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.
- Any corporate Ukrainian debtor (other than a bank or a financial institution) with outstanding financial indebtedness to at least one Ukrainian or foreign financial institution and whose business is deemed viable is eligible to benefit from the regime established by the Financial Restructuring Law. Several debtors within the same corporate group may participate in combined proceedings provided that they have at least one creditor in common and the majority of creditors of each debtor consented to such combined proceedings.
- The viability of the debtor's business shall be confirmed by an independent expert report.
- While the Financial Restructuring Law mainly targets creditors that are financial institutions, any other creditor could also participate in the proceedings. Participating creditors are selected by the debtor, but each creditor must expressly consent to participation, as well as to submission of disputes arising in the course of the proceedings to arbitration.
- Creditors that are the debtor's related parties are allowed to participate. However, any related party creditor will have no voting rights in the proceedings.
- The Ukrainian tax authorities, if designated by the debtor as a participating creditor, must join the proceedings provided that the debtor's tax debt is less than 1/3 of its total debt subject to the restructuring. In such case, the tax authorities shall have no voting rights. If the debtor's tax debt is equal to or greater than 1/3 of its total debt subject to the restructuring, the tax authorities shall expressly consent to participation and shall have voting rights.
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
- Upon commencement of the proceedings, a moratorium will automatically be imposed prohibiting any enforcement action by the participating creditors and all the debtor's related parties. The moratorium will also prevent any creditors (even those that are not involved in the proceedings) to enforce against non-encumbered fixed assets of the debtor.
- The moratorium will be in place for a period of 90 days but could be extended by the decision of the creditors by another 90 days (for a maximum of 180 days), similarly to the overall timeline of the proceedings.
- The participating creditors may at any time decide to terminate the moratorium. In such case, the debtor and any of the creditors will, nevertheless, be able to agree on a standstill, which may be subject to certain conditions and undertakings.
- A commercial court considering a pending bankruptcy application in respect of the debtor shall, in case of commencement of the financial restructuring proceedings, declare a stay of such a bankruptcy application until the financial restructuring proceedings are concluded.
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.
SPECIAL TAX REGIME FOR RESTRUCTURINGS UNDER THE FINANCIAL RESTRUCTURING LAW
Tax restructuring procedure
- Tax debt shall be restructured by way of release (write-off), instalment and/or deferment arrangement within 10 days from the approval of the restructuring plan.
- Tax pledge and administrative arrest over the debtor's assets shall be lifted upon approval of the restructuring plan.
- If the tax authorities participated in the financial restructuring, the following tax debt shall be written off automatically: (i) up to 3-year old tax debt - pro rata to the debt (if any) released by the creditors, (ii) tax debt older than three years – in full, (iii) disputed penalties – in full.
- The remaining tax debt shall be repaid pursuant to the terms and conditions of the restructuring plan, which shall not be worse than the terms and conditions for the repayment of the debt to the other creditors.
- The total tax debt repayment period may not exceed three years from the approval of the restructuring plan.
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:
- (as far as the debtor is concerned) income recognised as a result of write-off or instalment or deferment arrangement; and
- (as far as the participating banks and financial institutions are concerned) income recognised due to reversal of loan loss provisions ("LLPs"); instead, the respective banks and financial institutions shall increase their financial result before tax by 1/3 of such amount in each of the following three years; and
2. the financial result before tax shall remain unchanged in the amount of:
- other income and expenses recognised in accordance with the Ukrainian GAAP or IFRS as a result of the restructuring; and
- (as far as the participating financial institutions and banks are concerned) written-off debt covered by LLPs (i.e. the financial result of such banks and financial institutions shall not be increased even if the respective debt does not fall within the definition of "bad debt" under the Tax Code that would result in tax adjustment by the general rule).
- Until 1 January 2020, a VAT exemption applies to supplies of goods by the debtor, provided that the proceeds of such supplies are used by the debtor to repay its debts in accordance with the restructuring plan.
- A taxpayer-debtor shall not adjust the previously credited input VAT related to purchase of such goods despite further supplies are VAT-exempt
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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.