LEGAL

Ukraine's new insolvency code could improve the business climate for creditors and debtors

Legal changes could help to encourage more financing by strengthening the rights of creditors – but many are reserving their verdicts until after implementation

Ukraine's new insolvency code could improve the business climate for creditors and debtors
About the author: Anton Molchanov is a head of insolvency at Arzinger law firm
Anton Molchanov
Friday, 11 January 2019 13:54

In October 2018, the Ukrainian parliament finally adopted the very first Ukrainian Insolvency Code. The adopted Code underwent more than 1,300 amendments, of which approximately 40% were rejected. Thanks to a long voting process and vocal support from Ukraine’s key financial partners including the IMF and World Bank, the country obtained a brand new law for dealing with troubled debts.

For Ukrainian businesses in distress, the Code sets much better conditions for both debtors and creditors. It cancels the debt threshold of approximately USD 17000 for initiation of an insolvency case of a Ukrainian company, and brings the threshold down to USD 1,500 for private entrepreneurs. Despite widespread criticism over possible fraud, the economic reality is that a long-term USD 1,500 debt represents a significant burden for either a small private-owned company or an entrepreneur with no fixed property.

The new Code allows for the initiation of insolvency proceedings without prior collection through courts or enforcement services. From a debtor perspective, this should increase the chances of keeping the debtor's money and property from seizure by creditors by obtaining a court protection (a so-called moratorium) in a very short time period. On the other hand, for creditors this might significantly ease the debt collection process while removing the burden of spending enormous budgets on lawyers and court fees. The Code also fixes the principal length for each stage in company insolvencies to prevent deliberate delays.

Key rights will return to creditors who have debtor property in pledge or mortgage. This is definitely a key law for Ukrainian banks, which for the previous five years often found themselves spectators to insolvency cases with little-to-no collection from debtor pledges.   

The changes pave the way for the introduction of e-fire sales of all and any debtor assets and, particularly, allow for the establishment of court supervision over substantial asset sales. As many previous Ukrainian auctions took place in unknown locations with zero publicity and enormous price cutoffs, the new approach should allow all sales of debtor assets via e-trading services such as CETAM and ProZorro, creating transparency for both registration and bidding.

One of the main innovations of the Code is the introduction of personal insolvency. In brief, for the very first time in Ukrainian modern history, ordinary citizens with either commercial or consumer debts in distress may apply to a commercial court requesting a number of options. These include debt management (i.e. writing off some debts and scheduling instalments for others under a creditor- and court-approved repayment plan. The plan may oblige the debtor to sell some property, to limit monthly expenses to a certain point, or even to secure employment). Private individuals can also claim compulsory debt, when most of the debtor's property is subject to sale and all money received distributed between creditors.

Despite certain controversies and criticism, both Ukrainian and foreign businesses, especially lenders, have high expectations for the new Code, which will enter into force by mid-2019. The Code is actually quite a successful attempt to deal with current insolvency flaws and omissions by integrating several different bills into one single document.

However, the Code has also drawn criticism from many businesses, banks, lawyers and even judges. In particular, ever since the signing of a memorandum between the Ukrainian government and the IMF in 2010, both the IMF and World Bank have clearly indicated that any future Code should provide reliable protection of creditor interests by reducing not only the duration of procedures but also their price. This is not the case with the new Code. Ukrainian court fees for insolvency cases remain among the most expensive in Europe when compared to the money creditors receive. There have also been no significant steps towards introducing property liability for stakeholders and owners guilty of deliberate or fraudulent insolvencies.

Ultimately, the effectiveness or otherwise of the new Code will only become apparent via practical experience. Given the relatedly short five-year existence of the country’s previous insolvency law, we can only hope this new Code lasts longer and proves more effective.

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