“It is important to emphasize the possibility of business recovery, not liquidation” — Vitaliy Nestor, Senior Partner of ALARIUS, Chairman of AAU Bankruptcy Committee

“It is important to emphasize the possibility of business recovery, not liquidation” — Vitaliy Nestor, Senior Partner of ALARIUS, Chairman of AAU Bankruptcy Committee

The trends in the development of bankruptcy practice, legislative and law enforcement changes of wartime, as well as the expectations of the professional community in an interview with “Yuridichna Praktika” were analyzed by Vitaliy Nestor, Senior Partner of ALARIUS, Arbitration Manager, Chairman of the AAU Bankruptcy Committee.

— Are the predictions that the war will trigger an increase in the number of bankruptcy proceedings? What are the quantitative indicators of the industry at the moment?

We have lived two and a half years of large-scale war. According to data from the Department of Justice and the Supreme Court, which I have recently examined, a rapid increase in the number of bankruptcies has not yet been observed. Thus, the number of enterprises whose bankruptcy proceedings were opened was: in 2021 — 1335; in 2022 — 973; in 2023 — 1440. And the number of cases that went to the courts of first instance in 2021 is 2744, in 2022 - 2083, in 2023 - 2773. That is, we see a clear small drawdown in 2022. But the results of 2021 and 2023 are quite comparable.

— This picture shows that Ukrainian business as a whole is coping with the economic hardships of the war, are we dealing with delayed demand and the wave of bankruptcies still ahead?

— Undoubtedly, information on bankruptcies in this and the coming years will be interesting and important. For example, the data for this year will allow us to understand the trend towards increasing or maintaining the level of bankruptcies. It is also important to remember that some bankruptcies may occur in the occupied territories under Russian law and remain outside the Ukrainian statistics. In any case, we must understand that the war is an additional burden for Ukrainian business, which already has problems with tax pressure and staff shortages.

Therefore, I can say that it depends on the state policy to support business whether the number of bankruptcies will increase not so much, but in general the number of businesses operating.

If we refer to deferred demand, I will give an example of closing businesses - a faster procedure than bankruptcy. In the first 6 months of this year, 54% more entrepreneurs closed and 15% more legal entities closed (compared to the same period in 2023). This is YouControl.market data. But against the same background, an increase in registrations of new legal entities and individual entrepreneurs is recorded, that is, business activity is present, and an increase in the number of closed businesses this year may indicate that in 2022 or 2023, business owners did not have legal moments to settle.

— KUZPB is called procreditor. Has its adoption improved the efficiency of bankruptcy procedures (a World Bank study at the time estimated that creditors receive less than 10 cents on every dollar in bankruptcy proceedings)?

— As far as I remember, according to this study, the duration of the procedure in Ukraine before the entry into force of the Bankruptcy Procedure Code was almost three years. This is prohibitively long and expensive (both for business and for the state, if we talk about the burden on the judicial system on average). Unfortunately, 2020 is the last year that was studied in relation to Ukraine.

But according to the same judicial statistics, the number of pending cases at the end of the year increases in the courts of first instance from year to year: in 2021 there were 3,777 such cases, in 2022 - 4192, in 2023 - already 4677. There is hope that more new judges will appear in the courts and the process will go faster, especially since there are legislative changes that make it possible to simplify the trial. For example, the amendments introduced by Law No. 2971-IX in March 2023 introduce the consideration of bankruptcy applications under the rules of simplified claim proceedings (but the plaintiff can apply for consideration of the case under the rules of general claim proceedings). At the same time, this same law expands the list of court decisions that can be appealed in cassation, this adds opportunities for legal protection, but, again, affects the duration of the bankruptcy procedure.

Some information of the Supreme Court adds a little optimism, because according to the results of 2023, the amount of funds awarded for recovery in bankruptcy cases increased 4.7 times: UAH 37.2 billion (compared to UAH 7.9 billion in 2022).

Of course, we are far from the duration of the bankruptcy procedure of 3 months, as in Ireland, perhaps we do not need such speeds. But the annual duration and the recovery index of (conditionally) 85.4 cents on the dollar, as in the UK, is a good benchmark.

What can interfere with achieving this? First of all, in my opinion, insufficient business awareness of the possibilities of bankruptcy proceedings and restoration of solvency. It is important to emphasize the possibility of restoring the business, not its liquidation. Secondly, we must maintain integrity among arbitration managers and their continuous professional development.

Strangely enough, in response to the “pro-creditor” Code in the process of European integration, we are waiting for a new “debtor” document — EU Directive 2019/1023 on restructuring and insolvency. The implementation of the Directive will take place through the adoption of draft law No. 10143, which is due to pass the second reading in the Parliament. The Directive provides for the possibility of early detection of signs and prevention of insolvency of businesses, and is generally aimed at cooperation between bona fide debtors and creditors.

— What trends do we currently have in law enforcement, which legal conclusions of the courts, especially the Supreme Court, have a significant impact on the development of practice?

— It is pleasant to see that some of the conclusions of the Supreme Court were continued in the form of amendments to the KUZPB. For example, in the framework of the fight against possibly unscrupulous debtors, the same Law No. 2971-IX stipulates that a change in the debtor's registered place of stay or residence after filing an application for opening bankruptcy proceedings does not affect the change in the territorial jurisdiction of the case. Earlier this conclusion was reached by the Supreme Court in a resolution of February 3, 2021 in case No. 917/1759/19.

“In the event that initiating creditors apply to various economic courts with applications for opening bankruptcy proceedings, the application that was first submitted to the court on a calendar basis should be considered by the economic court at the place of residence of the debtor” — this is the opinion of the Supreme Court of 26 April 2023 in case No. 904/24/24/154/22, and a month earlier, in March, the relevant clarifications were made to KUZPB by the above-mentioned Law No. 2971-IX.

Also significant contribution of judicial practice to the development of subsidiary liability. In this case, Law No. 2971-IX also defines a new category of persons for whom subsidiary liability may be applied. We are talking about persons who committed/agreed transactions or property actions specified in Article 42 of the USSB, which are subsequently declared invalid. And already a few months after this, the norm was applied in practice. The issue of responsibility of managers for committing knowingly unprofitable transactions still remains relevant and difficult, as evidenced by the decision of the Supreme Court of June 19, 2024 in case No. 906/1155/20 (906/1113/21). It not only resolved the issue of applying subsidiary liability to individuals, but also determined the moment when liability arises and its scope. Regarding the limitation periods for bringing to subsidiary liability, the decision is important in this matter, because the judges departed from a number of previous positions.

— How do you evaluate legislative initiatives in the field of bankruptcy? Can we talk about an effective solution to the problems caused by the war and, accordingly, an effective implementation of the European integration track?

— Law No. 3249-IX, adopted last summer, was just aimed at improving bankruptcy procedures in the conditions of war, but some of the rules were introduced to KUZPB on a permanent basis and will not cease to be effective after the end of the martial law. This is a provision to strengthen the powers of the arbitration manager in terms of obtaining information. First, the debtor himself is obliged by law to provide the property manager with access to information on accounting, tax, management. Secondly, the law defines what is the request of the arbitration manager and establishes the obligation to respond to it. Such changes are timely, because information about all processes and property (and banks must respond to requests) is the most important thing that can be in the hands of the arbitration manager.

Regarding directly “war changes”, that is, those that will be in effect during the state of war and during the 6 months after it, there are, in addition to the understandable changes caused by the war, a number of those that have been ambiguously accepted. First, it is a new opportunity to open bankruptcy proceedings without advancing the remuneration of the arbitration manager to the court's deposit account.

Secondly, we are talking about protection against bankruptcy of executors of state contracts in the field of defense. On the one hand, this is a perfectly appropriate intervention, on the other hand, creditors must wait for the good will of the debtor or the end of the martial law (and the question already arises whether they will go bankrupt).

The following legislative changes introduced by Law No. 2971-IX, I can attribute to positive and expected. This is the possibility of concluding a settlement agreement in bankruptcy and, on its basis, closing the proceedings in the case. Another innovation is the extension of the rehabilitation procedure at the stage after the company is declared bankrupt.

An important change is the resumption of proceedings in the case, if after the closure the property of the bankrupt was discovered. Given that there are currently occupied territories and it is not possible to establish if there is property there (it could be destroyed or stolen), such changes are adequate for the situation.

— What other legislative changes does the professional community expect?

— The issue of booking arbitration managers remains open. I doubt that they will be able to meet the criteria for economic reservation, because companies that are in a state of bankruptcy have debts to public authorities. Accordingly, this makes it impossible to attribute them to both critical and those that pay an increased tax rate.

Also, arbitration managers struggle with the problems of correctly fixing losses from Russia's actions.

In general, it may make sense to simplify bankruptcy procedures for small businesses, because for small businesses such a procedure can be really expensive.

Therefore, we have sufficiently rational legislative changes and judicial practice, as well as interesting European integration prospects for solvency and bankruptcy procedures. The great challenge facing all of us is war. In these conditions, it is extremely important to keep the economy and businesses running.

(The conversation was conducted by Marina Bakholdina, “Juridicheskaya Praktika”)