Ukraine: Financial Restructuring Law To Provide For A New Framework For Corporate Debt Restructurings In Ukraine

Last Updated: 15 August 2016
Article by Nazar Chernyavsky, Serhiy Verlanov and Olexander Droug

Most Read Contributor in Ukraine, September 2017

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.

Eligible participants

  • 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.

CPT incentives

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).

VAT incentives

  • 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

APPLICATION

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.

RECOMMENDATIONS

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.