Closing down a non-resident company's business in Ukraine

02 07 2018

The recent years’ crisis and economic sanctions have led many foreign companies to consider winding down their operations in Ukraine, including through liquidation of their businesses. Those who are familiar with the legislative nuances of closing down a business in Ukraine understand that the principle of “one dollar in – two dollars out” is very appropriate to describe the balance of efforts and costs for opening a business and winding it down (the proper and legal liquidation of a company).

Many foreign companies (investors) with subsidiaries in Ukraine are concerned with the question of how to properly organize the liquidation process so that neither counterparties nor government agencies have any issue with the company in liquidation.

The applicable laws of Ukraine provide for several liquidation options. The choice of this or that option depends on many factors, namely: a legal form of the business going into liquidation, an activity type, the volume and structure of payables and receivables, the number of assets and whether they are impaired or not, the availability (absence) of all necessary financial and accounting statements of the company, etc.

Let us consider what dissolution options are provided by the Ukrainian laws.

Voluntary liquidation

Voluntary liquidation involves decision making on the company’s dissolution (liquidation) by the company’s founders, recording the respective data in the state register, appointing a liquidator or liquidation committee, taking a set of measures to discontinue business activities, namely inventorying, appraising and selling assets, notifying creditors and debtors, fulfilling all of the company’s obligations to its creditors, dismissing employees, closing bank accounts, cancelling permits and approvals, authorizing inspections by controlling authorities, as well as complying with other statutory requirements to “zero out” the company’s balance sheet.

Unfortunately, the duration of this procedure depends not only on the company’s size (the number of assets, liabilities and employees), but also on the actions of controlling authorities, specifically on how fast they will carry out their inspections in connection with the liquidation of the company. As the practice shows, voluntary liquidation of the company can take from 6 months to several years because of the “reluctance” of the bodies of the State Fiscal Service to inspect the companies going through liquidation.

It should also be noted that the voluntary liquidation process cannot be completed without going into bankruptcy if the company’s liabilities exceed its assets.

Bankruptcy petitioned by the creditor or the debtor

The second option, i.e. by going through the bankruptcy procedure, also looks complicated, first of all, in view of the requirements for the existence of an indisputable debt, namely: in order to file a petition in bankruptcy, the creditor or the debtor himself (the company in liquidation) must confirm in court the debtor’s indisputable debt in the amount of 300 times the minimum wage (UAH 1,116,900 equivalent to approximately EUR 35,000 as of 2018).

The indisputability of the debt must be confirmed by a court decision that has entered into force and by a resolution to commence enforcement proceedings that has been lasting for at least 3 months at the time of filing a petition with the court.

If neither the company, nor the company’s creditor has such documents in its possession, additional debt recovery proceedings will need to be initiated to obtain the relevant court decision and to further launch the enforcement proceedings based on such decision.

The liquidation of the company in bankruptcy, depending on the circumstances, can take, on average, from 12 to 18 months after the initiation of bankruptcy proceedings.

Voluntary liquidation passing into bankruptcy

The final one is a "combined" way to liquidate a company. The voluntary liquidation passing into bankruptcy is the most reasonable and economically feasible option for foreign companies not involved in any monetary or property disputes with their counterparties or having no outstanding liabilities to the government.

Given such circumstances, we believe it would be most appropriate to liquidate a company by following the voluntary liquidation procedure passing into the bankruptcy procedure.

Having identified all of the company's assets and liabilities and approved an interim liquidation balance sheet and having confirmed that the company's assets exceed its liabilities, a liquidator (liquidation committee) must file an application with court to initiate bankruptcy proceedings against the debtor. Moreover, there are no legal requirements to prove that the debt is undisputable (court decisions or enforcement officer's resolutions commencing enforcement proceedings) to file a bankruptcy application with court, so that the aforementioned problem is solved.

Furthermore, passing from the voluntary liquidation initiated under the founders' decision into the bankruptcy procedure implies a simplified bankruptcy procedure by avoiding property administration and potential (optional) rehabilitation procedures. Having ascertained that the debtor's property is not sufficient to repay all of its debts, the court immediately declares its bankruptcy and commences a liquidation procedure. The law states that the liquidation procedure should take up to 12 months. Moreover, the law is silent about prolonging the liquidation procedure.

We should also mention here the other apparent advantages of this procedure.

Firstly, the company's liquidation has nothing to do with whether the controlling bodies are willing or not to inspect the company; if so, the liquidation process becomes fully controllable and public officers no longer can "put on hold" the liquidation process.

Secondly, the law allows that the company's liquidator to be involved in the bankruptcy procedure may be the liquidator who acted at the previous stage, rather than a professional receiver. It may spare your time and money if the former manager who was responsible for liquidation at the "voluntary" stage is appointed to act as the liquidator.

Thus, you should take a measured and well-considered approach bearing in mind a great deal of factors to resolve the issue how to liquidate (close down) your business. The right way of liquidation would minimize the risks that creditors and government bodies may raise their claims not alone but spare the time and money you will need to liquidate your company. Therefore, it is competent legal advice you need to make the relevant business decision.

Authors: Oleg Kachmar, Yuriy Kolos