LAW FIRM DIRECTORY

Dispute Resolution |

Oleksandr BONDARCHUK ,
Managing partner, Absolute

Oleksiy SOKOL ,
Head of bankruptcy &restructuring, Absolute

Contradictory nature

Court practice for consideration of bankruptcy cases: negative and positive aspects of the multidimensional positions of higher courts

Court practice in bankruptcy cases is in most cases contradictory — both because of imperfections in procedural legislation, and in connection with different approaches to application of provisions of the Law of Ukraine On Restoration of Debtor Solvency or Declaring It Bankrupt (Law on Bankruptcy). The attempt by the Supreme Court of Ukraine (SCU) to overcome discrepancies in the positions of the Supreme Economic Court of Ukraine (SECU) was not quite successful, but now there is hope that the updating of procedural codes will contribute to further formation of unified court practice and all existing contradictions will only benefit development.

The new version of the Law on Bankruptcy, which came into force on 19 January, 2013, introduced a number of logical (and not so) changes regarding not only the bankruptcy procedure, but also the jurisdiction over disputes directly or indirectly related to such a procedure. Thus, Article 10 of this Law, as well as Articles 12 and 16 of the Commercial Procedure Code of Ukraine (as amended after 19 January, 2013), which contain similar rules, introduce a rule according to which the court, pending a bankruptcy case, considers all property disputes with the claims against a debtor. According to the legislator, such disputes also include disputes on declaring invalid any agreements concluded by a debtor regarding recovery of a wage, reinstatement of a debtor's officials and officers in work. The only exceptions to this rule are disputes on payment (withholding) of monetary obligations (tax debt), defined in accordance with the Tax Code of Ukraine.

At first glance, this is a very convenient and logical rule, which should unify and systematize the process of consideration of bankruptcy disputes. But, as it turned out in the process of development of court practice related to application of these provisions, everything is not as simple as would be desirable. The main problem for national courts was the expression "the court pending a bankruptcy case", which was not explained in detail either by the Law on Bankruptcy, or by the information letter from the SECU published in March 2013. Therefore, national courts, which have traditionally never been able to come to a common opinion, began starting to "interpret".

 

DISPUTABLE SITUATIONS            

In the period of 2013–2016, the SECU panel failed to develop a common position on how bankruptcy disputes should actually be considered: starting from consideration of such disputes within bankruptcy cases without the opening of separate proceedings (or with the opening thereof — here the opinions are also divided), ending with consideration of only selected disputes (expressly provided for by law) within a bankruptcy case, and not selected — in separate proceedings, but by the same economic court considering the bankruptcy case.

Such multidimensional approaches to application of provisions of the Law on Bankruptcy often led to absurd situations. For example, in the middle of 2016 in three absolutely similar cases (disputes on declaring invalid three loan agreements in which the legal entity acted as a party in respect of which the bankruptcy proceedings were opened), the SECU (consisting of three different panels) came to three interesting but mutually exclusive conclusions:

— the first panel concluded that the dispute should be considered within the bankruptcy case in respect of the company, a party to the loan agreement;

— the second panel agreed with the legality of considering such dispute in a separate action proceeding;

— the third panel supported the conclusion of the court of first instance on the necessity to terminate the proceedings in connection with the fact that the dispute is not subject to consideration by the courts of Ukraine (all challenged agreements provided an arbitration clause).

 

SUPREME POSITION

The Supreme Court of Ukraine, which in its ruling dated 13 April, 2016 (case No. 3-304гс16) presented a somewhat expanded interpretation of the aforementioned provisions of the Law on Bankruptcy, has made a significant contribution to developing the  practice of considering bankruptcy disputes.

According to the SCU’s position, from the moment of opening a bankruptcy case against a debtor, such debtor stays in a special legal regime, which replaces the entire complex of its legal relations, and special provisions of the Law on Bankruptcy have a higher priority. One of the peculiarities of this regime is the concentration of all disputes on bankruptcy in order to control the debtor activities in that proceeding, inclusion of all of its property in a mass liquidation and carrying out other activities for full or partial satisfaction of creditors' claims... In the same ruling, the SCU concluded that such disputes will be considered and resolved within the framework of the already opened bankruptcy case, without the opening of new proceedings.

It would appear that the SCU put a point in three-year opposing positions of the SECU and quite broadly explained what disputes will be considered in bankruptcy cases, but, as it turned out, the "point" was more like an "ellipsis". The SCU’s position contributed to a new round of court practice development. Since the second half of 2016 the courts have become very active in using the described position of the Supreme Court of Ukraine, while applying it in unexpected situations.

So, the court practice of considering property disputes of a debtor itself against third parties within a bankruptcy case is popular today. For example the SECU, in its ruling in case No. 920/360/16 dated 22 February, 2017 drew a conclusion on the need to consider within bankruptcy case the debtor's statement of claim for recovery of amounts receivables. At the same time, the court grounded its position by the fact that the dispute concerned the issue of formation of mass liquidation in the bankruptcy case so, therefore, it is directly connected with bankruptcy proceedings. Claims for declaring invalid agreements concluded not by a debtor (but related to bankruptcy proceedings), vindicatory actions, various non-property claims both against a debtor and its creditors, are considered in a bankruptcy case on similar grounds.

 

NEW ROUND

This direction in the development of court practice has a number of positive aspects: the concentration of all disputes in a bankruptcy case; greater involvement and competence of a court (regarding the peculiarities of bankruptcy proceedings) when considering disputes indirectly related to bankruptcy; certain efficiency in the settlement of disputes (consideration of all disputes within a bankruptcy case ends with rendering an order that comes into force at the moment of its announcement).

But, in general, the positive aspects closely border frankly negative ones: as the dispute is considered within a bankruptcy case, any procedural "sabotage" aimed at protracting a case will automatically entail a delay in the period for dispute consideration. In addition, more often than not the focus of all disputes in a bankruptcy case is convenient only to the participants in a bankruptcy case (creditors, insolvency officer), but not very convenient to third parties, for which such jurisdiction may come as a complete surprise.

It is fair to note that the described negative aspects are more related to imperfections in the current procedural legislation, which allows unjust participants in the process to abuse their rights and to sufficiently delay the period for considering key issues in a bankruptcy case. At the same time, it is difficult to underestimate future changes in procedural legislation which, among other things, provide mechanisms for counteracting instances of abuse of procedural rights.