Ukrainian Bankruptcy Law

Ukrainian Bankruptcy Law

I. Introduction

From the time of its adoption until its replacement in 1999, the Law “On Bankruptcy,”

No. 2344-XII (dated May 14, 1992, effective July 1, 1992), was never very effective. Although it was in force during the most difficult times of the Ukrainian transitional economy, the strict enforcement of the old bankruptcy law would have led to mass bankruptcy for most Ukrainian enterprises since the definition of “bankruptcy” would have applied to most of the existing Ukrainian enterprises. Economic collapse, resulting from mass bankruptcies, would have been unavoidable if the Ukrainian government tried to apply Article 1 of the old bankruptcy law, which quite fairly defined “bankruptcy” as the debtor’s inability to satisfy creditor demands due to insufficient liquidity of funds.

On June 30, 1999, the Parliament passed Law No. 784-XIV “On Introducing Changes to the Law of Ukraine ‘On Bankruptcy.'” Notwithstanding the modest title of the Law, these so-called “changes” were actually an entire re-working of the old bankruptcy law, starting with the current name. Henceforth, the Law “On Bankruptcy” is now referred to as the Law “On Restoration of the Solvency of a Debtor or Recognition of a Debtor as Bankrupt” (the “Law”). This version of the bankruptcy law took effect on January 1, 2000. Changes were constantly introduced to the improved Law up until December 22, 2011, when the Parliament once again passed an entirely new version of the Law, which came into effect on January 18, 2013. Below we analyze the current and projected effects of the latest version of the Law.

As a background, the Law was initially drafted by the State Agency on Bankruptcy Issues, which has the authority to define policies and set the procedures for preventing the bankruptcy of debtors. Not surprisingly, the drafters of the Law took upon themselves a wide variety of responsibilities in ensuring the proper implementation of the organizational, economical and other terms and conditions of the Law. These responsibilities include: proposing the candidates and providing training for arbitration administrators; creating a unified database of enterprises subject to bankruptcy proceedings; and organizing the expert examination of state-owned enterprises and enterprises with 25% or more state-owned shares for purposes of bankruptcy proceedings, among others.

The difference between the original and current bankruptcy laws is striking: whereas the original bankruptcy law focused primarily on liquidating the indebted enterprise, the latest bankruptcy law focuses, first and foremost, on restoration of the debtor’s solvency. Under this approach, an enterprise may accordingly be deemed bankrupt and liquidated only if implementation of the procedures in the new law to restore solvency have failed. At this stage, creditors must put their faith in a so-called “arbitration administrator” to gather up the pieces of the indebted enterprise and attempt to generate a rebirth of the economic activity of the enterprise in order to restore its ability to repay creditors. The role of this new entity in Ukrainian legislation, the arbitration administrator, is discussed in greater detail below.

Importantly, the latest bankruptcy legislation provides for bankruptcy of physical persons (i.e., individuals, private entrepreneurs and sole-proprietors) as well as legal entities. In contrast to the former bankruptcy law, which did not permit the seizure of citizens'(subjects’of entrepreneurial activity) property, the latest Law provides that property of citizens, who are registered as individual entrepreneurs, may be seized during bankruptcy proceedings in order to satisfy creditor claims. If actually enforced, this can become a useful deterrent to those individuals who once felt confident striking deals without the consequence of losing their personal property. The Law also provides a barrier for any semi-legal schemes to alienate property to related entrepreneurs/legal entities before bankruptcy proceedings set in. In particular, any agreements on the alienation of the property of individual entrepreneurs made in the year before bankruptcy proceedings are initiated can be recognized as invalid in certain circumstances at the request of at the request of the arbitration administrator or a recognized creditor.

II. Pre-Bankruptcy Measures

As mentioned above, the goal of the Ukrainian bankruptcy law is to avoid bankruptcy of the debtor to the extent possible. For this purpose, the Law obliges all debtors to take all steps possible to avoid bankruptcy proceedings. This obligation is laid upon of founders (participants or shareholders – hereinafter “shareholders”) of the debtor, the administrator of the debtor’s property and the executive branch of the government. If any signs of bankruptcy arise, the chief executive officer of the debtor is obliged to immediately inform its founders (participants or shareholders) and its property administrator.

This strict obligation is designed to provide the shareholders, property administrator, creditors and other parties a timely opportunity to grant financial aid to cover the cash debts of the debtor before its creditors, including the tax authorities and the pension and social insurance funds. Alas, this strict obligation does not oblige the debtor to warn creditors about bankruptcy signs and, therefore, most foreign creditors are never aware that bankruptcy may afflict the debtor in the near future.

The past versions of the Law provided for a so-called “rehabilitation procedure” during bankruptcy proceedings in the event that the debtor or creditor were able to agree upon a system of measures to restore the “health” or solvency of the debtor. This rehabilitation procedure remains in the latest version of the Law; additionally, however, a pre-bankruptcy rehabilitation procedure has been added. This way, prior to bankruptcy proceedings, the debtor’s shareholder(s), property administrator, creditor(s) or other party may apply commercial, administrative, investment, technical, financial and/or legal measures under a rehabilitation plan in order to avoid bankruptcy proceedings at all costs.

a. Pre-Bankruptcy Rehabilitation

The debtor or a creditor may initiate a rehabilitation procedure prior to bankruptcy proceedings by concluding an agreement either prior to or after the indebtedness of the debtor arises. Thus, if a debtor can foresee or knows that it will not be able to cover its debt before a creditor, then it can make a good-faith suggestion to undergo a rehabilitation procedure even before the repayment date of the debt arises. Unfortunately, most Ukrainian companies never take such precautionary measures, preferring instead to continue admitting to the debt after the repayment period has passed, but not making any effort to repay due to the “current economic crisis”.

Again, herein lays one of the many faults of the Ukrainian bankruptcy system: it gives the Ukrainian debtor a chance to recognize its inability to pay and show its willingness to work with the creditor in finding a viable solution, but it would only serve as a warning to the creditor that bankruptcy proceedings may be on the horizon. Unfortunately, Ukrainian companies are notorious for filing for bankruptcy and only giving creditors notice of such filing via Ukrainian newspapers, which are not published outside of Ukraine and seldom followed by foreign creditors. As a result, a Ukrainian court, especially a corrupt court, can rule that foreign creditors were provided with sufficient notice of bankruptcy proceedings and their late credit claims will not be recognized in the bankruptcy proceedings. Unfortunately, all too often foreign creditors only find out about their Ukrainian debtor’s bankruptcy proceedings after their numerous requests for repayment lead them to take legal measures or, in the very least, check the unified state register for bankruptcy proceedings against their Ukrainian counterpart.

Nevertheless, the latest version of the Law does stipulate that the parties may set forth in their initial agreement that a pre-bankruptcy rehabilitation procedure is mandatory for the debtor. Accordingly, foreign creditors would be wise to include such obligation into their agreements with Ukrainian counterparts as an argument for being included into the list of creditors should bankruptcy proceedings be initiated without their knowledge.

A pre-bankruptcy rehabilitation procedure may be initiated under three conditions: (i) written consent of the debtor’s property administrator (if applicable) is received; (ii) written consent of all of the debtor’s creditors, who have claims in aggregate exceeding 50% of the debtor’s overall creditor claims, is obtained; and (iii) the rehabilitation plan is agreed upon in writing by all secured creditors and approved by the debtor’s creditor committee (see below). There are no specific requirements for the contents of a pre-bankruptcy rehabilitation plan; however, it may contain the same provisions as those discussed below with respect to rehabilitation plans concluded during bankruptcy proceedings.

The conditions of a rehabilitation plan with respect to the satisfaction of claims of creditors, who did not participate in the voting for pre-bankruptcy rehabilitation or who voted against such rehabilitation, must be on equal conditions with the satisfaction of claims of creditors, who voted in favor of the rehabilitation plan. In general, a pre-bankruptcy rehabilitation plan may separate participating creditors into categories depending on types of claims and whether claims are secured. Moreover, such pre-bankruptcy rehabilitation plan may provide for different procedures for satisfying claims of different categories of creditors. The plan may even provide for the appointment of a sanation administrator for all participating creditors.

Procedurally, the debtor convenes the creditor committee by sending written notice to all creditors in its accounting books. An announcement of the creditor committee’s intended meeting must be published on the website of the state bankruptcy body and the highest commercial court of Ukraine. Once a pre-bankruptcy rehabilitation plan is approved by the creditor committee, a petition on its approval must be submitted to the commercial court at the location of the debtor along with the rehabilitation plan, the minutes of the creditor committee meeting, the list of all creditors, written objections of participating creditors (if any), and the court filing fee.

The commercial court will issue a decision to review the rehabilitation plan within five (5) days from the receipt of the petition and appoint a time and place for a court hearing. A copy of the said decision must be sent to the debtor and all creditors indicated in the petition. The commercial court will also publish notice concerning its decision to consider the rehabilitation plan on the website of the highest commercial court. This notice must contain the name and identification code of the debtor, the case number, the name of the relevant commercial court and the date of the first court hearing.

The commercial court has up to one (1) month to consider the rehabilitation plan once it is accepted for consideration. The commercial court is obliged to hear the objections of any creditors who voted against the rehabilitation plan at the creditor committee meeting. The court will reject the plan if it discovers any violations of the law during the creditor committee meeting, which may have influenced the voting. It will also reject the rehabilitation plan in the following cases:

1) if a creditor, who did not participate in the voting or who voted against the plan’s approval, proves that in case of the debtor’s liquidation its creditor claim would have been satisfied in an amount that exceeds the amount of claims, which will be satisfied pursuant to the rehabilitation plan;

2) the absence of written consent to the rehabilitation plan by all secured creditors;

3) the debtor provided inaccurate information regarding its indebtedness.

If the rehabilitation plan passes the commercial court’s examination, then the court will issue a decision to such effect and institute a moratorium on the satisfaction of creditor claims. The moratorium will apply to all creditor claims which arose prior to the court’s confirmation of the rehabilitation plan.

Even if the commercial court rules against the rehabilitation plan, the creditor committee may once again approve a rehabilitation plan and the debtor may apply to the commercial court for its confirmation of such plan.

A pre-bankruptcy rehabilitation plan may only be effective for a maximum period of twelve (12) months from the date of the court’s confirmation of the plan. During this period, the debtor and any other creditors may not apply for the initiation of bankruptcy proceedings against the debtor. Moreover, the moratorium on the satisfaction of any creditor claims will be effective for the duration of the rehabilitation plan.

III. Initiating Bankruptcy Proceedings

In Ukraine, bankruptcy proceedings are carried out in commercial courts, rather than in specialized bankruptcy courts, and take place at the location of the debtor according to the rules set forth in the Commercial Procedure Code of Ukraine and the specific provisions set forth in the Law. According to the Law, either creditors or the debtors themselves may submit an application to a commercial court to initiate bankruptcy proceedings.

As a general rule, bankruptcy proceedings may only be initiated if the amount of the indisputable claims of creditors toward the debtor aggregately equal no less than 300 minimum monthly salaries, which remained unsatisfied for a duration of three months after the agreed upon date of repayment. For example, in February 2013 this figure was approximately 344,100 Ukrainian Hryvnias (or approximately 43,012 US Dollars), based on then effective minimum monthly salary of 1,147 Ukrainian Hryvnias per month (which is expected to increase on December 1, 2013 to 1,218 Ukrainian Hryvnias per month). This threshold can be critical to the rights of smaller creditors because an enterprise can legally avoid fulfilling its obligations by keeping the amount of its indebtedness within the above limit.

On April 3, 2003, the Ukrainian Parliament adopted amendments to the Law (the amendments came into effect on May 31, 2003), which place creditors into various prioritized groups rather than the formerly established equal possibilities for the satisfaction of creditor claims. In the latest version of the Law, which came into force on January 18, 2013, creditors are broken down into “competitive creditors”, “current creditors” and “secured creditors”. “Competitive creditors” are defined as follows: “creditors with claims toward a debtor which arose before the initiation of bankruptcy proceedings, and claims, which are not secured by pledge of property of a debtor”. “Current creditors” are defined as creditors with claims toward a debtor which arose after the initiation of bankruptcy proceedings.” The novelty for 2013 is the welcome specification of “secured creditors”, which are defined as creditors whose claims are secured by pledge (lien, attachment, mortgage, etc.) of the property of the debtor (or property surety or guarantor).

As a result of this grouping of creditors, the moratorium on the satisfaction of claims (discussed below) will not apply to all of the debtor’s obligations that arise after the initiation of bankruptcy proceedings. Thus, the debtor is now able to create new debts, but some obligations of creditors will be covered immediately and other earlier debts subject to the moratorium will be covered in deferment.

A. Documentation

1. The Application

In order to initiate bankruptcy proceedings, a written application must be submitted to the relevant commercial court and subsequently signed by the chief executive officer of the debtor, a creditor or a citizen-subject of entrepreneurial activity (or a duly authorized representative).

The application must include the following information:

a) the name of the commercial court to which the application is submitted;

b) the name (surname, first name and patronymic), place of location (residence), identification code (for legal entities) and taxpayer registration number (if applicable) of the debtor;

c) the name (surname, first name and patronymic), place of location (residence), identification code (for legal entities) and taxpayer registration number (if applicable) of the creditor;

d) a description of the circumstances substantiating the application;

e) the list of documents attached to the application.

The following documents must be submitted along with the application:

a) an extract from the Unified State Register of Legal Entities and Natural Persons-Entrepreneurs in relation to the debtor;

b) confirmation of the payment of the court fees (except for cases when the law exempts payment);

c) the power of attorney or other document, which confirms the authority of the submitting party’s representative (if the application is signed by a representative);

d) proof that the amount of indisputable creditor claims aggregately amount to no less than three hundred (300) minimum monthly salaries, unless otherwise provided by the Law;

e) the legally effective court decision on the satisfaction of creditor claims;

f) the corresponding order of the state enforcement agency on the opening of enforcement proceedings to satisfy creditor claims;

g) proof that the amount of creditor claims is not fully secured by a pledge of property of the debtor (if applicable).

2. Initiation of Bankruptcy by the debtor

The debtor itself may initiate bankruptcy proceedings only if such debtor has sufficient property/funds to cover the legal costs of the bankruptcy proceedings. In this case, the debtor must submit additional information/documents along with its application, including:

a) the debtor’s founding documents (for legal entities);

b) the debtor’s accounting balance on the last reporting date;

c) the list of the debtor’s creditors, whose claims are recognized by the debtor, with an indication of the total amount of monetary claims of all creditors, and in relation to each creditor – his/her/its name, place of location or residence, identification code (for legal entities) or taxpayer registration number (if applicable), their amounts of monetary claims (total amount of indebtedness, indebtedness under principal obligations and amounts of penalties), the grounds for the accrual of obligations, and the term for the performance of such obligations pursuant to the law or an agreement;

d) a list of the debtor’s property with an indication of its balance value and location, and the total balance value of all property;

e) a list of the debtor’s property, which is subject to a pledge or is encumbered in other manners, its location and value as well as information on creditors in favor of which the debtor’s property is attached, their names, place of location (residence), identification code or taxpayer registration number, the amounts of creditor claims, the grounds for the accrual of obligations, and the terms for the performance of such obligations pursuant to the law or an agreement;

f) a statement/certificate from the privatization body (body authorized to manage state property) regarding the existence or absence of state property on the balance of the debtor, which was not contributed to the debtor’s authorized capital during privatization or corporatization;

g) the list of entities, which have unperformed obligations before the debtor with an indication of the value of such obligations, the term for performance and the grounds from which they arise (arose);

h) information about all of the debtor’s bank and other accounts and their requisites; i) information about all of the debtor’s securities accounts and their requisites;

j) the minutes of the general meeting (conference) of the debtor’s employees, the corresponding decision of the debtor’s primary trade union (if several – their joint decision) at which the employee representative was elected to participate in the bankruptcy proceedings (if such meeting or conference took place prior to the submission of the debtor’s application to the commercial court);

k) a copy of the special permit to conduct activity connected with state secrets, and in case of the expiration of such permit – a statement/certificate on the debtor’s possession of material carriers of secret information (technical documentation, products and their exploratory prototypes, etc.);

l) the decision of the debtor’s property administrator on the appeal to the commercial court to initiate bankruptcy proceedings;

m) other documents which confirm the insolvency of the debtor.

The Law makes it mandatory for debtors themselves to initiate bankruptcy proceedings in certain circumstances. Such circumstances include cases in which: (i) the satisfaction of claims of one or more creditors will lead to the impossibility of completely performing the debtor’s monetary obligations before other creditors (threat of insolvency); (ii) the liquidation of a debtor reveals its inabilit y to fully repay creditor claims; and (iii) other cases provided by the Law.

3. Initiation of Bankruptcy by a Creditor

The bankruptcy application of a creditor must contain information concerning the amount of the creditor’s claims against the debtor with a separate indication of the amount of penalties (fines, forfeits, etc.) and must include the following documents:

a) The executive (enforcement) order against the debtor;

b) Proof that copies of the creditor’s application and all attached documents were sent to the debtor;

c) In case the creditor is the state tax authority or other state body that exercises control over the correctness and timeliness of the payment of taxes and duties (mandatory payments) and pension and social insurance contributions, then such state body must include proof of its application of all measures to receive the debt amount pursuant to the procedure established by law.

The Law liberally permits a creditor to consolidate all of its claims toward the debtor into one application. Further, several creditors may unite their claims into a single application, which entails affixing the signature of each creditor onto the application and creating a so-called “creditor committee” to represent the interests of all creditors.

Upon submission of an application, the creditor(s) must send a copy of the application and all attached documents to the debtor. Of course, the creditor(s) must also pay an application fee. Once all of the above documents and information are properly submitted, the court begins to review the application in the order it was presented on the court’s docket.

The commercial court judge may reject an application for any number of reasons. For example, an application may be refused in the following cases: if the court lacks jurisdiction, a pre-bankruptcy rehabilitation plan has been approved by the commercial court, creditor claims are fully secured by pledge, or bankruptcy proceedings have already been initiated in relation to the debtor. The judge’s refusal will be sent to the applicant within five days from the date of the application’s submission, and will be accompanied by the application itself and the supporting documents.

In accordance with Ukrainian court practice, the judge of the relevant commercial court will refuse to accept any applications that have not been duly executed. Reasons for refusal may include improper signature authorization, omission of the applicant’s position or omission of the required personal information concerning the applicant. Applications may also be refused if they are not submitted in a timely fashion, or if the document evidencing payment of the application fee is not attached. Other reasons are provided by Article 62 of the Commercial Procedural Code of Ukraine for refusal as well.

If an application is submitted but rejected, the applicant can make the proper amendments and re-apply with the commercial court for consideration of the amended application. In cases when several creditors submit applications against a debtor, and one or more applications are returned without being reviewed, the judge will still consider the remaining duly filed applications. Any applicant may appeal a judge’s decision to return an application.

Finally, applicants may recall their applications any time before the initial (preparatory) sitting of the court takes place. The court will refuse to recall an application if such recall will violate any of the rights or interests of any party or the commercial court received another application (applications) of a creditor (creditors). It will also refuse to recall a debtor’s application in cases when the debtor’s bankruptcy filing is mandatory by law.

Once the above application procedure has been closed, the judge must decide whether to accept the application(s) within five days from the date of submission. The decision to accept an application will contain the date of the preparatory sitting of the court and the name of the arbitration administrator, who is automatically selected from the licensed arbitration administrators listed in the Unified Register of Arbitration Administrators (Property Administrators, Rehabilitation Administrators, Liquidators) of Ukraine.

The commercial court has the right to include in its decision: (i) the obligation of the applicant, debtor and other parties to provide additional information necessary to conclude the bankruptcy proceedings and (ii) the application of measures related to the securing of creditor claims by way of bans on the debtor’s property administrator or a prohibition on the debtor to initiate liquidation, reorganization or alienation of fixed assets.

The court’s decision to accept a bankruptcy application is sent to the interested parties, the state enforcement service at the debtor’s place of location (residence), the state registrar at the debtor’s place of location or residence, the arbitration administrator and, if applicable, the state body responsible for administering the debtor’s state property if state property comprises over 50% of the debtor’s authorized capital. At this point, the initiation of the bankruptcy proceedings officially begins.

B. Initiation of Bankruptcy Proceedings

After the court has decided to accept an application, it will indicate the date and time for carrying out a preparatory hearing of the commercial court, which must take place no later than fourteen days after the date the application is accepted or, if valid grounds (repayment of debts to creditors) exist, no later than thirty days. In the past, the judge could also choose to appoint the asset administrator at the preparatory sitting rather than upon acceptance of the application. However, the Law has introduced a new automated system for choosing arbitration administrators with the hope of avoiding corruption from judges and other parties in choosing a “loyal” arbitration administrator.

The debtor must officially respond to the initiation of bankruptcy proceedings. This written response should contain the name of the creditor and case number along with the following: (i) any objections the debtor has towards the claims of the applicant(s) (with references to the law); (ii) the documents supporting the debtor’s objections (with a power of attorney if the official response is submitted by the debtor’s legal representative); (iii) evidence that the response was sent to the applicant(s); (iv) the total amount of debt which must be paid in cash, including salaries in arrears and past due social insurance contributions, taxes and duties; and (v) information concerning the debtor’s property, including all bank and securities accounts and the requisites of its banks, depositories, securities custodians, etc.

1. The Preparatory Hearing

The first time the parties gather to prepare for the bankruptcy procedure is at the preparatory hearing of the commercial court. At this hearing, the judge considers all of the documentation submitted by the parties and listens to any objections or explanations by the parties. In case a creditor initiated the bankruptcy proceedings, the commercial court will verify the grounds for the creditor’s claims, their nature and whether the creditor took measures for the mandatory execution of its claims pursuant to the enforcement procedure prior to filing the bankruptcy claim. In case the debtor applies for bankruptcy, the preparatory hearing will be used to establish the facts of the debtor’s insolvency or the threat of insolvency.

If the commercial court receives several bankruptcy applications prior to the date of the preparatory hearing, and bankruptcy proceedings have been initiated under one of the applications, then the commercial court unify all such applications into the initiated case and simultaneously consider all applications. If any one of the applications is deemed unsubstantiated by the commercial court, it will still assess the other applications and join them into the bankruptcy proceedings.

The judge will use the preparatory hearing to determine the extent of the debtor’s insolvency. If necessary, the judge may appoint an expert examination of the debtor’s financial status pursuant to the Law “On Expert Court Examinations”. After it considers the bankruptcy application and the debtor’s official response (and any objections) the commercial court will decide whether to proceed with the bankruptcy.

The court will refuse to initiate bankruptcy proceedings in the following cases:

a) the applicant hasn’t provided sufficient grounds for initiating bankruptcy proceedings;

b) the creditor claims are fully secured by the debtor’s property;

c) the creditor claims prove the existence of a legal dispute which should be resolved by submission of another type of legal claim;

d) the creditor claims were completely satisfied by the debtor prior to the preparatory sitting;

e) the creditor claims lack judiciability (i.e., they do not exceed the threshold of 300 minimum monthly salaries and/or are not indisputable claims and/or their term for

performance has not exceeded three months, etc.);

f) the application is returned to the applicant to remove errors or the application has been recalled by the applicant prior to the preparatory hearing.

Should the commercial court rule that the bankruptcy case may proceed against the debtor, it will issue a corresponding decision with the following information:

a) recognition of the creditor claims and their amounts;

b) imposition of a moratorium on the satisfaction of creditor claims;

c) implementation of the procedure for property disposal;

d) appointment of an asset administrator and the establishment of his/her salary amount and source of payment;

e) implementation of measures to secure the creditor claims (ban on the debtor or its property manager from taking decisions on liquidation or reorganization of the debtor or from alienating fixed assets and pledged property);

f) the term for the asset administrator’s submission of information on the results of its review of creditor claims (this term may not exceed one month and twenty days from the date of the preparatory hearing);

g) the date by which the asset administrator must compile the register of creditor claims and submit it for approval to the commercial court (no later than one month and twenty days after the preparatory hearing);

h) the date of the preliminary hearing (no later than two months and ten days from the date of the preparatory hearing, and in case of several creditors – no later than three months from the date of the preparatory hearing);

i) the term for the asset administrator’s inventory of the debtor’s property, which may not exceed two months from the date of the preparatory hearing, and in case of an extensive volume of property – three months from the date of the preparatory hearing.

For the purpose of finding all creditors and other parties who wish to participate in the rehabilitation of the debtor, an official announcement will be published regarding the intiation of bankruptcy proceedings against the debtor on the official website of the Highest Commercial Court of Ukraine. The announcement must include the full name of the debtor, its postal address, bank requisites, the name and address of the commercial court, the specific case number assigned to the bankruptcy proceedings, information about the asset administrator, and the final date for the submission of competitive creditor claims against the debtor.

The commercial court’s decision to initiate bankruptcy proceedings may also oblige the debtor to conduct an audit. If the debtor does not have sufficient funds to undertake an audit, the court may appoint an audit at the expense of the creditor(s) upon its/their consent. In any case, the absence of an auditor’s conclusion may not hinder the bankruptcy proceedings.

The commercial court’s decision to initiate bankruptcy proceedings after conducting the preparatory hearing will come into legal force on the date it is issued. The procedure to administer the debtor’s property will be implemented at the same time that the commercial court’s decision to initiate bankruptcy proceedings is issued. This procedure will be effective for one hundred fifteen (115) calendar days and may be extended up to 2 months for valid cause upon request of the asset administrator, the creditor committee or the debtor. Previously, this procedure could have lasted for an unlimited time with the potential to drag out bankruptcy proceedings for 2-3 years. As of this moment:

1) the presentation of competitive and secured creditor claims against the debtor and their satisfaction may only take place within the framework of the bankruptcy proceedings;

2) the presentation of current creditor claims against the debtor and their satisfaction may only take place in the cases and pursuant to the procedure established by the Law;

3) the arrest of the debtor’s property and other restrictions on the debtor with respect to the alienation of its property may only be applied by the commercial court within the framework of the bankruptcy proceedings;

4) the satisfaction of claims of the debtor’s shareholders, which are legal entities, regarding the separation of a portion of the debtor’s property in connection with its withdrawal from the composition of the debtor’s shareholders will be prohibited;

5) decisions on the reorganization or liquidation of a legal entity debtor may only be taken within the context of the bankruptcy procedure established by the Law.

The commercial court’s decision to initiate bankruptcy proceedings must be sent within three days from the date of its issuance to the debtor, creditor(s) and other parties which will participate or should participate in the bankruptcy proceedings, including the state tax authorities, the local court of general jurisdiction, the state enforcement service at the place of location (residence) of the debtor, etc. If measures were put into effect to secure creditor claims, a copy of the said court decision will also be sent to: (i) the institutions which maintain registers related to moveable and immoveable property (state registrar of property rights, state notary offices, state automobile inspection bodies at the location of the debtor, etc.), (ii) banking institutions which service the debtor’s accounts, all relevant state registrars and securities registrars (depositaries, custodians, etc.) and (iii) the state registrar of liens and encumbrances on property.

If a claim was submitted against the debtor based on a monetary obligation that arose prior to the initiation of bankruptcy proceedings, courts must accept such claim according to the usual judicial procedure and resolve the dispute on the merits prior to the official announcement of the debtor’s bankruptcy. Once the announcement of bankruptcy proceedings is officially published, however, the asset administrator must inform each court, which is in the process of considering the claims of any competitive creditors against the debtor, regarding the official publication.

At this point, all courts must suspend their review of creditor claims against the debtor and explain to the plaintiff(s) that they have the right to submit their claims to the commercial court, which is handling the bankruptcy proceedings against the debtor, within thirty (30) days. The court(s) must further explain that in case of failure to do so in time, such creditors (except creditors related to salaries, author’s remuneration, alimony, pension, physical damages, etc.) will not be considered as “competitive creditors” within the framework of the bankruptcy proceedings and their claims will be satisfied in a lower priority during the liquidation procedure (see below). This information will also be set forth in the form of a court decision or protocol.

With reference to filing deadlines, if the plaintiff(s) do not submit an application to join their claims to the bankruptcy proceedings against the debtor within thirty (30) days from the date of the official announcement, a court that is considering a creditor claim outside of the bankruptcy proceedings will renew the creditor’s case and refuse to satisfy the creditor’s claim after the expiration of the aforementioned 30-day period. If a plaintiff appeals to the commercial court to recognize its claim after the commercial court has already considered all claims within the bankruptcy proceedings, then the plaintiff’s claim outside of the bankruptcy proceedings will be subject to termination on the procedural grounds that the commercial court has resolved the claim between the same parties, on the same subject and on the same grounds.

In the event that the debtor’s bankruptcy proceedings are disallowed or have been terminated, the creditors’ court claims against the debtor outside of the bankruptcy framework will be restored and the claims can be considered by the other courts on the merits. Of course, the aforementioned procedural steps for creditors do not apply to creditors, who are not subject to the bankruptcy moratorium discussed below.

During bankruptcy proceedings, the commercial court has the right to take measures to secure the claims of creditors pursuant to a petition of the parties/participants or at its own initiative.

In this case, the commercial court, upon request of the asset administrator, creditors or at its own initiative, may prohibit the conclusion of transactions (agreements) without the consent of the arbitration administrator (asset administrator) and it may oblige the debtor to transfer securities, currency valuables and other property for custody by third parties. The court may also apply other measures for the safe-keeping of property, such as depriving the debtor of the right to dispose of its real estate without the consent of the asset administrator or the court or placing an arrest on specific moveable property of the debtor.

Moreover, the commercial court has the power to dismiss the director of a debtor and transfer his responsibilities to the asset administrator if a petition is submitted by the parties, other participants in the bankruptcy proceedings or the asset administrator containing information to the effect that the debtor’s actions have hindered the asset administrator’s activity or the debtor’s actions have violated the rights and legal interests of the debtor or creditors. In this case, the commercial court will issue the relevant resolution.

The above measures will remain effective until one of the following situations occurs: (i) the rehabilitation procedure is commenced and a sanator is duly appointed; (ii) the commercial court issues a decision on the recognition of the debtor as bankrupt and the liquidation procedure is commenced with the appointment of a liquidator; or (iv) the bankruptcy proceedings are terminated.

The commercial court also has the right to cancel or change the said measures before any of the aforementioned circumstances occur.

A moratorium on the satisfaction of creditor claims commences simultaneously with the initiation of bankruptcy proceedings. The procedure entails the debtor’s suspension of its performance of monetary obligations and obligations to pay taxes and duties (mandatory payments), which should have been performed prior to the implementation of the moratorium. The moratorium also terminates any measures aimed at securing the performance of these obligations which were applied prior to the moratorium, including executive enforcement measures.

The moratorium will prohibit the levying of execution on the basis of executive orders and other documents, which contain property claims, including the levying of execution on pledged property within court and out-of-court procedures, unless the execution (enforcement) procedure is in the stage of the division of monetary funds already seized from the debtor (including those funds received from the sale of property) or in the stage of the sale of property after the public announcement of its sale.

During the moratorium, the application of penalties against the debtor is not calculated and all financial sanctions for the non-performance or improper performance of obligations are suspended with respect to all claims subject to the moratorium. Notably, this provision of the Law can be quite advantageous for the debtor because, among other things, it allows the debtor to avoid payment of penalties agreed upon with the creditor.

Quite often, the size of such penalties exceeds the value of the principal debt; therefore, the debtor is safe from further application of penalties and can hold off on payment of the accrued penalties until the end of the moratorium. By then, the debtor may either find an investor willing to take over its debts or the liquidation procedure may commence, which will further suspend the payment of the penalties.

The moratorium also suspends the statute of limitations on claims against the debtor for the duration of the moratorium, the application of the inflation index while the debtor’s monetary obligations remain unsatisfied, the application of three (3) percent annual interest on late payment amounts, etc. Additionally, the moratorium will apply to creditor claims related to the compensation of damages which arose due to the debtor’s refusal to perform transactions (agreements) during the rehabilitation procedure provided by the Law.

In contrast, the moratorium on the satisfaction of claims does not apply to current creditor claims, the payment of salaries and salary-related withholding taxes (social insurance and pension), alimony payments, compensation of damages caused to the health or life of citizens, author’s remuneration, and enforceable non-proprietary claims which oblige the debtor to take or refrain from taking specific actions.

In cases when monetary funds may be collected from the debtor during the moratorium, such funds will be collected from the debtor’s bank account under the supervision of the arbitration administrator (asset administrator, senator or liquidator). If the debtor’s property may be attached and seized during the moratorium, such attachment and seizure may only take place with the consent of the commercial court handling the bankruptcy proceedings.

The moratorium will only expire at the conclusion of the bankruptcy proceedings.

A highly useful novelty in the 2013 bankruptcy rules is the introduction of a procedure for invalidating or disputing transactions that were concluded within one year prior to the initiation of bankruptcy proceedings. This procedure also applies to transactions concluded after the initiation of bankruptcy proceedings. Pursuant to an application from the arbitration administrator or a competitive creditor, transactions concluded in the 12 months prior to the initiation of bankruptcy proceedings may be invalidated in the following cases:

1) the debtor gratuitously alienated property, took upon itself obligations without receiving corresponding proprietary obligations from the other party or waived its own proprietary claims;

2) the debtor performed its proprietary obligations prior to the established term for performance;

3) the debtor, prior to the initiation of bankruptcy proceedings, took upon itself an obligation resulting in its insolvency or the impossibility to fully or partially perform monetary obligations before other creditors;

4) the debtor alienated or acquired property at prices lower or higher than market prices resulting in insufficient property to satisfy creditor claims once the debtor accepted the corresponding obligation or performed its obligation;

5) the debtor repaid a creditor or accepted property in place of cash payment due to the debtor when the amount of the debtor’s creditor claims exceeded the value of its assets; 6) the debtor granted security for the performance of cash obligations.

In the event that any transactions are invalidated or disputed for one or more of the above reasons, the creditor is obliged to return any property received from the debtor to the debtor’s liquidation mass. If the return of property in kind is not possible, the creditor will be obliged to compensate

the value in cash at the market prices in existence when the transaction was concluded. In such case, however, the creditor is afforded two options: (i) to receive repayment of the debt in the first priority during the final bankruptcy stage (see below) or (ii) to receive repayment in kind after the bankruptcy proceedings have been completed. Obviously, the first option would be preferable to unsecured creditors, as the new version of the Law does not clarify whether such creditor’s status once moved to the first priority will remain unsecured, which would mean repayment before all unsecured creditors in the fourth category. Unless clarified further, this, in effect, would move an unsecured creditor onto an equal priority level with secured creditors.

2. The debtor’s Arbitration Administrator

As part of the Ukrainian bankruptcy legislation’s aim to save as many debtors as possible from bankruptcy, an arbitration administrator is appointed to supervise all of the debtor’s activities during bankruptcy proceedings. The arbitration administrator can play several roles simultaneously, including the asset administrator, sanation administrator and/or liquidator. In order for the arbitration administrator to successfully achieve the goal of pulling the debtor from its financial crisis, the Law provides such individuals with a wide range of authorities to keep the debtor afloat so that it is ready for the next stage of bankruptcy: either rehabilitation or liquidation.

Prior to the 2013 version of the Law, the party that applied for bankruptcy proceedings or the commercial court could have a significant influence in the choosing of the arbitration administrator. This led to the opening of numerous corrupt avenues in controlling the fate of the debtor through the arbitration administrator’s actions. Under the new version of the Law, however, the arbitration administrator is now chosen via a computer program on a random basis. The new version of the Law went even further by increasing the personal liability of the arbitration administrator and installing more strict conditions in order to receive a license to act as an arbitration administrator in any bankruptcy case.

A. Qualifications

The position of arbitration administrator is limited to Ukrainian citizens with a higher legal or economic education and related work experience of no less than three years or one year in chief executive positions after receipt of their diploma. Each arbitration administrator must go through a training course and internship for a period of six month as determined by the State Agency on Bankruptcy Issues and pass a special exam. Presently, the State Agency on Bankruptcy Issues has prepared hundreds of arbitration administrators and has created numerous training centers for such specialists in Kiev, Kharkov, Ivano-Frankovsk and other Ukrainian cities.

Accordingly, arbitration administrators must be of legal and sound mind by law and have a sufficient health record for holding such position. Individuals, who were previously convicted for committing an “economic crime” (crimes of ill gain or self-interest), and individuals restricted from holding a directorship position may not become arbitration administrators.

Finally, the State Agency on Bankruptcy Issues establishes a strict regime and procedure for the use of identification (attestation) cards and specially-issued stamps by arbitration adiminstrators. Each arbitration administrator must continue to increase his or her qualifications by attending courses stipulated by the State Agency on Bankruptcy Issues.

After appointment, the asset administrator may exercise a number of rights in relation to restoring the debtor’s solvency. These rights include convening the meeting of the creditor committee, participating in the creditor committee with an advisory vote, submitting appeals/ requests to the commercial court in all cases provided by the Law, engaging third parties to assist in carrying out his obligations at the debtor’s expense, and requesting various information and documents or copies thereof from state registrars or third parties.

As arbitration administrators are loaded with various functions that may be impossible for one individual to fulfill, the Law permits the asset administrator to hire specialists on a contractual basis to ensure that his or her responsibilities are met. Since a large number of enterprises go bankrupt because of ineffective management level employees, this provision enables the asset administrator to avoid working with the existing ineffective management, and to assemble his or her own team of specialists, which are better equipped to bring the debtor back to a level of profitability and enable the repayment of debts.

The arbitration administrator also has several obligations before all parties, including:

1) taking all measures to protect the property of the debtor;

2) analyzing the financial, commercial, investment and other activities of the debtor and its market status, and providing the results of such analyses to the commercial court along with confirming documents;

3) providing information to enable the State Agency on Bankruptcy Issues to maintain the unified register of enterprises under bankruptcy proceedings;

4) providing information to the internal affairs bodies or prosecutor’s office regarding criminal or administrative violations of law by employees of enterprises and organizations.

B. Liability

As the arbitration administrator occupies a central role in the treatment of the debtor or its recognition as bankrupt, the arbitration administrator has a heightened duty to act in good faith by taking into account the interests of the debtor, its creditors and any other parties. In fact, arbitration administrators bear civil, administrative, disciplinary and criminal liability for their actions before all third parties. Therefore, recent amendments to the Law require mandatory insurance of the arbitration administrator’s activity in case of any damages caused to the debtor or its creditors.

Disciplinary liability and disciplinary fines are governed by the State Agency on Bankruptcy Issues. For this purpose, the State Agency creates disciplinary commissions and keeps a record of disciplinary actions against arbitration administrators in the unified register of arbitration administrators. This way, the reputation of arbitration administrators can always be verified with the State Agency. Moreover, the State Agency conducts regular and unscheduled audits of the activity of all arbitration administrators.

An arbitration administrator’s failure to fulfill or improper fulfillment of his or her obligations may be grounds for the annulment of his or her license if significant damage is caused to the debtor or its creditors. In such cases, the commercial court sends a resolution regarding the failure to fulfill or undue fulfillment of the obligations placed on an arbitration administrator to the state body on bankruptcy issues. If no significant damage to the debtor or creditors is proved, then the arbitration administrator may still face discharge from the performance of his or her obligations if only the failure to fulfill or improper fulfillment of duties is proven.

These new requirements for 2013 were surely included to provide incentive for the arbitration administrator to perform his or her functions to the maximum extent each month or risk losing compensation due to lackadaisical or unlawful activity. Needless to say, heightened liability and strict regulation are excellent methods of weeding out corruption and creating an environment where opportunities for corrupt acts are decreased.

C. Compensation

In light of the strict environment in which arbitration administrators work, arbitration administrators are entitled to receive compensation for work and bankruptcy-related expenses from cash received from the sale of the debtor’s property or at the expense of cash funds received from creditors or as a result of the debtor’s production activity. The arbitration administrator’s compensation depends on the stage of the bankruptcy proceedings (asset administration, rehabilitation, liquidation, etc.) and the role he or she plays during such stage(s).

During the arbitration administrator’s role as asset administrator, his or her salary is set at the highest of either two (2) minimum monthly salaries per month or the average salary of the debtor’s chief executive for the last twelve months prior to the initiation of bankruptcy proceedings. In any case, an asset administrator’s salary may not exceed five (5) minimum monthly salaries per month for the performance of his or her duties. For reference purposes, the minimum monthly salary set for the period of January 1 – December 1, 2013 is 1,147 Ukrainian hryvnias (approximately 144 USD).

Payment for the services of an asset administrator must be carried out in advance by the party (creditor or debtor) initiating the bankruptcy proceedings in the amount as determined above. The advanced amount must be deposited on a deposit account of a notary office and is paid to the arbitration administrator on the last day of each calendar month of performance of his or her duties.

In the rehabilitation or liquidation phases of bankruptcy, the arbitration administrator’s (sanation administrator’s or liquidator’s) compensation is composed of a base compensation and additional compensation. The minimum monthly base compensation is equivalent to two (2) average monthly salaries of the debtor’s chief executive for the last twelve months prior to the court’s implementation of a rehabilitation or liquidation procedure. In any case, the base compensation for acting as a sanation administrator or liquidator may not exceed ten (10) minimum monthly salaries per month.

Additional compensation for a sanation administrator or liquidator is set at five (5) percent of the asset (cash, property or proprietary rights) value recovered in favor of the debtor from third parties after the initiation of bankruptcy proceedings and three (3) percent of any repaid claims of competitive creditors.

The arbitration administrator, in his or her role as sanation administrator or liquidator, has the right to receive his or her base compensation on the last day of each calendar month of performance of his or her duties. The right to additional compensation arises on the date of the actual receipt of assets (or a part thereof) by the debtor or on the date of the full or partial extinguishment of competitive creditor claims in proportion to the volume actually received.

Creditors may create a fund for the payment of the arbitration administrator’s services, the compensation of his or her expenses and the payment of any additional compensation amounts. Such fund and the procedure for using the cash funds therein must be determined by the creditor committee and approved by a resolution of the commercial court. The commercial court, however, has the right to decrease the amount of payments for the arbitration administrator’s services if it believes that the average monthly salary of the debtor’s chief executive was excessively high in comparison with the minimum monthly salary established by law.

In the various roles the arbitration administrator may play, he or she has a strict reporting requirement established by the Law. For instance, asset administrators are required to report on compensation they receive for their services and expenses spent and compensated at the first creditor committee session and report on the results of the debtor’s asset administration procedure. Likewise, sanation administrators are required to report before the creditor committee on their base and additional compensation received and their expenses spent and compensated at least once in each three-month period, while liquidators are required to do the same on a monthly basis. Final reports for each procedure must be submitted by the arbitration administrator five (5) days before the completion of the relevant procedure. The State Agency on Bankruptcy Issues also requires arbitration administrators to maintain and archive all documents and submit statistical, operational and informational reports.

3. The Asset Administrator

At the first stage of bankruptcy proceedings, an asset administrator is appointed to supervise all of the debtor’s activities. Please note that the asset administrator is one of only several “faces” an arbitration administrator may wear depending on the stage of the bankruptcy proceedings.

Likewise, the asset administrator can also play several simultaneous roles and has similar authorities to the arbitration administrator’s (in fact, they may be one and the same person).

The asset administrator may continue its role in the debtor’s bankruptcy proceedings by becoming the controller of the debtor’s “rehabilitation” process and/or the debtor’s liquidator.

When an arbitration administrator wears the hat of an asset administrator, the Law provides such individuals with more specified range of authorities to prepare for the outcome of the bankruptcy proceedings and all stages in between. The asset administrator is charged with overseeing the administration and disposal of the debtor’s property with the aim of preserving the debtor’s property and using the debtor’s assets in an effective manner. The asset administrator also analyzes the debtor’s financial condition and determines the optimal procedure (rehabilitation, settlement agreement or liquidation) for satisfying creditor claims in the maximum amount.

Unlike an arbitration administrator, the asset administrator may be appointed for a term of no longer than one hundred fifteen (115) calendar days. This term may be extended for an additional two (2) months by the commercial court upon submission of a substantiated petition from the creditor committee, the asset administrator or the debtor.

The Law specifically provides that the asset administrator is obligated to: (i) review all creditor applications with cash claims against the debtor; (ii) maintain a register of creditor claims; and (iii) inform all creditors regarding the results of the review of their claims. Moreover, the asset administrator, as the “master of ceremonies,” must take all possible measures to protect the debtor’s property during his or her term of duty. In choosing these measures, the asset administrator must analyze the debtor’s financial, economic and investment activities, including the debtor’s market status.

The asset administrator is also responsible for uncovering any signs of fictitious or forced bankruptcy, presenting information to the State Agency for Bankruptcy Issues for the unified database on enterprises subject to bankruptcy proceedings, etc. The asset administrator must prepare and present to the commercial court and the creditor committee a report, concerning its activity and the debtor’s financial condition, as well as a detailed assessment of the possibilities for restoring the debtor’s solvency. He or she must also inventory the debtor’s property with the debtor and determine the value of the debtor’s assets. Finally, if applicable and possible, the asset administrator must develop together with the debtor a rehabilitation plan within two (2) months from the initiation of bankruptcy proceedings and submit it to the creditor committee’s review.

Significantly, the asset administrator bears liability for the failure to effectuate or improper effectuation of its authority. Although asset administrators go through a strict selection process by the State Agency for Bankruptcy Issues, the Law still requires them to answer for any damages they cause to the debtor-enterprise according to Ukrainian legislation. For example, the Criminal Code provides punishment for negligence or abuse of authority and the Civil Code provides for liability for causal damages. It is impossible to completely insure an enterprise against abuses by the asset administrator, but the Law at least attempts to minimize the risk.

Once selected the asset administrator continues his or her duties until the commercial court approves a “settlement agreement” between the debtor and its creditor(s) or an investor is willing to cure the debtor’s ills. If the commercial court decides that the debtor is hopelessly bankrupt (i.e., restoration of solvency is entirely impossible), the asset administrator’s duties terminate upon appointment of a liquidator (see discussion on liquidation below), unless the asset administrator is appointed to carry out the debtor’s liquidation as well.

After the asset administrator is appointed, the debtor’s management body loses its right to decide on significant issues without the consent of the asset administrator. These issues include decisions on: (i) the reorganization (merger, acquisition, split up, spin off, transformation) or liquidation of the debtor; (ii) the creation of legal entities or participation in other legal entities; (iii) the creation of affiliates and representative offices; (iv) the payment of dividends; (v) the issuance of securities; and (vi) the exit/exclusion of the debtor’s participants (i.e., founders or shareholders) and the acquisition of previously issued shares of the debtor’s stock by its shareholders.

The debtor’s management body still retains the right to render decisions regarding the debtor’s participation in unions, associations, alliances, holding companies, industrial finance groups or other associations of legal entities, but only with the consent of the asset administrator. In effect, the appointment of an asset administrator does not lead to the complete termination of the chief executive or management body’s authority. In fact, the chief executive or management body will still be in control of the debtor’s day to day operation without interference from the asset administrator.

The authority of the debtor’s chief executive and management bodies is limited by the requirement that they must obtain the asset administrator’s consent before exercising their authority in regard to the conclusion of transactions necessary for restoring solvency. Much like the commercial court’s authority, the asset administrator has the power to prohibit the disposal or transfer of real property for lease, collateral or as a contribution to the authorized capital of another company. Additionally, the chief executive or management body of the debtor must obtain the asset administrator’s consent before receiving or issuing loans or guarantees, settling claims, transferring debt or transferring property into trust management. Generally, any action related to property with a book value of more than one percent of the book value of all of the debtor’s assets must be approved by the asset administrator, unless the commercial court has flatly prohibited such actions. In effect, the asset administrator has the right to apply to the commercial court to recognize any transactions concluded by the debtor in violation of the Law as invalid.

Of great importance to creditors, who are forced to stand by and wait during the seemingly endless process of restoring the debtor’s solvency, is the provision that enables the dismissal of the debtor’s chief executive or management body if such bodies fail to take the proper measures to secure the debtor’s property, or if they create obstacles for the asset administrator. In this case, upon petition of the debtor’s creditors or other bankruptcy participants, the commercial court will transfer the responsibility of the debtor’s chief executive or management to the asset administrator until a new chief executive and/or management is appointed. Consequently, all accounting documents, seals and stamps, and material and other valuables must be transferred to the asset administrator within three days of the dismissal decision.

4. Identification of Creditors and Potential Investors

After the asset administrator is appointed, all of the debtor’s creditors must be identified and an attempt must be made to find investors who are willing to participate in the restoration of the debtor’s solvency. The official publication on the initiation of bankruptcy proceedings serves as notice to all competitive creditors that they must make their claims known to the commercial court, as well as notice to all investors who wish to provide “treatment” to the insolvent debtor.

A. Procedure

Once identified, all competitive creditors with claims that arose before the initiation of bankruptcy proceedings must submit a written application to the commercial court, indicating their monetary claims toward the debtor within thirty days after the announcement on the initiation of bankruptcy proceedings is officially published. Of course, all creditor claims must be accompanied by the supporting documents which confirm such claims.

In case bankruptcy proceedings are intiated by a creditor, then such creditor has the right to apply for additional cash claims against the debtor within the aforementioned thirty-day period. During the bankruptcy proceedings secured creditors may only submit the unsecured portions of their cash claims against the debtor or waive the secured status of all of their cash claims. All creditor claims in cash must be determined in Ukrainian hryvnias or, if they are determined in a foreign currency, converted into Ukrainian hryvnias at the exchange rate of the National Bank of Ukraine on the date of their submission to the commercial court.

Unfortunately, this new rule fails to take into account the effect currency devaluation or inflation may have on the amount of the submitted claim, and whether claims in foreign currency will be satisfied in the said foreign currency.

All property claims against the debtor must be reflected in cash denominations within the required thirty-day period. Claims for salaries, author’s remuneration, alimony, damages to life and health, and payment of pension or social insurance constributions may be submitted in writing to the commercial court within the thirty-day period, along with the relevant confirming documents.

Creditors must also send copies of their applications, along with copies of the documents attached thereto, to the debtor and the asset administrator. Proof that this requirement was met must be submitted along with the claim application. Additionally, all creditor applications must contain the following:

1) the name of the commercial court;

2) the name of the debtor and creditor, their place of location or residence, and their identification code (for legal entities) or tax registration number (if available);

3) the amount of the creditor’s claim against the debtor with a separate determination of the amount of fines, penalties, etc.; 4) a statement of the circumstances which confirm the claim against the debtor and their substantiation;

5) information about the availability of the debtor’s pledged property which is security for the claim;

6) the list of documents attached to the claim application, including proof of payment of the court duty and the documents which confirm cash claims against the debtor.

Any creditors who fail to submit their claims within the provided thirty-day period, including those who fail to submit claims at all, will not be considered by the court as competitive creditors and their claims will be relegated to the last priority of claim satisfaction (sixth priority). Prior to 2013, such claims would have been discharged outright by the commercial court – a major problem for foreign creditors who faced difficulties in monitoring their Ukrainian debtors’ bankruptcy status via official publications in Ukrainian. Please note, however, that this rule does not apply to claims for salaries, author’s remuneration, alimony, damages to life and health, and payment of pension or social insurance constributions.

Thereafter, within 10 days after the completion of the above thirty-day period for creditor claims, the debtor, together with the asset administrator, will either accept or reject (in full or in part) such claims and send written notice of such acceptance or rejection with substantiated grounds to the creditor-applicants and the commercial court. The asset administrator must also submit a report to the court regarding the service of proper notice to all creditors regarding the consideration of their claims against the debtor.

Creditors with recognized claims have the right to receive information from the asset administrator regarding the recognized claims of other creditors. Such creditors may also submit to the asset administrator, debtor or commercial court objections against the recognition of the other creditors’ claims.

The asset administrator will record all competitive creditor claims recognized by the debtor or commercial court into the register of creditor claims. The asset administrator must separately introduce creditor claims secured by pledge into the register and all information regarding the debtor’s property under attachment (liens and encumbrances) from the State Register of Pledges. Information regarding claims for salaries, author’s remuneration, alimony, damages to life and health, and payment of pension or social insurance constributions must also be separately recorded in the register of creditor claims.

Conversely, current creditors with claims against the debtor which arose after the initiation of bankruptcy proceedings may only present their claims after the commercial court recognizes the debtor as hopelessly bankrupt and opens a liquidation procedure (see below). As briefly mentioned above, prior to recognition of the debtor as bankrupt, disputes involving current creditor claims are considered and resolved by the same commercial court handling the debtor’s bankruptcy proceedings, but outside of the bankruptcy framework.

The asset administration procedure grants to the debtor the right to obtain permission from the commercial court to satisfy all competitive creditor claims, provided that such claims are satisfied simultaneously and in full pursuant to the register of creditor claims.

At this time, all investors (physical or legal entities – hereinafter “Sanator(s)”) are also invited to submit applications to take part in the “rehabilitation” of the debtor by submitting proposals for “rehabilitation” (hereinafter – the “Rehabilitation Plan”). The debtor and the asset administrator must also prepare and submit a Rehabilitation Plan to the Creditor Committee at this time. “Rehabilitation” will be discussed in more detail below.

The commercial court is charged with reviewing the compliance of all submitted competitive creditor applications with the Law within five days of their receipt. In case of non-compliance, the commercial court will notify the applicant in writing regarding the specific deficiencies and their correction. Timely corrected applications are deemed to be received on the date of their initial submission to the court. If corrections are not submitted in a timely manner, however, they are returned to the creditor, who may still submit a repeat application, provided it is submitted within the required thirty-day term for submitting all applications.

5. The Preliminary Hearing of the Commercial Court

The next hearing of the commercial court must be held no later than two months and ten days after the preparatory hearing was held. In case of a large amount of creditors, this term may be extended up to three months from the preparatory hearing. All parties to the bankruptcy proceedings must be informed of the time and place of the preliminary hearing by the court, the asset administrator or the debtor. The purpose of the preliminary hearing is for the commercial court to review the register of creditor claims, as well as any creditor claims, which were rejected and not subsequently included into the register. The commercial court also determines the date for the meeting of all of the debtor’s creditors at this preliminary hearing.

After a final review, the commercial court determines the final amount of creditor claims to be included into the register and the list/amount of creditor claims unrecognized by the court. The court must also determine the date of the final hearing where the “fate” of the debtor’s bankruptcy proceedings will be decided. On this date, the commercial court will decide what is best for the debtor – rehabilitation, liquidation/bankruptcy, extension of asset administration or termination of the bankrtupcy proceedings. As previously mentioned, this date must come within 115 days or, in certain cases, 2 months from the commencement of the asset administration procedure.

The register must include information about each creditor, the size of its claim for monetary obligations as well as the priority of each claim. The register must also separate the amount of forfeitures (fines and penalties) from the principal claims. Forfeitures (fines and penalties) are satisfied in the sixth priority group (see below) and may be included into a settlement agreement between the debtor and its creditor(s).

This final decision of the commercial court serves as the basis for determining the number of votes, which will belong to each creditor for purposes of decision-making at the creditor committee. When determining the amount of votes for representative bodies of creditors, penalties and fines are not taken into account with respect to competitive creditor claims.

6. The Meeting of Creditors and the Creation of the Creditor Committee

Within ten days after the preliminary hearing of the commercial court the asset administrator must inform all creditors included in the register of creditor claims about the time and place of the creditors’ meeting. The asset administrator must also inform the representative of the debtor’s employees and the representative of the debtor’s founders (participants, shareholders) about the time and place of the meeting. The asset administrator is responsible for organizing the meetings of creditors, which must take place at the location of the debtor.

All competitive creditors recognized by the commercial court and entered into the register of creditors enjoy the right to cast deciding votes. Other parties may participate in the meeting with the right to an advisory vote only, including (i) creditors entered into the register of creditors on a separate basis (i.e., outside the framework of the bankruptcy proceedings), (ii) the representative of the debtor’s employees, (iii) the authorized representative of the debtor’s founders (participants, shareholders), (iv) a representative of the body authorized to manage state property (if applicable), and (v) the arbitration administrator. The initial meeting of creditors is deemed valid upon the presence of creditors with at least two-thirds (2/3) of the votes. All subsequent meetings are deemed valid and authorized upon the presence of creditors with more than half of the votes.

A meeting of creditors may be convened by the arbitration administrator at its own initiative, at the initiative of the creditor committee (which is created at the first meeting) or other creditors whose claims make up at least one-third of all registered creditor claims, or at the initiative of a one-third vote of all creditors. If the creditor committee or separate creditors present a demand for convocation of a meeting of creditors, the arbitration administrator (asset administrator, Sanator or liquidator) must convene the meeting within two weeks from the day written demand is received.

At the meeting of creditors, all competitive creditors are given the number of votes, proportionate to the amount of registered claims, divided by one thousand Hryvnias. When determining the amount of votes of creditors with a deciding vote, forfeitures (penalties, fines), other financial sanctions, moral damages and bankruptcy court fees applied for or paid by creditors are not calculated.

In accordance with the Law, the meeting of creditors has the authority to decide specific issues, including but not limited to the following:

1) the determination of the composition and the election of members of the creditor committee;

2) the early termination of the authority of the creditor committee or separate members thereof;

3) the approval of a rehabilitation plan for the debtor during the asset administration stage.

Throughout the bankruptcy proceedings the meeting of creditors elects the members of the creditor committee, whose membership may not exceed seven individuals. The election of the creditor committee is conducted by open voting of a majority of votes present at the meetings of creditors. Any creditor with twenty five (25%) percent or more of the votes must be automatically included into the creditor committee. The commercial court must be provided with the minutes of the creditor meeting regarding the creation and composition of the creditor committee.

The creditor committee has the authority to resolve the following issues:

1) the election of the chairman of the creditor committee;

2) the convocation of meetings of creditors;

3) petitions to the commercial court to initiate a rehabilitation procedure or recognize the debtor as bankrupt and initiate the liquidation procedure;

4) petitions to the commercial court to recognize transactions of the debtor as invalid at any stage of the bankruptcy proceedings;

5) petitions to the commercial court to appoint an arbitration administrator (sanator, liquidator) or to terminate the authority of an arbitration administrator (sanator, liquidator) and appoint another arbitration administrator;

6) the drafting and conclusion of a settlement agreement between the debtor and creditor(s);

7) the approval of a rehabilitation plan for the debtor and any amendments or additions thereto;

8) the determination of the debtor’s specific property to be sold during the rehabilitation or liquidation stages;

9) the submission of proposals to the commercial court regarding the extension or abbreviation of the asset administration or rehabilitation stages;

10) any other issues provided by the Law.

The arbitration administrator, the representative of the debtor’s employees, the representative of the debtor’s founders (participants, shareholders), secured creditors and, if necessary, a representative of the body authorized to manage state property and a representative of the body of local self-governance have the right to participate in the work of the committee on an advisory vote basis.

7. Compietion of the Asset Administration Stage

The final court session in the asset administration stage will start the next stage of the bankruptcy proceedings. Specifically, the commercial court will take its decision to move on to rehabilitation, liquidation, settlement with creditors or termination of the bankruptcy proceedings. Therefore, the creditor committee must make one of the following choices:

1) approve a rehabilitation plan and submit a petition to the commercial court to initiate the rehabilitation stage and confirm the rehabilitation plan;

2) decline the rehabilitation plan and submit a petition to the commercial court to initiate the rehabilitation stage and oblige the sanation administrator to prepare a new rehabilitation plan;

3) submit a petition to the commercial court to initiate the rehabilitation stage and oblige the sanation administrator to prepare a rehabilitation plan if not already submitted by the debtor;

4) submit a petition to the commercial court to recognize the debtor as bankrupt and initiate the liquidation stage;

5) submit a petition to the commercial court on the conclusion of a settlement agreement.

If circumstances dictate that the creditor committee is unable to take one of the above decisions within the required term, it may appeal to the commercial court to extend the asset administration procedure.

At the final court session in the asset adminstration stage, the commercial court, based on the proposal of the asset administrator and the decision of the creditor meetings, will issue one of the following court decisions:

1) to initiate the rehabilitation stage and approve the rehabilitation plan contingent on prior approval of the debtor’s rehabilitation plan by the creditor meetings and the consent of secured creditors pursuant to the procedure discussed further below;

2) to initiate the rehabilitation stage and oblige the Sanator to prepare the rehabilitation plan in case a rehabilitation plan was declined by the creditor committee or was not submitted by the debtor;

3) to declare the debtor as bankrupt and initiate the liquidation stage;

4) to terminate the bankruptcy proceedings;

5) to extend the asset administration procedure and postpone the final court session in the asset administration stage up to the maximum permissible date.

If the creditor committee fails to adopt one of the above decisions within the asset administration stage, then the commercial court, within five (5) days after completion of the asset administration stage and upon inherent signs of bankruptcy, will issue a decision to recognize the debtor as bankrupt and initiate the liquidation stage. However, even if the creditor committee fails to take one of the above decisions within the asset administration stage or decides to petition the court to recognize the debtor as bankrupt and initiate the liquidation stage, the commercial court will still have the right to order the initiation of the rehabilitation stage in the following cases:

1) if there are sufficient grounds to believe that the creditor committee’s decision to petition for bankruptcy and liquidation was taken to the detriment of the majority of members of the creditor committee and there is a realistic possibility to restore the solvency of the debtor;

2) if circumstances arise after the creditor committee’s meeting which provide sufficient grounds to believe that the solvency of the debtor may be restored;

3) in other circumstances provided by the Law.

The asset administration stage terminates when the court decides that the debtor is bankrupt or initiates the rehabilitation stage or approves a settlement agreement. At this point, the asset administrator’s authorities will also terminate. Below we review the two most common outcomes in bankruptcy proceedings: (i) rehabilitation and (ii) bankruptcy and liquidation.

IV. The “Rehabilitation” Option

The principal aim of the new bankruptcy law is to provide debtors with the proper tools to bring about the healthy financial recovery of indebted enterprises. Thus, it is drafted in a way that is designed to avoid bankruptcy to the greatest extent possible. One of the options for avoiding bankruptcy is to find a “sanator” or, simply put, a “debtor doctor,” to provide treatment for the ailing enterprise.

According to the Law, “rehabilitation” is defined as a system of measures, which is carried out during bankruptcy proceedings, to prevent the bankruptcy and liquidation of a debtor. These measures are aimed at improving the financial condition of a debtor, as well as satisfying, in full or in part, the claims of creditors by providing credit, restructuring of debts or capital, and/or transforming the organization’s legal or production structure(s). In other words, the Law encourages a search for investors willing to contribute their time, funds and efforts into putting the pieces of the broken enterprise back together again.

Upon petition of the creditor committee, the commercial court has the right to decide whether to apply a rehabilitation procedure for a debtor (hereinafter “Rehabilitation”) and, if so, request for the appointment of a Sanation administrator (hereinafter the “Sanator”). Whereas prior to 2013 rehabilitation had to be completed within a period of twelve (12) months, with a possible extension for a further six (6)months, the rehabilitation procedure may now last only six (6) months with a possible extension for a further six (6) months upon a substantiated petition of the Sanator or creditor committee.

If the commercial court decides to apply rehabilitation, unless rehabilitation is agreed upon by all parties beforehand, the Sanator will be appointed by the commercial court from the database of licensed arbitration administrators. The Sanator is responsible by court order for organizing the debtor’s Rehabilitation.

Once the commercial court approves the decision on rehabilitation, the following events occur:

(i) the authority of the debtor’s chief executive is terminated pursuant to labor legislation;

(ii) the management of the debtor is transferred to the Sanator;

(iii) the authority of the debtor’s governing bodies is suspended, and such bodies must transfer all of the debtor’s accounting and corporate documentation, seals, material and other valuables to the Sanator within three days; and

(iv) the property of the debtor may be arrested or restrictions may be imposed on the disposal of such property within the limits of the rehabilitation procedure if such arrest or restrictions will not hinder the performance of the rehabilitation plan and do not conflict with creditors’ rights. At the request of the Sanator, the commercial court may lift such arrests and restrictions if they prove to hinder the rehabilitation plan, the debtor’s commercial activity or the restoration of the debtor’s solvency.

An official announcement of the initiation of the debtor’s rehabilitation will be published on the official website of the Highest Commercial Court of Ukraine. The announcement must contain the characteristics and type of the debtor’s production, the amount of the debtor’s indebtedness, the commencement date for investors to submit applications to take part in rehabilitation of the debtor (no more than two (2) months), etc.

During rehabilitation, the Sanator has the right to independently dispose of the debtor’s property, conclude settlement agreements and other civil law or labor transactions (agreements) on behalf of the debtor, and submit petitions to the commercial court to recognize transactions concluded by the debtor as invalid. Along with these broad rights, the Sanator also undertakes a number of obligations, such as economically managing and inventorying the debtor’s property, opening a special bank account for carrying out Rehabilitation operations, developing a Rehabilitation plan to be approved by the creditor committee, organizing accounting and statistical reports, collecting the debtor’s accounts receivable, evaluating and, if appropriate, objecting to creditor claims, and reporting the progress of the Rehabilitation plan to the creditor committee. The Sanator must also obtain an independent valuation of the debtor’s property if such property will be sold during rehabilitation.

Throughout the rehabilitation stage, the Sanator has the right to attempt to conclude settlement agreements with the debtor’s creditors. In doing so, the debtor’s property management is not permitted to obstruct or limit the Sanator’s authority to dispose of the debtor’s property in any way. Any transactions or agreements concluded by the Sanator must be agreed upon with the creditor committee, unless otherwise provided by the Law or the rehabilitation plan.

The Sanator has a three-month window from the date of the initiation of the rehabilitation stage to withdraw from or reject the debtor’s transactions (agreements) concluded in violation of the bankruptcy proceedings, whether or not they have been performed in full. This may be done if the performance of the transaction will cause damages to the debtor, the transaction is for a long-term (over one year) or is aimed at long-term positive results for the debtor (except for the output of products with a technological cycle that is longer than the rehabilitation process), or the performance of the transaction will hinder the restoration of the debtor’s insolvency. In such cases, the debtor’s counterparty has a thirty-day term to demand the compensation of damages within the bankruptcy proceedings.

The rehabilitation procedure can be prematurely terminated in case of the failure to perform the conditions of the rehabilitation plan and/or the failure to perform the current obligations of the debtor. This inevitably leads to the recognition of the debtor as bankrupt and the initiation of the liquidation stage. In this case, the Sanator will retain his or her authority until he or she is appointed as the liquidator or his or her authority is transferred to another liquidator.

The Sanator is obliged by law to report before the creditor committee and the commercial court on a quarterly basis regarding the status of the rehabilitation plan’s fulfillment.

Within three months after the decision to initiate Rehabilitation, the Sanator must develop and agree upon a rehabilitation plan for the debtor with the creditor committee and submit it to the commercial court. Debtors partially or wholly owned by the state have additional obligations in the Rehabilitation stage which are not covered by this article. The aim of the plan, not surprisingly, is the restoration of the debtor’s solvency by way of investor participation and/ or the satisfaction of creditor claims. In case of investor participation, the investor(s) must also be involved in the development and signature of the plan. Investors may participate in the rehabilitation plan by investing their own proprietary and intellectual valuables or those received via loans or acquired from other investors.

Investors also bear liability for the non-performance of their agreed upon investment obligations. In return, they have the right to participate in the performance of the rehabilitation plan, participate in court proceedings during Rehabilitation, familiarize themselves with bankruptcy materials and the debtor’s accounting and statistical documents, and appeal any court decisions during Rehabilitation.

The plan must contain the specific measures regarding the restoration of the debtor’s sovency and the proposed period for restoring the debtor’s solvency. Restoration of the debtor’s solvency simply means eliminating any of the signs of bankruptcy provided by the Law. For this purpose, the rehabilitation plan may set forth conditions on performing the debtor’s obligations before third parties, satisfying creditor claims in any legal manner, and compensating any cash funds spent on conducting the shareholders meetings and/or meetings of the debtor’s management bodies. In all cases, a rehabilitation plan must ensure covering the debtor’s outstanding salary payments.

In terms of restoring the debtor’s solvency, legal measures may include, among others, the following:

1. restructuring of the debtor enterprise or its assets. Restructuring means all organizational, commercial, financial, economic, legal and technical measures aimed at either (i) the reorganization of the debtor by way of division/splitting of the enterprise with the transfer of debt obligations to the resulting legal entity, which will not be subject to rehabilitation, or (ii) the change of the ownership form, management or legal form of the enterprise in order to facilitate the financial recovery of the enterprise, increase production efficiency, increase the production of competitive products and fully or partially satisfy creditor claims;

2. re-profiling of production;

3. closure of unprofitable production;

4. the deferment of payments and/or breaking up of payments into installments or the forgiving (writing off) of a portion of debts. In these cases, the debtor must conclude a settlement agreement with the creditor(s);

5. the “liquidation” of accounts receivable;

6. the sale of a portion of the debtor’s property;

7. the performance of the debtor’s obligations by the asset manager and its liability for the non-performance of obligations;

8. the alienation of property and extinguishment of the debtor’s obligations by way of the substitution of assets;

9. the dismissal of the debtor’s employees (employee redundancy). In this case, the sanation administrator must work closely with the worker’s union or collective in order to take the proper legal steps in dismissing the employees, avoid the dismissal of too many employees, and alleviate the consequences for the dismissed employees;

10. the receipt of credit to cover severance payments due to the debtor’s employees who are dismissed under the rehabilitation plan. Such credit will be compensated in the relevant priority at the expense of the sale of the debtor’s property.

The rehabilitation plan will be deemed approved if it is supported at the creditor committee by more than half of the votes of the members of the creditor committee. At the voting session the creditor committee may adopt one of the following decisions: (i) approve the rehabilitation plan and submitt it to the commercial court, (ii) reject the plan and appeal to the commercial court to recognize the debtor as bankrupt and open the liquidation procedure, or (iii) reject the plan and appeal to the commercial court to remove the sanation administrator and appoint a new sanation administrator and date to approve a new rehabilitation plan.

If approved, the rehabilitation plan (and any amendments thereto) and the minutes of the creditor committee’s meeting must be submitted to the commercial court. In case the approved plan provides for a term that exceeds the initially established rehabilitation term, the commercial court will extend the term only up to the maximum allowable period of six months if it has grounds to believe that the extension and performance of the plan will lead to the restoration of the debtor’s solvency. If a rehabilitation plan is not submitted within six months from the time of the court’s decision to initiate a rehabilitation procedure for the debtor, the commercial court has the right to recognize the debtor as bankrupt and commence the liquidation procedure.

Within seven days from the date of the creditor committee’s approval of the rehabilitation plan, the plan must be approved by all secured creditors. In case any of the secured creditors object the rehabilitation plan, the other secured creditors may take one of the following decisions: (i) to separate secured items from the debtor’s assets, sell them at an auction pursuant to the established procedure, and satisfy the objecting creditor’s (creditors’) claim(s) from the funds received from the sale or (ii) to buyout the debt before the objecting creditor(s) according to the information in the register of creditor claims.

Similarly, in case all of the secured creditors object to the rehabilitation plan, the remaining creditors may either (i) separate secured items from the debtor’s assets, sell them at an auction and satisfy the secured creditors’ claims from the funds received from the sale or (ii) buy out all the debts before the secured creditors in accordance with the register of creditor claims.

In case the secured creditors do not approve the rehabilitation plan and the creditor committee fails to take one of the above decisions, the commercial court will review the rehabilitation plan approved by the creditor committee at a court hearing, listen to the objections of the secured creditors, and determine the feasibility of the plan’s approval. Obviously, it is important for the creditor committee to initially take into consideration the position of secured creditors prior to approving a rehabilitation plan in order to avoid additional court hearings, time and expenses.

To end bankruptcy proceedings against a debtor as quickly as possible, the debtor’s property owner or asset manager has the right throughout the rehabilitation procedure to satisfy all of the registered claims of competitive creditors or provide the debtor with sufficient funds to satisfy all of the registered competitive creditor claims with the exception of any forfeitures, fines or penalties. Such intention must be made known to the sanation administrator, creditor committee and commercial court and may be accompanied by additional proof of the ability to extinguish all competitive creditor claims.

Importantly, such intention must cover the extinguishment of all existing competitive creditor claims. The commercial court will review the application of intent at a court session with the sanation administrator and members of the creditor committee. If accepted, the property owner or asset manager has one month to settle with all competitive creditors. Once all competitive creditor claims are satisfied by the property owner or asset manager, the sanation administrator must submit a report to the commercial court within ten days for final approval.

The rehabilitation plan may also provide for the increase of the debtor’s authorized capital with the aim of restoring the debtor’s solvency. Joint stock companies may issue additional stock or obligations of the company that can only be converted into company securities. In this case, the shareholders will have the pre-emptive right to acquire additionally issued shares of the debtor. In case of limited liability companies, the participants have the pre-emptive right to acquire additional equity in the authorized capital of the company in proportion to their existing equity shares in the company.

Of course, the most expedient method of covering debts without taking on additional performance obligations is the sale of property. Under the Law, there are three ways for the debtor to sell of its property to cover existing debts during the rehabilitation procedure: (i) the sale of the debtor’s property as an integral property complex; (ii) the alienation of the debtor’s property by way of the replacement of assets; and (iii) the sale of part of the debtor’s property. These three methods are covered in more detail below.

A. Sale of the Debtor’s Property as an Integral Property Complex

To sell all of the debtor’s property as an integral property complex, all measures for securing creditor claims related to the debtor’s property subject to sale under the rehabilitation plan are cancelled by decision of the commercial court. At this point, all types of the debtor’s property designated for commercial activity will become subject to sale, including premises, buildings, equipment, inventory, raw materials, finished products, rights to claims, rights to marks and other representations which individualize the debtor or its products, works or services (brands, trademarks, etc.), and other rights belonging to the debtor (except any inalienable rights).

During the sale of the debtor’s property as an integral property complex, no cash obligations will be included into the debtor’s assets. However, all labor agreements (contracts) concluded prior to the sale date of the property complex will continue to be valid and all rights and obligations of the employer will transfer to the purchaser of the integral property complex.

The funds received from the sale of the debtor’s property as an integral property complex will be included into the debtor’s assets. The sale must take place via an auction pursuant to the specific procedure established by the Law (see section entitled “Bankruptcy and the Liquidation Procedure”). The initial sale price must be established by a licensed property appraiser.

The sale of the debtor’s property as a integral property complex may result in one of two outcomes: (i) the funds from the sale are sufficient to cover all of the creditor claims or (ii) the funds from the sale are insufficient to cover all creditor claims. In the former case, the commercial court will terminate the bankruptcy proceedings at the petition of the sanation administrator. In the latter case, the sanation administrator must suggest a settlement agreement take place between the debtor and the creditors. If the parties fail to reach a settlement agreement, the commercial court will recognize the debtor as bankrupt and commence the liquidation procedure. Of course, the sanation administrator must refrain from making any further settlements with creditors prior to the commercial court’s approval of a settlement agreement or its commencement of the liquidation procedure.

B. Replacement of Assets

In replacement of assets, all measures for securing creditor claims related to the debtor’s property subject to sale under the rehabilitation plan will be cancelled by decision of the commercial court. This involves transferring the debtor’s integral property complex or, as per the rehabilitation plan, a part of the debtor’s property with the related (proportional) part of its obligations (with the exception of obligations which arise from competitor creditor claims) to a business entity created by the debtor. The equity interests (shares of stock) in the authorized capital of such business entity will be included into the debtor’s property (replacement of assets). During the creation of the new business entity, the property assets of the debtor will be transferred to such entity, the debtor’s right to claims is assigned to the new entity, and the current creditor debts are also transferred to the new entity. The authorized capital of the new entity will be set as the difference between the value of property assets and the value of the debts of competitive creditors.

Upon alienation of the debtor’s property as an integrated property complex under this method, all labor agreements (contracts) concluded prior to alienation of assets will continue to be valid. Accordingly, the rights and obligations of the employer will transfer to the newly created entity. In case only a part of the debtor’s property and the related obligations are alienated under this method, all labor agreements (contracts) concluded with employees in the production sectors whose property is being transferred to the new entity will continue to be valid and the rights and obligations of the employer will also transfer to the new entity.

The alienation of any equity or shares in the authorized capital of the newly created entity must take place at an auction (see section entitled “Bankruptcy and the Liquidation Procedure”). If the initial value of a portion of the equity or shares is sufficient to satisfy creditor claims against the debtor, the corresponding portion belonging to the debtor may be put up for auction. If the amount received from the replacement of assets and their sale is insufficient to cover all creditor claims, then the Sanator has no choice but to suggest that the parties negotiate and enter into a settlement agreement or, alternatively, the court will deem the debtor bankrupt and start the liquidation procedure.

C. Sale of a Part of the Debtor’s Property During Rehabilitation

In case of selling a part of the debtor’s property, only property approved in the rehabilitation plan may be sold and all security measures related to such property are cancelled by the court. In addition, the sale may only take place via an auction according to the procedure provided by the Law (see section entitled “Bankruptcy and the Liquidation Procedure”). In the event that the debtor has any property that is restricted or limited for turnover on the market, such property will be sold at closed sales at no lower than fair market prices. Any parties, which may own such property by law or right, may participate in the closed sales.

The initial value of the property will be set according to the Law of Ukraine “On Valuation of Property and Proprietary Rights and Professional Appraisal Activity in Ukraine” and other sub-legislative acts.

Fifteen (15) days preceding expiration of the Rehabilitation period, or upon the presence of grounds for premature termination of Rehabilitation, the Sanator must present to the creditor committee a detailed report concerning the debtor’s status with the date and place of the meeting of the creditor committee. This report must include information about the debtor’s balance, profit/loss ratio, funds available for repayment of creditors, accounts payable and receivable, etc. In addition, evidence of the satisfaction of any competitive creditor claims from the register of creditor claims must be attached to the report.

Depending on the debtor’s status and the Sanator’s proposals, the creditor committee will petition the commercial court to take one of three possible decisions within ten (10) days of the receipt of the report and no later than the expiration date of the rehabilitation procedure set forth in the rehabilitation plan: (i) to terminate Rehabilitation in connection with the restoration of the debtor’s solvency; (ii) to terminate Rehabilitation, recognize the debtor as bankrupt and commence the liquidation procedure; or (iii) to terminate or prolong Rehabilitation and conclude a settlement agreement with the debtor. If any circumstances arise that may serve as grounds for terminating the Rehabilitation procedure, then the creditor committee may render its decision without the Sanator’s report.

In the event that the creditor committee fails to take one of the above decisions or fails to submit its decision to the commercial court within the prescribed term, the commercial court will rule on whether to terminate the bankruptcy proceedings or recognize the debtor as bankrupt and commence the liquidation procedure.

Otherwise, the Sanator’s report, as reviewed by the creditor committee, and the relevant minutes of the creditor committee must be sent to the commercial court no later than five (5) days after the creditor committee session. The register of creditor claims and objections of any creditors, who voted against the creditor committee’s decision or did not participate in the voting, must be annexed to the Sanator’s report.

The commercial court will review the Sanator’s report and any complaints of creditors attached thereto. Both the Sanator and any creditors with complaints will be informed of the time and place of such review. If the meeting of creditors decides that the Rehabilitation plan is fulfilled, or that the Rehabilitation procedure should be terminated due to restoration of the debtor’s solvency, then the Sanator’s report is subject to final approval by the commercial court. The commercial court will refuse to approve the report if it finds grounds for the complaints of any creditors.

If settlements with creditors have not been conducted within the term set forth in the rehabilitation plan, and the court does not receive a petition to prolong such term, then the commercial court will recognize the debtor as being bankrupt and commence the liquidation procedure. The prolongation of the rehabilitation procedure within the maximum term permissible by law will only be approved by the commercial court upon introduction of the relevant changes or additions to the Rehabilitation Plan.

Any settlements with creditors whose claims are included into the register of creditor claims will be conducted by the Sanator starting from the date set forth in the court-approved rehabilitation plan according to the priority set forth in the Law. A copy of the commercial court’s final decision and a copy of the Sanator’s report must be sent to the parties and participants in the bankruptcy proceedings.

V. Bankruptcy and the Liquidation Procedure

If the commercial court decides that the restoration of the debtor’s solvency is not possible, the court will approve a resolution to this effect (the “Bankruptcy Resolution”) and commence the liquidation procedure. According to the Law, the liquidation procedure may not exceed twelve (12) months and is designed to satisfy creditor claims by selling the debtor’s property.

Unless a last-minute Rehabilitation Plan is produced by one of the parties or the court prior to the sale of the debtor’s property, the liquidation procedure will commence from date of the court’s Bankruptcy Resolution. The approval of the Bankruptcy Resolution leads to a series of consequences, including the following:

a) the business activity of the debtor (hereinafter the “Bankrupt Entity”) terminates with the completion of the technological cycle for the manufacturing of products and the possible sale of the said products. However, the debtor may conclude and perform agreements, which protect the Bankrupt Entity’s property or secure its upkeep in a proper condition, and lease agreements for property that is temporarily out of use until such time as it will be sold during liquidation;

b) the term for the performance of the Bankrupt Entity’s monetary obligations will be deemed to have not become due;

c) sale of the Bankrupt Entity’s property is permissible only under the specific conditions of the liquidation procedure;

d) the Bankrupt Entity may not incur any additional obligations (including the payment of taxes, duties and other mandatory payments), except expenses directly connected with the liquidation procedure;

e) the calculation of forfeitures (i.e., fines and penalties), interest and other economic sanctions for all types of the Bankrupt Entity’s indebtedness terminates;

f) information on the financial condition of the Bankrupt Entity ceases to be deemed confidential or that which constitutes a commercial secret;

g) arrests placed upon the Bankrupt Entity’s property or other restrictions on the disposal of such property are canceled. The imposition of new arrests or other restrictions on the alienation of the Bankrupt Entity’s property will not be permissible;

h) claims against the debtor, which arose during the bankruptcy procedure, may be brought forward only within the framework of the liquidation procedure within two months from the date of the official publication of the notice on the recognition of the debtor as bankrupt and the commencement of the liquidation procedure. All creditors with claims submitted after the term established for their submission and unregistered creditors’ claims will be settled in the sixth priority (see below) of the liquidation procedure; and

In addition to the above consequences, the authority of the Bankrupt Entity’s management bodies is terminated, unless done so previously, from the day of the approval of the Bankruptcy Resolution, and the Bankrupt Entity’s chief executive is dismissed from his position. Furthermore, the authority of the owner (owners) of the Bankrupt Entity’s property is also terminated, unless this was done previously.

Procedurally, in order to uncover all possible creditor claims that arose during the bankruptcy proceedings, an announcement must be published on the official website of the Highest Commercial Court of Ukraine regarding recognition of the debtor as bankrupt and the commencement of the liquidation procedure. The notice must contain (i) the name and requisites of the Bankrupt Entity, (ii) the name of the commercial court in which the bankruptcy proceedings have been ongoing, (iii) the date of the court’s decision to recognize the debtor as bankrupt and initiate liquidation, and (iv) information about the “liquidator” or liquidation commission (hereinafter the “Trustee”).

During the liquidation procedure the Bankrupt Entity’s owner (or property management body) may at any time prior to the completion of the liquidation procedure satisfy all competitive creditors’ claims or provide cash to the Bankrupt Entity to satisfy creditor claims. The Bankrupt Entity’s owner (or property management body) may also participate in the composition of the Trustee’s report and settlement agreements and submit a petition to extinguish the indebtedness or move to a rehabilitation procedure.

A. The Trustee and the Liquidation Commission

In its Bankruptcy Resolution, the commercial court commences the liquidation procedure and appoints the Trustee who is selected from the register of arbitration adminstrators. It will also appoint the members of the liquidation commission based on the agreement between the arbitration administrator and the creditor committee.

The liquidation commission must include the representatives of the creditors, the shareholders/ participants, the Bankrupt Entity’s financial bodies and workers’ unions. If necessary, the liquidation commission may also include representatives from the State Body for the Supervision of Insurance Activities, the Antimonopoly Committee, the State Property Fund and bodies of local self-governance.

In order to fully appreciate the task laid upon the Trustee’s frail shoulders during the liquidation procedure, one may simply review the Trustee’s overly broad list of authorities, which include the power to:

1. accept the Bankrupt Entity’s property into its authority and take measures for ensuring its safe-keeping;

2. management functions and dispose of the Bankrupt Entity’s property;

3. inventory and appraise the Bankrupt Entity’s property;

4. analyze the Bankrupt Entity’s financial condition;

5. carry out the authorities of the Bankrupt Entity’s chief executive (management body);

6. chair the liquidation commission and form the so-called “liquidation mass” (hereinafter the “Bankrupt Estate”);

7. present claims to third parties for the return of the Bankrupt Entity’s accounts receivable;

8. exercise the right to receive credit to effectuate severance payments to employees dismissed as a result of the Bankrupt Entity’s liquidation. The severance payments to the Bankrupt Entity’s employees must be effectuated by the Trustee on a first priority basis from any funds received from the sale of the Bankrupt Entity’s property or credit received for such purpose; 9. inform the Bankrupt Entity’s employees of their dismissal, and carry out their dismissal in accordance with labor legislation;

10. submit pursuant to the established procedure objections to current creditor claims toward the debtor for obligations, which arose during bankruptcy proceedings and are unpaid;

11. submit to a commercial court a petition to recognize the transactions of the debtor as invalid on the specific grounds provided by the Law; 12. search, identify and take back the Bankrupt Entity’s property in the possession of third parties;

13. transfer the Bankrupt Entity’s documents, which are subject to mandatory safe keeping by law;

14. sell the Bankrupt Entity’s property to satisfy claims included in the register of creditor claims;

15. inform the State Agency on Bankruptcy Issues of his/her appointment within a ten-day period from the day of the commercial court’s Bankruptcy Resolution and provide information to the State Agency on Bankruptcy Issues for inclusion into the unified database of enterprises subject to bankruptcy proceedings;

16. in case the Bankrupt Entity’s activity is connected with state secrets, take measures to liquidate the body responsible for maintaining state secrets. In this case, upon agreement with the State Security Service of Ukraine, the Trustee must appoint the liquidation commission for such special body according to special rules established by law;

17. maintain the register of creditors; and

18. carry out any other authorities provided by the Law.

During the performance of his/her functions, the Trustee has the right to send claims to third parties with joint liability for the obligations of the Bankrupt Entity in order to complete the bankruptcy procedure. The amount of such claims is the difference between the amount of creditor claims and the Bankrupt Estate. If bankruptcy was brought about by fault of the Bankrupt Entity’s founders (participants, shareholders) or other parties, including the debtor’s chief executive, who have the right to give instructions that are mandatory for the debtor or in any other way determine the debtor’s activities, such parties can be subjected to joint liability in case the Bankrupt Entity has insufficient funds to cover creditor claims. Any amounts claimed in this manner will be included into the Bankrupt Estate and may only be used for the satisfaction of creditor claims in the relevant priority.

In order for the Trustee to carry out its authorities, the management bodies must transfer all of the Bankrupt Entity’s accounting and other documents, seals, stamps, and material or other valuables to the Trustee within fifteen (15) days from the Trustee’s appointment. The Trustee also takes over the rights of the Bankrupt Entity’s management bodies and chief executive, including the right to order duplicate seals and stamps in case of their loss. This latter right is important in case the management or chief executive claims to have lost the Bankrupt Entity’s seal, which could significantly delay the bankruptcy proceedings.

Throughout liquidation the Trustee may only use one bank account of the Bankrupt Entity. All other bank accounts must be closed and the funds therein transferred to the account designated for the liquidation procedure. Any other funds located during liquidation must also be transferred to the designated account. The designated account is used for payments to creditors and day-to-day payments and expenses. The Trustee must report to the creditor committee at least once per month and, if required, to the commercial court and the State Agency on Bankruptcy Issues on the status of liquidation.

B. The Bankrupt Estate

All types of the Bankrupt Entity’s property or property rights must be included into the Bankrupt Estate, including those which belong to it on the date the liquidation procedure is commenced as well as those which are discovered during the course of the liquidation procedure. Even fungible goods possessed or used by the Bankrupt Entity must be included into the Bankrupt Estate. The only property not included into the Bankrupt Estate is the Bankrupt Entity’s socalled “state-owned residential fund,” which includes dormitories, day care centers and other objects of the debtor’s communal infrastructure, if any. Such properties are transferred into the communal ownership of the relevant community without additional terms and conditions.

Note that all properties subject to pledge (lien, arrest or other type of security) are not included into the Bankrupt Estate; such properties must be used exclusively for satisfaction of the pledge holder’s claims (i.e., secured creditors). Secured property may only be sold by the Trustee upon consent of the secured creditor. Any cash remaining after covering secured claims and expenses connected with the receipt, storage and sale of secured property must be included into the Bankrupt Estate.

Finally, once the Bankrupt Estate is distinguished from the general property of the Bankrupt Entity, the Trustee must initiate the apportionment of the Bankrupt Estate for purposes of satisfying creditor claims.

C. Sale of the Bankrupt Entity’s Property

In order to prepare for the sale of the Bankrupt Entity’s property to cover creditor claims, all property in the Bankrupt Estate must be appraised by the Trustee. Unfortunately, the Law does not provide a specific procedure for appraising the value of such property.

Instead, all appraisals are carried out according to the presently existing appraisal procedure provided by Ukrainian legislation, and any property to be sold at an auction will be valued according to its initial cost. In any event, a licensed appraiser should be hired to establish the official value of the property at the expense of the proceeds received from production activity or the sale of property.

Once all property in the Bankrupt Estate is properly valued and inventoried, the Trustee may begin the sale of such property either by conducting an auction or by selling directly to legal entities or natural persons. Regardless of the methodology, theoretically, the Trustee’s chosen method of sale should ensure that the property will be sold for the highest possible price.

In case the Trustee deems that an auction is the optimal vehicle for selling the property in the Bankrupt Estate, he/she must organize the auction in accordance with rather strict rules. Property that may be sold at an auction includes (i) fixed assets (real estate, unfinished construction, transportation/vehicles, construction materials, etc.), (ii) separate structural subdivisions, (iii) non-current assets, and (iv) accounts receivable via the assignment of the Bankrupt Entity’s right to claim under agreements.

1. Direct Sale

As an alternative to an auction, the Trustee may sell the following property via direct sale to legal entities or natural persons:

1. fixed assets with a remaining balance value that does not exceed 1,000 hryvnias and any other non-current tangible assets, commercial materials, and low-cost and non durable objects with a turnover or value that is insufficient for conducting an auction.

2. property that has gone unsold at an auction;

3. property that has gone unsold via a commodity exchange;

4. property that has been subject to one purchase proposal after publication of the announcement of an auction;

5. securities of a private joint stock company or an equity share in a limited liability company, which belong to the debtor and are being bought out by such company or its shareholders (participants).

Whether the auction or direct sale option is chosen, the Trustee is not permitted to conclude sale-purchase agreements which call for installment or deferred payments.

2. Auction

Procedurally, the Trustee must contract with a licensed organizer to conduct an auction. The organizer must be chosen via a tender amongst legal entities or natural persons with the proper license, at least three (3) years of experience in conducting auctions and the lowest price for conducting the auction. Of course, the organizer may not be an interested party in relation to the debtor, creditors or the Trustee.

Ukrainian citizens, foreigners, Ukrainian legal entities and foreign legal entities may participate in an auction, provided they have properly undergone the required registration steps. Neither the Trustee nor the organizer may establish rules that would place participants on unequal footing.

The Trustee is responsible for ensuring proper notice of an auction by placing an announcement on the websites of the State Agency for Bankruptcy Issues and the Highest Commercial Court within fifteen (15) working days prior to the date of the auction. The announcement must include information on the property subject to sale, its description and its location, as well as the date and time of the auction. It must also include the initial value, the amount of the guaranteed deposit, the registration procedure, the procedure and required documentation for participants, the criteria for winning the auction, the method to obtain detailed information about the auction, etc.

The organizer must conduct the auction within two (2) months from the date of its contract with the Trustee. Auctions, except those held by electronic means, must be held on working days at working hours. In case of electronic auctions, the website must contain the full information necessary for participants to place timely and acceptable bids.

Prior to the auction, the participants must be informed of the terms and conditions of the agreement to purchase property, the minimum bidding amounts and the initial value of the property. The specific procedural details of the auction procedure are quite complex and beyond the scope of this article, but once the Trustee and a bidder agree upon an acceptable price for specific property of the Bankrupt Entity, the parties must conclude a sale-purchase agreement in conformity with the terms and conditions announced with the auction.

All funds received from the sale of the Bankrupt Entity’s property must be paid out to satisfy the claims of creditors. Significantly, claims are repaid in the following priority:

1. The following claims must be satisfied first:

a) salary-related debts to existing and dismissed employees, including pay for unused annual vacation, funds due for paid leaves (maternal, medical, military, sabbatical, etc.), social insurance and pension contributions, severance pay, etc.;

b) creditor claims under insurance agreements;

c) expenses connected with bankruptcy proceedings in the commercial court and the liquidation commission’s work, including a wide variety of expenses:

(i) for the payment of court fees;

(ii) of creditors for carrying out an audit, if an audit was performed according to the decision of the commercial court at the expense of their own funds; and

(iii) of the applicant for publication of notices regarding the initiation of bankruptcy proceedings, the Rehabilitation procedure and recognition of the debtor as bankrupt;

(iv) for the official publication of information on the procedure of the sale of the Bankrupt Entity’s property; (v) for the mass media publication of information concerning the resumption of bankruptcy proceedings in case a concluded settlement agreement is subsequently deemed invalid;

(vi) related to payment of principle cash remuneration to the arbitration administrator;

(vii) of the arbitration administrator connected with the performance of the authority of the asset administrator, Sanator or Trustee;

(viii) of the arbitration administrator (asset administrator, Sanator, Trustee, etc.) connected with the maintenance and safe-keeping of the Bankrupt Entity’s property assets.

2. Claims arising from the Bankrupt Entity’s obligations due to damages caused to the life and health of citizens by capitalizing corresponding payments during the liquidation procedure, including payments to the social insurance fund for professional accidents and sicknesses (for citizens insured in this fund), obligations for payments to the state pension fund and other social insurance funds as well as claims of citizens-principals (investors) of trust associations or other subjects of entrepreneurial activity;

3. Claims for the payment of taxes and duties (mandatory payments);

4. Claims of creditors which are unsecured by pledge (collateral), including creditor claims stemming from obligations that arose during the disposal of the Bankrupt Entity’s property or during the Rehabilitation procedure;

5. Claims for the return of contributions of the workers’ collective members to the authorized capital of the Bankrupt Entity. Claims related to the payment of additional remuneration to the Sanator or Trustee in the amount of five (5) percent of the volume of assets collected in favor of the debtor (return of cash funds, property, property rights, etc.) which were held by third parties during the bankruptcy proceedings. Claims related to the payment of additional remuneration to the Sanator or Trustee in the amount of three (3) percent of the volume of repaid claims of competitive creditors whose claims were subject to out-of-priority satisfaction but became competitive creditor claims according to the Law; and

6. All other claims not mentioned above.

The claims of each of the succeeding priorities are satisfied as funds are credited to the main account of the Bankrupt Entity from the sale of its property after the complete satisfaction of the claims of the preceding priority. If there are insufficient funds to completely satisfy all claims in one priority, such claims are satisfied proportionately to the claims due to each creditor in the relevant priority group. In the end, all claims that remain unsatisfied due to insufficient property are considered to be repaid.

In the event that there are unsold assets at the expiration of the liquidation term and their immediate sale will lead to significant loss of value, the Trustee must transfer such assets for administration to a legal entity appointed by the commercial court. This legal entity will be responsible for continuing the efforts to sell the assets and extinguish creditors’ debts at the expense of those assets. The Trustee and the creditor committee are responsible for proposing candidates for the legal entity to which the assets will be transferred. The candidates must be sent to the commercial court no later than two months before the completion of the liquidation procedure. Of course, the candidates may not be creditors of the Bankrupt Entity or connected with its shareholders/participants or a debtor before the Bankrupt Entity or a party to a court procedure involving the Bankrupt Entity.

The Trustee must also send to the commercial court the total volume of unsold assets, the reason for the inability to sell the assets and the total amount of unsatisfied creditor claims as well as a list of unsold assets, information about such assets, and the officially appraised value of such assets.

Finally, if any property remains after the satisfaction of creditor claims of a bankrupt legal entity, it is transferred to the owner or its authorized body. Before formally wrapping up the Bankrupt Entity’s business activities, the Trustee must present a report and liquidation balance to the commercial court which is handling the bankruptcy proceedings. Along with these documents, the Trustee must attach an inventory of the Bankrupt Estate; information on the sale of the Bankrupt Estate (with reference to all concluded sale-purchase agreements); a copy of the salepurchase agreements and corresponding transfer-acceptance acts; the register of creditor claims indicating the amounts repaid; and the documents confirming repayment of creditor claims.

Thereafter, the commercial court will review the Trustee’s report, taking into consideration any opinions of the creditor committee or separate creditors, and confirm the report and liquidation balance. Upon receiving such approval, the Trustee must inform the State Agency on Bankruptcy Issues about the completion of the liquidation procedure. Once liquidation is completed, there are two possible results:

1. The Bankrupt Entity will have no more property after satisfaction of all creditor claims, or it will have insufficient property to continue its functions. In such cases, the commercial court will completely liquidate the Bankrupt Entity and send a copy of its decision to the relevant registration authority (i.e., the body that carried out the original state registration of the Bankrupt Entity), the state tax inspection, the state statistics body, among others; or

2. The Bankrupt Entity will have enough property to satisfy all creditor claims and enough property assets to continue its activities. In this case, the above entity will be considered free of debt, and may carry on its business.

However, if the commercial court does not approve the liquidation report because it finds that the Trustee did not uncover or sell all of the property assets of the Bankruptcy Estate necessary to satisfy all creditor claims, then the commercial court will appoint a new Trustee. This new Trustee will head the liquidation commission and complete the liquidation procedure in accordance with the Law. Thereafter, the bankruptcy proceedings will terminate upon final approval of the new Trustee’s liquidation report. In any case, the Trustee is responsible for ensuring the proper execution, order and storage of all documents of the Bankrupt Entity during the liquidation procedure, including all financial and commercial documents.

VI. The Settlement Agreement Option

At any stage of the bankruptcy proceedings, the debtor and its creditors may decide to enter into an agreement on the deferment of debt repayment, an installment plan for repayment, and/or debt forgiveness (write off). In this case, the creditor committee will permit the parties to enter into a settlement agreement (“Settlement Agreement”). This decision is made by a majority vote of the creditor committee, and will only be approved with the prior written consent of all creditors whose claims are secured by pledge of the debtor’s property.

As a rule, Settlement Agreements may be concluded in relation to creditor claims that are secured by collateral or claims of the second and subsequent priorities. If the conditions of a Settlement Agreement call for deferred or installment payments or forgiveness of debt, the relevant state enforcement body must provide its consent to the parts of the agreement related to the payment of taxes and other mandatory state payments. Any tax debt which arose more than three (3) full calendar years prior to the submission of a bankruptcy claim to a commercial court will be deemed irrecoverable and written off. Any tax debt which arose within three (3) calendar years of the submission of a bankruptcy claim to a commercial court will be subject to deferred or installment payments or written off under the conditions of the Settlement Agreement.

Debts related to salary payments, including unused vacation, paid leaves, medical leaves, severance payments, etc., may not be subject to installment or deferred payment or forgiveness.

Debts related to payments to the social insurance funds and the mandatory pension fund also may not be written off under a Settlement Agreement.

In all cases, the Settlement Agreement must adhere to the priority for repayment of creditor claims described above. Conditions for creditors who don’t participate in the voting or voted against a Settlement Agreement may not be worse than those established for creditors who voted in favor of the Settlement Agreement in relation to their relevant priorities of repayment. Settlement Agreements must be in writing and must be approved by the commercial court hearing the bankruptcy case. A Settlement Agreement comes into force on the day of its approval, and becomes binding on the Bankrupt Entity, secured creditors and creditors in the second and subsequent priorities.

According to the Law, Settlement Agreements must contain provisions (i) on the debt amount and the terms and procedures for performance of the debtor’s obligations; and (ii) the deferment, installment or forgiveness of debts or a portion thereof. In addition, such agreements may contain terms and conditions regarding the performance of the debtor’s obligations by third parties or other methods permitted under Ukrainian law.

All secured creditors must agree to the Settlement Agreement within seven (7) days from the date of the creditor committee’s decision to conclude a Settlement Agreement.

In the event that any of the secured creditors objects to the Settlement Agreement, the remaining secured creditors may either (i) separate secured items from the debtor’s property, sell them at an auction, and satisfy the objecting creditor’s claim from the sale proceeds or (ii) buyout the debt owed to the objecting creditor. If all of the secured creditors vote against the Settlement Agreement, the other creditors may either (i) separate secured items from the debtor’s property, sell them at an auction and satisfy all secured creditor claims or (ii) buyout all of the debt amounts owed to secured creditors according to the register of creditor claims.

The parties to a Settlement Agreement must submit an application to the commercial court for its approval within five days after its conclusion. For this purpose, the text of the agreement, the relevant minutes of the creditor committee and the list of creditors must be submitted along with the application. Other information includes a description of the debtor’s obligations for salaries, salary-related and severance-related payments before existing and dismissed employees, first priority debts (except secured creditor claims), and any written objections by creditors. The commercial court considers the application at a hearing with the participation of all creditors who wish to express their objections, even if they voted in favor of the Settlement Agreement.

On the one hand, if the commercial court approves the Settlement Agreement, the debtor must commence the repayment of creditor claims according to the agreed upon schedule. Consequently, the commercial court has the right to terminate bankruptcy proceedings. The arbitration administrator (asset administrator, Sanator or Trustee, depending on the stage of the bankruptcy proceedings) must inform the debtor’s chief executive or body responsible for appointing the chief executive (management body) regarding the court’s approval of the Settlement Agreement within five (5) days from the date of court approval. However, the Law provides that the arbitration administrator, if necessary, may continue to perform his or her function until such time as a chief executive or management body can be appointed by law.

The commercial court has the right to subsequently invalidate or terminate Settlement Agreements in certain instances at the initiative of any competitive creditor. In this case, the bankruptcy proceedings will be resumed and a corresponding decision will be issued by the court with an officially published announcement.

On the other hand, if the commercial court refuses to approve the Settlement Agreement, the bankruptcy proceedings will continue at their present stage. The commercial court may refuse to approve such an agreement if it discovers a violation of the procedure for concluding Settlement Agreements or the terms and conditions of such agreement contradict Ukrainian legislation. In this case, the parties are free to negotiate a new Settlement Agreement on different terms and conditions, taking into consideration the court’s grounds for rejecting the original Settlement Agreement.

VII. Ukrainian Bankruptcy Procedures Connected With Foreign Bankruptcy

The bankruptcy procedure connected with bankruptcy in a foreign country is applied on the basis of reciprocity, unless otherwise provided by an international agreement to which Ukraine is a party. This procedure will not be applied in case of bankruptcy proceedings involving banks and financial institutions, but is applied in the following cases:

1. a commercial court hearing a current bankruptcy case in Ukraine receives an application from a foreign bankruptcy trustee (asset manager, sanator, liquidator, etc.) regarding the recognition of a foreign case and judicial assistance or a commercial court receives a request from a foreign court to cooperate in a foreign bankruptcy case;

2. a commercial court hearing a current bankruptcy case in Ukraine sends a request or an arbitration administrator in Ukraine submits an application to a foreign court regarding the recognition of a bankruptcy case initiated in Ukraine and judicial assistance and cooperation in connection with such case;

3. a commercial court receives an application of a foreign bankruptcy trustee regarding the recognition of a foreign bankruptcy procedure with a request for judicial assistance and cooperation in connection with such foreign case.

Ukrainian commercial courts may not apply foreign aspects of bankruptcy if their application contradicts public order, state sovereignty and the general principles of Ukrainian legislation. In addition, Ukrainian commercial courts may refuse to apply this procedure if the relevant foreign court refuses to cooperate with the commercial court or arbitration administrator. In all cases, the Ukrainian commercial court will base its decision on the following principles:

1. bankruptcy proceedings against a debtor, which is created and acts in accordance with Ukrainian legislation and is located in Ukraine, are the primary proceedings in relation to any other foreign proceedings;

2. bankrutpcy proceedings against a debtor, which is a permanent representative office of a business entity of Ukraine in a foreign state, are secondary to foreign proceedings in relation to the primary proceedings in Ukraine;

3. bankruptcy proceedings initiated in a foreign state against a debtor, which is created and acts in accordance with a foreign state’s legislation and is located outside of Ukraine, are the primary foreign proceedings;

4. bankruptcy proceedings against a debtor, which is a permanent representative office in a foreign state of a business entity, which was created and acts in accordance with a foreign state and is located outside of Ukraine in a foreign state, are secondary to the foreign proceedings.

The recognition of foreign bankruptcy proceedings includes the recognition of foreign court decisions during such proceedings, decisions regarding the appointment, dismissal or replacement of the foreign bankruptcy trustee and decisions regarding the status of the foreign proceedings and its suspension or completion. Ukrainian commercial courts and arbitration administrators, who are involved in bankruptcy proceedings in Ukaine, are obliged to provide judicial assistance to foreign bankruptcy trustees or cooperate with foreign courts pursuant to Ukrainian bankruptcy laws and international agreements.

Foreign bankruptcy trustees must produce confirmation of their authority in order to exercise their rights and obligations in Ukraine. The method of confirming authority will depend on the relevant international agreement to which Ukraine is a party. Under the Law, foreign bankruptcy trustees are instructed to act “conscientiously and rationally”; any non-performance of or failure to perform their obligations can lead to their removal from the proceedings and possible liability for damages caused to any creditors or the debtor. Foreign bankruptcy trustees must submit any applications, requests and documents in the Ukrainian language and must be assisted by a translator at all stages of the proceedings at their own expense.

Ukrainian commercial courts must review all applications and duly executed documents submitted by a foreign bankruptcy trustee within three (3) days. At this point, the commercial court may begin to provide judicial assistance in protecting the debtor’s assets and interests of creditors, including the collection of evidence or information about the debtor’s assets, business operations and all rights, obligations or liabilities. If these actions tie in closely with primary bankruptcy proceedings in Ukraine, the commercial court may refuse to provide judicial assistance.

The debtor has a thirty (30) day period to submit any objections against the foreign bankruptcy trustee’s application. Once this period has lapsed, the court will appoint a court hearing and inform the foreign bankruptcy trustee and debtor in writing within three (3) days from the date of its decision. Having reviewed all documentation and heard all explanations of the parties the court will issue a decision on whether or not to recognize the foreign bankruptcy proceedings. This decision will be sent to the foreign bankruptcy trustee and debtor within a three (3) day period.

Acommercial court may refuse to recognize foreign bankruptcy proceedings in cases provided by international agreements or, if such cases are not provided, in the following situations:

1. the decision of the foreign court regarding the initiation of foreign bankruptcy proceedings has not yet come into legal force;

2. the party against which foreign bankruptcy proceedings have been initiated was not properly informed about the consideration of the case;

3. a Ukrainian commercial court has already issued a decision on the recognition of the foreign bankruptcy proceedings on the same grounds and such decision has already come into legal force;

4. the foreign bankruptcy proceedings are related to a debtor established under Ukrainian legislation;

5. bankruptcy proceedings in Ukraine have already come to a close;

6. the term established by Ukrainian law for presenting the foreign court decision for enforcement in Ukraine has passed;

7. enforcement of the foreign court decision would contradict public order, state sovereignty and the general principles of Ukrainian legislation.

A decision in favor of recognizing foreign bankruptcy proceedings will indicate (i) the full name and location (residence) of the debtor, (ii) the name of the foreign court which initiated bankruptcy proceedings, (iii) the full name and location (residence) of the foreign bankruptcy trustee, and (iv) the status of the foreign bankruptcy proceedings. This decision may be appealed pursuant to the procedure provided by the Commercial Procedure Code of Ukraine. The grounds for changes to or the cancellation of a decision include the improper application substantive or procedural law or changes in the circumstances which governed the court’s initial decision.

Upon recognition of foreign bankruptcy proceedings, the foreign bankruptcy trustee may apply for the following judicial assistance:

1. the suspension of the bankruptcy proceedings or other procedural actions related to the assets, rights, obligations or liabilities of the debtor, provided that all necessary measures have been taken to guarantee the satisfaction of creditor interests in Ukraine;

2. the suspension of the right to dispose of any of the debtor’s assets;

3. the extension of any judicial assistance granted pursuant to the Law;

4.the provision of additional judicial assistance pursuant to Ukrainian legislation or international agreements.

Once the creditor claims under the foreign proceedings have been included into the approved register of creditor claims or the rehabilitation plan has been accordingly amended, all judicial assistance will cease. During the entire term of the bankruptcy proceedings, the foreign bankruptcy trustee and the commercial court must cooperate in the following ways:

1. the commercial court, under the principle of reciprocity, must cooperate with foreign courts or the foreign bankruptcy trustee by way of issuing judicial instructions to the arbitration administrator (asset administrator, sanator or liquidator) in Ukraine;

2. the arbitration administrator has the right to cooperate with foreign courts and the foreign bankruptcy trustee during the performance of his or her functions;

3. the arbitration administrator must immediately inform the commercial court in writing regarding his or her cooperation with a foreign court or foreign bankruptcy trustee.

Cooperation can come in the form of actions taken in the foreign state, the transfer of information to foreign courts or foreign bankruptcy trustees, the coordination of acts involving the management of the debtor’s assets and commercial activity, and the coordination of judicial assistance in relation to the same debtor. The Ukrainian commercial court may suspend or restrict any cooperation at its own initiative or upon the request of a party to the bankruptcy proceedings if it will cause damages to either the debtor or creditors.

In certain cases the foreign bankruptcy proceedings and Ukrainian bankruptcy proceedings may be considered to be mutually connected and judicial assistance may only be provided under certain conditions. For example, if the application to recognize foreign bankruptcy proceedings was submitted after the initiation of Ukrainian bankruptcy proceedings, judicial assistance may not exclude the possibility of the satisfaction of Ukrainian creditor claims. If the application to recognize foreign bankruptcy proceedings was submitted or approved prior to the initiation of Ukrainian bankruptcy proceedings, then the issue of judicial assistance will be reconsidered and, if necessary, amended or suspended by the court if it becomes inconsistent with the Ukrainian bankruptcy proceedings.

In the event that several foreign bankruptcy proceedings have been initiated in relation to one debtor, the Ukrainian commercial court may provide judicial assistance under the following conditions: (i) the provision of judicial assistance to the foreign bankruptcy trustee of a secondary foreign bankruptcy procedure must consistent with the judicial assistance provided during the primary bankruptcy procedure; and (ii) if another secondary bankruptcy procedure is recognized after the recognition of a previously recognized secondary bankruptcy procedure, the commercial court will provide, amend or suspend judicial assistance for purposes of bringing consistency to such secondary procedures.

VIII. Conclusion

This article focuses on the general bankruptcy procedure for legal entities in Ukraine. Note, however, the Law contains an entire section on the peculiarities of bankruptcy for specific types of businesses, including enterprises with state-owned shares, urban-development enterprises, enterprises involved in ultra-dangerous activities, agricultural enterprises, insurance companies, joint investment institutions and securities companies, sole proprietors (citizens), entrepreneurs (citizens), farming enterprises, etc.

The bankruptcy law is constantly criticized, subject to proposed amendments, and the results of its application are often unpredictable. One of the major criticisms removed by the newest version of the Law was that the arbitration administrator was tempted by creditors to mold his or her decisions to the creditor’s interests. The stricter rules and liability imposed on arbitration administrators, including the necessity to receive licenses, registration rules and automatically chosen administrators, somewhat softened the provision of the Law that allowed creditors to give additional compensation to the arbitration administrator for “other” roles it plays in receipt of “favors.”

Many critics still complain that the newest version of the Law is based on too many Western concepts of bankruptcy that are foreign to Ukrainian enterprises and are outright ineffective in a somewhat hostile market environment. For example, some critics argue that the moratorium on satisfying creditor demands is a cover for unscrupulous enterprises.

In spite of these criticisms, as more and more companies apply the new bankruptcy procedure, the major flaws of the Law will be revealed and the necessary changes will be ironed out.

At this point, we can only hope that this Law will be enforced, bringing with it increased efficiency to the Ukrainian market.

Frishberg & Partners Litigation and Arbitration Group

In our experience, litigation and arbitration can result not only in monetary damages but, more importantly, in the disruption of a company’s business. We believe that most disputes have the potential for an amicable resolution.

To this end, we try to position a case for an early settlement. Because of our pro-active approach, our clients often reach peaceful settlements instead of heading into full-blown litigation or arbitration proceedings. Should negotiations fail, however, we can immediately respond through the appropriate legal channels.

Our advocates are top Ukrainian experts in complex commercial litigation. For that reason, we usually succeeded in difficult and sometimes precedent-setting cases involving consumer products, maritime and aviation law, intellectual property, employment-related disputes and real estate claims.

In addition to participating in litigation with local and foreign entities, we act as legal counsel in arbitration matters administered worldwide by major arbitration institutions and ad hoc arbitration bodies. We can provide immediate advice in numerous jurisdictions and coordinate complex, cross-border actions quickly and effectively.

Note: information contained herein is provided as general information and shouldnot be relied upon as legal advice.