Pravo-Justice Supported Online Consultations on the Principles of Bankruptcy, Including in Wartime

On September 19, 2022, online consultations dedicated to the “Principles of Bankruptcy. Economic Courts and Bankruptcy Trustees in Wartime”. Consultations are conducted by the Ministry of Justice of Ukraine within the framework of the monitoring of application of bankruptcy-related legislation. The event was attended by insolvency practitioners and judges. The speakers presented five reports at the event where they raised the most pressing issues related to the topic in question and offered possible solutions.

Olena Fonova argued in favor of the expediency of proper regulation of the issue of expanding the powers of economic courts to decide on the impossibility of further bankruptcy proceedings due to the fact that the debtor and their property are located in the temporarily occupied territory of Ukraine or in the territory where hostilities are taking place, said Olena Fonova, judge of the Economic Court of Luhansk region.

“I know that there was the draft law No. 5510, which provided for solving the problem of bankruptcy of such legal entities through the introduction of a moratorium. However, we understand that another moratorium for another category of legal entities will in no way contribute to the protection of creditors’ rights and the country’s investment attractiveness. Therefore, in my opinion, it seems more expedient to terminate such bankruptcy case at the request of the parties, the debtor, the bankruptcy trustee, the creditors, or at the initiative of the court. This should only be done if the debtor does not have any property in the territory controlled by Ukraine or it is fully wound up,” said Olena Fonova.

Vladyslav Filatov, Director of the Bankruptcy Department of the Ministry of Justice of Ukraine, also expressed his opinion and confirmed the expediency of closing a bankruptcy case where it is no more possible to continue the bankruptcy procedure.

“A legal entity without property is a fiction; just a name on paper or in a register. And there can be no procedure without procedures. Therefore, we are more inclined to resolve the issue by closing a bankruptcy case, but only after having taken all possible actions regarding the debtor’s property, which is located in the territory controlled by Ukraine,” said Vladyslav Filatov.

The principles of bankruptcy and the role of the court in a bankruptcy/insolvency case by ensuring the effectiveness of bankruptcy/insolvency procedures were highlighted by Viacheslav Pieskov, Judge of the Economic Cassation Court of the Supreme Court.

“Our first declarative principle is to raise Ukraine’s ranking internationally and boost investment attractiveness by increasing the efficiency of bankruptcy procedures,” said Viacheslav Pieskov.

The judge of the Economic Cassation Court of the Supreme Court also said that when deciding on the opening of a bankruptcy case, judges should focus on preventing fictitious bankruptcy.

“We need to stay in line with best practices existing worldwide when dealing with bankruptcy – those of Finland, Japan, and the USA. In these countries, any fraudulent actions in respects of a debtor, including fictitious bankruptcy, are subject to prosecution. In Finland, such actions are punishable by 2-year imprisonment; in Japan – 10-year imprisonment, in the United States – 5-year imprisonment or a fine of 80,000 dollars. Unfortunately, Ukraine has chosen its own way which is to decriminalize fictitious bankruptcy,” said Viacheslav Pieskov.

According to him, at the stage of disposal of assets, the goal of a court should consist in balancing the interests of all participants in the bankruptcy proceedings. In his report, Judge Pieskov also touched upon the issue of remuneration of bankruptcy trustees.

“Mandatory remuneration of the property administrator will increase their responsibility before creditors, and the court will be more pro-active in respect of the property administrator in order to prevent the State from being held accountable for any of their eventual unlawful actions in the future,” explained the Judge of the Economic Cassation Court of the Supreme Court.

Viacheslav Pieskov stated in his report that as to the subsidiary liability, the Supreme Court ECC is trying to rely on the principles laid down by the ECtHR, in particular, in “Khodorkovskiy v. Russia” and “Lekic v. Slovenia”, but, at the same time, it seeks to listen to arguments the top management of companies.

Roman Militsianov, judge of the Economic Court of Vinnytsia region, presented a report and a presentation on the “Dispute of Law in Bankruptcy Cases”.

"From my own experience and the jurisprudence of the Supreme Court, I can say that the more often we introduce into the legislation terms and concepts that lack legal definition, the more often we will have different interpretations and different judicial practices - thus, legal uncertainty. There should be a clear statutory definition of the concept of “dispute of rigth”. By the way, the Constitution of Ukraine, which we have to consider as a basis, appeals to the concept of “right-related dispute” rather than “dispute of right”. The concept of “dispute of right” needs to be separately defined within the framework of bankruptcy proceedings, said Roman Militsianov. – The next proposal is that the dispute of right should be resolved by the court within the framework of bankruptcy proceedings."

Serhii Donkov, advisor of the LCF law firm, spoke on the topic “Advisability of Providing a Summary Report, by the Bankruptcy Trustee, on the Work Done to the Economic Court (in the case of exercising the relevant powers in a bankruptcy/insolvency case) in the Event of the Termination of the BT’s Activities at Their Written Request”.

“The legislation should be amended to include norms containing a clear list and volume of documents to be transferred, alongside the deadlines for such transfer. Besides, I believe that the Ukrainian National Insolvency Trustees Association should change the Code of Professional Ethics and provide for a certain procedure and responsibility for the failure to transfer documents from one BT to another on time,” said Serhii Donkov.

Diana Kozlovska, bankruptcy trustee, President of LF “ELIT CONSULT GROUP” LLC, spoke on the need for statutory regulation of a BT’s actions in the event that the debtor’s property or the debtor themselves remain in the temporarily occupied territory or in the territory affected by hostilities.

“Solving the issue of further bankruptcy proceedings in wartime or if the case remains in the temporarily occupied territories requires proper regulation either by amending the Bankruptcy Procedures Code or by adopting a separate legal act," said Diana Kozlovska.