LAW FIRM DIRECTORY

Bankruptcy And Restructuring

The Great Shutdown

The main trends in the field of bankruptcy are related to the liquidation of state enterprises and banks. Changes in the relevant Ukrainian legislation are taking place at a slow rate, as is the bankruptcy procedure itself. Great expectations are associated with the implementation of an alternative mechanism, namely financial restructuring. However, the eponymously-named law raises a lot of questions which stimulate demand for the services of lawyers specializing in the respective practices

VITALY DUDIN

The paradox established in previous years is preserved and even aggravated: to set up a business in Ukraine is becoming easier, but to shut it down is far from easy. In the Doing Business-2017 rating our country managed to occupy 20th position in the "Business Registration" indicator, though in terms of bankruptcy (one of the most common ways in which businesses are terminated) the situation has worsened to 150th position. Long-awaited changes have not been introduced, although the transformations in related fields are taking place dynamically. In such conditions the work of lawyers has not been simplified, but the circle of tasks handled has expanded.

Taking into account the economic crisis the bankruptcy practice will continue to develop. One of the negative trends is the removal of insolvent banks from the market: seventy seven banks were declared bankrupts by the National Bank of Ukraine in two years, i.e. one third of their total number. The acuteness of the problem was such that in 2015 the concealing of the insolvency of a financial institution was made a criminal offense (however, one cannot yet find verdicts under this article in the register of court decisions). Despite anticipated growth many businesses will still be forced to go through the liquidation procedure. According to the State Property Fund of Ukraine, standing state enterprises caused 100 bln USD in losses per year. Consequently, the Ministry of Economic Development and Trade (MEDT) suggests liquidating and privatizing state companies. The reform assumes closure of 50 out of 1,300 state enterprises that stand idle. The corresponding pilot project "to develop a detailed liquidation plan" was launched last year (according to MEDT estimates, the termination of one company will cost 2,000-7,000 USD). Lawyers point out that the adoption of the new Law of Ukraine "On State Assistance to Business Entities" as provided for under the process of adaptation of legislation to EU competition law, will limit the ability of the state to support insolvent companies (the law will enter into full force and effect in 2017). It may be said that the elimination of non-strategic enterprises is elevated to the rank of a priority of state policy. Therefore, one will be forced to turn to the services of specialists in the area of bankruptcy more often.

Experts have different opinions regarding the role of the sectoral Law of Ukraine "On Restoring Debtor Solvency or Declaring a Debtor Bankrupt". Attention is drawn to the fact that the law in its title already declares the possibility of restoring the debtor solvency, though in practice rehabilitation is an extremely rare phenomenon. The idea of introducing a differentiated approach to deadlines, depending on the volume of debt and the size of the enterprise, is being discussed. Other people see the problem in the law-enforcement culture. Therefore, the adoption of a new version of the law in 2013 did not significantly change the situation, as the due dates specified in it are violated.

And neither can it be said that state policy in the area of regulation of bankruptcy procedures is coordinated. The improvement of legislation in this area is dismally slow. Draft law No. 3132, which is positively assessed both by the MEDT and the business community, was not adopted by Parliament (it provides for the automatic withdrawal of the moratorium in the event of delays in the process, the deregulation of the rehabilitation procedure, etc.). The document was on the parliamentary agenda at least six times. "What kind of investor attractiveness can we expect if draft laws just sit there on the shelf?" – Yuliia Klimenko, the Deputy Minister of Economic Development and Trade of Ukraine said commenting on this issue rather sternly. Neither were any of the draft laws on the bankruptcy of individuals adopted by Parliament. Perhaps this is due to the fact that the personal bankruptcy procedure was not taken into account in the Doing Business rating, the compliance with which is a priority of the government. However, with the introduction of the institution of private bailiffs the demand for the institution of individual bankruptcy increases.

The protracted bankruptcy procedure slows down economic growth: this does not allow resources to move into those sectors where they will bring the greatest benefit. However, contrary to negative estimates from the World Bank, the situation is not so dramatic.

However, lawyers admit that this area has become more transparent. Registries allowing quick access to the required information are available. A project for the sale of bank property using the ProZorro system was launched. Announcements on bankruptcy are promptly published on the website of the Supreme Economic Court of Ukraine (there is an argument that publications in Ukrainian do not allow foreign creditors to promptly make a claim against the debtor, despite the fact they are supported by Ukrainian lawyers after all).

The restructuring of existing debt under the new Law "On Financial Restructuring" No. 1414-VIII dated June 14, 2016 providing for new approaches to corporate debt restructuring in Ukraine can become a meaningful alternative to bankruptcy. The Law came into effect on October 19, 2016 and will be in effect for a period of three years.

According to this Law the debtor has the right to opt for restructuring, if it "finds itself in critical financial condition and its economic activities may be considered as having good prospects". The key point is that at least one Ukrainian or foreign financial institution should act as its creditor. The key role in this process is given to the National Bank of Ukraine. According to the National Bank of Ukraine the financial restructuring of enterprises' debts will enable the solving of the issue of the significant number of problem loans, the risk of bankruptcy and termination of the business activities of enterprise, which have temporary liquidity problems, but are able to restore sound business activity. Many things in the procedure will depend on the consent of the parties, which allows experts to talk about the more "informal" relations compared with the established regulation of bankruptcy. However, there is no absolute certainty that the flexibility would do good.

Will the financial restructuring become an alternative to bankruptcy? Perhaps, but not for everyone. The tool is not readily available for small business entities. Potentially the provisions of the law could be extended to a wide range of business entities: it is believed that the majority of Ukrainian companies are in financial distress. However, not every debtor is able to fulfill the requirements, such as reporting according to international standards over the last three years. Attention is drawn to the fact that the "prospects" of the enterprise will be established in each individual case, which is fraught with subjectivity. Moreover, the expert evaluation establishing this "prospective" is carried out at the expense of debtor. The debtor pays for the expert services on the preparation of the report on the inspection of financial and economic activities, the condition of collateral of the debtor and the property guarantor, forecasting of the major operating and financial indicators of the debtor and related parties for the period of restructuring of the liabilities (Article 11), "unless otherwise agreed by the parties".

The restructuring mechanisms may be different and are determined by the parties. However, the most favorable to the debtor will be waiver of part of the debt, and provision of new financing, as well as review of the interest rates and introduction of changes to loan contracts.

How did the adoption of the Law on Financial Restructuring effect the practice of national law firms? It is too early to assess the results of application of the mentioned Law, — noted Oleg Malinevskiy, a partner of FCLEX Law Company. — Its very adoption is definitely a positive event, since legislators are gradually filling the vacuum in relations between the debtor and creditor. Nevertheless, the law is not a panacea for solving existing problems in this sphere both because of the limited nature of the subject of its regulation and because of certain internal deficiencies".

The lawyer draws attention to the fact that the law provides for the possibility of introducing the financial restructuring procedure only with respect to those debtors that have financial institutions in the pool of their creditors. The latter are also given the defining role in making the key decisions. "In addition, legislators have not clearly and fully settled the question of the effect of the procedure, according to the adopted law, on the possibility of initiating the bankruptcy proceedings in line with the standard procedure", — added Mr. Malinevskiy.

The regulating body has made efforts to implement the provisions promoting the implementation of the law. Thus, the framework agreement on financial restructuring was approved on October 13, 2016, which, it is worth noting, gives the parties a lot of room for maneuver. Even from the principles of cooperation it becomes evident that a new kind of relationship, distinct from  market ideology, is being introduced in the legislative environment. The parties are required not only to comply with legal equality, but also to "protect the interests of each other". Moreover, certain principles can conflict with each other. For instance, the parties should cooperate on  transparent terms but at the same time prevent the disclosure of confidential information. It is important that the parties can authorize representatives to sign the restructuring plan. However, their appointment takes place only with the consent of all the parties to such agreement. The Parties shall endeavor to achieve successful results of the financial restructuring, honestly fulfill the provisions of the framework agreement, as well as "not to be limited only by the principles available in the agreement during coordination of actions". Certainly, the presence of many evaluatory concepts makes it almost impossible to use this tool without the support of lawyers. At the same time, each party has the right to withdraw unilaterally from the agreement. For this purpose it is necessary to send a formal written notice to the National Bank of Ukraine not less than 30 days before the withdrawal. According to the adopted document, its parties may be: 1) banks and non-bank financial institutions; 2) the Deposit Insurance Fund.

According to the framework agreement, the arbitration decision on the dispute will be final and binding on its parties. There is no certainty that such arbitration authorities will be competent authorities. Lawyers definitely see this as violation of the constitutional principle of the jurisdiction of all disputes to the courts. Nevertheless, the adoption of the law resulted from special circumstances and its implementation is not binding. Therefore, changes are very unlikely in this area, though amendments are possible in other aspects. For example, it is assumed that the requirements applicable to the debtor will be reduced: in particular, the rule is set out that the expert evaluation should be paid for by the creditor as the stronger party in financial terms.

In general, lawyers believe the adoption of the law on the financial restructuring to be a milestone event, but suggest not to overestimate it. In conclusion we would like to note that restructuring will not become a widespread phenomenon and at the first stage it will be confined to the range of large companies. In fact, some entities have previously entered into similar agreements, but they were obviously not based on the adopted law and were structured, inter alia, using elements of foreign law. Indeed, such options for business to escape a difficult situation are used routinely in the entire civilized world.

 

Bankruptcy

Leading FIRMS

 

1

 

1.

Ilyashev & Partners

 

2

 

2.

Law Firm Ario

 

3

 

3.

Alekseev, Boyarchukov and Partners

 

4

L.I. Group

5

 

FCLEX

 

Leading INDIVIDUALS

 

1

 

Julian KHORUNZHYI

( Law Firm Ario)

 

2

 

Roman MARCHENKO

( Ilyashev & Partners)

 

3

 

Oleksandr KHOMENKO

( Khomenko, Pita & Partners)

 

4

 

Sergey BOYARCHUKOV

( Alekseev, Boyarchukov and Partners)

 

5

 

Denys KYTSENKO

(Integrites)

 

OTHER NOTABLE PRACTITIONERS

 

Viktor BARSUK

(FCLEX)

Oleg KACHMAR

( Vasil Kisil & Partners)

 

Mykola KOVALCHUK

(L.I. Group)

 

Artur MEGERYA

(L.I. Group)

 

Anton MOLCHANOV

(Arzinger)

 

Iryna SERBIN

( Law Firm Ario)

 

Stanislav SKRYPNYCK

( Lavrynovych & Partners)

 

Artem STOYANOV

( LCF Law Group)

 

Mykola STRUTS

(IMG Partners)

 

Ihor SIUSEL

(Baker & McKenzie)

 

Andrii TREMBICH

( Gramatskiy & Partners)

 

Vladyslav FILATOV

( Sokolovskyi & Partners)

 

Restructuring

Leading FIRMS

 

1

 

Avellum

 

2

 

Sayenko Kharenko

 

3

 

Baker & McKenzie

 

4

 

Dentons

 

5

 

Asters

 

Leading INDIVIDUALS

 

1

 

Michael KHARENKO

(Sayenko Kharenko)

 

2

 

Glib BONDAR

(Avellum)

 

3

 

Serhiy CHORNY

(Baker & McKenzie)

 

4

 

Natalia SELYAKOVA

(Dentons)

 

5

 

Olexiy SOSHENKO

(Redcliffe Partners)

 

 

 

OTHER NOTABLE PRACTITIONERS

 

Vsevolod VOLKOV

(Integrites)

 

Oleh ZAHNITKO

(Integrites)

 

Igor KRASOVSKIY

(Jeantet Ukraine)

 

Oleksandr KURDYDYK

(DLA Piper)

 

Yulia KYRPA

(AEQUO)

 

Helen LYNNYK

(Gryphon Investment Consulting Group)

 

Iryna MARUSHKO

(Marushko & Associates)

 

Andriy NIKITIN

(FCLEX)

 

Ihor OLEKHOV

(Baker & McKenzie)

 

Oleksandr PLOTNIKOV

(Arzinger)

 

Iryna POKANAY

(Asters)

 

Roman STEPANENKO

( Egorov Puginsky Afanasiev & Partners Ukraine)

 

Artem STOYANOV

(LCF)

 

Nazar CHERNYAVSKY

(Sayenko Kharenko)

 

Armen KHACHATURYAN

(Asters)

 

* — Listed in alphabetical order UKRAINIAN LAW FIRMS 2016. A HANDBOOK FOR FOREIGN CLIENTS