“Individual Insolvency in Wartime”: EU Project Pravo-Justice Presented the Analytical Report

On May 12, the EU Project Pravo-Justice held the online round table “Individual Insolvency under Martial Law: Expert Discussion and Presentation of the Analytical Report.” The presented report was prepared with the participation of experts of the EU Project Pravo-Justice. The participants to the event were representatives of the judiciary, the Ministry of Justice of Ukraine, the banking community, RJRCs’ members, insolvency practitioners, and academia.

“At today’s event, we will present the findings and recommendations of the Report prepared by the experts of the EU Project Pravo-Justice, we will analyze the existing judicial practice on insolvency of natural persons, the state of play and application of the existing legislation,” said Iryna Zharonkina, Property Rights and Enforcement Component Lead. She also noted that in many EU jurisdictions, the individual insolvency procedure prevails. In EU countries, the number of cases from individuals significantly exceeds the number of corporate bankruptcy cases. In Ukraine, the situation is different.

Liudmyla Nikolenko, co-author of the Report, professor, Department of Economic and Legal Disciplines and Economic Security, Division No. 4 of the Donetsk State University of Internal Affairs, spoke about the impact of martial law on the solvency of the population and the peculiarities of the legal status of individual debtors under martial law.

"Russian military aggression in Ukraine significantly affected the solvency of the population. The full-scale invasion led to a significant decrease in economic activity and an increase in unemployment, which reduced the incomes of many Ukrainians. Also, many people were forced to leave their homes; suspend business activities due to hostilities, which also resulted in a decrease in their solvency,” Liudmyla Nikolenko said. Ms. Nikolenko also highlighted certain issues relating to the legal status of three categories of individual debtors: IDPs; persons who have gone abroad; and servicemen. She also covered some issues of the legal status of the debtor’s property in wartime. In particular, she talked about the debtor’s property seized for military purposes, property that remained in the territory that is not controlled by Ukraine, reduced or damaged property, and foreign assets of the debtor.

Borys Poliakov, judge of the Northern Commercial Court of Appeal, spoke about the problems that arise when considering cases of individual insolvency under martial law.

“The Bankruptcy Code was designed for peacetime. It cannot be used under martial law,” said Borys Poliakov. He noted that the problems start with establishing the identity of a person who should be present at the preparatory meeting when opening the bankruptcy case. It is complicated to do this online. The second difficult issue, according to Borys Poliakov, consists in the nomination of a bankruptcy trustee.

"It is wrong when the debtor himself or herself nominates the bankruptcy trustee. This leads to abuses on the part of both, because in this case the bankruptcy trustee would not perform properly. In particular, he/she would not check in full the debtor’s declaration. Then the creditors would detect such inaccuracies. This would give grounds for closing the proceedings,” said Borys Poliakov. He also added that it is more reasonable to bankruptcy trustees using an automated system. He also drew attention to the necessity of expanding the scope of cross-border bankruptcy rules to natural persons, rather than only legal entities.

Oleh Mykhaliuk, Key National Expert of the EU Project Pravo-Justice covered in his speech the moral and ethical aspects of bankruptcy of individuals. According to him, this problem was raised in the latest reports of the World Bank, which concern individual bankruptcy.

“Bankruptcy of a natural person, in addition to the purely legal one, has sociocultural, ethical, moral, sociological, religious, and psychological aspects. The following components of the ethical aspect in the bankruptcy of a natural person can be distinguished: moral damage from the bankruptcy procedure; possible fraud by the debtor; stigmatization (feeling of shame by the debtor). Besides, easily accessible bankruptcy procedures and the possibility for any debtor to begin his/her financial life from scratch” can be a negative signal to irresponsible financial behavior and unjustified acceptance of obligations a person cannot comply with; and formation of an inadequate lifestyle,” noted Oleh Mykhaliuk. According to him, the World Bank pays attention to the problem of fraud by debtors in bankruptcy cases. The analysis of bankruptcy procedures in different jurisdictions shows that at times, debtors intentionally distort information about their financial situation and obligations or behave dishonestly.

“Ukraine should look into the experience of other jurisdictions for a better understanding of how to counteract cases of dishonest behavior and possible fraud on the part of debtors,” said Oleh Mykhaliuk. In our opinion, individual bankruptcy, as an opportunity to “start one’s financial life from scratch” should not be used for dishonest purposes. No less sensitive, according to the Expert of the EU Project Pravo-Justice, is the issue of stigmatization within individual bankruptcy procedures, that is, shame for the debtor. To avoid this, the bankruptcy of individuals should not be perceived negatively by society.

Legislation and judicial practice should develop in such a way that the bankruptcy procedure is available only to bona fide debtors; opportunities for fraud should be minimized; and society should be free of the stereotype that bankruptcy is a harmful phenomenon,” added Oleh Mykhaliuk.

Liliia Hrabovan, judge of the Economic Court of Odesa region, talked about the peculiarities of applying before an economic court with an application to open proceedings in cases of insolvency of natural persons under martial law.

"We start seeing the problem from the moment we receive applications to open insolvency proceedings. These are applications that are similar, in terms of content, to appeal and cassation complaints. That is, we do not receive an application to the court about the opening of proceedings, but immediately the text of an appeal complaint, where one tells the court what to do and how to evaluate the evidence provided by the debtor. All these statements have absolutely identical text, only details and personal data change,” said Liliia Hrabovan. She also informed about how the courts evaluate evidence that debtors add to applications for opening of insolvency proceedings and what problems arise I connection with the submission of such evidence.

Iryna Butyrska, coordinator of the Chernivtsi Regional Justice Reform Council of the EU Project Pravo-Justice, spoke in detail about the general and specific procedural features of consideration of individual insolvency cases under martial law.

“Consideration of cases on the insolvency of natural persons under martial law is characterized by both general features that are intrinsic to the consideration of any court case under martial law, and by specific features that are inherent only to cases on the insolvency of natural persons. Thus, the general features of consideration of court cases in the wartime period may include: increased duration of court proceedings; increase in the number of court cases that are considered by video conference; expansion of the list of sources of evidence in the case. The specific features may include: particular deadlines within the bankruptcy procedure; prohibition of the debtor going abroad (in case where he/she is already abroad); suspending proceedings”, listed Iryna Butyrska.

Anatolii Butyrskyi, judge of the Economic Court of Chernivtsi region covered in his speech the difficulties faced by insolvency practitioners in individual insolvency cases under martial law. There are three major problems. The first one is the payment of services.

“Individuals who are future debtors in insolvency cases are constantly trying to avoid the costs of advancing the insolvency practitioner’s fee by entering into an agreement with the latter on the payment of such fee in installments,” said Anatolii Butyrskyi. The second problem is holding an inventory.

“It is impossible to proceed with a case without carrying out an inventory of assets. But how to carry out an inventory of property if the person is abroad? Thus, there is a question: how to proceed further?” noted the judge. “The inventory is also complicated by the absence of ownership title documents with the debtor, who left war zone or if the property accounted as owned by the debtor is located in the occupied territory”.

The third problematic aspect is obtaining information by the bankruptcy trustee - once they reach this stage – in a quite formal manner, or the debtor not providing the relevant information. When summarizing the problematic aspects outlined during the presentation of the Report, Iryna Butyrska listed the proposals for improving the legislation in the field of individual insolvency and its practical application in view of the realia of martial law.

“We suggest amending the Code on Bankruptcy Procedures in terms of the specifics of applying bankruptcy procedures to certain categories of natural persons in the period of martial law, in particular: IDPs; servicemen; persons staying abroad,” said Iryna Butyrska.

She detailed that the authors of the Report propose to provide some privileged conditions for the initiation of insolvency proceedings against persons who used to live in the territory where hostilities took place or are taking place. It is about exempting such a person from presenting evidence that he/she may not have as a result of hostilities. With regard to servicemen, it is proposed to consider the possibility of suspending proceedings in the insolvency case in respect of such a person until the moment he/she is released from military service. In cases of bankruptcy of natural persons who were forced to go abroad, it is proposed to enshrine a statutory rule which would facilitate the economic court receive information from foreign state institutions regarding income and assets of a natural person in whose respect insolvency proceedings have been opened in Ukraine.

“Issues relating to the destroyed and damaged property of the debtor or the debtor’ property located in the territory that is not controlled by Ukraine; the debtor’s property abroad; and the property seized for military purposes require specific legal regulation,” said Iryna Butyrska. She also emphasized the need to adopt in the second reading draft law No. 7442 on amendments to the Code on Bankruptcy Procedures regarding the application of bankruptcy procedures in wartime. This document provides for: holding meetings of creditors in video conference mode; introduction of the mechanism of request of the bankruptcy trustee; exemption of the bankruptcy trustee from disciplinary responsibility for the failure to perform actions or fulfill duties provided for by this Code, if the failure was caused by the hostilities in the areas where the place of residence or stay of the debtor or the creditor; or the debtor’s property; or the BT’s office, place of residence or stay is located; causing threats to life and health.

“As to the proposals for improving the practical application of the legislation on insolvency of natural persons, it is important to reach out, since one may state that people are not aware of the advantages and disadvantages of this mechanism. It is also necessary to train judges, insolvency practitioners and lawyers, including, to constantly improve their qualifications in terms of both – general features of the implementation of insolvency procedures in respect of individuals, and doing this in the period of martial law,” summarized Iryna Butyrska.

In his closing remarks, Vladyslav Filatov noted the relevance of preparing and presenting the Report on Insolvency Procedures for Individuals, and discussing the application of this mechanism for its further legislative improvement.

Video of the presentation of the Analytical Report.

Text of the Analytical Report.