Dmytro Kapliuk, JSC Ukreximbank Member of the Management Board, CRO

The low level of debt recovery in Ukraine was one of the factors that hindered investment in Ukraine even before today's full-scale war. Weak regulation of bankruptcy procedures allowed debtors to avoid fulfilling their obligations to creditors; procedures were too long and insufficiently efficient, while the rules for selling debtors' property did not always allow for the best price and did not ensure reliable protection of the buyer's property rights.

The Bankruptcy Code of 2019 was expected to remedy this situation. On 21 October 2019, the Bankruptcy Code (the "Bankruptcy Code"), which was adopted by the Verkhovna Rada in October 2018 and was intended to address the gaps in the previous bankruptcy law, the Law of Ukraine "On Restoring Debtor's Solvency or Declaring a Debtor Bankrupt", came into force in Ukraine. International financial organizations were also involved in the development of the draft BIPL. When presenting the draft B2B Code, its developers aimed, among other things, to help improve Ukraine's position in the Doing Business ranking. The Code was aimed at improving the efficiency of bankruptcy procedures, the level of protection of creditors' rights, improving the procedure for selling debtor's property at auction, increasing the level of enforcement of contracts and court decisions, and regulating relations to restore the solvency of individuals who find themselves in a difficult financial situation and need state assistance.

However, despite numerous amendments to the Code, it has not met expectations, and gaps continue to be identified in the course of its application by Ukrainian courts. What is wrong with the new Code? On 15 March 2023, Deputy Minister of Justice Valeriia Kolomiets said at the Restructuring and Bankruptcy Forum that the current bankruptcy procedure in Ukraine is not effective. "Today, we understand that bankruptcy procedures are very inefficient. They are long, money is becoming cheaper, interest in the debtor's property is falling, and the investment climate is deteriorating," said Kolomiets.

According to lawyers, the issue is primarily the lack of regulation of the procedure involving the insolvency officer and the court. Even though the special law on insolvency was called a Code, it did not detail a number of issues that arise in practice. The number of articles in the new Code is less than in the old law. For example, the list of actions of the insolvency receiver, their order, and the timing of a particular court procedure (property disposal, rehabilitation or liquidation) are not regulated. In other words, the law does not establish a clear list of actions to be taken by the insolvency trustee, nor does it set out specific requirements for the form of reports to be submitted by insolvency trustees.

In addition, there is no provision for the liquidator to prepare an action plan after the opening of the liquidation procedure and to notify the creditors and the court of the schedule of debt repayment, which would set out at least the approximate time frame for actions to be taken to ensure the transparency of the bankruptcy procedure. The functions of the court in bankruptcy proceedings are also insufficiently defined; if we are talking about the need to respect and preserve the public interest (which means the protection of other creditors and the bankrupt individual) in the competition between individual creditors to settle their claims at the expense of the bankrupt, the court should have not only the right but also the obligation to monitor compliance with the deadlines and sufficiency of the actions of the insolvency officers (accordingly, the insolvency proceedings should be based on the principle of official clarification of the circumstances of the case rather than the principle of competition).

As a result, the bankruptcy procedure is currently inefficient and lengthy. No one is responsible for this (neither the court nor the insolvency officers nor the Ministry of Justice as the main government body responsible for forming and implementing state policy on bankruptcy). Representatives of banking institutions, whose claims in bankruptcy proceedings are usually secured by collateral, also add to the disadvantages of bankruptcy proceedings the absence of a specific provision in the Code requiring the insolvency officer to pre-approve any transfer of collateral for use (in particular, under the guise of "preservation") to third parties.

In practice, in all bankruptcy proceedings, the property is transferred for use to continue business activities to persons related to the debtor. This is the root cause of lengthy bankruptcy proceedings, as the debtor continues to use the bankrupt's production facilities without paying any money to creditors. This state of affairs and its considerable duration suits the debtor. Other shortcomings of current legislative regulation include lenient liability for bringing a company to bankruptcy (the law provides for a fine that does not even exceed the court fees in litigation).

Lawyers specializing in bankruptcy cases also draw attention to the imperfections of the work of the Disciplinary Commission of Insolvency Receivers under the Ministry of Justice. Among the alleged shortcomings of its work are the non-publicity of information on the content and motives of decisions made, as well as the overwhelming majority of insolvency receivers in the commission. A significant number of experts involved in the issue believe that it is long overdue to involve representatives of creditors (NBU, bank associations, investors' associations, public human rights organizations, etc.) in the commission and that it is imperative to publish the commission's decisions, including motivation.

The Code enables unscrupulous but technically legal schemes of debt recovery. The most important novelty of the new Code is the sale of the property at electronic auctions instead of selling bankruptcy assets through little-known exchanges. However, unscrupulous debtors have already found ways to circumvent the transparency and competitiveness of bankruptcy auctions by taking advantage of the Code's imperfections. The recent case of the first auction of property in Ice Terminal LLC bankruptcy indicates an attempt to implement unfair but legal schemes due to gaps in the Code. This case was not chosen for illustration by chance, as the creditor, in this case, is the largest corporate state-owned bank. Accordingly, an unscrupulous debtor harms the state, its economy, and its defense capabilities, which is unacceptable when Ukraine is fighting for its right to exist. In April 2023, an announcement was made to hold an auction to sell the bankrupt's property in this case. After that, three seizures of the bankrupt's property were imposed by various district general courts.

The auction for the sale of the property of Ice Terminal LLC was held on 3 May 2023 after the cancellation of these arrests. As a result, the winner was announced as FC Winstar LLC with a price offer of UAH 452 million. However, the auction was declared invalid due to the winner's failure to pay the proposed price. According to Article 86 of the Bankruptcy Code of Ukraine and paragraphs 90, 95, and 96 of the Procedure for Organising and Conducting Auctions for the Sale of Debtors' Property in Bankruptcy (Insolvency) Cases, if the winner of the auction fails to sign the auction protocol or fails to pay the price, the auction is declared void, and a new auction is scheduled. The above provisions require a new auction to be held for the further sale of the property, which was done by the liquidator.

It should also be noted that in the auction that was declared void due to non-payment of the price, the next price bid was UAH 450 million. In other words, it would be more appropriate to give the next bidder the right to pay the price offered since it is likely that court arrests may also disrupt the next auction. To this end, Article 86 of the Code and the above-mentioned provisions of the procedure should be amended. In addition, the guarantee fee (almost UAH 16 million) of FC Winstar LLC was not transferred by the electronic platform of the winner, Online Market LLC, to the bankrupt's account, as it was blocked by a court order.

The above further demonstrates the need for legislative changes so that the accumulation of guarantee fees takes place not on the accounts of electronic platforms but on the accounts of SE Prozorro.Sale. In particular, given the amount of the guarantee fee in this case, there is a risk of non-transfer of funds with subsequent self-liquidation (bankruptcy) of such an electronic platform. It is necessary to establish legislative norms (in the Code and legislation on state registration of real rights to immovable property) stating that seizures of bankruptcy property imposed after the opening of the liquidation procedure cannot serve as grounds for stopping the auction, registration of its results, and possible appeal over the results of such an auction. Such a provision would make it meaningless to initiate seizures of bankruptcy property to prevent an auction. The above proposals, along with the extension of the rights of secured creditors to require the secured creditor's approval of any transfer of pledged property to third parties, will minimize the existing risks as much as possible: taking possible actions to disrupt auctions, reducing the attractiveness of acquiring bankruptcy property for investors, limiting competition, and increasing the sale price of the property to maximize the satisfaction of creditors' claims.