On 14 July 2016, the Ukrainian Parliament adopted the Law of Ukraine “On Financial Restructuring” No. 1414-VIII (the “Law”) which, based on its transitional provisions, entered into force on 19 October 2016 and will remain valid for 3 years as of the day of its entrance into force. The Law introduces the procedure of voluntary financial restructuring of legal entities (including municipal and state enterprises) having outstanding debt(s) towards at least one financial institution which is not a related party to the entity. Per the Law, the list of monetary obligations which may be subject to a voluntary restructuring excludes mandatory payments to the State Pension Fund, social insurance payments and a number of other outstanding payments, as well as the debtors` obligations towards its founders (shareholders).
According to the Law, the debtor may define the creditors which may be involved in the restructuring procedure, subject to such creditors` consent expressed in the form prescribed by the Law. Thus, the important novelty introduced by the Law is that parties involved in the restructuring procedure may independently decide as to the feasibility of its application or to choose other mechanisms of debt recovery. Notably, the Law relates exclusively to “live” entities – debtors, which as a result of restructuring of their debts may continue to operate in due course -and does not permit the restructuring of debtors against which a bankruptcy or “financial solvency restoration” procedure has been initiated.
The restructuring procedure takes place out of court by means of negotiations between the debtor and creditors. In case of disputes between the parties, such dispute shall be subject to consideration by the court of arbitration. The restructuring procedure commences upon the debtor`s application submission (with the consent of the relevant creditors) to a specially created inter-governmental authority, and is considered completed upon unanimous approval by the debtor and creditors of the debt restructuring plan. The plan itself may envisage the following measures: amending the respective loan and other agreements, issuing new financing to the debtor, alienation of the debtor`s property, assignment to the creditor of the debtor`s ownership rights to certain properties, termination of agreements, granting additional security by the debtor, attraction of equity investments, issuance of securities, reorganization, etc. The terms of the debt restructuring plan are mandatory for all parties involved and prevail over any agreements entered into between the debtor and creditors, guarantors, etc. covered by the restructuring plan.
Importantly, based on the Law, no bankruptcy proceedings can be initiated against the debtor during the debt restructuring. Should any such procedure be initiated, then the commercial court shall, upon the debtor`s or any of the creditor`s request, suspend such procedures. Additionally, for the period of debt restructuring procedure a moratorium for the fulfilment of creditors` demands is being introduced, which may continue up to 180 days.
Banks and other financial institutions as secured creditors will be able to initiate the debt restructuring procedures and participate in the development of debt restructuring plans in order to achieve the borrower`s debt recovery out of insolvency and bankruptcy proceedings. Although provisions of the Law are yet to be tested in practice and respective regulatory acts are supposed to be adopted for its implementation, its adoption is expected to decrease the amount of bad debts with the banks, and, obviously, its provisions and newly approved arrangements can be considered a positive step permitting the debt recovery in the out-of-court order.
Inter-jurisdictional professionals of Eurofast -a known international business advisory organization – will be happy to assist clients in Ukraine, either debtors or creditors, with relevant issues arising in the process of financial restructuring under the Law, particularly with the development and implementation of the restructuring plan involving foreign creditors.
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