Restructuring and insolvency law in Ukraine

The primary legislative acts governing insolvency and restructuring proceedings in Ukraine are the Code of Ukraine on Bankruptcy Proceedings No. 2597-VIII, dated 18 October 2018, which became effective on 21 October 2019 (the “Bankruptcy Code”), and the Law of Ukraine “On Financial Restructuring” No. 1414-VIII, dated 14 June 2016 (the “Restructuring Law”), as amended. Restructuring proceedings outside of insolvency proceedings are basically directed by the regular civil, security, corporate and labour law regulations.

Insolvency Proceedings

In Ukraine, there are two types of insolvency proceedings, namely corporate and consumer (see more under point 4). Under the Bankruptcy Code, corporate insolvency proceedings can be initiated by a debtor or any creditor through filing an application to a commercial court. In respect of consumer insolvency, the Bankruptcy Code allows these proceedings to be initiated only by a debtor. The debtor has to apply with a respective application to a commercial court. 

Restructuring Proceedings

Financial restructuring

Financial restructuring proceedings may be commenced only by a debtor. These proceedings may be initiated by any legal entity that has a debt to at least one financial institution. State enterprises with a special status (kazenni pidpryiemstva) and financial institutions cannot act as debtors under the Restructuring Law. To be eligible to initiate voluntary financial restructuring, a debtor should be in a critical financial condition (i.e. unable to perform its liabilities towards creditors as they fall due), but its business must be recognised as potentially viable by an independent auditor selected by the creditors. The debtor has the right to select any of its creditors to participate in the voluntary financial restructuring, one of which should in any case be a financial institution. Voluntary financial restructuring will be possible provided it is agreed by financial institutions holding at least 50% of the financial institutions’ claims (excluding the claims of financial institutions that are the debtor’s related parties). 

Pre-bankruptcy restructuring

The Bankruptcy Code provides for a possibility to commence pre-bankruptcy restructuring proceedings which are considered an out-of-court and out-of-bankruptcy settlement. Only a debtor (based on the decision of the founders (participants, shareholders)), but not the creditors, has a right to initiate pre-bankruptcy restructuring proceedings. No specific conditions are provided in law for starting this procedure. At the same time, while restructuring negotiations take place on a voluntary basis between the parties, parties have to apply to court to approve the restructuring plan in order for such restructuring plan to be enforceable against third parties (although still with some limitations). If the court finds that the restructuring plan does not meet the requirements of the Bankruptcy Code (e.g. the amounts, procedure and terms of repayment of the creditors’ claims or scope of the trustee’s powers were not indicated in it), the initiation of pre-bankruptcy restructuring proceedings will not be approved. Thus, notwithstanding the “out-of-court” nature, pre-bankruptcy restructuring proceedings still require the court’s involvement.  

Other restructuring proceedings/techniques

A debtor and its creditors may agree on a different restructuring procedure. However, in case bankruptcy commences before the agreement on voluntary restructuring is reached, the parties will most likely not be able to complete such restructuring. In any event, such arrangements are not exempt from the clawback and cherry-picking bankruptcy rules. The specific terms of such arrangements would bind the parties to the arrangement only.

Corporate insolvency

Corporate insolvency proceedings can be initiated if there are outstanding claims whose fulfilment term is due and which a debtor is unable to satisfy, or if there is a risk of the debtor’s insolvency. The Bankruptcy Code neither specifies the time frame for the claims to be overdue nor provides any requirements for the amounts of such claims. Moreover, there is no obligation for the creditor to prove the existence of other creditors having past due receivables against the debtor. The court has discretion to commence insolvency proceedings based on the documents and/or evidence provided by the debtor/creditor while applying to the commercial court to the extent they evidence that a debtor cannot pay its debts. 

Consumer insolvency

The Bankruptcy Code allows the debtor to apply to a commercial court to start consumer insolvency proceedings if at least one of the following conditions is in place:

• the value of the debtor’s overdue obligations exceeds 30 times the minimum wage
• during state enforcement proceedings (e.g. enforcing a court decision against the debtor), it has been determined that the debtor has no assets against which creditors can enforce their claims
• for the last 2 months prior to bankruptcy filing, the debtor failed to pay at least 50% of the monthly amount due under loans or other scheduled payments
• the risk of insolvency exists (e.g. where the satisfaction of claims towards one or several creditors may cause a debtor’s inability to satisfy the claims of other creditors in full).

Corporate insolvency

If the commercial court accepts the bankruptcy application and commences proceedings, notice of the same is published on the website of Ukrainian Judiciary (https://supreme.court.gov.ua/supreme/pro_sud/og_pov/). Within 30 days of publication, creditors must register their claims with the insolvency officer. Creditors should monitor the website for such notices to protect their full set of rights during all stages of insolvency proceedings.

The moment that corporate insolvency proceedings begin, it is declared that:

• creditors’ claims can be satisfied only within the framework of the insolvency proceedings
• the debtor’s property can be seized only by the commercial court, and previously existing seizures may be cancelled by the court
• penalties, fines and interest being charged on the debts cease to accrue
• a moratorium is imposed on the satisfaction of the creditors’ claims
• owners’ (shareholders’/participants’) corporate rights could be realised complying with restrictions established by the Bankruptcy Code
• decision or reorganisation or liquidation of the debtor can be made only in accordance with the Bankruptcy Code.

There are three stages which may apply during the bankruptcy proceedings depending on the debtor’s circumstances:

• asset management
• sanation (i.e. rehabilitation)
• liquidation.

Asset management

Asset management is broadly analogous to receivership in other jurisdictions. To secure the creditors’ property interests, the commercial court introduces asset management over the debtor’s property. An asset manager is appointed and conducts an analysis of the debtor’s financial state and all claims filed against it. The asset manager then implements measures to supervise and control the debtor’s property by restricting the debtor’s right to dispose of its assets. During asset management, the commercial court approves a list of creditors and their demands as well as the composition of the committee of creditors.

Asset management lasts up to 170 days from the date the commercial court starts insolvency proceedings. Depending on its results, the asset management stage may be followed by:

• sanation (rehabilitation)
• liquidation, or
• a return to solvency, payment of debts by the debtor, and termination of the insolvency proceedings. 

Normally, it is up to the creditors to decide which stage of procedure is appropriate in each case. If there is a chance to restore the debtor’s solvency and satisfy the claims of all creditors, the parties may decide to proceed with sanation (rehabilitation). However, if sanation (rehabilitation) does not seem to be realistic and fruitful for the creditors, then liquidation should be implemented.

Sanation (rehabilitation)

Sanation is broadly analogous to a rehabilitation procedure in other jurisdictions and includes a system of measures aimed at restoring the debtor’s solvency and discharging its outstanding debts. The commercial court starts the sanation procedure at the request of the committee of creditors. It may include measures such as refinancing, rescheduling of debt payments, restructuring of the debtor or its business, closure of unprofitable manufacturing facilities, sale of the debtor’s property, employee lay-offs, etc.

During sanation, the debtor’s directors are suspended and its governing bodies are dissolved. All powers are transferred to a certified sanation manager. The Bankruptcy Code does not limit the term of the sanation period, enabling parties to implement long-term restructuring programmes and restore the debtor’s solvency.

Sanation is followed by:

• liquidation, or
• a return to solvency, payment of debts by the debtor, and termination of the insolvency proceedings.

Liquidation

Liquidation begins when the commercial court declares the debtor insolvent. Insolvency occurs if:

• no settlements have been made with creditors within the timeframe envisaged by the sanation plan and the committee of creditors has not filed a petition to extend it, or
• funds from the sale of the debtor’s property during the sanation period do not satisfy all the demands of creditors.

The liquidation procedure focuses on realising and distributing the debtor’s assets. A standard liquidation procedure may not exceed 12 months. Overall, the winding up of the debtor is organised and carried out by a liquidator (or a liquidation commission) appointed by the court.

The commercial court may terminate bankruptcy proceedings, in particular, when:

• the debtor has completely discharged all its liabilities to its creditors
• the court approves the sanation manager’s report certifying that all the demands of registered creditors have been satisfied and the debtor has returned to solvency, or
• the court approves the liquidator’s report certifying that the claims of registered creditors have been discharged.

Note that the Bankruptcy Code does not contain provisions for amicable settlements. These provisions were intentionally deleted in order to emphasise the sanation procedure.

Consumer insolvency

If the commercial court accepts the bankruptcy application and commences proceedings, notice of the same is published on the website of Ukrainian Judiciary (https://supreme.court.gov.ua/supreme/pro_sud/og_pov/). Within 30 days of publication, creditors must register their claims with the insolvency officer. Creditors should monitor the website for such notices to protect their full set of rights during all stages of insolvency proceedings.

The moment that insolvency proceedings begin, it is declared that:

• claims of secured and unsecured creditors (see point 5) can be satisfied only within the framework of the insolvency proceedings
• the debtor’s property can be seized only by the commercial court, and previously existing seizures may be cancelled by the court
• penalties, fines and interest being charged on the debts cease to accrue
• a moratorium is imposed on the satisfaction of the creditors’ claims
• all monetary obligations of the debtor are considered due immediately, and
• any alienation and disposal of the debtor’s property can be carried out solely in accordance with the Bankruptcy Code.   

Preliminary hearing

No later than 60 days from the start of insolvency proceedings, a preliminary hearing should be conducted. The commercial court requires the restructuring manager to arrange a meeting of creditors to consider a restructuring plan. As a rule, the restructuring plan will identify which outstanding claims of the creditors will be forgiven. At the meeting, the creditors must decide to:

• approve the restructuring plan
• reject the restructuring plan and request the court to launch a debt repayment procedure, or
• ask the court to close the insolvency proceedings.

Debt repayment procedure

If the restructuring plan is approved, the restructuring manager asks the commercial court to confirm it within 3 days. The court, however, will not confirm the plan if the debtor has outstanding debts that are non-dischargeable (i.e., are not written off despite the insolvency), such as alimony payments or compensation due for causing an injury. Once plan is approved, the debtor then proceeds to satisfy the creditors’ claims in accordance with the plan. Upon the successful completion of the plan, the insolvency proceedings are closed, and the claims that were agreed to be forgiven (other than non-dischargeable debts) cease to exist.

If the restructuring plan is not completed or approved by the creditors or court, the debtor is declared insolvent and the debt repayment procedure begins. In this case, creditors file their claims against the debtor. All of the debtor’s property is realised. The claims of secured creditors are satisfied from the proceeds of property used to secure those debts, and the claims of unsecured creditors are satisfied from the remaining proceeds in the order of priority set out in the Bankruptcy Code. Remaining claims that cannot be satisfied due to a lack of assets are discharged.

The following types of debt are non-dischargeable:

• alimony payments
• compensation due for causing injury to the health or the death of an individual
• lump sum payments owed to the compulsory state social insurance
• other obligatory payments for the compulsory state social insurance.

At the end of the debt repayment procedure, the commercial court closes the insolvency proceedings and makes a decision to release the debtor from his/her debts, except for non-dischargeable debts.

Indebtedness secured by a mortgaged residential property

Currently, mortgaged residential property securing foreign currency consumer loans cannot be enforced (subject to certain exemptions), including under insolvency proceedings, due to an existing moratorium. From 21 October 2020, however, creditors will be able to enforce indebtedness secured by a mortgaged residential property. At the same time, within 5 years from the adoption of the Bankruptcy Code (until 18 October 2023), an individual debtor can, by initiating an insolvency procedure, restructure its indebtedness under foreign currency loans granted by Ukrainian banks to individuals by preparing a debt restructuring plan or by an amicable settlement, the terms of which must not be worse than those established by law.

Financial restructuring

Under this procedure, the restructuring plan can specify different ways of restructuring claims including: 

• termination or amendment of agreements
• issuance of securities
• satisfaction of claims
• reorganisation, e.g. merger, corporate consolidation, spin-off and split
• debt forgiveness
• attracting new investments to the debtor’s capital.

Pre-bankruptcy restructuring

The procedure includes the elaboration and adoption of the restructuring plan, which may consist of the same restructuring methods as in bankruptcy proceedings. Additionally, the restructuring plan can provide for the adoption of measures to obtain loans, as well as propose the split of creditors participating in the restructuring proceedings into different categories. To approve the restructuring plan, the debtor convenes a meeting of creditors by written notification of all creditors who are to take part in the restructuring. In case the restructuring plan provides for participation of secured creditors, such plan must be approved by the secured creditors (in each category) holding two thirds of creditors’ votes out of the total amount of secured claims included in the restructuring plan. If the restructuring plan foresees a change in the priority of claims of secured creditors, each of them has to vote for such a plan. Moreover, the restructuring plan must be approved by unsecured creditors (of each category) holding more than 50% of the total amount of unsecured claims included in the restructuring plan in the respective category. The application of any restructuring methods in the course of a pre-bankruptcy restructuring procedure should be approved by the court and should not take longer than 12 months.

At the same time, there is a risk that creditors that do not take part in a pre-bankruptcy restructuring can initiate bankruptcy proceedings. It is thus prudent to involve all creditors in the pre-bankruptcy proceedings

The Bankruptcy Code classifies creditors into categories depending on the type of claims and the existence of collateral. There are three types of creditors:

• secured creditors – creditors whose claims are secured by the debtor’s property or any other security interest
• unsecured creditors – creditors whose claims arose before the opening of insolvency proceedings, fulfilment of which is not secured by the debtor’s property or any other security interest
• current creditors – creditors whose claims arose after the commencement of insolvency proceedings.

Based on the category of creditors, the sequence of fulfilment of their claims in the course of insolvency proceedings differs. 

Secured creditors

Secured creditors’ claims should be satisfied outside the priority sequence from the proceeds of the property used to secure those debts. 

Unsecured creditors

Unsecured creditors’ claims should be fulfilled only after inter alia the discharge of different social payments, compensation for death or injury caused to individuals and tax payments. 

Current creditors

Unlike with secured and unsecured creditors, satisfaction of current creditors’ claims arising after the opening of bankruptcy proceedings are not subject to a moratorium. This means that the debtor can freely pay such claims to the current creditors ahead of other creditors until liquidation begins. Any disputes between current creditors and the debtor are resolved by the commercial court considering the bankruptcy case. In case current creditors’ claims that have arisen after the commencement of bankruptcy proceedings remain unsatisfied when the liquidation procedure begins, such claims will be fulfilled in the same way as those of unsecured creditors, i.e. only after inter alia the discharge of different social payments, compensation for death or injury caused to individuals and tax payments.

Moreover, for the purposes of approving/rejecting the sanation (rehabilitation) plan, all creditors are divided into classes. Secured creditors form a separate class. Creditors included in each of the priority lines constitute a separate class (six in total based on this criterion). Those creditors whose claims belong to two or more priority lines should accordingly be included in two or more classes. The decision on approving/rejecting the sanation (rehabilitation) plan should be approved separately by each class of creditors by way of voting.

Under the Bankruptcy Code, within a 1 month period, the debtor is obliged to apply to the commercial court with a request to open insolvency proceedings in case the fulfilment of claims of one or more creditors leads to failure to fulfil the debtor’s obligations in full to all other creditors (i.e. the risk of insolvency exists). The Bankruptcy Code specifically provides for joint and several liability of the management of the company for non-compliance with the above obligation. 

Where insolvency is the result of the representative bodies’ mismanagement or destructive interference, managers (shareholders, owners) will bear the subsidiary liability in case of lack of debtor’s property to satisfy all creditors’ claims. 
Note that fault of the representative bodies in mismanagement and/or destructive intervention should be proven by the court

Under the Bankruptcy Code, the representative bodies are under the obligation to take timely measures to prevent the insolvency of the debtor and file for bankruptcy in a timely manner as discussed in point 6 above. 

The representative bodies do not participate in insolvency proceedings as such. At the same time, even after launching insolvency proceedings, representative bodies continue to operate the company until the sanation (rehabilitation)/liquidation procedure (depending on the creditors’ discretion) is initiated. 

The main duties during all stages of the insolvency proceedings are maintained by a trustee (insolvency/bankruptcy manager).

In particular, the trustee exercises inter alia the following functions:

• enjoys all rights of an asset manager (in asset management), a rehabilitation manager (in sanation), and a liquidator (e.g. sells the debtor’s property and distributes between creditors)
• convenes a creditors’ meeting and creditors’ committee and participates in such meetings and committees with an advisory vote
• obtains information from the state registers
• applies to the commercial court with various claims (e.g. invalidation of agreements, challenging of creditor’s claims etc.).

The representative bodies of a legal entity are not involved in restructuring/insolvency proceedings as such (see more in point 7). At the same time, the Bankruptcy Code allows representative bodies of the company to participate in the creditors’ committee with an advisory vote, which means that representative bodies may also take part in upholding decisions regarding the invalidation of burdensome agreements, applying to the commercial court with a request to appoint/fire the trustee and/or decide on extending/shortening the duration of asset management and/or sanation (rehabilitation) procedures etc.

The Bankruptcy Code specifically provides that shareholders of the company are obliged to take timely measures to prevent insolvency of the debtor. 

Also, shareholders of the company take a decision on initiating pre-bankruptcy restructuring proceedings in order to restore solvency of the debtor. In the course of pre-bankruptcy restructuring proceedings, shareholders may provide the debtor with financial assistance in the amount which is required for debt repayment.

On a separate note, shareholders may take part in the creditors’ committee with an advisory vote.

As a general rule, shareholders of the company are not involved in restructuring/insolvency proceedings as such (see more in point 7). At the same time, the Bankruptcy Code allows shareholders to participate in the creditors’ committee with an advisory vote, which means that shareholders also take part in upholding decisions regarding the invalidation of burdensome agreements, applying to the commercial court with a request to appoint/fire the trustee and/or decide on extending/shortening the duration of asset management and/or sanation (rehabilitation) procedures etc.

Solvent liquidation is an available mechanism. At the same time, it entails satisfaction of all creditors’ claims who have to be notified in the process of solvent liquidation. Thus, if this is not possible, it is very likely that one of the creditors will file a bankruptcy application to the commercial court with respect to the debtor. 

Financial and pre-bankruptcy restructuring proceedings described in points 2 and 4 above are to some extent bankruptcy prevention instruments.

Corporate insolvency

Historically, in-court rehabilitation procedures were rarely used to restore a debtor’s solvency.  Even if used, the result was far from desirable. This was because in most cases, parties tried to restructure the debts out-of-court first; if they did not succeed, they went into insolvency to go directly to liquidation in order to get whatever was possible from the debtor’s assets. As a general rule, insolvency proceedings were lengthy and generally inefficient. As a result, insolvency proceedings did not compensate creditors for the time and money spent. 

However, the adoption of the Bankruptcy Code specifically aims to change this practice and to put more emphasis on the debtor’s rehabilitation. Given that the Bankruptcy Code has been in force for less than 10 months, it is too soon to judge if the new corporate insolvency proceedings in Ukraine have indeed become more efficient.  

Consumer insolvency

As the concept of consumer insolvency in Ukraine has only been established recently, there is insufficient public information available regarding its efficiency. 

Pre-bankruptcy rehabilitation

The pre-bankruptcy rehabilitation procedure is not very popular in Ukraine and companies rarely resort to this type of proceedings. Based on publicly available information, during the period 2013-2017, only 37 rehabilitation plans in terms of pre-bankruptcy rehabilitation proceedings were approved by the commercial courts. At the same time, the newly-adopted Bankruptcy Code provides for certain significant changes to the existing pre-bankruptcy rehabilitation procedure. However, being very new, the “upgraded” pre-bankruptcy rehabilitation procedure has not yet been widely tested, thus conclusions about its effectiveness are premature.

Financial restructuring proceedings

Based on publicly available information, as of 6 August 2020, 38 financial restructuring proceedings have been conducted under the Restructuring Law. Given that this law has been in force for almost 4 years, the number of restructuring cases is not significant. In addition, most of the restructurings were those effected regarding debtors’ indebtedness toward state banks. Thus, the law is seen as being mainly of use to state banks as the only clear legal grounds enabling them to use such restructuring methods as debt forgiveness without bearing the risk of criminal liability towards the state. Therefore, the Restructuring Law has not met the expectation of the lawmakers and has shown its inefficiency.  

On 19 September 2019, the Law of Ukraine “On Amendments to Certain Laws of Ukraine on Improvement of Financial Restructuring Procedure” was adopted, which extended the legal force of the Restructuring Law for another 3 years until 19 October 2022 and introduced a new procedure, namely a joint financial restructuring procedure for several debtors (related parties) that have different creditors. These legislative changes aim to reduce regulatory restrictions on financial restructuring and facilitate the full implementation of bank restructuring practices, which may give another life to the financial restructuring procedure under the Restructuring Law.