Individual Bankruptcy Procedure. Pros and Cons of Bankruptcy

Today, April 21, 2020, commemorates exactly one year from the date of entry into force of the Code of Ukraine on Bankruptcy Procedures and six months from the date of its entry into force. The Code consolidated a new institution in Ukrainian legislation – the bankruptcy of individuals. During this time, a certain judicial practice has appeared in these cases, which will be interesting to analyze. But first, some words about regulation.

The fourth book of the Code is devoted to the issue of restoring the solvency of individuals. The Code establishes the following features of proceedings in cases of insolvency of individuals:

Voluntariness. The bankruptcy proceedings can be started only at the request of an individual.

Size of the claims. The debtor can apply with a statement if one of the following requirements is met:

– the amount of the debtor’s overdue obligations to the creditor (creditors) is at least 30 times the minimum wage (today it is UAH 141,690);

– the debtor stopped repaying loans or making other planned payments in the amount of more than 50 percent of monthly payments for each of the loan and other obligations within two months

– a resolution was adopted in enforcement proceedings on the absence of property from an individual on which a claim can be levied;

– there are other circumstances confirming that in the near future the debtor will not be able to fulfill monetary obligations or make ordinary current payments (threat of insolvency).

Thus, the list of grounds is not exhaustive, which gives the court broad powers in deciding questions about the opening of proceedings. At the same time, the composition of monetary claims, including the payment of taxes, dues (mandatory payments), does not include forfeit (fine, penalty) and other financial sanctions.

Proceeding Stages

1. Commencement of insolvency proceedings

The opening of production is carried out on the basis of the debtor’s application. The application is accompanied by a list of documents established by the Code, among which there is evidence of the debtor’s advance payment to the deposit account of the court of remuneration to the restructuring manager for three months of the exercise of powers. Such remuneration is five times the subsistence level for able-bodied persons for each month the arbitration manager exercises his powers. For today it is 10,510 UAH. Accordingly, the remuneration for three months will amount to UAH 31,530. This amount is very significant and can be an obstacle to going to court for many debtors who find themselves in a difficult financial situation. At the same time, we would like to draw your attention to the fact that the payment of the court fee for filing such an application is not provided for by the Code.

In addition, the debtor also submits a declaration of property status for three years (for each year separately) preceding the filing of an application to the court to open insolvency proceedings. The declaration must contain information regarding the property, income and expenses of the debtor and their family members, which exceeded 30 times the minimum wage. The family members of the debtor include persons who are married to the debtor (including if the marriage is dissolved within three years before the date of filing the declaration), as well as their children, including adults, parents, persons under the guardianship or guardianship of the debtor, other persons who live together with them are connected by a common life, have mutual rights and obligations (except for persons whose mutual rights and obligations with the debtor do not have a family character), including persons who live together, but are not married.

This legislative requirement is controversial in terms of declaring an individual bankrupt. In addition to the fact that filling out such a declaration will require significant effort and time, there may be cases when it will be very difficult, if not completely impossible. For example, how to enter information about the ex-spouse in the declaration if the relationship is completely terminated, communication is not maintained and there is no information about the property status of the ex-husband/wife? The question is rhetorical. It is clear that the requirement of legislation to provide such a detailed declaration of property status can in many cases become an obstacle to the debtor’s appeal to the economic court.

On the other hand, it is obvious that the original goal of the legislator is to make the bankruptcy procedure available to bona fide citizens, therefore, full disclosure of financial information about oneself, including a list of one’s property, is mandatory. In the event that the debtor in the declaration of property status indicated incomplete or inaccurate information about the property, the court, on its own initiative or at the request of creditors, decides to close the proceedings. In such a case, repeated proceedings on the debtor’s insolvency can be opened not earlier than in a year.

In the absence of grounds for refusal to accept the application for the commencement of insolvency proceedings, the court shall issue a resolution on the acceptance of the application for consideration. The decision shall indicate the date of the preparatory meeting, and the surname, name and patronymic of the arbitration managers.

It should be noted that the person of an arbitration manager in cases of bankruptcy of individuals is determined by an automated selection for the appointment of a restructuring manager.

The issue of opening proceedings is decided at a preparatory court session. The resolution on the commencement of proceedings shall indicate the time period for the submission by the arbitration manager to the economic court of information on the results of consideration of creditors’ claims, which may not exceed 30 days from the date of the preparatory court hearing.

From the moment of the opening of proceedings, a moratorium is introduced on the satisfaction of creditors’ claims for a period of 120 days, during which, in particular, the collection from the debtor on all executive documents stops, a forfeit (fine, penalty) is not charged, other financial sanctions are not applied for non-fulfillment or improper fulfillment of obligations under the satisfaction of claims subject to the moratorium, and the limitation period for claims against the debtor is stopped.

The moratorium does not apply to compensation for harm caused by injury, other damage to health or death of an individual; payment and collection of alimony; requirements for enforcement documents of a non-property nature, obliging the debtor to perform certain actions or refrain from performing them; satisfaction of creditors’ claims in the procedure for restructuring the debtor’s debts in accordance with the approved plan and in the procedure for repaying the debtor’s debts in accordance with the Code.

Identification of Claims of Creditors and Meeting of Creditors

Consideration of creditors’ monetary claims is carried out by the restructuring manager, after which a preliminary court session is held, based on the results of which the court establishes:

1) The duty of the restructuring manager to hold a meeting of creditors. The meeting must take place no later than 14 days from the date of such a resolution;

2) The date of the meeting of the economic court. The meeting must take place no later than 60 days from the date of such a decision, it will consider the debt restructuring plan agreed by the creditors or decide to proceed to the procedure for paying off debts or to close the proceedings on the case.

Thus, the meeting of creditors decides to approve the debt restructuring plan or to file a petition with the arbitration court to proceed to the procedure for repaying the debtor’s debts or to close the insolvency proceedings.

2. Restructuring the debtor’s debts

The restructuring manager, within three days from the date of approval by the meeting of creditors of the debt restructuring plan agreed with the debtor, submits an application to the economic court for approval of the debt restructuring plan. According to the debt restructuring plan approved by the court, the claims of creditors are satisfied by the arbitration manager proportionally at the expense of funds received from the implementation of the debt restructuring plan, in the order determined by the Code.

The restructuring plan is binding on the debtor and creditors. From the day the court approves the plan for restructuring the debtor’s debts, the claims included in such a plan can only be satisfied in the manner determined in the debtor’s debts restructuring plan.

The term for fulfilling the plan for restructuring debts of the debtor in the insolvency case may not exceed five years. In case of repayment of debts on loans received by the debtor for the purchase of housing, the term for the implementation of the debtor’s debt restructuring plan cannot exceed 10 years. On a reasoned petition of the debtor and subject to the repayment of more than 80 percent of the creditors’ claims, the economic court may extend the deadline for the implementation of the debt restructuring plan beyond the deadline.

Not later than five days after the end of the deadline for the implementation of the debtor’s debt restructuring plan, as well as if there are grounds for early termination of the debt restructuring procedure, the debtor is obliged to submit to the creditors included in the debt restructuring plan a report on the implementation of the debt restructuring plan. Based on the results of consideration of the report on the implementation of the debtor’s debt restructuring plan, as well as complaints from creditors, the economic court makes one of the following decisions:

1) on the termination of insolvency proceedings in connection with the execution of the debt restructuring plan by the debtor;

2) on non-fulfillment of the debt restructuring plan by the debtor, declaring the debtor bankrupt and the introduction of the debtor’s debt repayment procedure.

Declaring a Debtor Bankrupt and Introducing a Procedure for Paying Off Debtor’s Debts

The economic court makes the ruling on declaring the debtor bankrupt and introducing a procedure for repaying debtor’s debts in the following cases:

– if, within 120 days from the date of the commencement of the insolvency proceedings, the meeting of creditors has not decided to approve the debt restructuring plan, or

– if a decision is made to switch to the procedure for repaying debts (in case of non-fulfillment of the debt restructuring plan).

The court appoints a property sale manager. The property sale manager together with the debtor conducts an inventory of the debtor’s property and determines its value.

From the moment the debtor is declared bankrupt, the disposal of all rights in relation to the property included in the bankruptcy property is carried out by the sales manager on behalf of the debtor. Thus, at this stage, an individual no longer has the authority to any disposal (alienation, lease, destruction, etc.) of such property.

The liquidation estate does not include housing that is the only place of residence of the debtor’s family (an apartment with a total area of ??not more than 60 square meters or a living area of ??not more than 13.65 square meters for each member of the debtor’s family or a residential building with a total area of ??not more than 120 square meters) and is not a subject of security, as well as other property of the debtor, which, in accordance with the legislation, cannot be foreclosed. The list of such property is established by the Appendix to the Law of Ukraine “On Enforcement Proceedings” No. 1404-VIII dated June 2, 2016.

Such property includes: items of daily household use to meet daily physiological and hygienic needs (dishes, bed linen, hygiene products), personal items (clothes, shoes, all children’s things); medicines, glasses and other medical products necessary for the debtor, their family members and dependents for medical reasons; furniture – one bed and one chair for each person, one table, one wardrobe for a family; one refrigerator for a family; one TV set, one personal computer for a family, one mobile phone for each person, and the like.

Moreover, the liquidation estate does not include the funds that are on the debtor’s accounts in pension funds and social insurance funds.

Priority for satisfying creditors’ claims:

1) first of all, claims against the debtor for the payment of alimony, compensation for harm caused by injury, other damage to the health or death of an individual, payment of insurance contributions for compulsory state pension and other social insurance are satisfied;

2) in the second place, claims for the payment of taxes and fees (mandatory payments) are satisfied, and settlements are made with other creditors;

3) in the third place, forfeits (fines, penalties) entered in the register of creditors’ claims are paid.

The claims of each subsequent priority are satisfied at the expense of funds from the sale of the debtor’s property after the full satisfaction of the claims of the previous priority, except for the cases established by the Code.

In case of insufficient funds received from the sale of bankruptcy property, for the full satisfaction of all claims of one priority, the claims shall be satisfied in proportion to the number of claims belonging to each creditor of one priority.

Consequences of Declaring an Individual Bankrupt

Claims not satisfied due to the insufficiency of the debtor’s property are considered extinguished, except for the cases provided for by the Code.

Such an exception is established for claims for the payment of alimony, compensation for harm caused by injury, other damage to health or death of an individual, for the payment of insurance contributions for compulsory state pension and other social insurance, as well as other personal claims, if they were not satisfied or partially repaid. in the procedure for satisfying creditors’ claims, can be declared after the end of the insolvency proceedings of an individual in the manner prescribed by civil law.

In addition, the legislation establishes certain restrictions in relation to a person declared bankrupt. In particular, within five years after the individual is declared bankrupt:

– Insolvency proceedings cannot be opened upon their application, unless the debtor has paid off all debts in full in the manner prescribed by the Code;

– Such a person is obliged, before concluding loan agreements, credit agreements, surety agreements or pledge agreements, to notify in writing the fact of their insolvency to the other parties to such agreements;

– Within three years after the individual is declared bankrupt, they cannot be considered as having a good business standing (it can become important if the person intends to take certain positions).

At the same time, we would like to draw your attention to the fact that the Code does not define any responsibility for the failure to inform the fact of insolvency or the consequences of such a message (or it may be possible to terminate the contract/invalidate it, etc.).

Next, let’s turn to the most interesting part, namely, judicial practice. We analyzed a significant number of court decisions from the Unified State Register of Court Decisions, and although it is still premature to talk about the established practice in cases of bankruptcy of individuals, we could not help but pay attention to certain recurring phenomena that are acquiring signs of trends, and to some interesting cases of law enforcement.

First of all, it is evident that most of the proceedings are opened by the courts precisely on applications from individuals on debts, the creditors for which, in the overwhelming majority of cases, are banks. At the same time, the applicant’s debt is often a debt under a number of loan agreements to various banks. A significant number of debtors who have filed an application with the economic court to open insolvency proceedings have a rather insignificant monthly income, which, as a rule, does not exceed UAH 5,000.

A striking example of the above can be the circumstances of case No. 922/386/20 https://reyestr.court.gov.ua/Review/88430477 , and this case is far from being an isolated one.

As noted above, the debtor provides evidence of the advance payment by the debtor to the deposit account of the court of remuneration to the restructuring manager for three months of the exercise of powers to the application for the commencement of insolvency proceedings. It should be noted that debtors very often neglect this provision, counting, perhaps, on the inattention of the court and resorting to attempts to save money, or use the fact of filing an insolvency petition as manipulation in relations with creditors or other persons for their own purposes. At the same time, we understand that it can be quite difficult for a person who has applied for such measures to find funds to advance remuneration to the restructuring manager.

The situation is not entirely unambiguous with the decision on the motion of an application that does not meet the requirements of the Code. The content of the problem lies in the fact that if the application does not meet the requirements of Art. 116 of the Code, the court either leaves the application to open proceedings in the case without movement and provides an opportunity for the debtor to correct the deficiencies in such a statement or leaves the application without consideration and returns the application with attachments to the debtor. That is, it does not have the unity of law enforcement.

In our opinion, in this case, questions should not arise, because at least Art. 38 of the Code and provides for cases in which the court leaves the application without consideration, but the list of such cases is exhaustive and, for example, the lack of evidence of advance payment of remuneration to the restructuring manager is not one of such grounds. However, the courts often leave such statements without consideration. In our opinion, the judge must leave such a statement without movement and give the applicant a time limit to eliminate the shortcomings on the basis of Part 1 of Art. 174 of the Commercial Procedural Code of Ukraine, as such, according to Clause 8 of Part 3 of Art. 162, which does not contain the required list of documents.

At the same time, when the court leaves the application without progress on the grounds of failure to provide evidence of the advance payment of remuneration to the restructuring manager, as a rule, the debtors file a petition with the court to withdraw the application to open the proceedings. This observation, in our opinion, may indicate that some debtors are not averse to using the procedure provided for by the Code, but they are unable to cover the advance payment costs or file a corresponding application without the intention of actually starting the bankruptcy procedure.

As we noted, an individual applicant does not pay a court fee for filing a relevant application, however, some courts, despite the fact that payment of a court fee is not provided for either by the Code or the Law of Ukraine “On Court Fee” http://http//reyestr.court.gov.ua/Review/86209506 , leave statements in which there is no evidence of payment of the court fee without movement. At the same time, such decisions are rarely made.

From the point of view of initiating the bankruptcy procedure of an individual, not all creditors have been attentive to the study of the provisions of the new codified act regulating the restoration of the solvency of an individual. Yes, we have noticed several cases when the main departments of the State Tax Service of Ukraine applied to economic courts with an application to open insolvency proceedings against individual entrepreneurs who have tax debt. However, the court refused to accept such statements on the basis of Part 1 of Art. 115 of the Code, in accordance with which the insolvency proceedings of an individual and an individual entrepreneur can be opened only at the request of the latter https://reyestr.court.gov.ua/Review/86660217.

In addition, the court is usually quite attentive to the presence in the case file of documents of title to the debtor’s property, primarily to real estate objects.

For example, if an individual debtor applies to the economic court and reflects information about real estate objects in the text of such an application and in the declaration of property status and does not add copies of title documents, the court in most cases will not disregard this fact and can leave this application without movement https://reyestr.court.gov.ua/Review/86879760.

We draw your attention to the fact that in cases in which an individual who is a civil servant submits an application for the opening of proceedings, the court may demand not only the one provided for in Clause 11 of Part 3 of Art. 116 of the Code, a declaration, but also an e-declaration that a person as a civil servant submits in accordance with the Law of Ukraine “On Prevention of Corruption” http://http//reyestr.court.gov.ua/Review/86879760.

The state of the proceedings to restore the solvency of individual entrepreneurs, which were opened at the request of creditors before the Code came into force, remains uncertain. Indeed, as noted, from now on, according to Part 1 of Art. 115 of the Code, the relevant proceedings can be opened only at the request of the debtor. Judge of the Economic Court of Cassation, Nina Tkachenko, notes that the closure of such proceedings is clearly unfair in relation to creditors who expect to satisfy their claims and have already contributed some efforts towards their satisfaction. However, we are waiting for the position of the courts in resolving this issue.

In our opinion, it is also interesting to show how the courts adapt to the establishment of the grounds for opening proceedings in the event of an individual’s insolvency, in terms of such concepts as “life circumstances”. Thus, the Commercial Court of the Kharkiv Region refused to open the proceedings to the person due to the fact that “…the debtor did not take any action aimed at paying off the accounts payable; the foregoing testifies to the deliberate evasion of the debtor from the performance of debt obligations, and not that the impossibility of repaying the debt arose due to certain life circumstances that may indicate the debtor’s insolvency… “. https://reyestr.court.gov.ua/Review/87329760

In general, as of April 21, 2020, the procedure for recognizing a debtor as an insolvent individual or an individual entrepreneur is quite effective. We can observe hundreds of open production facilities in which the restructuring manager has already been identified and the creditors’ claims have been declared. However, half a year is a rather short period for such a category of cases. Moreover, the courts are acting very carefully, because the judicial practice has not yet been formed and the issues that are not resolved at the level of the Code should be decided by the courts. They are forced to pave the way in almost complete darkness, because the bankruptcy procedure of an individual is new in the history of independent Ukraine.

The state of credit legal relations and their further development will largely depend on the position the courts will take. At the same time, lawyers of the “Prime” Law Firm are tracking changes and directions of development of judicial practice in cases of this category.

Anastasiia Obertynska-Enich, Lawyer of the “Prime” Law Firm

Stanislav Hoza, Legal Assistant