On 21 October 2019, the Code on Bankruptcy Procedures adopted by Ukraine’s parliament on 18 October 2018 (“the Code”) came into effect. The Code replaces the Act of Ukraine on Renewal of Debtor’s Solvency or Declaring It Bankrupt dated 14 May 1992 that applied previously. The Code has sparked controversy in Ukraine and until the last moment there were discussions whether its entering into effect should be postponed until a later date.

Launch of insolvency proceedings

The Code makes launching insolvency proceedings much easier compared to the previous law. Under the Code, creditors may file to start insolvency proceedings against a debtor as soon as the debtor fails to pay a debt when due, regardless of the amount and period of delay. The court in charge of bankruptcy proceedings (“bankruptcy court”) must commence the proceedings unless there are grounds to stay them: (a) the debtor has satisfied the creditors’ claims in full before the preliminary hearing of the case, or (b) there is a dispute on the merits in relation to the debt (i.e., the debtor has brought an action against the creditor).

In the past, insolvency proceedings could be commenced only by a creditor whose claims were confirmed by (a) a court judgement that came into force, and (b) an enforcement order issued by Ukraine’s state enforcement service. Under the old law, it could take years for a creditor to secure a final court judgement that could be used as the basis for insolvency proceedings, and therefore international lenders rarely resorted to insolvency proceedings to recover a debt owed by a Ukrainian company.

Three-year hardening period

Under the Code, the bankruptcy court may declare an agreement of the debtor invalid if the agreement was entered into within three years prior to the commencement of the insolvency proceedings and meets the criteria described below.

Clawback

The bankruptcy court may declare an agreement of the debtor invalid upon a claim of the insolvency trustee or a creditor, in particular, if the debtor:

• accepted an undertaking that led to its insolvency or breach of its obligations towards other creditors;
• accepted an undertaking without adequate consideration from the counterparty; and
• granted a security interest over its assets that led to a loss for the debtor or creditors.

The simplified requirements to launch insolvency proceedings, combined with the foregoing, broadly formulated claw-back grounds and the longer, three-year hardening period, potentially lay the groundwork for a change in the approach of creditors toward assessing the proposed security package in relation to new investments. In particular, international lenders may wish to reconsider going forward whether it makes sense to seek security interests or unlimited corporate guarantees from Ukrainian operating companies that are not acting as borrowers or issuers on a particular credit or bond deal.

In addition to the foregoing, the Code now allows to “claw back” any agreement entered between the debtor and an interested party that is defined to include all affiliates of the debtor. The Code will therefore put at risk all multiparty finance documents to which two or more Ukrainian obligors are parties on the basis that these companies are, e.g., under common control by a certain holding company.

Late filing is not a disaster anymore

In the past, failure by an unsecured creditor to file a claim within 30 days following the commencement of insolvency proceedings would result in its claims receiving a lower ranking than the claims of other unsecured creditors that were filed on time. Under the Code, late filing does not have an impact on the ranking of the claim. However, a creditor that filed its claim late does not have a vote at the creditors’ meeting or creditors’ committee.

CEO liability for a failure to file for bankruptcy

The Code introduces the liability of the debtor’s CEO (in Ukrainian: “kerivnyk”) for the failure to file for the debtor’s bankruptcy in accordance with the Code within one month from the moment when the debtor has become unable to pay its debts as they fall due. Once this has been established by the bankruptcy court and indicated in the court’s ruling, creditors are entitled to bring claims against the CEO. Under the Code, the debtor’s CEO acts as a joint and several debtor in these circumstances, and therefore a creditor may seek to recover its debt from the debtor’s CEO at any stage of the insolvency proceedings.

The newly introduced joint and several liability of CEOs will exist alongside other rules on the liability of managers and shareholders for the debtor’s insolvency under Ukrainian law. Under the Code, managers and shareholders of debtors may be subject to liability for destructive intervention into the debtor’s business or its mismanagement, to the extent the debtor’s assets are insufficient to cover the creditors’ claims. Also, under the Act of Ukraine on Companies with Limited and Additional Liability dated 6 February 2018, members of the executive governing body of the company or its CEO (if there is no such corporate body) may be subject to secondary liability for the company’s debts in insolvency if they fail to convene a meeting of the company’s shareholders within 60 days from the date of the decrease of the company’s net assets by more than 50% compared to the net assets as at the end of the previous year.

Security trust in bankruptcy

Almost simultaneously with the Code’s entering into effect, a new type of security interest – the security trust – has been introduced into Ukrainian law. The Code has been amended to accommodate this new type of security interest by creating a special regime for security trusts, as follows:

• a security trustee is not a secured creditor and therefore is not subject to the rules applicable to secured creditors;
• trust property is not included in the liquidation estate of the trustee or the trustor; and
• the moratorium instituted in connection with the insolvency proceedings of the debtor does not restrict the security trustee from enforcement in relation to the trust property of the debtor as trustor.

For further information please contact Andriy Nikiforov, Counsel, at  andriy.nikiforov@kinstellar.com, or Ganna Kalinichenko, Senior Associate, at  ganna.kalinichenko@kinstellar.com.