Argument (#09 September 2012)

Novelties of the Rehabilitation Procedure in Ukraine

Andriy M. Konoplia

The new edition of the On Restoration of Debtors Solvency or Bankruptcy Recognition Act of Ukraine was signed on 22 December 2011. According to the final and transitional provisions, the Act shall take effect one year after its publication.

The new edition has been based on the old version. Just as before, bankruptcy proceedings consist of the following judicial procedures: administration of the debtors property, financial rehabilitation of the debtor, amicable settlement agreement, and liquidation of the bankrupt. Special attention should be paid to the procedure of financial rehabilitation.

The new edition provides for financial rehabilitation of the debtor before a bankruptcy proceeding is initiated by a debtor or a creditor. In order to commence the procedure it is necessary to have the written consent of the owner (a body authorized to manage the property) of the debtor; written consent of creditors, whose total claims exceed 50% payables of the debtor according to the latters accounting data, and a plan of financial rehabilitation. The rehabilitation plan is to be approved by a Commercial Court.

The decision on the bankruptcy proceedings should name the arbitration manager, who is appointed randomly by an automated system from among the persons listed in the Unified Register of court-appointed receivers. The activity of arbitration managers (property managers, receivers, liquidators) is regulated by a separate section, which specifies the details of the rights and obligations of the latter, including taking exams, control, responsibility, establishment of self-regulatory organizations of arbitration managers, and payment of remuneration. It should be noted that the Act defines the status of an arbitration manager as an independent professional.

According to the new edition of the Act, announcements will be published on the official website of the Higher Commercial Court of Ukraine in order to identify creditors. But it should be mentioned that this provision comes into effect two years after the date of publication. Applications by bankruptcy creditors should meet the requirements established by the Act. Courts would offer some time to eliminate drawbacks in applications.

According to the new version, a moratorium would apply to the inflation index at 3% per annum. The Act envisages more grounds to recognize a debtors legal actions (agreements) void. The creditors committee would automatically include creditors that hold 25% or more of votes.

The rehabilitation procedure includes alienation of the debtors assets by substituting assets, which implies establishment of a new business partnership with the subsequent transfer of assets and liabilities.

The liquidation procedure provides an opportunity to resume the financial rehabilitation procedure even after the debtor has been recognized bankrupt and before the sale of the bankrupts estate. Appraisal of the assets is conducted by a receiver (except for the property of companies whose state ownership exceeds 50%), but the committee of creditors, or an individual creditor or the property owner may apply to the Commercial Court with a request for an independent appraisal. The receiver can directly sell assets at the net book value not exceeding UAH 1,000 or assets that were not sold at auction or at the exchange. Mortgage obligations are met on a priority basis. Those debtors assets that failed to be sold during the liquidation process can be transferred to a person who is determined by a court and is obliged to take steps to make payments to creditors from the proceeds.

The sale of property in the bankruptcy proceedings is governed by a separate section that establishes rules for the sale of a debtors property. This section provides an opportunity to conduct auctions in electronic form and it sets rules for such auctions. The movables that are purchased at auctions and the rights of claim are transferred upon complete payment. Real estate should be paid for before the certificate of title to the property is issued.

The section on special features of bankruptcy excluded formation of cities and especially dangerous enterprises. On the other hand, it included business entities that have public value or special status. A missing debtor has been excluded from the list of special categories.

The new version of the Act has a section on the bankruptcy proceedings related to foreign bankruptcy proceedings. It regulates the interaction of Ukrainian courts with foreign courts, foreign receivers based on the principle of reciprocity if it is provided for by international agreements to which Ukraine is a party.

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