Alexeyev V. S.

Oles’ Honchar Dnipropetrovsk National University (Ukraine)

The Amended Ukrainian Insolvency Law: Key Issues

In the course of restatement of Ukraine’s insolvency law (the Insolvency Act) that came into effect on 19 January 2013, several significant amendments were made. The changes were an attempt to create a more streamlined and efficient insolvency process and to remedy some of the real and perceived defects in the current law. In doing so, legislature implemented some fairly significant changes to the Insolvency Act which impact both debtors and creditors.

Before 19 January 2013, due to deficiencies in the drafting of the law, there was in effect no actual period during which transactions entered into by a debtor prior to the commencement of insolvency could be set aside. The amended Insolvency Act remedied this and introduced a new procedure for determining which transactions made before the commencement of insolvency may be set aside.

Under the new rules, a court will now be able, following an application from the insolvency manager or any creditor, to invalidate any transactions made by a debtor during a one-year period prior to the date of the commencement of insolvency proceedings, if such transactions resulted in the debtor:

— alienating assets, incurring undertakings or waiving proprietary claim(s) without consideration;

— performing obligations before they became due (this would not include an acceleration or mandatory prepayment of a loan but it would include a voluntary prepayment of a loan);

— entering into obligations as a result of which it became insolvent;

— alienating or acquiring assets not at their market value and as a result of which it became insolvent;

— making any cash payments or receiving payments in kind when the sum of creditors’ claims exceeds the value of the debtor’s assets;

— granting security.

The amended law does not impose any additional criteria for the invalidation of such transactions. For example, it does not expressly require evidence that the transaction resulted in preferential treatment.

The result of such invalidation will be that the relevant creditor will need to release the security (if any) or return the assets it received from the debtor or compensate the debtor for the market value of such assets (should it be impossible to return them in kind) and, in the case of a loan, the debtor would need to repay the loan to the creditor. We note that if a loan agreement is invalidated on this ground, any Ukrainian law security and/or guarantees/sureties provided in connection with that loan would fall away.

The law does seek to address creditors’ concerns in relation to these issues by determining that any creditors who have claims against a debtor as a result of the invalidation of their transaction will rank in the first rank of creditors irrespective of whether or not they had security. This would mean that even though a creditor’s security had fallen away, such creditor would rank pari passu with other secured creditors.

However, the provisions are poorly drafted in the sense that they do not carve out preferential transactions. For example, if a shareholder has an unsecured loan to the debtor (which would normally qualify for the fourth rank of priority) and such loan is invalidated pursuant to the above provisions, then claims of such shareholders would be elevated to the first rank as well.

A further consequence of this provision is that if a creditor’s security has fallen away, even though their claim will rank in the first priority, the law is unclear as to whether such creditor will continue to be treated as a “secured creditor”. The most likely scenario is that they would not, and as a consequence the creditor would lose its secured creditor status, including the right to block any rehabilitation plan or amicable settlement agreement.

The amended law allows both shareholders and directors of the debtor to be liable in certain circumstances to creditors of the insolvent debtor. Accordingly, any director or shareholder of a debtor or any other person which has control over the business or corporate governance of that debtor can be liable in the debtor’s bankruptcy if:

— the assets of the debtor are insufficient to satisfy the creditors’ claims in full; and

— the actions of such director, shareholder or any other person resulted in the debtor’s bankruptcy.

No guidance is given in the law as to what actions may give rise to such liability. Furthermore, the reference to “any other person” in the category of those who may be liable arguably extends liability to those acting as “shadow directors”.

Creditors will, therefore, need to be very careful that they cannot be deemed to have control over the business of a debtor in order to avoid being liable to other creditors.

Before 19 January 2013, unsecured competitive claims had to be submitted to the court within 30 days of each publication of the commencement of insolvency and the commencement of the liquidation phase of any insolvency, otherwise such claims were automatically discharged.

A positive development under the amended law is that a failure to submit a claim within the 30-day period will no longer result in the claim being discharged, but simply that its ranking will drop from the fourth rank (which is the rank applying to unsecured creditors) to the sixth (alongside all other claims not assigned a higher rank).

We note that there is an exception to these rules where there is ongoing litigation in relation to a claim at the time that the debtor enters insolvency. In this case a court will suspend the litigation and the claimant will need to submit a claim within 30 days after the insolvency announcement is made. Failure to do so will result in the automatic discharge of such a creditor’s claim.