PREVENTIVE DEBT RESTRUCTURING: IMPLEMENTATION OF THE EU STANDARDS INTO UKRAINIAN LEGISLATION

07/10/2024

On September 19, 2024, the Verkhovna Rada of Ukraine adopted the draft law on amendments to the Code of Ukraine on Bankruptcy Procedures and other legislative acts of Ukraine regarding the implementation of Directive 2019/1023 of the European Parliament and the Council of the European Union and the introduction of preventive restructuring procedures (reg. No. 10143) in the second reading and as a whole as a law.

Novelties of the Law No. 10143:

• economically reasonable for the debtor;
• relatively low costs;
• wide range of debt restructuring options for debtors, in particular, installment plans, partial debt forgiveness, securing additional financing, reprofiling or reorganization of the debtor company;
• 4 classes of creditors: secured creditors; unsecured creditors; unsecured creditors interested in the debtor; debtor’s founders. Nonetheless, it does not mean that the debtor is limited to these 4 classes,  in particular, the EU Directive (as the main source of the Law) allows creditors to be divided into classes such as employees, suppliers and others;
• financial support to debtors during the preventive restructuring procedure provides the concept of interim financing; the concept of additional financing, which involves securing this type of financing as outlined in the restructuring plan after its approval in order to enable the court to decide on the feasibility of the procedure and the preventive restructuring plan.
• provisions for the protection of  investments in order to encourage investors to support the debtor’s recovery.

Objective of the Law – to support businesses facing temporary financial challenges, providing a clear path for readjustment and recovery.

Key Aspects of Preventive Restructuring Mechanism

The restructuring procedure commences when the debtor presents a restructuring plan to the court, highlighting potential resolutions to its financial difficulties. The initial phase involves negotiations with creditors based on the plan. Importantly, court approval of the debtor’s plan does not automatically bind discontented creditors to its terms. This ensures that the interests of both debtors and creditors are considered, providing creditors the opportunity to contest the plan in court.

One of the law’s key features is the introduction of a negotiation stage, which shields the debtor from bankruptcy proceedings during this phase. The law also allows for the appointment of an administrator—nominated by either the debtor or creditors—to prepare the plan, manage negotiations, monitor its adoption, and inform the court.

Time limits for application of preventive mechanism: the preventive restructuring mechanism applies for a period of six months, during which bankruptcy proceedings cannot be initiated against the debtor at the request of a participating creditor. However, non-participating creditors retain the right to initiate bankruptcy proceedings at any time. Additionally, fines and other financial penalties for obligations to participating creditors are suspended for six months. The statute of limitations on claims of participating creditors against the debtor is also suspended for the entire duration of the preventive restructuring process.

In conclusion, Law No. 10143 offers a proactive approach to identifying and resolving business challenges at an early stage, preventing the collapse of enterprises. While previous Ukrainian bankruptcy legislation primarily favoured creditors, this new mechanism places a stronger emphasis on the debtor’s position, while still offering creditors the chance to recover their funds quickly and avoid prolonged court proceedings. Ultimately, creditors retain the right to withdraw from the procedure at any stage.

 

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