With contributions by EU Project “Pravo-Justice”, there were online consultations held devoted to selling the bankrupt’s property and protecting the secured creditors’ rights

On September 15, 2022, the Ministry of Justice of Ukraine, supported by EU Project “Pravo-Justice”, held online consultations, the topic being “Selling the bankrupt’s property and protecting the secured creditors’ rights.” The event participants, namely, bankruptcy trustees, representatives of NABU, SoE “SETAM”, SoE “Prozzoro Sales” voiced aspects that are of most concern to them and shared their vision as to what legislative amendments need to be made in order to improve the quality of bankruptcy procedures.

The event started with opening remarks by Oleksandr Oliinyk, Director of the Directorate of Justice and Criminal Justice, the Ministry of Justice of Ukraine.

“Recently, we presented the findings of monitoring ‘Justice during the war’. We categorized the issues raised by you during the survey and the recent questionnaire into main challenges. Today we will discuss them. The common goal is for us to decide among ourselves what are the best suitable ways to solve the problems raised,” Oleksandr Oliinyk said.

In course of these online consultations, the participants discussed four challenges in detail.

The first one is “Challenges arising during the sale of property seized at electronic auctions in course of enforcement proceedings, the ones related to moratoria on satisfying the creditors’ claims in the bankruptcy procedure.”

According to Viktoriia Yovych, representative of SoE “Setam”, there are challenges arising when applying Articles 41 and 121 of the Bankruptcy Code. The current legislation stipulates that while moratoria on satisfying creditors’ claims are in force, foreclosures arising from enforcement documents are prohibited, except if the property is at the stage of sale from the moment information on the sale of such property was published. However, a question arises: what exactly should be considered as the moment when such information was published? On September 14, 2021, the Supreme Court issued a ruling in which it came to the conclusion that e-auction is the only sales process consisting of certain stages, but at the same time all these stages - the first, second and third auction - are relatively self-contained.

“As a result, there may be instances when we submitted the lot and had the first auction, but we cannot conduct the actions further because there is a moratorium - the property cannot be sold. Therefore, we cannot agree with such jurisprudence of the Supreme Court as we believe that it is feasible to pay attention to what exactly the legislator tried to set forth in the provisions regarding the cases not covered by the moratorium. It is obvious that these cases are when the enforcement proceedings are almost completed, all enforcement actions have been taken and nothing depends on the enforcement officer. In this case, the rights and claims of the creditor must be fully ensured. Our recommendation is to set forth in detail the procedure for the sale of property and to determine that it is a single and indivisible process,” Viktoriia Yovych said.

SETAM representative drew attention to the problem that courts interpret and apply the said articles of the Code in a contradictory manner.

First instance courts and sometimes second instance courts directly forbid “SETAM” and enforcement officers to take actions related to the sale of such property. Judges pay no attention at all to the second part of the rule which provides for instances to which the moratorium does not apply,” said Viktoriia Yovych. “But all the final jurisprudence in our country is positive: either the appeal or the cassation instance quashed these decisions and resumed the auction. With such a lay of the land, debtors gained quite a lot of time and debt collectors found themselves at a disadvantage as their claims remained unsatisfied for a long time.

Oleksandr Lykhotop, Deputy PMO in Prozorro.Sale delivered a presentation on auctions to sell the debtors’ property in bankruptcy cases. He pinpointed that from the electronic trading system perspective, auctions to sell debtors’ property in bankruptcy cases are a stable and efficient sales format; it has a relatively high success rate, procedures are transparent and understandable, and there are almost no violations in the system.

The second one is “The need to provide regulatory framework for the procedure and timeline for the secured creditor to refuse security.” Vasyl Khei, NABU Committee on Legal Support expert highlighted the points at issue related to this. He drew attention to legislative gaps and the fact that jurisprudence is quite often ambiguous.

“Article 45 of the Code does not govern the situation when a secured creditor initiates a bankruptcy case. What should he do in such a case? There is no clear answer. It is necessary to set forth in detail the procedure for waiving security, and what form it should take. Another challenge is the option to waive the security as to the value of the collateral in part or in full. The question arises of what to do if a secured creditor has its own assessment of the value of the collateral conducted by an independent expert, or if not all property as per the collateral agreement is available.” said Vasyl Khei and voiced NABU’s proposals. “Our proposals boil down to the fact that the right to submit an application for refusal of security - full or partial, including within the limits of one contract, can be exercised at any stage of the proceedings in the case.”

Diana Kozlovska, bankruptcy trustee, head of “ELIT CONSULT GROUP” LLC, spoke on this issue. In her intervention, she focused on the fact that banks should again determine the value of the subject of pledge and mortgage by assessing what the property was like at the time when such a bankruptcy procedure was initiated.

“As far as procedure and timelines are concerned, in my opinion, the secured creditor should be obliged to submit his waiver at the stage when the register of creditors’ claims is formed and creditors’ claims are considered,” Diana Kozlovska said.

The third one is “Feasibility of regulatory governance of the fate of the bankrupt’s property if such property is not sold at the second re-auction.”

Delivering a presentation on the topic mentioned, Nataliia Tyshchenko, managing partner of “NOBILI” law company and bankruptcy trustee said that it is necessary to enshrine at the legislative level the possibility for one of the creditors to take away the property that was not sold at the second re-auction or the possibility to regulate its sale or to give it to the creditor as repayment of creditor’s claims upon approval of the creditors’ committee.

“I would also highlight write-offs as we have a lot of illiquid assets. Yet another challenge is a lot of property located in the temporarily occupied territories that today cannot be sold at all. Issues also arise with the sale of receivables,” Nataliia Tyshchenko pinpointed.

The fourth one is “Feasibility of regulatory government of the write-off (recognising as paid) of claims not declared in the insolvency case of a natural person and natural person-entrepreneur”.

“A short answer to this question would be: yes, it is necessary to govern this aspect.” This is how Ruslan Sydorovych, Ario law firm partner, started his presentation.

He noted that the legislation in force does not provide a conclusive answer to this situation. Bankruptcy trustees should be guided by the jurisprudence that has ruled that claims that are not lodged, as a result of repayment, are also considered to be written off, except for those that are not subject to restructuring.

“However, there is no such rule in the Code. And objectively, this causes legal uncertainty,” said Ruslan Sydorovych.