On 19 July 2016, the Law of Ukraine "On Financial Restructuring" No. 1414-VII dated 14 June 2016 (the "Financial Restructuring Law") was officially published. The drafting of the Financial Restructuring Law was a joint EBRD – World Bank project. Sayenko Kharenko acted as Ukrainian legal advisor to the World Bank on this project and were involved in all the stages of the process leading to the adoption of the Financial Restructuring Law.
According to the transitory provisions of the Financial Restructuring Law, it will become effective three months after official publication (i.e. on 19 October 2016) and will cease to be effective after three years (i.e. on 19 October 2019). The Financial Restructuring Law is expressly linked to the recent amendments to the Tax Code of Ukraine (the "Tax Code") providing for various tax incentives to the participants of restructurings under the Financial Restructuring Law. The tax incentives will also remain in place for the period of three years.
Conduct and commencement of proceedings
Proceedings are conducted out-of-court through negotiations among the debtor, its creditors and investors, if any.
To initiate the restructuring proceedings, the debtor shall file an application with the Secretariat, an administrative body handling technical support of the proceedings. The application shall be accompanied with the documents evidencing consent of one or more financial institutions to participate in the proceedings. None of such creditors may be the debtor’s related party, and all such creditors must hold in aggregate at least 50 per cent of the total claims of all the financial institutions (excluding the debtor’s liabilities to its related parties).
Upon commencement, the parties have a maximum of 180 days to complete the proceedings and agree on a restructuring plan (comprised of the initial 90-day period extendable by another 90-day period if the creditors so decide).
Moratorium, standstill agreement and stay of bankruptcy proceedings
Restructuring plan: terms, approval and implementation
Normally, it is expected that the restructuring plan will be approved by the consensus of all the participating creditors, since all such creditors have already agreed to participate in the proceedings and, potentially, have already made up their minds as to the restructuring. In fact, the debtor could prepare the restructuring plan and collect preliminary approvals from its principal creditors in advance of filing an application for the restructuring proceedings.
If there is any disagreement among the creditors, but 2/3 of the participating creditors support the restructuring plan, the matter may be referred to an arbitrator who shall deliver a binding award as to the approval of the restructuring. If the arbitrator decides in favour of the restructuring plan, its terms and conditions will become binding on all the creditors and will prevail over any conflicting terms and conditions of the existing contracts between the creditors and the debtor.
Related party creditors (and the tax authorities, in case their claims do no exceed 1/3 of the total debt subject to the restructuring) shall have no voting rights in the approval of the restructuring plan.
Tax restructuring procedure
Temporary CPT rules (effective until 19 October 2019) envisage special “tax differences” which are used in determination of CPT base (adjustments of financial result before tax as per accounting records):
1. financial result before tax shall be decreased by the amount of:
2. the financial result before tax shall remain unchanged in the amount of:
The initial version of the Financial Restructuring Law submitted by the Cabinet of Ministers of Ukraine to the Parliament of Ukraine and adopted in the first reading was more ambitious than the final version adopted by the Parliament of Ukraine.
Its main feature was the revised Article 6 of the Law of Ukraine "On Restoration of the Debtor’s Solvency or Declaration of Its Bankruptcy" (the "Bankruptcy Law"), which contemplated a restructuring mechanism similar to US-style pre-packaged restructurings or UK-style schemes of arrangement, i.e. a restructuring plan prepared by the debtor and approved by majority creditors that becomes binding on all the creditors. However, these amendments to the Bankruptcy Law were eliminated in the final version of the Financial Restructuring Law, which now addresses consensual out-of-court restructurings only.
This obviously limits the number of cases that could go through the procedures contemplated by the Financial Restructuring Law, most importantly those with holdout creditors. The work on the revised Article 6 of the Bankruptcy Law continues in a separate draft bill pending before the Parliament of Ukraine.
In light of the impending introduction of the new restructuring procedures under the Financial Restructuring Law and availability of tax incentives, both creditors and debtors should reassess their positions in the pending or planned debt restructurings to understand whether they could gain any benefits by resorting to the Financial Restructuring Law. This will be particularly important in cases where all the parties to a restructuring are largely in agreement and would be willing to voluntarily participate in such new procedures.