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International Law

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 practically met?


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 countries.

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 Bankruptcy Act).

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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Michael V. Pergamenshik is an associate with the Kyiv office of Konnov & Sozanovsky. He specializes in contract law, commercial law and litigation.