12/07/2012 02:35:48 PM EST
Michael V. Pergamenshik on Ukraine's New Bankruptcy Act: Forthcoming Changes and Potential Impact on Cross-Border Bankruptcy
by Michael V. Pergamenshik
The introduction of narrower
timeframes, online notification of potential creditors, electronic bidding,
creditor substitution and a roughly sketched mechanism of cooperation in cross-border
bankruptcy proceedings in Ukraine's new Bankruptcy Act is designed to be a big
leap in bankruptcy management but does it ensure that the intended effects are
Working with Ukrainian laws is
not easy, but dealing with bankruptcy proceedings in Ukraine is definitely not
a craft for the faint-hearted.
According to the Word Bank statistical data developed through its famous Doing
Business project, Ukraine is one of those countries where one would least wish
to deal with bankruptcy. Ukraine ranked 158 in 2011 and in 2012 moved only 2
points up, ranking 156 - out of 183 countries by ease of resolving insolvency.
Essentially, the ease of resolving insolvency determines the ease with which a
foreign investor can both close a business and recover debt from a local
failing firm, which in its turn determines the overall investment
attractiveness of the country.
In Ukraine it takes an average of 2.9 years to close a business with an average
cost of bankruptcy proceedings reaching 42 per cent of the asset value and the
average recovery rate barely reaching 9 cents on the dollar. These figures
would be on average 1.7 years, 9 per cent and 68.2 cents respectively for OECD
The backbone of the current bankruptcy regulations is Law "On Restoring
Debtor Solvency or Declaring Him a Bankrupt" No.2343-XII dated 14 May 1992
(the 1992 Bankruptcy Act). In the course of the years the Bankruptcy Act has
enabled the development of a variety of legal tools for sabotaging the proceedings:
from the appealing of intermediate court decision and the suspension of the
proceedings by parallel litigation to the dissolution of real creditor claims
and manipulations with the appointment of receivers.
In hopes of improving the situation and as a part of the more general endeavor
to reform the country's economics, the Ukrainian parliament passed Law
No.4212-VI dated 22 December 2011, almost a complete rewriting of the 1992
Bankruptcy Act currently in force, and which is supposed to cancel and replace
the latter starting from its entry into force on 19 January 2013 (the 2013
The 2013 Bankruptcy Act will introduce many new features to bankruptcy
regulation (some of which are described in the article) and will even include a
separate chapter on the interaction of Ukrainian courts and receivers with
foreign bankruptcy proceedings.
Creditors whose claims are secured with a pledge (pledged creditors) should now
be more protected even despite their exclusion from the creditor committee
(Article 26). The pledged assets of the debtor will be isolated from the main
asset (liquidation) pool (Article 42) and will be reserved only for the
settlement of the claims of the respective pledged creditor. In addition,
pledged creditors will have the right to reject a reorganization plan approved
by the creditor committee and withdraw from bankruptcy proceedings with their
claims being settled by either a detachment and sale of the respective pledged
assets or by a direct purchase of the debt by other creditors (Article 30).
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V. Pergamenshik is an associate with the Kyiv office of Konnov & Sozanovsky. He
specializes in contract law, commercial law and litigation.