Crux (#04 April 2013)

Asset Protection

Asset protection is a huge legal challenge for many emerging markets. Ukraine is consequently no exception. Illegal seizure of assets and abuses in case of bankruptcy is observed pretty often. The practice worked out defensive mechanisms in response to this. Besides, introduction of the basic provision of current legislation could be the initial point of effective property management.

Alexey Pokotylo, senior associate, Konnov & Sozanovsky

Alexey Pokotylo, senior associate, Konnov & Sozanovsky

There have been many reports lately on raiding in the country. What tools to prevent raider attacks would you recommend to your clients in the current situation?

It is generally regarded that a hostile takeover is easier to prevent than to deal with when it has been brought into action. There is a variety of defensive tactics specifically designed to prevent an outsider from succeeding in an attempt to seize a company’s assets. For example, by making a takeover prohibitively expensive or reducing the firm’s overall appeal. That is what “poison pills”, “golden parachutes”, and “scorched earth policies” are used for worldwide. In Ukraine these strategies can also be successfully applied, yet often it is more effective not to let outsiders know what and whom exactly they are targeting, and that is to keep strict confidence of the assets that may be targeted and their true owner. It is pointless to attempt a hostile takeover without this data. Ukrainian jurisdiction doesn’t offer much flexibility in terms of keeping confidentiality of the firm’s structure and assets, and that is why many prefer to use non-resident corporate entities not only for tax planning purposes, but also as a preventive measure against a hostile takeover attempt. For example, some foreign jurisdictions allow a firm to keep the list of its directors in secret, without being obliged to disclose it to the authorities or the registration agent. Still, the greater the roadblocks that an outsider must face to succeed in a takeover attempt, the less is his initial incentive to engage in the costly activity of uncovering and overcoming them.

Yaroslav Romanchuk, managing partner, ILC EUCON

Yaroslav Romanchuk, managing partner, ILC EUCON

What tools to prevent raider attacks on assets, and particularly on intellectual property, do you believe are reasonable for Ukrainian businesses to apply?

Many countries face the problem of raiding, but Ukraine has its own specifics. Where there is raiding, there appears anti-raiding, as it is necessary to protect one’s assets. The aim of raiders is always a company’s assets, including intangible assets — intellectual property.

As a rule, the unrestructured business contains all tangible and intangible assets in one company, which is the target of raiding. As a result, all assets are captured by a raider.

There are four main categories of attacks that threaten intellectual property objects: organized crime; unfair competitors; government agencies; individuals.

The easiest way to protect intellectual property objects is to put them in a separate limited liability company, which is properly structured. Later, intellectual property rights can be assigned to others (under a licensing agreement, or otherwise). Of course, each case is unique and cannot be applied to all intellectual property objects.

When a parent company faces a court claim, or in the case of bankruptcy, creditors can receive intellectual property assets only if they are awarded by a court. Apart from asset protection, placement of intellectual property objects into a separate company can help founders to sustain long-term control of their companies.

Establishment of LLC in an offshore jurisdiction can ensure better protection of assets, because assets in offshore LLC are usually protected from claims and business risks by the limitations regarding order of seizure, as well as by legal and practical impossibility of their recovery in offshore companies in foreign jurisdictions. A resolution on the seizure of assets of LLC may be a powerful tool for a creditor. Neither an offshore LLC nor its director can be forced by a “domestic (national)” creditor to assign assets or to distribute funds.

The typical jurisdictions, where such LLC are established, have very strict, well-designed legislation that protects LLC and interests of its participants not only from the seizure of property, but also from a variety of claims. We have described only some of the ways in which to act but they vary depending on the intellectual property objects.

Vadym Kizlenko, attorney at law, Ilyashev & Partners

Vadym Kizlenko, attorney at law, Ilyashev & Partners

How is it possible to determine that a bankruptcy is fictitious? What penalties (liability) exist in Ukraine for fraudulent bankruptcy?

According to Article 22 of the On Restoring Debtor’s Solvency or Declaring it Bankrupt Act of Ukraine the debtor’s property shall, in particular, identify (if any) signs of fraudulent bankruptcy, bringing to bankruptcy, hiding stable financial insolvency, and unlawful actions in case of bankruptcy. Identifying signs of fraudulent bankruptcy is regulated by the Regulation On Identifying Signs of Insolvency and Actions aimed at Concealment of Bankruptcy, Fraudulent Bankruptcy or Bringing to Bankruptcy Guidelines approved by the Order of the Ministry of Economy of Ukraine of 19 January 2006, No.14 (as amended by the Order of the Ministry of Economy of Ukraine of 26 October 2010, No.1361). The specified regulation provides for the acts to be preformed by an asset manager to identify signs of fraudulent bankruptcy.

Bringing a firm to bankruptcy in Ukraine entails criminal responsibility. Illegal actions in case of bankruptcy and hiding stable financial insolvency are punishable by administrative fines since responsibility for these unlawful acts will be decriminalized.

Viktor Korolenko, partner, Salkom

Viktor Korolenko, partner, Salkom

Please, describe the features of monetary or other claims against debtors under bankruptcy proceedings. What is the order in which creditors claims are satisfied, in what manner?

Pursuant to the provisions of the On Restoring Debtor’s Solvency or Declaring it Bankrupt Act of Ukraine only monetary claims are included in the register of claims. Depending on the grounds and time periods for the occurrence of the claims, or whether monetary claims are secured by property (pledge), it is possible to distinguish certain categories of creditors. The special characteristics of presenting monetary claims by a creditor are determined by the particular category to which the creditor belongs.

In this regard, the Act stipulates that competitive creditors having claims which arose prior to instituting bankruptcy proceedings must submit to the commercial court written statements of claims against the debtor, as well as supporting documents, within thirty days from the date of publication in the official print newspaper of the announcement on the initiation of bankruptcy proceedings. If a competitive creditor fails to submit a monetary claim to the debtor within the prescribed period, such claims are considered to be satisfied.

Creditors which have claims in relation to the debtor for the payment of salary, royalties, alimony as well as claims for compensation for harm caused to life and health of citizens, are entitled to submit to the commercial court a written statement with claims in relation to the debtor, as well as supporting documents. Therefore, throughout the entire bankruptcy proceedings the abovementioned creditors are entitled to submit their claims against the debtor.

Current creditors are entitled to declare their monetary claims only in the liquidation procedure. At the reorganization stage settlements with competitive creditors are carried out in the manner and within the timeframes established by the plan of reorganization.

At the liquidation stage settlements are made after the sale of any separate property in the order of priority established by Article 45 of the Act.

Specifically, debt in salary payments, social benefits, creditors’ claims under insurance contracts, the costs of an arbitration manager on the proceedings in the bankruptcy case and so forth are paid in the first order of priority.

Obligations related to insurance payments for compulsory state pension, other social insurance, etc., are paid in the second order of priority.

Obligations in relation to tax payments and charges (obligatory payments) are satisfied in the third order of priority.

Creditors’ clams, which are not secured by a pledge, including creditors’ claims arising from commitments in the procedure disposition of the debtor’s property or the debtor’s reorganization proceedings are satisfied in the fourth order of priority. Claims related to the return of contributions made by staff members to the authorized capital of a company are satisfied in the fifth order of priority.

Other claims are satisfied in the sixth order of priority. Based on the provisions of the Act, members contributions to the charter capital of business entities and payments on monetary obligations of competitive creditors who have not declared their claims within the period established by the Act are satisfied in the sixth order of priority.

Yulia Yashenkova, senior associate, AstapovLawyers

Yulia Yashenkova, senior associate, AstapovLawyers

Please, describe the features of initiating a bankruptcy procedure for a missing debtor

Before coming into force on 19 January 2013, amendments to the On Restoring Debtor’s Solvency or Declaring it Bankrupt Act of Ukraine provided for simplified proceedings in bankruptcy cases of absent debtors. Such simplified proceedings could be applied if a debtor was absent at its registered address (evidenced by an Extract from the Unified State Register of Legal Entities and Individuals-Entrepreneurs) or failed to submit tax and accounting reports for the period of one year. In such cases the creditor could initiate bankruptcy proceedings in relation to the debtor disregarding the debt amount and maturity date of obligation.

Currently, the amended Act excludes the said simplified proceedings. Consequently, to initiate bankruptcy proceedings in relation to an absent debtor the creditor shall comply with the general requirements for initiating bankruptcy proceedings, in particular:

(1) creditors’ claims shall be non-controversial (evidenced with respective final judgment and public enforcement decree), (2) an aggregate amount of claims shall be equal to three hundred minimum salaries, (3) the claims were failed to be satisfied within three months from the maturity date.

Therefore, according to the amended Act, the bankruptcy of the absent debtor may be initiated and performed by the creditor under the general bankruptcy proceedings only.

Roman Drozhanskyi, partner, Volkov & Partners

Roman Drozhanskyi, partner, Volkov & Partners

In what cases is a moratorium on satisfaction of creditors’ claims applied in bankruptcy? In what cases and on what grounds can a liquidator of debtors’ assets be dismissed?

A moratorium for satisfaction of creditors’ claims shall be imposed by the court ruling initiating bankruptcy proceedings. Such a moratorium remains in force until bankruptcy proceedings are discontinued. The administrator may be dismissed due to his/her resignation.

The administrator may also be dismissed upon the application of the creditors’ committee, state property managing authority (for state-owned companies) or at the court’s initiative in the following cases: a) if the administrator does not comply or complies unduly with his/her duties; b) if the administrator abuses his/her duties;

c) if the administrator files false information with the court; d) if the administrator’s application for access to state secrets is denied or the administrator is stripped of such access; e) if the administrator’s license is annulled.

Maxim Korchagin, senior associate, ANTIKA Law Firm

Maxim Korchagin, senior associate, ANTIKA Law Firm

What are the most common abuses associated with bankruptcy procedures in Ukraine?

Certainly, implementing the new version of the On Restoring Debtor’s Solvency or Declaring it Bankrupt Act of Ukraine made the whole mechanism more complete. A lot of bankruptcy misuse schemes were brought to nothing, in particular the so-called “cut-off” of creditors, who did not manage to apply claims within the set terms, the opportunity to interpret differently the term “indisputable requirements”, etc. The main mechanism will probably be left unchanged, the so-called planned bankruptcy scheme. That is, the procedure initiated by a “friendly-oriented” creditor who in advance and artificially creates large size claims. It is most likely that according to the new version of the Act the main objective of most bankruptcies will remain the moratorium on satisfaction of creditors’ claims, rather than the actual financial recovery of enterprises. Now the time to implement the moratorium is postponed for a preliminary hearing where the court considers whether or not the application on initiation of proceedings on a bankruptcy case is reasonable. However, this measure will be effective only if the debtor is interested in providing evidence of its normal financial condition. That is, the change in the time to implement a moratorium is aimed at protecting the interests of the debtor, the normal activity of which the creditors of bad faith wanted to stop. If the debtor himself is interested in the moratorium, then a carefully designed plan of action may help to effect this.

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