The Struggle for Independence Ukraines New Bankruptcy Law

The Struggle for Independence Ukraines New Bankruptcy Law

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Struggling to overcome 70 years of a command economy followed by the International Monetary Fund's (IMF) radical privatization program in the early 1990s and the loss of many of its markets (particularly the Soviet military), Ukraine continues to restructure its economy and laws to accommodate itself to the new global market economy.1 In the process, drawing on a variety of resources, in 1999 it enacted a uniquely creative and pragmatic bankruptcy law. That system is being tested right now; Ukraine's national Agency for Bankruptcy estimated last fall that more than half of the businesses in Ukraine are eligible for bankruptcy, and 53 percent of them are operating at a loss.

The participants in the bankruptcy process of course include the debtor and its creditors, but also, depending on the case, a representative of the employees, local government (required in cases in which the debtor is a "town-creating enterprise," defined as a business that employs more than 5,000 employees or for which the employees and their families comprise more than half the population of the town or region), Agency for Bankruptcy (a cabinet-level agency that keeps track of the economy in general and bankruptcies in particular, and administers the bankruptcy system by training and supplying trustees) and state taxing authorities.

Once the court grants the bankruptcy petition (the equivalent of entering an order for relief), it appoints an interim trustee for the company. But in a practical approach to the problem of the need for someone to "watch the store" but also have experience to run the business, this trustee is charged with preventing transactions out of the ordinary course of business and gathering information on the company, while management stays in place to run the daily operations of the business. A creditors' committee is formed, which largely speaks for the creditors through the rest of the case. Committee members have weighted votes determined by the size of their claims.

...Ukraine's Agency for Bankruptcy estimated last fall that more than half of the businesses in Ukraine are eligible for bankruptcy, and 53 percent of themare operating at a loss.

Within approximately seven months of the filing, the court must make the decision of whether to order the liquidation of the company or to permit a "sanation" (reorganization) manager to work on developing a sanation plan. If the court orders the latter (which will usually be based on the recommendation of the creditors' committee), the trustee may become the sanation manager or the court may appoint the person selected by the committee. (The debtor's management can also serve as the sanation manager, becoming the rough equivalent of a debtor-in-possession in a U.S. reorganization case.) Either way, the sanation manager completely replaces management, and has three months to come up with a plan to sanate (reorganize) the company while running the company. The sanation manager receives the same salary as management, but he and the creditors' committee may also agree on an incentive program for a successful sanation—a financial arrangement not subject to review by the court.

Their Code permits a very wide range of provisions for sanation, including (as in the U.S.) a controlled liquidation. If the proposed sanation plan is not approved by the court, the sanation manager is fired. In consequence, the Code contemplates intense negotiations by the manager with the parties to make something work. Prior to the court hearing on the proposed plan, the manager presents the plan to the committee for approval; the creditors do not get a direct vote on the plan.

If the court does not approve the plan, the court may allow the committee to try to put together another plan with another manager, or it may order liquidation. If the sanation plan is approved, then the manager has up to one year (which may be extended) to effect the plan. At the conclusion of the term of the plan (or before, if the company is doing very well or very poorly), the manager conducts a meeting of all the creditors at which he presents a complete history and current picture of the company's finances and prospects. The creditors meet as a whole, then decide on a recommendation to the court, which can include ending the plan to commence payments to creditors, ending the plan to commence liquidation or extending the plan. The court then conducts a hearing at which any creditor objecting to the recommendation has the right to be heard.

Following the conclusion of a successful plan, the manager (or the plan-designated successor) has six months to pay claims. Payment of claims follows a priority scheme that recognizes conceptually similar but different values than in the United States, such as (1) secured claims, (2) benefits for severed employees, (3) administrative costs, (4) (still employed) employee wages and benefits, (5) taxes, (6) unsecured claims including post-petition trade debt, (7) employee contributions to the company's capital and expenses, and (8) other claims.

Another feature of the Code is the Amicable Settlement Agreement (ASA), which can encompass any number of different compromises among some or all of the parties and can take place at any stage of the proceedings. An ASA can require the government to compromise its taxes by forgiveness, reduction or extended payment terms. In reality, the government is often eager to find a basis to forgive or restructure the company's tax debt (which, when actually assessed, is quite large) in order to keep businesses afloat so the government can realize more income in the long run. The ASA is arranged for the creditors by the committee and for the debtor by the sanation manager. However, illustrating the power of secured creditors, any secured creditor can veto an ASA, even if the proposed ASA does not involve the property or claim of the secured creditor. The court conducts a hearing on the ASA at which time any interested party may be heard.

Over the years, it will bear watching to see how well Ukraine's bankruptcy law softens and conforms the harsh realities of the current Ukraine economy to the global market forces enveloping eastern Europe.


1 As part of its program to help establish the legal, accounting and financial infrastructure to support the development of market economies in central and eastern Europe, the U.S. Agency for International Development (USAID) has, through companies such as Deloitte Touche, provided expertise to the legislative and administrative branches, and training to the judiciaries, of various countries. The author has been fortunate to participate in one of those programs, for Ukraine, starting last fall. The views expressed herein are of course solely those of the author and not of Deloitte Touche, USAID or the government of Ukraine. Nothing in this article is to be construed as an endorsement of any of these entities. Return to article

Journal Date: 
Sunday, October 1, 2000