New bankruptcy procedure for foreign currency borrowers needs to be improved - experts of EU Project "Pravo-Justice" and RJRC members
On June 18, an expert discussion “Foreign currency borrowers. New Rules” was held. Representatives of the Regional Justice Reform Councils (RJRCs) participated in it. National experts of EU-Project "Pravo-Justice", judges, lawyers, bankruptcy trustees, private enforcement officers and other participants discussed recent legislative changes as well as practical experience in applying bankruptcy procedure under the new rules.
In the introductory speech Oleksandr Bondarchuk, acting Chair of the National Association of Bankruptcy Trustees, outlined the primary challenges as to applying bankruptcy proceedings to individuals: "Analysis of bankruptcy proceedings as to individuals today shows low numbers of proceedings and there are several reasons for this. First of all, it is because legislation is complex and entering the procedure is overly regulated. This challenge is being addressed by a working group at the Ministry of Justice. The second challenge is economic - so far it is too expensive a procedure for the majority of debtors, which can be solved by amending the law or involving free legal aid centres of the Ministry of Justice. [...] Thirdly, the very word "bankruptcy" frightens the majority of debtors, so it is necessary to disseminate information about the possibility of using the bankruptcy procedure".
Dovydas Vitkauskas, EU Project "Pravo-Justice" Team Leader emphasized social significance of this challenge: "This challenge should be considered as social one. As best European practices show, we see that not only the Ministry of Justice and the legal aid system, but the Ministry of Social Policy interact here as well. Therefore, it is important for us to inform the Ministry of Social Policy that they may have a certain obligation in order to solve these tasks in a more comprehensive way."
The first session "Debt Restructuring of Foreign Currency Borrowers: New Rules and Procedures" was opened by Heorhii Hryhorian, lawyer, EU Project "Pravo-Justice" national expert. He elaborated on the challenges in drafting a restructuring plan on preferential terms, such as:
- determining the exact amount of debt for calculating the restructuring plan correctly;
- determining the market value of the property through an appraiser provided by the lender;
- no bankruptcy trustee who checks whether the information provided by the debtor is accurate.
"If there is correct and high-quality calculation in place, a foreign currency borrower can count on good financial conditions for restructuring. Moreover, if income for debt restructuring is insufficient according to the schedule determined by preferential terms, the minimum amount of monthly execution of the restructuring plan may be set in the amount not less than half of the minimum wage", said Heorhii Hryhorian.
Olena Fonova, Ph. D. in Law, judge of the Commercial Court of Luhansk Region, Donbas RJRC Coordinator drew attention to procedural issues related to reducing the deadline for approval of the restructuring plan to 15 days: "The advantages of the new procedure for foreign currency borrowers are that it is free, efficient, preferential. However, at present, this procedure is virtually impossible. [...] By interfering in the review process and trying to make it faster, the legislator did not take into account all the points left from the old procedure, in particular, the need to provide assessment of the market value of property by an appraiser appointed by the creditor, but it is impossible to make it work in the framework of the new one given its promptness".
At the second session "Procedural Aspects of Insolvency Proceedings of Individuals" Serhii Donkov, Member of the Board of Bankruptcy Trustees of Ukraine told about what is necessary to improve in the bankruptcy procedure as to individuals laid down in the government draft law No. 4409: "Promoting bankruptcy procedure of individuals primarily means simplification of the opening of a bankruptcy case, reducing the number of documents prepared for the opening of such a case, as well as simplify the procedure for appointing a bankruptcy trustee so that it is predictable for debtor-individual."
Then, Iryna Butyrska, lawyer, Ph. D. in Law, Chernivtsi RJRC Coordinator focused on the most controversial issues regarding the grounds for closing the insolvency proceedings of an individual. Relevant rules governing the grounds for closing such proceedings set out in the Bankruptcy Code, are often unclear and conflicting and give rise to different practices of its application: "The grounds governing the closure of bankruptcy proceedings in general and insolvency in particular need to be improved as soon as possible in order to govern such cases much more transparently and unambiguously."
The third session of the event had to do with tax consequences of the debt restructuring procedure.
Serhii Voltornist, lawyer, bankruptcy trustee familiarized the participants of the discussion with the changes in Article 165 of the Tax Code of Ukraine of April 13, 2021, according to which the amounts by which the debt of foreign currency borrowers is reduced (forgiven) by restructuring the obligations under the loan agreement are not included in taxable income.
Lawyer Serhii Lytvynenko added that this rule applies to mortgages and does not cover all cases of forgiving obligations to the lender: "Certain provisions of the Tax Code indicate that the forgiven debt of an individual may be the basis for accrual of tax liabilities. However, the taxation of written-off debts contradicts the task of the institution of bankruptcy of an individual. The rules underlying the Bankruptcy Procedure Code are aimed at clearing the debtor of debts rather than accumulating new ones."
At the fourth session dedicated to legal grounds for lifting the moratorium, Oleksandr Sivokozov, Deputy Chair of the Council of Private Enforcement Officers of Ukraine, Member of Dnipro RJRC, cited the grounds on which the sale of the only home for foreign currency borrowers is possible. Among other things, this applies to residential real estate that is actually used for commercial activities or leased: "In fact, the debtor having outstanding debt receives income from property protected by law."
"We need to use the bankruptcy procedure, promote and offer this procedure. After all, a fresh financial start is an important step for any citizen who finds himself in a tight corner", emphasized Roman Chumak, Kharkiv RJRC Coordinator, lawyer, "Ares" Law Firm managing partner at the end of the discussion.
Regional Justice Reform Councils (RJRCs) have been established with support of EU Project "Pravo-Justice" and function in Chernivtsi, Dnipro, Kharkiv, Lviv, Odesa regions and Donbas. To date, Councils members have been actively participating in drafting a bill on mediation, amendments to the Bankruptcy Code, proposals to improve legislation on enforcement proceedings, introducing e-court and discussing the concept of transitional justice.
RJRCs act as permanent working groups to promote bottom-up reforms: bringing region-specific challenges and potential solutions thereof to the level of central government.