Bankruptcy of individuals: Certain problems of legal regulation of the procedure

The Code of Ukraine on Bankruptcy Procedures (Bankruptcy Code) has introduced the individual insolvency instrument in Ukraine. This novelty has given rise to a broad and vivid discussion in the legal community. Many expected the Bankruptcy Code being adopted, economic courts would receive incoming individual insolvency applications on daily basis. The Bankruptcy Code is in place for more than one year, however, the individual insolvency instrument is not even close to being as popular as it was expected. Why did that happen and why would individual debtors, instead of restarting their financial life from scratch, continue looking for means to evade repayment of debts?

There are many reasons for this, including: high cost of the procedure and lack of awareness of the population about advantages and disadvantages of the individual bankruptcy tool. But the main reason is the complexity of legal regulation of this procedure.

Thus, in accordance with the Bankruptcy Code provisions, the debtor is supposed to draft an application on the opening of individual insolvency proceedings and prepare the relevant annexes.

As for the application, the Bankruptcy Code makes it look very simple when setting them out the requirements to it in only four paragraphs of part 2 of Article 116:

1. Name of the economic court where the application is submitted.
2. Debtor’s full name, place of residence, taxpayer number, passport number (for individuals who, due to their religious beliefs, refuse to accept the taxpayer number, have officially notified the relevant supervisory authority, and have a respective mark in their passport), contact number, and e-mail address (if any).
3. Statement of facts giving rise to action before court.
4. List of annexes.

As for the annexes to the application, the list is provided in part 3 of Article 116 of the Bankruptcy Code. However, paragraph 14 of part 3 indicates ‘other documents confirming the existence of the grounds specified in Article 115 of this Code.’ And it is the debtor and the economic court, which will consider the individual insolvency application, who are supposed to decide what the documents should be considered as such. It is not uncommon to see individual insolvency applications left without action because of the absence of the said ‘other’ documents. Some courts would leave applications without motion because of the lack of confirmation that the applicant has not filed another claim(s) against the same debtor with the same subject matter and on the same grounds as envisaged for claims in the Economic Procedural Code of Ukraine, although it is not required in a special act which the Code of Bankruptcy is. There are also cases when courts require debtors to prove the payment of court fees for filing an insolvency application, although the Law of Ukraine ‘On Court Fees’ does not provide for this.

Another problem is filling in the debtor’s declaration. To be exact, it comes to three declarations for the three years preceding the court action. These declarations must provide detailed information on all members of the debtor’s family under the Bankruptcy Code, namely:

• persons who are married to the debtor (including if the marriage was dissolved within three years before the date of filing the declaration;
• children, including adults;
• parents;
• persons who are under the guardianship or custody of the debtor;
• other persons who live with the debtor, share household, have mutual rights and obligations (except for persons whose mutual rights and obligations with the debtor are not of family nature), including persons who live together without being married.

Unfortunately, the Bankruptcy Code does not offer any mechanism that would allow the economic court or the insolvency manager to verify information on the exact circle of the debtor’s family members. For example, how to detect the fact that the debtor has hidden information about the existence of any person living with him or even about the adult children?

The debtor’s declaration should also include information on all open accounts and funds in these accounts of both the debtor and all their family members. However, if a family member does not want to disclose such information, it will be problematic for the insolvency manager or the economic court to obtain such information, because under the existing legislation, the insolvency practitioner may obtain information that constitutes bank secret, but only in respect of the debtor, not of members of their family.

These issues are only part of the problems faced by debtors, their lawyers, insolvency practitioners, and judges when applying the relevant provisions of the Bankruptcy Code. Unfortunately, the practical application of the Bankruptcy Code has brought to light a number of collisions and gaps in the legal regulation of individual bankruptcy, which are usually eliminated by the practice of the Supreme Court. However, due to the poor number of such cases across Ukraine, the Supreme Court receives relatively few individual bankruptcy cases. As a result, courts are forced to either decide on how to resolve conflict issues by themselves, or be guided with the practice of the relevant court of appeal whose jurisdiction covers the area where the first-instance court is located. In the meantime, the practice of appellate economic courts may also differ from one appellate district to another.

In this regard, it seems that it would be relevant to hold interregional discussions, forums, seminars, round tables, etc. in order to exchange best practices in individual bankruptcies among judges, insolvency practitioners, and lawyers from different regions. Such exchanges would facilitate achieving several goals at once: exchange views and experiences with colleagues from other regions and come to ‘common ground’ while resolving together collisions which arise during individual insolvency proceedings.

The expert discussion "Individual Bankruptcy: Major Practical Issues and Possible Solutions", conducted by the EU Project Pravo-Justice on March 22, 2021, as attended by the representatives of Regional Justice Reform Councils (RJRCs), the Verkhovna Rada, and the Ministry of Justice of Ukraine, is an example of abovementioned events. That event provided an opportunity to exchange experiences on the application of individual bankruptcy procedures among judges, insolvency practitioners, and lawyers from different regions, and to brainstorm together on possible ways to improve bankruptcy legislation in this area. The participants of the event also pointed at the excessive regulation of the issue of initiating individual insolvency proceedings.

Thus, when discussing the problems of individual bankruptcy of individuals, the experts agree on the need to clarify the regulation of the requirements to the individual insolvency application. This would allow avoiding ambiguous interpretation of legal rules which contain the requirements to the application and, as a consequence, would simplify the mechanism for initiating proceedings in an individual insolvency case.

In our opinion, the list of requirements to the application to initiate insolvency proceedings should be formalized and clearly defined, similar to the requirements for a statement of claim under the Economic Procedure Code of Ukraine. To develop this idea, we note that all additional documents that may be of use in the process of consideration of a case, should be collected by the insolvency manager.

Coordinator of Chernivtsi RJRC of the EU Project Pravo-Justice Iryna Butyrska for Borg.Expert.