The New Ukrainian Insolvency Law: Key Issues

On 19 January 2013amendments to the insolvency laws in Ukraine became effective.  While the general framework for insolvency proceedings remained the same, a number of significant amendments were made.  Below we set out a summary of the most important changes.  We note that the President of Ukraine requested that the government revise certain sections of the amended law and so there is a likelihood that further changes of the law will occur in the future.
 
Changes in the Status of Secured Creditors
 
Before 19 January 2013it was not entirely clear whether a secured creditor could enforce its security once insolvency proceedings had commenced and the moratorium was in place.  This was due to inconsistencies between the wording of the insolvency law and the enforcement law.  The amendments to the insolvency laws resolved the issue by allowing a secured creditor to enforce its security after the commencement of insolvency proceedings, irrespective of the moratorium.  However, in order to do this the secured creditor would need to obtain the consent of the insolvency court.
 
Before 19 January 2013there were no express rules on whether secured creditors were allowed to vote at creditors' meetings.  This resulted in different interpretations of the law by the courts.  Under the amended law, secured creditors are explicitly prevented from voting.
 
Under the amended law, in addition to the currently existing right to veto the amicable settlement agreement which is preserved in the amended law, the secured creditors will also have the right to veto the rehabilitation plan if the latter is prepared during the rehabilitation stage.  Under the new law, should any of the secured creditors not agree with the plan, the other secured creditors may decide either to sell the collateral and satisfy the claim of such dissenting creditor or to buy the claim.  The same options now exist for unsecured creditors if a secured creditor does not agree with the plan.  Eventually, the court will decide whether or not to approve the plan if anybody does not buy out claim(s) of the dissenting secured creditor(s).  The same procedure now applies to overcoming the veto of secured creditors as to an amicable settlement agreement executed during insolvency.
 
New Concept of Hardening Periods
 
The amended insolvency law introduced a completely new procedure for determining which transactions made before the commencement of insolvency proceedings may be set aside.
The court may, following an application from the insolvency manager or any competitive creditor, invalidate any transaction made by the debtor during the period of one year before the date of the preparatory hearing, if such transaction resulted in the debtor:
 

• alienating its assets, incurring undertakings or waiving its proprietary claim(s) without consideration from the other party;
• performing its obligations before they became due (in our view, this should not include an acceleration or mandatory prepayment of a loan but would include a voluntary prepayment of a loan);
• entering into obligations as a result of which it became insolvent.  This means that if a loan agreement is invalidated on this ground, the security and guarantees/sureties provided in connection with that loan will fall away;
• alienating or acquiring assets not at their market value and as a result of which the debtor became insolvent;
• making any cash payments or receiving payments in kind at a time when the amount of creditors' claims exceeds the value of the debtor's assets.  This would mean that (re)payments under loans and suretyships would potentially be challengeable in the event when the value of the debtor's assets is lower than the aggregate amount of the creditor's claims; and
• granting security.

 
The amended law does not require that any additional criteria for invalidation of such transactions arise, for example, it does not expressly require evidence that the transaction resulted in preferential treatment.
 
The result of such invalidation will be that the relevant creditor will need to release the security (if any) or return the assets it received from the debtor or compensate the debtor for the market value of such assets (should it be impossible to return them in kind) and, in the case of a loan, the debtor would need to repay the loan to the creditor.
 
The interesting new development in the law is that creditors who have claims against a debtor as a result of the invalidation of their transaction would rank in the first rank of creditors irrespective of whether or not they had security.  In particular, this would mean that if shareholders' unsecured loans (which qualify for the 4th rank) and any secured loans are invalidated pursuant to the above provisions, then claims of both shareholders and former secured creditors would fall under the same first rank.  However, if their security has fallen away, the creditor will not be treated as a "secured creditor" and so would lose its ability to block rehabilitation plan and amicable settlement agreement.  On the other hand, it is not entirely clear under the insolvency law whether such former secured creditor would be able to benefit from voting rights as a result of the mentioned transformation of the claim during insolvency.
 
'Piercing the Corporate Veil'
 
The new law establishes a rather revolutionary concept according to which the shareholders along with directors of the debtor may be found secondary liable before third party creditors of the insolvent party if:
 

• the assets of the debtor are insufficient to satisfy the creditors' claims in full; and
• the actions of such director, shareholder or any other person resulted in the debtor's bankruptcy.

 
Replacement of Assets as a New Restructuring Method
 
The new law introduces a procedure for the replacement of a debtor's assets as one of the rehabilitation options.  In order to be able to implement the replacement of assets, the creditors must ensure that such arrangement is included to the rehabilitation plan which is approved by the court.
 
This would work by permitting the debtor, during the rehabilitation phase, to incorporate a subsidiary and become its sole shareholder.  In return for the shares in such entity, the debtor will be able to contribute all its assets and all its liabilities (save the liabilities to the competitive creditors) to the share capital of such entity.
 
Subsequently, these shares may be sold and the proceeds received out of such sale used for satisfaction of the claims of the competitive creditors.
 
On one hand, the described procedure could ease the process of satisfaction of the creditors' claims.  However, on the other hand, it would require significant preliminary work to be carried out (e.g., incorporation of a new entity, inventorying the debtors' assets, sale of shares in the newly established subsidiary).
 
Olexiy Soshenko is a counsel in Clifford Chance Kyiv office and specialises in cross-border finance.  Olexiy's practice focuses on banking and finance, capital markets and secured transactions, including restructuring and refinancing.  Olexiy Soshenko has over 15 years of experience of practicing law in Ukraine representing both lending institutions and borrowers in various types of financings including debt capital markets, project finance, real estate financings, acquisition finance and pre-export finance, as well as M&A transactions in the banking sphere.
 
Andrii Grebonkin, a senior associate in Clifford Chance Kyiv.  Andrii specialises in real estate transactions, bankruptcy procedures, merger & acquisitions through acquiring real estate, basic corporate matters in spheres of real estate and bankruptcy.
 
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