling issued by the Supreme Court of 7 October 2020, issued in case No. 917/1230/15, referencing the conclusions drawn in a prior Supreme Court Judgment of 10 December 2019 issued in case No. 906/1290/15 by the panel of judges specializing in consideration of bankruptcy cases of the Commercial Court of Cassation.
The consistency of this legal stance is further confirmed by the Supreme Court’s continued adherence to such conclusions, as evidenced in its Judgments of 5 November 2019 in case No. 910/3704/13, 12 December 2019 in case No. 923/382/14, 19 December 2019, in case No. 50/155, 26 May 2020 in case No. 922/1200/18, and 7 October 2020 in case No. 917/1230/15.
In bankruptcy cases, the identification of a creditor’s connection with residents of the Russian Federation may signify the absence of a disputable subject (as the claims of such a creditor cannot be fulfilled). In such instances, we believe that courts do possess the grounds to terminate bankruptcy proceedings regarding the claims of the said creditor.
We advocate legislative reform to ensure that the pertinent laws remain current and more effectively address the procedural consequences for creditors affiliated with the Russian Federation and those subjected to special economic sanctions, beyond mere asset-blocking.
Despite the existing gaps in relevant legislation, our belief is that the prohibition of monetary settlements, as established by Resolution No. 187 of the Cabinet of Ministers of Ukraine, provides a foundation for:
a) refusing to acknowledge the creditor’s monetary claims (if such a motion has not been considered);
b) closing proceedings on the claims of such a creditor due to the absence of a dispute (if the creditor’s claims have already been recognized by the court).
Regrettably, we must acknowledge that the procedural status of creditors associated with the Russian Federation in bankruptcy cases requires legislative regulation. Nevertheless, even in the absence of such regulation, we remain hopeful that judicial practice will evolve to exclude sanctioned creditors and those connected with the Russian Federation from national bankruptcy cases.
