GROUNDS FOR REFUSAL TO OPEN BANKRUPTCY PROCEEDINGS

ARMED AGGRESSION AGAINST UKRAINE

The Code of Ukraine on Bankruptcy Procedures (“Code”) has significantly simplified the process of opening bankruptcy proceedings. In particular, it abolished the requirements regarding the amount of debt and the existence of enforcement proceedings. In practice, the only general obstacles to opening of the bankruptcy proceedings under the Code are (i) the repayment of the debt prior to the preparatory court hearing, (ii) the existence of a legal dispute to be considered in civil proceedings, and (iii) the debtor’s status as a wholesale supplier of electricity.

At the same time, since the Code came into force and given the realities of the war in Ukraine, additional grounds for refusal to open bankruptcy proceedings have emerged. Some of these are enshrined in the Code, whilst others are set out in the Supreme Court’s case law. In this article, we examine the grounds for refusing to open bankruptcy proceedings related to the armed aggression of the russian federation.

The armed aggression of the russian federation has caused extensive damage to business entities within Ukraine, including through the destruction or occupation of territories where their property and production facilities are located. As a result, numerous legal entities face difficulties in fulfilment of creditors’ claims and are at risk of bankruptcy.

Currently, the Code imposes certain restrictions on the opening of bankruptcy proceedings during the martial law. In particular, the Code prohibits the opening of bankruptcy proceedings against:

• entities expressly specified in the Code (for example, State Joint Stock Company “Chornomornaftogaz” and State Enterprise “Eastern Mining and Processing Plant”);
• operators of critical infrastructure whose shares (stocks, equity interests) were compulsorily expropriated during martial law and in which the state directly or indirectly holds more than 50 per cent of the share capital, except for business entities being liquidated by decision of their owner;
• debtor companies which, prior to the preparatory hearing, demonstrate to the commercial court that they are listed in the electronic register of participants and contractors selected for state contracts (agreements) and that they have valid contracts with state customers in the defence sector; or
• debtor companies which, prior to the preparatory hearing, prove to the commercial court that creditors’ claims have not been fulfilled because of the armed aggression against Ukraine, including where the debtor’s integrated property complex is located in territories where hostilities are (or were) taking place, or in territories temporarily occupied by the russian federation.

The latter category of debtors is the broadest. At the same time, the Code does not clearly define the criterion of “creditors’ claims have not been fulfilled because of the armed aggression against Ukraine”. Below, we analyse in detail the courts’ findings regarding this criterion and the requirements for its application.

TIME LIMITS FOR THE APPLICATION OF THE PROHIBITION ON OPENING OF PROCEEDINGS

On 13 July 2023, the Code was amended by the introduction of paragraph 1-6 of the Transitional Provisions, which prohibits the opening of proceedings against debtors that have failed to fulfil creditors’ claims because of the armed aggression against Ukraine (“Prohibition”). The amending legislation entered into force on 29 July 2023 and does not clarify whether it may be applied retrospectively.

At the same time, the Supreme Court has held that, despite entering into force only in July 2023, the Prohibition also applies to cases where the debtor’s inability to repay its debt arose following the commencement of the full-scale invasion. However, the Prohibition does not apply to circumstances that arose before 24 February 2022 (for example, in the case of the occupation of property in 2014).

Thus, the provisions of paragraph 1-6 of the Transitional Provisions of the Code may be applied to debts arising after 24 February 2022.

ANALYSIS OF THE IMPACT OF ARMED AGGRESSION ON THE FULFILLMENT OF CREDITORS’ CLAIMS

When determining whether the Prohibition applies, the courts assess the nature of the impact of armed aggression on the debtor’s business activities and the causal link between the armed aggression and the debtor’s inability to fulfil its obligations to the petitioning creditor.

The Supreme Court has drawn up a list of circumstances that must be examined to establish whether there are grounds for applying the Prohibition:

• the moment when the relevant legal relations arose (the date of conclusion of the contract, the delivery or transfer of goods, payment, the moment when the debtor’s obligation or debt arose, etc.);
• the reasons and circumstances in which the debtor’s indebtedness arose within these legal relations;
• the debtor’s financial position and the status of its business activities during the relevant period: active, conducted in the ordinary course of business, or effectively suspended, etc. (as evidenced by the debtor’s relevant reporting (tax, accounting) documents);
• the location of the debtor’s assets and integrated property complex (whether situated in territories that, after 24 February 2022, were included in the list of territories: (1) where hostilities are (or were) taking place, or (2) which are occupied or have been excluded from the list of occupied territories of Ukraine);
• whether or not the debtor has property in the territory controlled by Ukraine, as well as the characteristics of such property (the debtor’s integrated property complex or part thereof, as well as its nature, significance, and purpose in the debtor’s business activities);
• a direct causal link between the armed aggression against Ukraine and both (i) the debtor’s debt to the petitioning creditor and (ii) and the failure to repay that debt to the relevant creditor(s).

When assessing the applicability of the Prohibition, the Supreme Court pays particular attention to the question whether the debtor possesses other assets located in the territory controlled by Ukraine that could be used either to perform its obligations under the relevant contract with the creditor or to repay the debt.

For example, in several cases, debtors sought to prove their inability to repay the debt due to the loss of assets as a result of armed aggression of the russian federation. However, the courts found that the debtors had retained other assets in territory controlled by Ukraine, or that their financial statements showed increased revenues after the beginning of the full-scale invasion. The Supreme Court therefore concluded that the armed aggression did not deprive those debtors of the ability to repay their debts, and that bankruptcy proceedings may be opened.

At the same time, the Supreme Court reached the opposite conclusion in another case. There, the debt arose from a supply contract, under which the debtor was required to supply goods using assets of a manufacturing facility located in the city of Tokmak (occupied since 26 February 2022). In that case, the Supreme Court did not regard the existence of the debtor’s other assets in the territory controlled by Ukraine as grounds for not applying the Prohibition. In this instance, the debt arose specifically from a supply contract, whose performance depended solely on the operation of an integral property complex situated in the temporarily occupied territory. Therefore, the court held that the Prohibition applied and refused to open bankruptcy proceedings.

CONCLUSION

The courts recognise the armed aggression of the russian federation and its impact on business activities as grounds for refusing to open bankruptcy proceedings. At the same time, for this condition to apply, it must be proven that the inability to fulfil obligations to the petitioning creditor was caused specifically by the armed aggression. The current case law of the Supreme Court, in particular the approaches discussed in this article, serve as guidelines for proving or refuting such a condition.

ADDITIONAL INFORMATION

The information provided above does not constitute legal or other professional advice and should not be relied upon as a substitute for specific advice tailored to individual circumstances.

Authors: counsel Oleksandra Syerova, senior associate Kristina Mysenko, and associate Oleksii Nazarkevych.

For further information on bankruptcy and insolvency matters, please contact partner Vadim Medvedev or counsel Oleksandra Syerova.