Should you have any questions with regard to the below please feel free to contact Mr M. Shkabry directrly: M.Shkabry@jvs.com.ua
Moratorium of satisfaction of creditor's demands
Declaration of bankruptcy and liquidation
General remarks
Bankruptcy procedure is regulated by the Law "On Restoration of Debtor’s Solvency or its Declaration of Bankruptcy" (Bankruptcy Law), which has been effective from 1 January 2000. The Law covers all kinds of entities, irrespective of their ownership forms and activities, excluding: financial institutions and banks. The peculiarities of matters surrounding their insolvency are covered in the Law "On Banks and Banking Activities";
- state-owned enterprises excluded from privatisation;
- municipal enterprises (if a local government body decides to exclude enterprises from the Law).
For some kinds of enterprises a special regime of bankruptcy proceedings, reorganisation, or liquidation is stipulated. These are:
- "city entities", in which workers and employees form not less than half of the inhabitants of the city, including family members of such workers and employees;
entities having over 5,000 employees; - "especially dangerous enterprises". This includes all enterprises in the chemical, petrochemical, mining, coal, metallurgical and atomic industries. The special regime stipulates the obligatory participation of representatives of the local government body or of the Ukrainian government. Some special measures are provided for the insurance and agricultural sectors and individual entrepreneurs and securities traders.
A bankruptcy procedure may be started by any creditor with undisputed claims only within 3 months after the non-payment of the debt. According to the Law a creditor may only instigate bankruptcy proceedings if his undisputed claims exceed 49,500 UAH (US$ 9,900).
The Law stipulates when an entity (a debtor) is allowed to apply to a court with an application for bankruptcy - if the satisfaction of the claims of a creditor or creditors results in the inability of the debtor to satisfy other creditors' claims, the debtor can start bankruptcy proceedings.
Preparatory session
Having taken a decision on the commencement of bankruptcy proceedings, the court shall designate a "preparatory" court session, to be conducted within 30 days. The purpose of the preparatory session is not only to listen to the creditor initiating the bankruptcy proceedings but also to the debtor on matters of his total indebtedness before other creditors, including obligations on salaries to employees and taxes to the budget and his total assets. Only after such a preparatory session and a study of the financial position of the debtor is the creditor allowed to publish a notice in an official newspaper declaring commencement of bankruptcy proceedings.
The financial position of the debtor is assessed by a special state body - the Bankruptcy Agency. The agency hires necessary specialists whose work shall be paid by the debtor. In addition, the court may require the debtor to conduct an audit which may be paid for by a creditor.
The preparatory session results in an interim order which states:
- the date on which the manager of the debtor's assets, as appointed by the court, shall submit the full list of creditor claims. The maximum period allowed for the manager to prepare such a list is two months and ten days from the preparatory session. (Anyone acquainted with such work understands that this period is too short, especially if the debtor is a big company.); the date of the "preliminary" court session, to be conducted not later than 3 months from the preparatory session;
- the date of the first general meeting of creditors, to be conducted not later than 3 months and 10 days from the preparatory session;
- the date of the court session at which the question of whether the debtor can be reorganized, declared bankrupt, or liquidated shall be defined.
Security of creditor claims
As soon as the bankruptcy proceedings have been started the court may freeze the debtor's assets. The court order can be taken either at its discretion or at a creditor's request. Freezing the assets includes:
- arrest of the debtor's assets;
- binding the debtor to save currency, securities, and other assets with third persons;
- prohibition of the debtor's officials and owners (shareholders) from committing any actions regarding the assets;
- prohibition of the debtor being reorganized or liquidated.
Security measures can be decided by the court at any stage of the bankruptcy proceedings and cancelled only after definition of the debtor's destiny - either approval of the reorganization report, termination of the reorganization, declaring the debtor bankrupt, or commencement of liquidation proceedings.
Moratorium of satisfaction of creditor's demands
Having decided to commence bankruptcy proceedings, the court shall enter a moratorium on satisfaction by the debtor of his creditors' demands. The moratorium covers any demand, including demands under writs of execution (which means the suspension of judgments and awards issued earlier against the debtor and of ongoing enforcement). After the moratorium is introduced the accrual of fines and penalties on delayed obligations is not allowed.
Preliminary session
After publication by a creditor or the debtor of information on the commencement of bankruptcy proceedings, any other creditors may submit their claims within 1 month to the court mentioned in the information. Having received a creditor's claim, the debtor, together with the asset manager, shall consider it and inform the creditor and the court whether the claim is recognized. The recognized claims are included in a list of creditors' demands and the debtor will be allowed to satisfy them whilst observing the principle of proportional satisfaction of all claims. Unrecognized claims will be considered at the court hearings and judgment taken on them.
The process of receipt and consideration of creditors' claims results in the preliminary court session. The main aim of the session is to decide which demands shall be satisfied and to appoint the date of the creditors' meeting. This session can be quite lengthy and has many hearings. At the preliminary session, the court shall consider the list of creditors' demands and decide which of the unrecognized claims shall be recognized and included in the list of creditors' demands. In fact, the preliminary session defines the creditors, thus ultimately deciding the debtor's destiny. The creditors' meeting elects a creditors’ committee whose main purpose is to choose the procedure to be applied to the debtor. One of the procedures, stipulated by Law, is reorganisation ("sanation"), i.e., restoration of the debtor's solvency or his declaration as bankrupt with subsequent liquidation.
Reorganization ("sanation")
To reorganise the debtor, the court makes an interim order. The reorganisation period shall not exceed 12 months. The court appoints a "sanation trustee", a person with a special licence. Mr.Shkabry and Mr. Salatiuk, partners of Jurvneshservice, and Mrs. Kulga, a lawyer of Jurvneshservice, have such a licences and work as trustees. The sanation trustee takes charge of the debtor's assets as well as taking other necessary actions.
Within 3 months of the appointment, the sanation trustee shall produce a reorganisation plan which is submitted to the creditors' committee and/or to an investor (a person having the intention of covering the debtor's debts). The main purpose of the reorganisation is to restore the debtor's solvency. Different measures, including restructuring, partial sale of assets and instalment plan of repayments may be used. A deadline of 4 months after the interim order of reorganisation (i.e. 1 month after submission) is given to the creditors' committee to consider the reorganisation plan. Having considered the plan, the creditors' committee may decide either:
to adopt it, with subsequent submission for court approval;
to reject it, with a further request to the court to recognize the debtor as bankrupt and to start bankruptcy proceedings;
to reject the plan, with a further request to the court to appoint a new sanation trustee manager.
If, within 6 months of the interim order on reorganisation, a reorganization plan is not submitted to the court , the court may declare the debtor bankrupt and start liquidation.
Where the decision is made to reorganise the debtor through the sale of his assets, such sale shall be made through public auction or tender. The sanation trustee decides whether the assets are to be sold in part or in whole. The decision is taken after a full inventory and assessment of the debtor's assets with determination of the initial price for sale. Public auctions or tenders shall be announced at least 30 days before they are held. In case the first auction (tender) is unsuccessful, a repeat one shall be held.
The reorganisation procedure is finished by a report of the sanation trustee to the creditors' meeting. The report includes information about auctions (tenders) and moneys obtained thereof, a plan for satisfying the claims, an estimate of whether all claims will be covered in full etc. Having discussed and approved the report, the creditors' meeting may request the court:
- to extend the reorganisation, when not all the measures stipulated by the reorganisation plan have been performed;
- to halt the bankruptcy proceedings, where all claims are satisfied;
- to declare the debtor bankrupt, where not all claims are satisfied and the creditors refuse to sign a conciliatory agreement on forgiveness of the debtor's debts.
Satisfaction of the creditors' claims is made according to the list of creditors' demands after the reorganisation report is approved by the court. Satisfaction is made in the following priority:
- First: pledged or mortgaged claims, dismissal pay to employees, bankruptcy expenditures including payment to the arbitrage managers, audit expenses etc.;
- Second: obligations to workers and employees;
- Third: taxes and other mandatory payments to the budget;
- Fourth: creditors' claims which were not secured by a pledge or a mortgage;
- Fifth: demands of members of the labour collective for the return of their shares in the authorized capital of the debtor;
- Sixth: any other claims.
Declaration of bankruptcy and liquidation
The declaration of the debtor as bankrupt and the start of the liquidation procedure is the final measure when the debtor's solvency cannot be restored by other measures.
The liquidation procedure is initiated only by a special court decree. From the moment the court adopts such a decree, any business activity of the debtor shall be terminated. The terms of any and all liabilities of the debtor are considered due, accrual of fines and penalties is halted, information on the financial position of the debtor is not confidential any more and a special notice is published in an official newspaper on the beginning of the liquidation procedure.
To undertake the liquidation, the court shall nominate a liquidator (a person with a special licence) and, in some cases, a liquidation commission. Having received the assignment, the liquidator takes over management of the debtor's assets, receives all accounting documentation etc., claims against any and all debtors of the debtor, ensures a search of the debtor's assets and their safety and forms a liquidation inventory. Having taken the necessary steps to identify and recover the debtor's debts and search the assets, the liquidator shall assess these assets and carry out their sale. Such sales are conducted at public tenders or otherwise, if the creditors' committee insists. The priority for satisfaction of creditors’ claims from the revenues of the debtor's asset sale is the same as for reorganisation. Having sold the assets and paid the creditors, the liquidator shall present a report and the liquidation balance to the court.
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