How to Counteract the Abuse by Unscrupulous Parties in a Bankruptcy Case: EU Project Pravo-Justice joined the online consultation

10.10.2023 |

On October 6, the Ministry of Justice of Ukraine initiated another round of online consultations on improving legislation in the field of insolvency. This time, it has been dedicated to discussing the issue of abuse by unscrupulous creditors in bankruptcy/insolvency procedures. The event was attended by representatives of the Ministry of Justice of Ukraine, the Ukrainian National Insolvency Trustees Association, and the Independent Association of Banks of Ukraine; as well as judges and experts of the EU Project Pravo-Justice.

“Abuse of procedural rights is a huge problem. Sometimes the parties act within the limits of what is allowed by the Code, and formally, it cannot be deemed as an abuse. However, such behavior harms the entire procedure; protracts the consideration of a case; and violates the rights of the opponents,” said Olena Volianska, BT, Expert of the EU Project Pravo-Justice, while outlining the intricacies of the issues under discussion.

The participants to the event shared their experience and talked about cases where creditors or their representatives abused procedural and/or substantive rights in bankruptcy procedures. Thus, according to the participants to the online discussion, most often abuse of procedural rights manifests in the form of: intentional non-payment of court fees for submitted applications; multiple postponements of the case consideration; submission of groundless motions on the recusal of a judge; failure to comply with the requirements constituted in a court order; groundless submission of various motions allowed by bankruptcy/insolvency procedures.

Speaking of the abuse of substantive rights, the panelists articulated the most common “tricks” played by creditors: failure to approve a rehabilitation plan/restructuring plan; failure to agree the sale of property or disagreement with the terms of sale. According to them, there are multiple cases where a creditor/debtor abuses their rights in order to replace the bankruptcy trustee. To do this, they file groundless complaints about the actions/omissions of the BT or fail to approve the report on the remuneration and expenses of the BT.

There are multiple cases of abuse related to the submission of various appeals, such as groundless multiple appeals against auctions (it may be an appeal against either entire contract or protocol, or act, or all results); appeals against court decisions on the transition to the procedure of sanation (financial rehabilitation) or liquidation, or closing of proceedings in the case, or refusal to recognize creditor claims; and other decisions that are generally cannot be challenged.

When discussing the ways to solve the mentioned problems, the participants to the event spoke in favor of creating effective tools for prevention of abuse by creditors. Among other things, it has been proposed to provide for mandatory indication of the reasons, by the meeting/committee of creditors, for not approving a rehabilitation/restructuring plan; or disapproving the terms of sale of the debtor’s property; or complaining/filing motions, or not approving the BT’s report, in the minutes. The key players in the field of bankruptcy presented their proposals regarding such issues as the statutory regulation of restrictions and determining the procedure for returning property to the liquidation estate in the event the auction has been recognized as invalid. One of possible solutions to the said problem suggests the court being able to recognize the debtor’s right of ownership or to collect the corresponding monetary compensation. The participants to the discussion proposed that the Ministry of Justice consider the following possible options for the statutory enshrinement of new mechanisms aimed to prevent abuse by creditors: application of financial sanctions in the form of fines or introduction of certain restrictions of rights within the bankruptcy procedure.

The Ministry of Justice will analyze the proposals articulated at the online discussion when working on legislative amendments in the field of insolvency.