Recently, the long-awaited bill No. 8060, dated 26 February 2018, was registered “Draft Code of Ukraine on Bankruptcy Procedures”, which is aimed at increasing the efficiency of the existing bankruptcy procedures of legal entities and introduces a bankruptcy system for individuals.

The bill was developed by a group of experienced legal and economic experts. The initiator was the People’s Deputy of Ukraine, Chairman of the Committee on Economic Policy Ivanchuk A. V. A special role of the Center for Commercial Law and the Ministry of Justice of Ukraine in the preparation of the bill prior to its initiation in a very difficult discussion atmosphere should be noted.

The draft Code of Ukraine on bankruptcy procedures itself consists of two main parts:

  1. “Book One. Corporate Bankruptcy”;
  2. “Book Two. Restoring individual’s solvency”.

If Book One is essentially a new edition of the current Law of Ukraine “On Restoring the Debtor’s Solvency or Recognizing It as a Bankrupt”, then Book Two is a revolutionary and highly debatable legislative act regulating the bankruptcy of individuals.

Currently, the subjects of bankruptcy procedures are only individual entrepreneurs. However, the long-lasting collapse of the credit and financial system, inflationary processes, downfall of the national currency and simultaneous liquidation of several dozen banks caused the urgent need for a regulatory settlement of financial insolvency for thousands of Ukrainian citizens. In order to release citizens from debt obligations, the legislator proposes an application of judicial procedures for debt restructuring, declaring bankrupt and debt repayment at the expense of their own property. It is these legislative novelties that are contained in the second book of the bill.

The bill’s authors had the best intentions, as discussed in the Explanatory Note to the bill: “…improving bankruptcy procedures, reducing the time limits for bankruptcy proceedings; ensuring significant improvement of business conditions in Ukraine in the areas considered by the World Bank and the International Finance Corporation when rating Doing Business, with the strategic goal of Ukraine to join the top twenty countries of the world in terms of doing business; ensuring equal rights and opportunities for the same protection of all debtor’s creditors of their legitimate interests in the bankruptcy procedure; reducing the possibility of abuse in bankruptcy procedures”.

According to expert estimates, it is the adoption of these changes that will enable Ukraine to substantially improve the efficiency of bankruptcy procedures and increase its rating in Doing Business  by 81 points for the component and by 9 points in the overall rating. For comparison, over the past 3 years, Ukraine managed to climb only 7 points in the overall Doing Business rating.

The main innovations of the bill have the following objectives:

  1. to eliminate unnecessary barriers and facilitate access to procedures, in particular, by a debtor himself;
  2. to increase opportunities for rehabilitation and create effective mechanisms for extrajudicial settlement;
  3. to exclude all provisions that may be considered as grounds for exemption from debts, except in cases where the creditors agree to it;
  4. to unite amicable settlement and rehabilitation into a single procedure;
  5. to improve conditions for participation in secured creditors’ bankruptcy procedures, for which purpose, in particular: to provide secured creditors with the right to initiate a bankruptcy case; to provide secured creditors with a possibility to participate in voting at decision-making; to establish that during the procedure of a debtor’s rehabilitation, at the request of a secured creditor, court may decide to terminate a moratorium on its claims, if a collateral will not be used for the procedure of the debtor’s rehabilitation;
  6. to increase the level of protection of the rights of all creditors, for which purpose, in particular: to transfer key powers from a committee of creditors to a meeting of creditors; to reduce quorum when reconvening the first meetings, if the first attempt failed because of the absence of creditors with the required number of votes; to introduce voting on approval of a rehabilitation plan by classes of creditors; to ensure participation of creditors in the choice of a receiver; to oblige a receiver to disclose information about financial condition of the debtor to the creditors and about the progress of the bankruptcy proceedings through the Internet; to prioritize claims of the current lenders before the tender ones;
  7. to shorten the terms of consideration of cases, in particular, by reducing the number of appeals;
  8. to improve provisions of the law related to the sale of a debtor’s assets thus providing the basis for the sale of property at the highest price, in particular: to introduce rules for supervision over the sale of essential assets; to ensure the sale of all property on a competitive basis at an auction; to improve rules for the notification of a sale of property (through the Internet);
  9. to ensure stability of contracts signed at an auction;
  10. to improve provisions that ensure protection of operating businesses, etc.

In addition, the bill takes into account the wishes of the banking community as for improving the situation of secured creditors in bankruptcy procedures, namely:

1) sale of property of bankrupts exclusively at an electronic auction through a single system that meets principles of transparency, similar to those introduced in the system of public procurement, which should ensure the sale of bankrupt property at the highest price;

2) compulsory agreement with secured creditors on the starting price of property, a lot, an auction step, an ad text, cost of retention, storage and expenses for the sale of mortgaged property. In the event that no agreement is reached, the matter shall be decided by court;

3) price reduction in the first re-auction is possible only with the consent of a secured creditor; if, in the opinion of the secured creditor, the price during the reduction has fallen too low, he may purchase the property at the starting price after the first re-auction; he shall pay for the purchased property by netting;

4) the same way, in case of winning the auction, a secured creditor shall pay for the purchased property by netting, paying only difference between the price and the amount of claims, as well as the costs of saving and selling the property;

5) a receiver’s duty is established to agree on the cost of saving the property with a secured creditor; in the event of a dispute, the amount of storage costs shall be determined by court.

Undoubtedly, this bill is designed to strengthen the protection of creditors’ rights, given the large number of debtors’ outstanding debts and the long duration of the existing bankruptcy procedures, as well as to stimulate the financial and credit system. Such an integrated approach to the settlement of economic problems of mass default on debts has a great social and economic significance. However, it is likely that during a discussion of the bill in the Parliament there will be a lot of comments, corrections and additional proposals. Nevertheless, the adoption of the bill in its final version will allow taking into account the interests of all market participants.