The Struggle for Independence Ukraines New Bankruptcy Law

Struggling to overcome 70 years of a command economy followed by the International Monetary Fund's
(IMF) radical privatization program in the early 1990s and the loss of many of its markets (particularly the
Soviet military), Ukraine continues to restructure its economy and laws to accommodate itself to the new
global market economy.<small>^{<a href="#1" name="1a">1</a>}</small> In the process, drawing on a variety of resources, in 1999 it enacted a uniquely
creative and pragmatic bankruptcy law. That system is being tested right now; Ukraine's national Agency
for Bankruptcy estimated last fall that more than half of the businesses in Ukraine are eligible for
bankruptcy, and 53 percent of them are operating at a loss.

</p><p>The participants in the bankruptcy process of course include the debtor and its creditors, but also,
depending on the case, a representative of the employees, local government (required in cases in which the
debtor is a "town-creating enterprise," defined as a business that employs more than 5,000 employees or
for which the employees and their families comprise more than half the population of the town or region),
Agency for Bankruptcy (a cabinet-level agency that keeps track of the economy in general and bankruptcies
in particular, and administers the bankruptcy system by training and supplying trustees) and state taxing
authorities.

</p><p>Once the court grants the bankruptcy petition (the equivalent of entering an order for relief), it appoints
an interim trustee for the company. But in a practical approach to the problem of the need for someone to
"watch the store" but also have experience to run the business, this trustee is charged with preventing
transactions out of the ordinary course of business and gathering information on the company, while
management stays in place to run the daily operations of the business. A creditors' committee is formed,
which largely speaks for the creditors through the rest of the case. Committee members have weighted
votes determined by the size of their claims.

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...Ukraine's Agency for Bankruptcy estimated last fall that more than half of the businesses in Ukraine are eligible for bankruptcy, and 53 percent of themare operating at a loss.
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<p>Within approximately seven months of the filing, the court must make the decision of whether to order
the liquidation of the company or to permit a "sanation" (reorganization) manager to work on developing
a sanation plan. If the court orders the latter (which will usually be based on the recommendation of the
creditors' committee), the trustee may become the sanation manager or the court may appoint the person
selected by the committee. (The debtor's management can also serve as the sanation manager, becoming
the rough equivalent of a debtor-in-possession in a U.S. reorganization case.) Either way, the sanation
manager completely replaces management, and has three months to come up with a plan to sanate
(reorganize) the company while running the company. The sanation manager receives the same salary as
management, but he and the creditors' committee may also agree on an incentive program for a successful
sanation—a financial arrangement <i>not</i> subject to review by the court.

</p><p>Their Code permits a very wide range of provisions for sanation, including (as in the U.S.) a controlled
liquidation. If the proposed sanation plan is not approved by the court, the sanation manager is fired. In
consequence, the Code contemplates intense negotiations by the manager with the parties to make
something work. Prior to the court hearing on the proposed plan, the manager presents the plan to the
committee for approval; the creditors do not get a direct vote on the plan.

</p><p>If the court does not approve the plan, the court may allow the committee to try to put together
another plan with another manager, or it may order liquidation. If the sanation plan is approved, then the
manager has up to one year (which may be extended) to effect the plan. At the conclusion of the term
of the plan (or before, if the company is doing very well or very poorly), the manager conducts a meeting
of all the creditors at which he presents a complete history and current picture of the company's finances
and prospects. The creditors meet as a whole, then decide on a recommendation to the court, which can
include ending the plan to commence payments to creditors, ending the plan to commence liquidation
or extending the plan. The court then conducts a hearing at which any creditor objecting to the
recommendation has the right to be heard.

</p><p>Following the conclusion of a successful plan, the manager (or the plan-designated successor) has six
months to pay claims. Payment of claims follows a priority scheme that recognizes conceptually similar
but different values than in the United States, such as (1) secured claims, (2) benefits for severed
employees, (3) administrative costs, (4) (still employed) employee wages and benefits, (5) taxes, (6)
unsecured claims including post-petition trade debt, (7) employee contributions to the company's capital
and expenses, and (8) other claims.

</p><p>Another feature of the Code is the Amicable Settlement Agreement (ASA), which can encompass any
number of different compromises among some or all of the parties and can take place at any stage of the
proceedings. An ASA can require the government to compromise its taxes by forgiveness, reduction or
extended payment terms. In reality, the government is often eager to find a basis to forgive or restructure
the company's tax debt (which, when actually assessed, is quite large) in order to keep businesses afloat
so the government can realize more income in the long run. The ASA is arranged for the creditors by the
committee and for the debtor by the sanation manager. However, illustrating the power of secured creditors,
any secured creditor can veto an ASA, even if the proposed ASA does not involve the property or claim
of the secured creditor. The court conducts a hearing on the ASA at which time any interested party may
be heard.

</p><p>Over the years, it will bear watching to see how well Ukraine's bankruptcy law softens and conforms
the harsh realities of the current Ukraine economy to the global market forces enveloping eastern Europe.

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<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} As part of its program to help establish the legal, accounting and financial infrastructure to support the development of market economies
in central and eastern Europe, the U.S. Agency for International Development (USAID) has, through companies such as Deloitte Touche,
provided expertise to the legislative and administrative branches, and training to the judiciaries, of various countries. The author has been
fortunate to participate in one of those programs, for Ukraine, starting last fall. The views expressed herein are of course solely those
of the author and not of Deloitte Touche, USAID or the government of Ukraine. Nothing in this article is to be construed as an endorsement
of any of these entities. <a href="#1a">Return to article</a>