Restructuring & Insolvency 2022

The principal act governing bankruptcies in Ukraine is the Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018 (the Bankruptcy Code), as amended, which contains provisions with respect to insolvency proceedings. Another important act, which regulates different court procedures, including general procedural issues regarding insolvency, is the Commercial Procedural Code of Ukraine, dated 6 November 1991, as amended. The subsidiary pieces of legislation relating to insolvency in Ukraine are contained in the following acts:

• the Commercial Code of Ukraine, dated 16 January 2003;
• the Civil Code of Ukraine, dated 16 January 2003;
• the Law of Ukraine on Introducing a Moratorium on Mandatory Sale of Property, dated 29 November 2001;
• the Law of Ukraine on Banks and Banking, dated 7 December 2000;
• the Law of Ukraine on Financial Rehabilitation, dated 14 June 2016;
• the Law of Ukraine on Holding Companies in Ukraine, dated 15 March 2006;
• the Law of Ukraine on Insurance dated, 7 March 1996; and
• the Law of Ukraine on the Household Deposit Guarantee System, dated 23 February 2012.

Insolvency procedures do not apply to state enterprises that are created by the Cabinet of Ministers of Ukraine and operate state-owned assets.

The Bankruptcy Code provides special treatment for banks, insurance companies, participants of stock and bond markets, security issuers, farms, legal entities in which the state is a majority stakeholder.

According to Ukrainian law, assets that are covered by the moratorium envisaged by the Law of Ukraine on Introducing a Moratorium on Mandatory Sale of Property are excluded from insolvency proceedings, namely:

• assets owned by the state enterprises; and
• assets owned by the business entities in whose authorised capital the state holds a stake of no less than 25 per cent.

It is prohibited for a legal entity from an aggressor state, an occupying state or a legal entity with foreign investments or a foreign entity from an aggressor state or an occupying state (currently this only applies to the Russian Federation) to initiate insolvency proceedings against enterprises of the defence industrial complex, which are included in the list of state-owned objects of strategic importance to the economy and security of the state.

The assets that cannot be privatised are exempt from claims of creditors.

The Bankruptcy Code provides a special procedure regarding the insolvency of government-owned enterprises or enterprises with more than 50 per cent of their assets owned by the state. These enterprises may be subject to rehabilitation or liquidation.

The government may decide to avoid bankruptcy by means of state aid, pledge or adopt other measures aiming to protect state interests. The body authorised to manage state property controls the insolvency procedure from the start of proceedings, has a right of advisory vote at the meeting of creditors, approves the rehabilitation plan and lists of liquidation masses. The commencement of the insolvency procedure does not prevent the body authorised to manage state property from executing its competence towards the enterprise. The property left after satisfaction of creditors’ claims transfers to the body responsible for privatisation.

While the Bankruptcy Code does not provide any special treatment for the institutions that are considered ‘too big to fail’, Ukrainian banking legislation contains provisions aimed at preventing the bankruptcy of banks. In particular, the Law of Ukraine on the Household Deposit Guarantee System, dated 23 February 2012, envisages that the Deposit Guarantee Fund (the DGF) introduces a temporary administration in an insolvent bank upon this decision of the National Bank of Ukraine (the NBU) on the classification of a bank as insolvent. The main goals of the introduction of temporary administration are to protect the interests of creditors and depositors, the preservation of capital and assets, stabilisation of the bank’s operations and financial restoration of the bank.

For the duration of the temporary administration:

• the claims of depositors and other creditors of the bank will not be satisfied;
• no enforcement against the bank’s assets may occur;
• no default interest or any other penalties or sanction for non-performance or improper performance of the bank’s obligations may be charged;
• set-off may not be performed; and
• interest on the bank’s obligations to depositors and creditors does not accrue.

If the implementation of the temporary administration does not lead to stabilisation of the bank’s operations and restoration of the bank’s solvency, the DGF, upon a decision of the NBU to withdraw a banking licence and liquidate a bank, may commence the liquidation procedure.

According to Ukrainian law, insolvency cases are considered by the commercial court whose jurisdiction covers the location in which the debtor has its registered office.

Ukrainian legislation does not contain any restrictions on the commercial courts regarding matters arising from bankruptcy cases, so they will have jurisdiction to deal with all bankruptcy related matters. Moreover, all monetary claims against the debtor are also currently dealt with by the commercial courts.

At the same time, the courts of general jurisdiction consider criminal cases with respect to bankruptcy; for instance, criminal cases against individual chief executive officers, members of management boards or founders (participants or shareholders) of the legal entity under charges of deliberate insolvency. Cases relating to administrative liability for fraudulent bankruptcy, illegal actions during bankruptcy and concealing permanent insolvency are also considered by courts of general jurisdiction.

Almost all court rulings and resolutions are amenable to appellate review. The right to cassation review is limited to rulings regarding the initiation of insolvency proceedings, regarding the closure of the insolvency proceedings, rulings confirming monetary claims of creditors and resolutions on announcing the debtor being bankrupt and initiating the liquidation procedure.

An appellant does not need to obtain permission to ask for a reviewal. Ukrainian law does not require the posting of security to proceed with an appeal.

Voluntary liquidation is not a matter for the legislation dealing with bankruptcy. According to the general principle of civil legislation and special laws regulating activities or particular types of commercial entities (eg, the Law of Ukraine on Joint-Stock Companies, dated 17 September 2008), a legal entity may be liquidated under a decision of its principal body (eg, a general meeting of shareholders or participants) at any time. A legal entity is deemed to be terminated since the removal of the legal entity from the Unified State Register. The law provides with the order of creditors, whose claims are to be satisfied first.

During insolvency proceedings under Ukrainian law, the term ‘reorganisation’ is similar to the procedure that is called ‘rehabilitation’ of the debtor (insolvent company). The main goal of rehabilitation of the debtor is to restore the debtor’s solvency and avoid bankruptcy.

The Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018 (the Bankruptcy Code), stipulates that the debtor may initiate a pre-trial rehabilitation (ie, rehabilitation of the debtor before the commencement of insolvency proceedings). The agreement between the debtor and creditors in terms of the pre-trial rehabilitation can be achieved before the debtor becomes insolvent and entails certain financial obligations for the debtor.

The criteria for the commencement of the pre-trial rehabilitation procedure are as follows:

• resolution of the debtor’s founders (shareholders and participants);
• a rehabilitation plan agreed by the general meeting of the debtor’s creditors and approved by the commercial court.

This procedure precludes the initiation of any bankruptcy case regarding the debtor upon this debtor’s application or upon application of any of its creditors. A moratorium preventing satisfaction of creditors’ claims also applies in this period (covering creditors’ claims raised before the approval of the rehabilitation plan).

Generally, creditors are classified as secured and unsecured.

The preparation of a rehabilitation plan is aimed at the restoration of the debtor’s solvency within the period specified in the rehabilitation plan. For the rehabilitation plan to become effective, it must first be approved by the creditors’ committee, and after that by the court.

The Bankruptcy Code classifies creditors into categories depending on the type of claims and the existence of collateral. Moreover, the rank (priority) of the creditors’ claims may be determined in the rehabilitation plan depending on different categories of the creditors. The first (employment-related claims of employees) and second-rank (claims of damage caused by injury, other health impairment or death) creditors do not take part in the rehabilitation procedure.

The Bankruptcy Code does not provide for release of the non-debtor parties from liability.

A creditor may commence involuntary liquidation through the means of insolvency proceedings against a debtor if its claim is monetary and the debtor failed to repay the debt.

If a creditor’s claim meets the above-mentioned requirements, the commercial court, based on the creditor’s application, shall commence insolvency proceedings. In the course of the general insolvency proceedings, the court is entitled to apply the following procedures to the debtor:

• administration of assets;
• rehabilitation; and
• liquidation.

At the stage of the liquidation procedure, the court appoints a liquidator, who must accumulate the debtor’s assets into the liquidation estate and make orderly satisfaction of the creditors’ claims in accordance with rankings envisaged by the Bankruptcy Code. After all distributions of proceeds from the disposal of the debtor’s assets have been made, the liquidator must submit a report and liquidation balance sheet to the court, whereupon the court shall pass a ruling on approval of the liquidator’s report and the liquidation balance sheet. If, according to the liquidation balance sheet, no property remains after satisfaction of the creditors’ claims, the court shall pass the ruling on the liquidation of the bankrupt legal entity. The liquidation proceedings end with the removal of the bankrupt from the Unified State Register.

During the assets administration procedure, the creditors’ committee may take the decision to approve a rehabilitation plan and submit to the court a motion for the commencement of the rehabilitation procedure. The court commences rehabilitation proceedings and appoints the rehabilitation manager.

This will cause the following to happen:

• the termination of debtor’s directors’ authority;
• the seizure of the debtor’s assets and the imposition of other restrictions on the administration of the debtor’s assets; and
• the development of a rehabilitation plan and its submission to the creditors’ committee for approval (after the plan has been approved by the creditors’ committee, it must be approved by the court).

The rehabilitation manager is entitled to conclude agreements, submit applications regarding nullification of debtor’s agreements and administer debtor’s property.

If the rehabilitation is successful, the debtor is deemed reinstated and may conduct its business activities as usual.

The Bankruptcy Code establishes the procedure for expedited reorganisation, particularly, pre-trial rehabilitation of the debtor (before the commencement of insolvency proceedings). The agreement between the debtor and creditors in terms of a pre-trial rehabilitation can be achieved before the debtor becomes insolvent and entails certain financial obligations for the debtor.

The rehabilitation procedure will be defeated on the following grounds:

• a decision is taken by the creditors’ committee to request that the court terminate the rehabilitation proceedings, to declare the debtor bankrupt and to commence the liquidation proceedings;
• the debtor fails to satisfy the creditors’ claims.

In these circumstances, the court declares the debtor bankrupt and commences the liquidation proceedings. The creditors’ committee may also prolong the payment schedule for the debtor.

If the creditors’ committee fails to take any decision upon consideration of the report of the rehabilitation manager or fails to submit the report to the court within 15 days of the date of termination of the rehabilitation proceedings, the court decides whether to terminate the insolvency procedure or to declare the debtor bankrupt.

According to the general rule envisaged by corporate legislation, reorganisation of a company is provided by its members’ or founders’ decision, and in cases stipulated by law, by court decision.

A debtor is obliged to notify its creditors about the reorganisation. Creditors may require the debtor to:

• secure the obligation; or
• terminate or fulfil an obligation ahead of schedule, unless stipulated otherwise in the agreement between the parties.

If the creditor fails to contact the debtor with such a request within 30 days, it is presumed that the creditor does not have additional requirements regarding its obligation.

If a solvent company is liquidated, the creditors’ claims are satisfied in the following order:

• rank one: claims of damage caused by injury, other health impairment or death and those creditors’ claims that are secured by pledge or mortgage;
• rank two: employment-related claims of employees and authors’ claims of payments for use of intellectual property objects;
• rank three: claims related to payment of taxes, duties (mandatory payments); and
• rank four: all other claims.

The main distinctions between corporate liquidation and liquidation under the insolvency proceedings are as follows:

• insolvency proceedings may be initiated by creditors;
• the key role in the dissolution process in the course of the corporate liquidation is played by the bodies and officers of the company; and
• different priority orders for the satisfaction of creditors’ claims.

The rehabilitation and liquidation proceedings are concluded by the relevant court ruling after satisfaction of the creditors’ claims. The conclusion of the rehabilitation proceedings depends on the restoration of the debtor’s solvency. If the rehabilitation of the debtor is successful, the debtor’s solvency is deemed reinstated and it may continue its business.

Concerning the conclusion of the liquidation procedure, the court passes the ruling on the liquidation of the bankrupt legal entity. Formally, the liquidation proceedings end with the removal of the bankrupt from the Unified State Register.

If the debtor’s assets are sufficient to satisfy all claims of the creditors, it shall be deemed free of debts and continue its business activities, and thus the insolvency proceedings will be terminated.

If a solvent entity enters corporate liquidation or reorganisation procedure, then these cases are formally concluded when the respective information is inserted in the Unified State Register.

Criteria for the insolvency determination of the natural person and legal entity are different.

As for the legal entity, the Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018 (the Bankruptcy Code), does not envisage strict criteria regarding debtor’s insolvency. Any creditor, who has not received the payment in due time from the debtor, may initiate the insolvency procedure. During the insolvency procedure, it is established whether the debtor is able to meet its monetary obligations and, thus, whether the debtor is solvent.

Regarding the insolvency of a natural person, the Code states the debtor may file to commence insolvency proceedings if:

• the amount of the overdue obligations exceeds 30 minimum wages;
• the debtor terminated the settlement of any planned payments;
• established absence of assets; or
• other circumstances that preclude the debtor to fulfil his or her obligations.

Under the Bankruptcy Code, a debtor (insolvent company) must file a bankruptcy application to the commercial court in the following circumstances:

• if the debtor finds that paying a debt will prevent it from fully meeting monetary obligations towards other creditors;
• if the debtor’s body, which is authorised by law or statutory documents of the debtor to take a decision on liquidation of the debtor, decides to file the application for commencement of insolvency proceedings against the debtor to the court; or
• it has been established during liquidation of the debtor beyond the insolvency proceedings that the debtor is unable to fully satisfy creditors’ claims.

The Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018 (the Bankruptcy Code), stipulates that if the debtor fails in its obligation to file a bankruptcy application to the commercial court in the above-mentioned circumstances, the debtor’s director (liquidator of the debtor) bears civil liability (solidary liability) for the unsatisfied creditors’ claims.

The Code of Ukraine on administrative offences establishes an administrative liability for the concealing permanent insolvency; in other words, when the founder (participant or shareholder) or an official of the company intentionally conceals, by means of false information, the company’s financial insolvency and this causes gross material damage to the creditors.

When insolvency of an entity occurs as a result of its founders’ or participants’ or other persons’ actions, who are capable of influencing the actions of a debtor, these persons may bear subsidiary liability.

Ukrainian criminal and administrative legislation provide that the officials of an insolvent company bear liability for the crime and administrative offences described below.

The Criminal Code of Ukraine provides that the founder (participant or shareholder) or the official of the company bears criminal liability (a fine equivalent to up to 68,000 hryvnas with the prohibition to occupy certain positions or engage in certain activities up to three years) for deliberate bankruptcy. Within the meaning of the criminal law ‘deliberate bankruptcy’ means determined actions of the founder (participant, shareholder) or the official of the company that have resulted in the financial insolvency of the company and caused material damage to the creditors or the state (more than 567,500 hryvnas).

The Criminal Code of Ukraine also imposes a fine of up to 68,000 hryvnas or conditional imprisonment up to four years, with the prohibition to occupy certain positions or engage in certain activities up to 10 years for inserting false information into accounting documents with the purpose of concealing the facts of the bankruptcy of a financial institution.

The Code of Ukraine on administrative offences establishes an administrative liability for the following offences:

• fraudulent bankruptcy (ie, when the founder (participant or shareholder) or the officials of the company, as well as the individual entrepreneur, intentionally make an official statement of financial insolvency and this statement causes gross material damage (which is also over 567,500 hryvnas) to the creditors or the state) (a fine between 12,750 and 34,000 hryvnas); and
• illegal actions during bankruptcy (ie, when the founder (participant or shareholder) or the official of the company against which the insolvency proceedings are commenced by the court intentionally conceals the assets, information on assets, illegally transfers the assets or disposes of them as well as forging, concealing or destroying the documents of company’s business activity and such illegal actions cause gross material damage (a fine between 8,500 and 17,000 hryvnas)).

Directors and officers enjoy the general scope of defence. If an issue of subsidiary or solidary responsibility of directors and officers arises, they may defend themselves by claiming that their conduct has not led to the insolvency of a company.

According to the Bankruptcy Code, before the commencement of the rehabilitation or liquidation procedure, the duties of directors do not shift to the creditors. The limitation of directors’ duties is enforced only after the commencement of the insolvency proceedings.

According to the Bankruptcy Code, the appointment of the asset manager is not a ground for termination of authority of debtors’ administration (directors and officers). However, agreements with respect to the property of the debtor must be concluded by the administration of the debtor only upon consent of the asset manager.

Also, following the appointment of the asset manager, the debtor administration has no right without the consent of the asset manager to make decisions about:

• reorganisation and liquidation of the debtor;
• establishment of legal entities or participation in other legal entities;
• establishment of branches and representative offices;
• payment of dividends;
• issue of securities by the debtor;
• withdrawal from the participants of a debtor by a legal entity, acquiring from the shareholders of the debtor’s shares;
• granting loans, warranties, guarantees, concluding trusts; or
• conveyance or encumbrance of the property.

The decision to receive a loan, participate in the unions, associations, holding companies, financial-industrial groups or other associations of the legal entities must be adopted by the administration of the debtor only upon consent of the asset manager.

When the rehabilitation procedure is commenced, the powers of the debtor’s managing bodies are transferred to the rehabilitation manager, notwithstanding the powers that are granted to the management bodies by the rehabilitation plan.

From the date of passing the ruling of a court on commencement of the liquidation procedure, the authority of debtors’ administration in respect to the management of the bankrupt and disposal of its property is terminated, the debtors’ director shall be dismissed.

The Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018 (the Bankruptcy Code), provides that immediately after the commencement of insolvency proceedings, the court imposes a moratorium on satisfaction of the creditors’ claims that had become due and payable before the insolvency proceedings were started.

For the period of the moratorium:

• no enforcement against the debtors’ assets may occur upon the enforcement documents as well as upon other documents granting creditors the right to recover debts (except for enforcement with regard to foreclosure on the pledge or mortgage collateral);
• no default interest or any other penalties or sanction for breaching any monetary obligations may be charged; and
• limitation periods stop running.

The moratorium does not apply to:

• claims against current creditors (ie, creditors whose claims become due and payable after the commencement of the insolvency proceedings);
• claims against creditors approved under the rehabilitation plan on the restoration of the debtor’s solvency;
• claims made as part of any liquidation proceedings in relation to the debtor;
• claims of salary, alimony, author’s royalties and compensation for damages to the life or health of individuals;
• any actions by the trustor regarding the trust; or
• non-property claims.

The closure of the insolvency proceedings terminates the moratorium. The moratorium on the fulfilment of secured creditors’ claims automatically expires after 170 days if the court fails to pass the ruling for the introduction of the next stage of proceedings. The moratorium is lifted upon the relevant court ruling.

According to the Bankruptcy Code, the commencement of the rehabilitation procedure in respect of the debtor does not affect the debtor’s right to continue its business operations.

Creditors who deliver goods or services to the debtor after the commencement of insolvency proceedings have the status of current creditors. These creditors do not have special status as their claims, together with other unsecured claims of competitive creditors, are considered fourth-priority creditor claims.

Control over the debtor’s business activities and over the activities of an asset or rehabilitation manager is exercised by the creditors’ committee and the court. The creditors’ committee has the following powers:

• filing letters demanding that the court recognise the debtor’s transactions as void;
• approving the execution of the debtor’s material contracts or contracts with affiliated persons; and
• determination of the property assets in the event of the sale of the property during the course of the rehabilitation or liquidation procedures.

Further, measures to secure creditors’ claims may be taken upon the request of the creditors’ committee. The court may, upon request of the asset manager, creditors or on its own initiative, prohibit the execution of any transactions without the insolvency administrator’s prior consent and compel the debtor to transfer securities, currency values and other property to third parties for safe custody or shall take other actions to safeguard the property, to which effect a ruling shall be passed.

The Bankruptcy Code provides that the debtor has an opportunity to obtain secured or unsecured loans or credit after the commencement of insolvency proceedings. The debtor may obtain loans or credit at any stage of the insolvency proceedings with some restrictions applicable at the liquidation stage.

Meanwhile, the debtor must obtain the insolvency administrator’s prior consent for loans.

At the liquidation stage, the chances of the debtor obtaining new obligations, including borrowing money, is limited to cases expressly provided by law. The liquidator may borrow money to satisfy employees’ claims (dismissal payments) only. In the course of the liquidation procedure, the obtaining of the secured loans or credits is impossible, because after the commencement of the liquidation proceedings all restrictions on the disposal of the debtor’s assets are lifted to enable their further sale.

Loans received during the course of the liquidation procedure are paid out of the order of priority of the creditors’ claims from the proceeds of the bankrupt’s property sale. Claims that arise from the secured loans or credits are considered first-ranked creditors’ claims. In contrast, claims that arise from unsecured loans or credits are considered fourth-ranked creditors’ claims, as are claims that arise during assets administration proceedings or financial rehabilitation proceedings.

The rehabilitation plan may provide, inter alia, the sale of part of the debtor’s property or the sale of the debtor’s property as an integral property complex. For the purposes of selling the debtor’s property in accordance with the rehabilitation plan, the court issues a ruling to cancel the measures that have been applied to secure creditors’ claims. The liquidator conducts the sale of debtor’s property on the auction.

Before the sale of property under the liquidation procedure, all the debtor’s property assets are included in the liquidation estate. The liquidation estate includes:

• all types of the bankrupt’s property assets to which the bankrupt has title or over which the bankrupt exercises full economic management as of the date of commencement of the liquidation proceedings and that have been revealed in the course of the liquidation proceedings; and
• things defined by generic features to which the bankrupt has a title or the right of use.

The liquidation estate does not include:

• housing facilities, including dormitories, pre-school facilities and utilities, infrastructure facilities, which in the event of the company’s bankruptcy are transferred in the manner prescribed by law to the municipal property of respective territorial communities without any additional terms and conditions and are financed in the prescribed manner;
• individually defined objects owned by the bankrupt on the basis of property rights, other than the title of ownership and full economic management; or
• the bankrupt’s pledged property (used only to satisfy the pledgees’ claims).

After the court adopts the resolution to declare the debtor bankrupt and commences the liquidation proceedings, the attachment imposed on the debtor’s property and any other restrictions on the disposal of such property are lifted. No new attachments or restrictions may be imposed. Thus, the buyer of the property of the debtor who has been declared bankrupt receives the property free of any restrictions or liabilities associated with the insolvency proceedings and with the bankrupt person’s liabilities to its creditors, except for those encumbrances that are imposed by law and remain attached to the object (eg, servitude).

The Bankruptcy Code does not provide for any ‘stalking horse’ bids in sale procedures, because property is sold on the basis of the results of an open auction (tender) where the sale and purchase agreement is signed with the public auction (tender) winner.

Generally, the Bankruptcy Code does not allow a creditor to acquire the debtor’s property by way of setting off part of the creditor’s claims against the debtor. These actions may be regarded as violating the general principles envisaged by the Bankruptcy Code relating to the impossibility of any individual satisfaction of creditors’ claims and to the sequence of satisfaction of creditors’ claims.

The Bankruptcy Code provides exceptions to the general rule contained in the Civil Code of Ukraine regarding the impossibility of unilateral refusal by a party to perform obligations under contracts. A rehabilitation manager, may, on behalf of the debtor, refuse to perform a contract, but only on the basis of the certain special grounds.

The rehabilitation manager may, within three months of the date of commencement of the financial rehabilitation procedure, refuse to fully or partially perform the debtor’s contracts if these contracts were concluded before the commencement of the financial rehabilitation procedure and they are not performed by the parties in full or in part.

Refusal to perform contracts by the debtor may be expressed with respect to the long-term contracts and contracts that cause damage to the debtor or prevent the restoration of the debtor’s solvency.

The Bankruptcy Code does not regulate the procedure dealing with a refusal to perform contracts by the debtor. The party to the contract in relation to which the decision of refusal to perform the contract by the debtor has been taken has the right, within 30 days of the date of implementation of this decision, to demand compensation for losses incurred as a result of the refusal to perform the contract by the debtor in the course of the insolvency proceedings.

If the contract is breached by the debtor after the insolvency case is opened, the obligations under a contract will arise. Pursuant to the Bankruptcy Code, if such obligations are of monetary nature, the party to the breached contract is considered to be a current creditor.

The commencement of insolvency proceedings does not lead to the termination of the IP agreement. At the same time, in accordance with the Civil Code of Ukraine, the bankruptcy of a copyrighter or franchisee is grounds for termination of the commercial concession agreement (franchising agreement).

Ukrainian legislation does not provide restrictions on the insolvency administrator using intellectual property objects, but the use of intellectual property objects after the termination of the IP agreement is not allowed.

Personal information or customer data is regulated under general grounds provided in the Law on Information, dated 2 October 1992, and the Law on Protection of Personal Data ,dated 1 June 2010.

The Bankruptcy Code provides special regulations regarding state secrets. In particular, the rehabilitation plan shall also include measures aiming at safeguarding state secrets. Moreover, the insolvency administrator must obtain a permit to have access to state secrets. The asset manager shall conduct the seizure, proper registration, arrangement and storage of material carriers of classified information.

The parties may agree to opt for arbitration in the rehabilitation proceedings, which is separated from the ordinary insolvency proceedings under the Bankruptcy Code. However, arbitral tribunals have no competence in liquidation or insolvency proceedings.

According to the Financial Rehabilitation Law, the application for rehabilitation shall include the debtor’s consent to solve possible disputes in an arbitral tribunal. Thus, the disputes that arose after the rehabilitation case was opened cannot be arbitrated without the prior consent of the parties before the commencement of the rehabilitation proceedings.

Under the Law of Ukraine on Enforcement Proceedings, the commencement of insolvency proceedings with regard to the debtor will result in the termination of all enforcement proceedings that are under the moratorium. Moreover, from the moment of the commencement of insolvency proceedings, the arrest of the assets or other restrictions regarding the debtor’s rights to dispose of the assets may be enforced only by a commercial court within the insolvency proceedings.

The Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018 (the Bankruptcy Code), provides the following remedies to unsecured creditors (ie, creditors whose claims are not secured by a pledge or mortgage):

• prohibition on entering into the agreements (contracts) without the prior consent of an insolvency administrator;
• transfer of all the debtor’s securities, currency values and other property to a third party for safe custody;
• introduction of the moratorium on satisfaction of creditors’ claims; and
• termination of the debtor’s directors’ authority and transfer of their powers to the insolvency administrator (asset manager).

The moratorium on the satisfaction of the creditors’ claims is imposed immediately after the commencement of the insolvency proceedings. It covers claims that had become due and payable before the insolvency proceedings were started.

The Bankruptcy Code stipulates that a court can impose a preliminary injunction by establishing a prohibition on liquidation or reorganisation of the debtor and alienation of capital assets.

During liquidation or rehabilitation proceedings, the following notices are given to creditors:

• notice of the time, place and terms of sale of the collateral;
• notice of the court decision refusing to accept the application for commencement of insolvency proceedings;
• notice of the court decision to return without consideration the bankruptcy applications and the documents attached thereto;
• notice of the court decision to commence insolvency proceedings;
• notice of the results of consideration of creditors’ claims;
• notice of other creditors’ claims that are recognised by the debtor;
• notice of the preparatory court hearing;
• notice of the holding of the meeting of creditors, its time and place;
• notice of the reports of the rehabilitation manager;
• notice of the time and place of the meeting of the creditors’ committee to review the rehabilitation plan and the rehabilitation manager’s report and other notices.

Also, the decisions or resolutions adopted by the court in the course of the insolvency proceedings should be sent to the parties.

During insolvency proceedings, creditors are represented by the creditors’ meeting and the creditors’ committee.

At least once a month, a liquidator is obliged to report to the creditors’ committee regarding his or her activities, information on the financial situation and assets of a debtor, the usage of debtor’s money and other information upon the creditors’ request. Upon completion of all settlements with creditors, the liquidator submits to the commercial court the report and the liquidation balance sheet.

Pursuant to the Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018 (the Bankruptcy Code), there are two bodies that represent creditors during insolvency proceedings:

• the creditors’ meeting; and
• the creditors’ committee.

Creditors’ meetings are meetings of all creditors, and as such, all creditors whose claims are included on the creditors’ register may participate in the sessions of the creditors’ meeting. Creditors’ meetings are convened by the insolvency administrator on his or her initiative or on the initiative of the creditors’ committee or other creditors whose total claims are no less than one-third of all the claims included in the creditors’ register, or on the initiative of one-third of the creditors’ votes. The creditors’ meeting is held at the location of the debtor.

The competence of the creditors’ meeting includes the following issues:

• taking a decision regarding the election of members of the creditors’ committee;
• replacing the insolvency administrator;
• determination of the number of members of the creditors’ committee, its powers, dissolution of the creditors’ committee or replacement of individual members;
• approval and amendment of the rehabilitation plan;
• asking the court to move to another stage of the insolvency proceedings; and
• other issues including the ones within the competence of the creditors’ committee.

The main powers of the creditors’ committee, which are subject to subsequent approval by the court, include the following:

• initiating the creditors’ meeting;
• electing a head of the committee;
• filing a request to the commercial court for recognition of invalid transactions;
• recommending to the court a new insolvency administrator (rehabilitation manager, asset manager or liquidator);
• allowing the sale of assets during the rehabilitation procedure; and
• approval of the rehabilitation plan and any amendments thereof and others.

Ukrainian law does not provide any procedure under which the creditors may pursue the estate’s remedies.

Under the Bankruptcy Code, creditors’ claims are divided into pre-bankruptcy creditors’ claims and current creditors’ claims. For the purposes of detecting all creditors and persons intending to participate in the debtor’s rehabilitation, an official announcement on the opening of insolvency proceedings is to be published. After the announcement is published, the creditors with pre-bankruptcy claims (competitive creditors) must submit their claims to the court within 30 days of the announcement. Pre-bankruptcy claims filed upon expiry of the 30-day term are accepted by the commercial court, but the creditors do not have a right to vote while creditor’s meetings.

The debtor, together with the asset manager, upon consideration of the creditors’ claims, takes a decision to accept or to reject claims in full or in part. The asset manager must notify the creditors in writing and the court of the decision taken after the consideration of creditors’ claims. The debtor’s decision of non-acceptance of the creditor’s claims may be appealed to the court. The creditor’s claims accepted by the debtor and by the court must be included in the register of creditors’ claims.

Current creditors’ claims – claims that become due and payable after the commencement of insolvency proceedings – are not included in the register of creditors’ claims. After the commercial court decides on the opening of a liquidation procedure, current creditors may submit their claims.

Also, according to the Bankruptcy Code, claims that are not monetary and claims for contingent or unliquidated amounts may not be included in the register of creditors’ claims.

The Bankruptcy Code provides that it is allowed to engage a successor in the insolvency proceedings in connection with the replacement of the creditor in the obligation. Thus, the assignment of rights (eg, because of a contract on the assignment of rights) is a ground for the replacement of the creditor in the insolvency proceedings with its successor. To replace the creditor with its successor, the respective resolution of the court must be passed and the register of creditors must be amended accordingly.

A claim to the debtor acquired at a discount (eg, under the assignment agreement or factoring agreement) can be enforced for its full face value in the insolvency proceedings.

Interest that accrued after the opening of an insolvency case can be enforced as current obligations. The creditor is not deprived of the right to submit additional monetary requirements for the collection of interest on loans and credits in accordance with the procedure established by law.

Under the provisions of the Civil Code of Ukraine, set-off is one of the grounds for the termination of obligations under the respective transaction. Set-off requires the parties to the transaction to have single-currency mutual and matured contractual obligations.

During a liquidation, it is possible for a creditor to exercise the right of set-off if the claims are of a similar nature and if such set-off does not violate other creditors’ property rights. Set-off is not prohibited during other proceedings. However, it may be treated as the satisfaction of a specific creditor’s claims, which is contrary to the general principles of the insolvency proceedings.

Under Ukrainian insolvency legislation, the court cannot change the rank of the creditor’s claims. The creditors’ claims are satisfied in the strict order of priority envisaged by the Bankruptcy Code.

In the framework of insolvency proceedings, court fees, insolvency administrators’ fees, operating costs and expenses incurred in connection with insolvency proceedings have priority above all other claims.

Generally, the claims of creditors are satisfied in the strict order of priority envisaged by the Bankruptcy Code, with secured creditors and employees in the queue before unsecured corporate creditors. Thus, the claims secured by a pledge or mortgage are considered privileged claims, which should be satisfied in the first rank of priority. However, if the proceeds from the disposal of the assets secured to a particular creditor are not sufficient to cover that creditors’ claim, then the balance of that secured creditors’ claim is transferred to the fourth rank as an unsecured claim. Also, pursuant to the Bankruptcy Code, the claims against a debtor as a result of the invalidation of its transaction would be satisfied in the first rank of priority irrespective of whether they were secured.

Under the Bankruptcy Code, the creditors’ claims will be satisfied in the following order of priority:

• rank one: employees’ claims (compensation for unused vacations or dismissal payments); payments to the fund securing bank deposits of individuals within the established amount of compensation; creditors’ claims under insurance contracts; creditor’s audit expenses and compensation of damages to the state budget; court fees, insolvency administrators’ fees and expenses incurred in connection with insolvency proceedings; compensation for services provided under ‘gig contracts’;
• rank two: other employees’ claims (personal injury) and social insurance payments;
• rank three: claims for taxes and other mandatory duties; claims of the central government authority for national emergency reserve;
• rank four: unsecured creditors’ claims;
• rank five: claims of the employees to receive contributions from the share capital of the debtor; and
• rank six: all other claims.

Claims of secured creditors are listed separately in a registry of creditors’ claims.

According to the Bankruptcy Code, employees may be dismissed after the commencement of insolvency or bankruptcy proceedings and appointment of the asset manager under general conditions set out in the Labour Code of Ukraine. Employees may be dismissed at any stage of the bankruptcy proceedings.

Generally, the dismissal procedure is the same at each stage of the insolvency proceedings and must be performed as follows.

First, in the event of dismissal of employees in the course of liquidation or reorganisation of an insolvent debtor, notification of the employees regarding further dismissal is required (two months before such dismissal).

Second, the insolvency administrator (asset manager, rehabilitation manager or liquidator) must notify the primary trade union (if any) no later than three months before the actual dismissal of the employees. Also, the insolvency administrator must conduct consultations with the relevant trade union regarding measures to be taken for the purposes of minimising the negative consequences of such dismissal. The above-mentioned consultations may be held no later than three months after the decision to dismiss is taken.

Third, the insolvency administrator must notify the relevant local agency of the government employment service in writing of the further dismissal no later than two months before the dismissal of the employees.

In the course of the insolvency proceedings, the employees of the insolvent debtor have a right to claim payment of their salaries for the three-month period before insolvency proceedings were commenced by the court, compensation for unused vacations and dismissal payments (eg, severance payment to employees in connection with the termination of their employment). Such employees’ claims will be ranked first. Also, employees have the right to claim reimbursement for damages caused to their health and claim against the dismissal order and some related claims.

The Bankruptcy Code provides that pension-related claims against employers in insolvency proceedings can be satisfied with funds received from the sale of the property of the bankrupt. Retirement pay owed to employees in connection with the termination of employment and accrued on contributions for compulsory pension insurance must be satisfied in the first rank of priority. Claims that occurred because of the debtor’s obligations to pay insurance contributions for compulsory pension insurance will fall within the second rank of priority.

The Ukrainian bankruptcy legislation does not provide any specific regulation in this respect. General bankruptcy procedure and environmental law are applicable.

Under Ukrainian law, after the debtor is recognised as bankrupt, it is subject to involuntary liquidation. The involuntary liquidation procedure aims to sell the debtor’s assets, to distribute collected funds to creditors, and to wind up the legal entity. Once all creditors’ claims are satisfied and no property remains after satisfaction of the creditors’ claims, the court will pass a ruling on the liquidation of the bankrupt legal entity. The legal entity is deemed liquidated from the date of its removal from the Unified State Register. After that, no liabilities of the debtor survive.

In contrast, in the event of the debtor’s reorganisation during the rehabilitation procedure, its liabilities are transferred to its legal successors.

After the sale of the debtor’s property, the creditors’ claims will be satisfied in the following order of priority:

• rank one: employees’ claims (compensation for unused vacations, dismissal payments); payments to the fund securing bank deposits of individuals within the established amount of compensation; creditors’ claims under insurance contracts; creditor’s audit expenses and compensation of damages to the state budget; court fees, insolvency administrators’ fees and expenses incurred in connection with insolvency proceedings; compensation for services provided under ‘gig contracts’;
• rank two: other employees’ claims (personal injury) and social insurance payments;
• rank three: claims for taxes and other mandatory duties; claims of the central government authority for national emergency reserve;
• rank four: unsecured creditors’ claims;
• rank five: claims of the employees to receive contributions from the share capital of the debtor; and
• rank six: all other claims.

The liquidator is obliged to use a specific bank account of a debtor and has to transfer assets, received during the liquidation proceedings, solely on this account.

The principal type of security taken on immovable property is a mortgage. A mortgage does not cause an automatic transfer of ownership of the property from the mortgagor to the mortgagee. In the event of the mortgagor’s failure to comply with its obligations under a secured agreement, the mortgagee may proceed with out-of-court or in-court enforcement of the immovable property.

In the course of the insolvency proceedings, the mortgagee has the priority right to be paid debts owing to the mortgagee from the proceeds of the sale of the mortgaged property.

The principal type of security taken on a movable property is a pledge. Under Ukrainian law, there are two types of pledges: a public pledge (imposed by tax authorities in the event of default of payment of taxes); and a private pledge (imposed by the creditor according to a contract).

A pledge does not entail an automatic transfer of ownership of the property from the pledgor to the pledgee. In the event of the pledgor’s failure to comply with his or her obligations under a secured agreement, the pledgee is eligible to proceed with out-of-court or in-court enforcement.

In the course of the insolvency proceedings, the pledgee has the priority right to be paid debts owing to it from the proceeds of the sale of the pledged property.

In the framework of bankruptcy proceedings, the insolvency administrator is entitled to challenge transactions and decisions of the debtor at any stage on the general grounds for invalidation set out in the Ukrainian civil legislation.

Also, special provisions of the Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018 (the Bankruptcy Code), entitle the insolvency administrator as well as competitive creditors to challenge the transactions entered into by the debtor after and within three years before the commencement of insolvency proceedings on the following grounds:

• the debtor has carried out the expropriation without compensation, or assumed the obligations without the appropriate pecuniary reward from the other party, releasing its own property claims;
• the debtor has executed its obligations before they became due;
• the debtor has assumed obligations before the commencement of the bankruptcy proceedings, becoming insolvent as a result, or the fulfilment of its financial obligations to other creditors in whole or in part has become impossible;
• the debtor has carried out disposal of or acquired property at a price higher or lower, respectively, than the market price, and as a result, at the time of assumption or as a result of fulfilling the obligation the debtor’s property was (or has become) insufficient to satisfy the claims of creditors;
• the debtor has paid the creditor or accepted assets in fulfilment of monetary claims on the date on which the amount of the creditors’ claims against the debtor exceeded the value of the property;
• the debtor has assumed an encumbrance to ensure that the monetary claims are fulfilled;
• the debtor has concluded an agreement with an interested party; or
• the debtor has concluded a gift agreement.

The Bankruptcy Code defines the specific consequences of invalidating the debtor’s transactions. In particular, it has been clarified that as a result of the challenge to the transactions, any assets received from the debtor must be returned to the liquidation estate.

Related parties cannot vote when the creditors decide whether to approve a rehabilitation plan (during both pre-trial and ordinary rehabilitation proceedings).

Under Ukrainian law, a holding company may be liable for its subsidiaries’ insolvencies. A Ukrainian holding company is a joint-stock company that owns, uses and administers shares in other companies – its subsidiaries. The Law of Ukraine on Holding Companies, dated 15 March 2006, provides that the holding company bears liability for the obligations of its subsidiaries if the actions or omissions by the holding company cause any subsidiary’s insolvency and bankruptcy. The liability of a holding company is linked to the fact that it or its representatives commit certain errors in managing the other company, which leads to its insolvency.

The Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018, does not provide any special insolvency proceedings involving a corporate group. Moreover, according to the general principle of civil law, the legal entity bears independent liability on its obligations. Therefore, insolvency proceedings of a parent company and its subsidiaries cannot be combined for administrative purposes.

Foreign court judgments in bankruptcy cases may be recognised and enforced in Ukraine in accordance with the procedures specified in international treaties between Ukraine and the other jurisdiction. At the moment, however, Ukraine is not a party to any specific international insolvency treaty. In such a case, the Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018 (the Bankruptcy Code), provides that the foreign court judgments in insolvency cases are recognised based on the principle of reciprocity. The Civil Procedural Code of Ukraine contains a presumption that the reciprocity principle exists unless provided otherwise. This principle is recognised and enforced by Ukrainian courts during insolvency proceedings.

The UNCITRAL Model Law on Cross-Border Insolvency is not part of Ukrainian domestic legislation as it is not adopted by Ukraine.

According to the general principle envisaged by commercial procedural law, foreign creditors have equal rights with national creditors in the course of the insolvency proceedings, unless the relationships between the creditor and the debtor are governed by the relevant international agreements ratified by the Ukrainian parliament. In the event of the absence of such ratification, foreign judicial decisions are recognised in accordance with a reciprocity principle. In contrast, foreign debtors are not considered subjects of the insolvency proceedings. Ukrainian law also envisages restrictions on creditors from the Russian Federation as an aggressor state.

Under the Bankruptcy Code, it is not possible to transfer assets from a Ukrainian administration to an administration in another country as there is no cross-border cooperation in place between domestic and foreign administrations.

According to the Bankruptcy Code, during the insolvency proceedings the commercial court assumes the following:

insolvency proceedings of the debtor, which is established and operates in accordance with the laws of Ukraine located on its territory, is utmost in respect of any other foreign proceedings;
insolvency proceedings of the debtor: the permanent representation of a business entity of Ukraine in a foreign country is derived in respect of the main proceedings in Ukraine;
insolvency proceedings of the debtor, which is established and operates under the laws of another state with headquarters outside Ukraine, initiated in a foreign country is a foreign main proceeding; and
insolvency proceedings of the debtor, which is a permanent representation in a foreign country of the business entity, which is established and operates in accordance with the laws of another state with headquarters outside Ukraine is derived as foreign proceedings.

Pursuant to the Law of Ukraine on International Private Law, the jurisdiction of the courts of Ukraine is exceptional in the case the debtor is established in accordance with the laws of Ukraine.

Thus, pursuant to the legislation of Ukraine, main insolvency proceedings are determined through the criteria of the place of registration of the debtor, whereas the concept of COMI is not applicable.

The Bankruptcy Code provides for the possibility of administering insolvency cases in foreign countries under their respective laws. Foreign insolvency proceedings may be applied in the following cases:

• upon application of a foreign insolvency administrator (assets manager or rehabilitation manager) seeking recognition of foreign proceedings and court assistance, or when the commercial court has received a motion from a foreign court regarding cooperation in foreign insolvency proceedings;
• upon application of an insolvency administrator in the foreign insolvency proceedings seeking recognition of that proceedings and court assistance and cooperation regarding foreign insolvency proceedings in the insolvency case; and
• upon the filing of an application of the commercial court with a foreign court.

We are not aware of any cases in which the court has refused to recognise foreign proceedings or to cooperate with foreign courts, but the Bankruptcy Code establishes grounds for such a refusal (eg, the court’s decision regarding the initiation of the bankruptcy proceedings is not final, a debtor was not properly informed about the case, the execution of the court’s decision contradicts the public order of Ukraine, etc).

At the moment, in Ukraine, there are no cross-border insolvency protocols that Ukrainian courts have entered into, and there are no other arrangements of the Ukrainian courts with courts in other countries with respect to the coordination of the insolvency proceedings.

The Bankruptcy Code defines a debtor as, inter alia, a legal or natural person that conducts entrepreneurial activities. Thus, Ukrainian courts may rule on the insolvency of only those foreign companies that have created a separate legal entity in Ukraine. In turn, foreign companies’ branches or other organisations without legal entity status are not subjects of insolvency procedure in Ukraine.

On 21 October 2019, the Code of Ukraine on Bankruptcy Procedures came into force.

The Ukrainian parliament has adopted emergency legislation amending the Code of Ukraine on the Bankruptcy Procedures, dated 18 October 2018, to meet recent challenges, which includes, inter alia, the moratorium on the initiation of insolvency proceedings and more flexible deadlines if a party cannot meet them owing to the coronavirus-related restrictions. This law came into force on 17 October 2020, thus, currently, those provisions are relevant. The law also provides that creditors’ committees and creditors’ meetings can be carried out remotely through videoconferencing.