New regulations of the arbitration practitioners’ activity

04.12.20

Amendments to the Bankruptcy Code of Ukraine related to arbitration practitioners have come into force. What are these changes about, and how would you describe them?

Olena Volianska, partner, head of bankruptcy and restructuring at LCF Law Group, has commented on these amendments exclusively for The Ukrainian Journal of Business Law.

It’s not possible just to up and stop improving bankruptcy legislation.

Amendments to the Bankruptcy Code of Ukraine came into force on 17 October 2020. Thus, the President signed Law of Ukraine On Amendments to the Bankruptcy Code of Ukraine No. 686-IX, which was adopted by Parliament on 5 June, 2020.

The most interesting point for business is the temporary change in the procedure of appointing an insolvency practitioner in a bankruptcy case.

Now the candidacy of the insolvency practitioner to manage the bankruptcy process of a legal entity can be submitted by the creditor initiating the bankruptcy procedure.

Similarly, such a candidacy is submitted by an individual who initiates his own bankruptcy. It is this person who must be appointed in the case without any alternative. Exceptions are cases of impossibility to appoint a certain person, as defined by law. For example: the initiator of the bankruptcy procedure is the debtor-legal entity itself, the person who previously managed the legal entity-debtor, or is a relative of the private person-debtor, etc.

How was it before? Since 2013 there has been a system of automated selection of an insolvency practitioner to be appointed in the case. The practitioner was selected automatically from among all the insolvency practitioners and appointed by the court. This procedure was not perfect, and if a system-selected specialist were to refuse, any other insolvency practitioner could be appointed who had submitted the respective application to the court.

The Bankruptcy Code, which came into force in October 2019, maintained the automated system for the selection of practitioners. During the development of the draft code, this option was considered the most appropriate to ensure the independence of the insolvency practitioner. The court would have to make a request to a system that would select three candidates, and one of the selected specialists would be appointed to the case.

There is one “but”. Automated selection should be provided by the Unified Judicial Information and Telecommunication System (the UJITS). However, this has not been created yet, and since the introduction of the Code, the “lottery” for the selection of arbitrators has been taking place in a way not actually provided by law. The old system was used, refined in the past so that it could provide three candidates to the court. It is obvious that new defects have been added to previous problems.

The mechanism proposed by legislators is a quite advantageous, albeit pro-creditor, solution to the problem for the transition period to the establishment of the UJITS.

Thus, giving creditors the right to initiate the appointment of an insolvency practitioner should encourage debtors to perform their duties in a more conscientious way. Creditors also get some guarantees of an efficient and fast procedure in the event of addressing a professional and experienced practitioner.

Of course, so-called “friendly” bankruptcy, at the initiative of the debtor’s creditors with the participation of a loyal insolvency practitioner, cannot be ruled out. However, on the other hand, the Code contains sufficient mechanisms for other creditors to exercise control over the insolvency practitioner, as well as to review disputed transactions of the debtor and to refute the claims of other creditors.