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NEWSLETTER #11 September 2001
Financial Restructuring » NEWSLETTER'S ARCHIVE » NEWSLETTER #11 September 2001
NEWSLETTERON ENTERPRISE RESTRUCTURING Dear reader, In December 1999, the Financial Restructuring Project (FRP) opened its first Regional Training Center in Ivano-Frankivsk. Over the past two years the FRP’s Regional Center in Ivano-Frankivsk has regularly organized training, informational, and topical seminars for solvency restoration practitioners, representatives of enterprises, and government officials. Thanks to this persevering and beneficial work, this Center, headed by its Director, Mr. Mykola Sayevich, has managed to create a friendly climate in the region for restructuring practitioners, financial analysts, lawyers, and arbitration managers. Many interesting projects have been launched under the aegis of the Center, and in this issue we should like to call one such project to your attention. The article "How to Avoid Bankruptcy" was prepared by Vasyl Martynyuk, a well-known financial restructuring practitioner in the Ivano-Frankivsk area. This article highlights the main advantages of the Law of Ukraine "On Restoration of Solvency of the Debtor or Declaring It Bankrupt," especially under Article 53, described in "Specific Features of a Debtor’s Manager-led Sanation". A new Satellite Training Center in Sevastopol commenced active training activities. This July, the Center held two seminars. The first involved practitioners, arbitration managers, representatives of Crimean consulting companies, who were issued certificates on completion of the course. The second involved managers of Crimean enterprises, who were introduced to the ways and means available under the Law to address solvency problems. A brief report on these activities is published in this issue. We should like to congratulate and wish every success to Liliya Dyachenko, Director of the Donetsk Regional Training Center, the most recent such center opened by FRP. We hope that enterprises and arbitration managers in the Donetsk region will take advantage of this opportunity and will productively cooperate with this Center. The address and telephone numbers are located on the last page of this Bulletin. FRP has been monitoring the activities in the creation of the first independent national Ukrainian organization of bankruptcy practitioners. In behalf of Mr. Pavel Mikhailidi, Head of the Working Group preparing for the Founding Congress of this organization, we now publish here the draft Action Program of the Ukrainian Union of Crisis Managers and invite you to submit your comments and ideas on this draft. In addition, the Organizational Committee now has its own web-site, http://www.komitet.bankrupt.net, where you can leave your comments and learn about the prospects and progress in creating and developing this Union. We also wish to call your attention to a new section, "Publications." I shall permit myself to begin with a quotation: "Bankruptcy should work when provisions of other civil laws cannot solve the problem of a debtor’s insolvency. These provisions are weak because they are intended to protect private interests. When the Law of bankruptcy comes into play, other civil laws lose their effect in regard to the debtor." This is a quotation from a recently published book by Judge Boris Polyakov, "Bankruptcy Procedure in Ukraine: Theory and Practice." In this issue we include an interview with the author, as well as two reviews of this important book by Valentina Danishevska, Director of the Commercial Law Center, and by Mr. A. Zhukov, the Head of the Lawyers’ Council of Ukrainian Banks Association. We are continually trying to make our Bulletins as interesting and useful for you as possible, and your comments are always of great help, so we look forward to hearing from you. Olga Makara, PR and Media Coordinator HOW TO AVOID BANKRUPTCY? Prepared by Vasil Martyniuk, Financial Restructuring Practitioner You are having serious financial problems… your company cannot pay its bills… you tell your secretary you’re not there if your creditors call… you are threatened with bankruptcy, liquidation… you’ve run out of time, you need a breather…? Then this article is for you. You know that your company needs changes but you do not have time and resources. Normally, the end result (denouement) of such a situation is that some of the creditors will say they have had enough and file a bankruptcy against the company. In the best case scenario this will result in sanation of the enterprise, and in the worst it will be liquidated. However, the remorseless logic of business says that a bankruptcy filed against a company by its creditors most certainly means the loss of business for its owner, because during the period of bankruptcy he loses all control over the business itself. If there is sanation, it will proceed without involvement of the owner, and his interests will hardly be taken into account. How to avoid this situation? – file for bankruptcy- but do it yourself! There is a way out! With the new Law becoming effective, it created a powerful instrument for resolving financial problems: restoration of solvency and avoidance of bankruptcy through… filing for bankruptcy. Precisely! Why? Because this Law has Article 53, "specific features of the debtor’s manager led sanation," which gives an enterprise a chance to get out of financial trouble with honor. A sanation plan developed and implemented by the enterprise’s management makes restoration of the solvency of the business possible.
Having filed for bankruptcy on its own initiative, the enterprise receives powerful mechanisms for solvency restoration through sanation:
When is it possible to use Article 53 of the Law of Ukraine "On Restoration of Solvency of the Debtor or Declaring It Bankrupt"? This procedure can be used if:
What does this procedure look like? Normally the following organizational and procedural steps must be taken:
What is the duration of this procedure?
What is the role of a Trustee? If bankruptcy proceedings are initiated by the debtor, the role of the Trustee is purely a procedural one:
What is an amicable settlement agreement?
How much will it cost the enterprise? The enterprise will have to bear the costs of:
What is a Sanation Plan? As a rule, this is a document that incorporates a comprehensive enterprise analysis and economically substantiated measures for enterprise solvency restoration. It is usually between 30 and 50 pages long and includes the following sections:
The sanation plan should also include:
What kind of sanation plan will secure the creditors’ consent?
Do the creditors have to be paid all the debt? The answer is no. But, in any event, whatever you propose to the creditors should benefit them. In our practice we had a case when private creditors agreed to write-off UAH 27 ml and accept the remaining UAH 3 ml in installments over six years! Can you count on the support of a majority of creditors?
What are the dangers and risks?
Why is it preferable to involve outside practitioners in the process of solvency restoration?
How do we work? The author was fortunate to participate in the Deloitte Touche Tohmatsu Financial Restructuring Project funded by USAID. The following scheme of work with enterprises was developed based on acquired experience:
What are the possibilities of CRM?
Where to find us? Of course, what you can find in this article is no more than an overview, although we hope that the information will be useful for you. For more details call (03422) 3 22 63, Ivano-Frankivsk, or e-mail: OUR SEMINARS FRP’s intensive educational program is continuing. Recently FRP held its eighth series of two-stage seminars. The first stage involves a four-day seminar on financial restructuring for solvency restoration practitioners. The second stage is a one-day seminar, "The Law of Ukraine ‘On Restoration of Solvency of the Debtor or Declaring It Bankrupt’ as a Powerful Means of Assistance to Ukrainian Enterprises" for enterprise managers. This session was held on July 16-20 in Sevastopol. We have already written about similar such seminars in our Bulletin. This time we should like to mention the great interest demonstrated by local representatives in new information. For the first seminar, FRP staff selected candidate trainees who already have some basic knowledge in this area in order to ensure an appropriate level of training. Mr. V. Zachosov, People’s Deputy from Sevastopol, spoke at this seminar. He shared his ideas about the possibilities for applying the Law and the prospects for making needed changes and amendments to this Law, as well as answering numerous questions from the trainees. Applying an American methodology, each trainee received a special questionnaire where he could assess the quality and usefulness of the event, as well as the quality of the presentations of the experts. We are pleased that the series of seminars was favorably rated, especially the interactive approach and practical training in using the Corporate Restructuring Model. We offer several interesting photos from these seminars. NEWS Dear Readers! We call to your attention the Action Program of the Union of Crisis Managers. You can also find much useful information on our web site: http://komitet.bankrut.net . At this site you can leave your comments, learn about legislation on non-governmental organizations, review the draft Charter of the Ukrainian Union of Crisis Managers, vote, and express your opinion on different aspects of this subject. You can also follow the progress in preparing for the National Congress of Crisis Managers that is planned for this September. We should be very happy and grateful for your practical advice and direct involvement in creating a Ukrainian corps of professional crisis managers, in developing bankruptcy legislation, and in enterprise solvency restoration, which will certainly assist in developing the national economy and contribute to the prosperity of Ukraine. Sincerely and with all best wishes, Pavel Mikhailidi, Chairman of the Working Group Draft ACTION PROGRAM OF THE UKRAINIAN UNION OF CRISIS MANAGERS Membership policy:
Services for members:
Measures carried out by the Union: Organizational:
Round table on interaction of arbitration managers with governmental entities and management bodies during crisis management of enterprises. Seminars and conferences:
Development of legislation:
External relations: Interaction and cooperation with government agencies:
Cooperation with Russian Guild of Crisis Managers
Development and implementation of comprehensive program for raising the competence of arbitration managers:
Forming positive image of the Union and its members:
Support to operation of elected bodies and head office of the Union:
PUBLICATIONS In this issue we bring to your attention a book by Judge Boris Polyakov, "Bankruptcy Procedure in Ukraine: Theory and Practice". The book considers theoretical issues of bankruptcy: insolvency and bankruptcy; composition and amount of pecuniary claims; parties and court procedures in bankruptcy. Special attention is devoted to a section that deals with legal regulation of insolvency (bankruptcy) abroad, in such countries as Germany, U.S.A., Russia, and France. As an attachment the book includes Ukrainian legislative acts that regulate bankruptcy issues, current as of May 1, 2001. The book is useful and will be a reliable assistant to arbitration managers, enterprise managers, accountants, economists, financiers, private entrepreneurs, teachers, and students. We offer the comments of several well-known experts on this work. First, we asked the opinion of Mrs. Valentina Danishevska, Director of the Commercial Law Center, who has extensive practical experience as a bankruptcy judge. Also, Mr. Anatoliy Vyazovchenko, the Head of the Ukrainian National Union of Arbitration Managers, shared his views. Mr. Anatoliy Vyazovchenko is an active member of the Working Group for creation of the All-Ukrainian [National] Association of Arbitration Managers. He is quite familiar with the practical issues in applying Ukrainian bankruptcy legislation and addressing problems of financial restructuring. Mr. A. Zhukov, the Head of the Lawyers’ Council of the Ukrainian Association of Banks, prepared a scholarly review of the book. Taking advantage of this opportunity, we obtained his consent to the first publication of this review in our Bulletin. Mr. Zhukov was actively involved in developing the Law of Ukraine "On Restoration of Solvency of the Debtor or Declaring It Bankrupt," paying special attention to the efficacy of this legislation and defending the legitimate interests of creditors. Valentina Danishevska, Director, Commercial Law Center:
This is a book you can measure your own position against, a book to be used as a guide, a book one may disagree with, but in any event, that is useful, necessary, and timely. The book provides a clear account of the author’s understanding of provisions of the Law "On Restoration of Solvency of the Debtor or Declaring It Bankrupt," as well as (through conceptual norms) those aspects that lawmakers did not address directly. Studying this work, one can recognize the gaps in the bankruptcy legislation. For instance, the author’s indication that abrogation of an amicable settlement agreement has the same consequences as finding it invalid is an issue that could be debated. In my opinion, it is doubtful that it is impossible to sign an amicable settlement agreement before the creditors’ meeting is convened and the claims register prepared. There are a number of possible criticisms of Section 5.5 of the book, "Procedure for finding creditors and preparing the claims register," in particular, as regards failing to file property claims within the prescribed time, the procedure for considering petitions by the court, the decision of the court or other competent body to resolve disputes, the procedural rights of creditors when considering petitions, etc. However, despite this, I congratulate Mr. Polyakov, the Financial Restructuring Project, myself, and all those interested in such "progress reports" on bankruptcy, on the publication of this book. I hope, and I am convinced, that this book will be of great interest, will provoke discussion, and will facilitate choosing the best approach to improving the Law. A.M. Vyazovchenko, Chairman of the National Professional Union of Arbitration Managers of Ukraine. The book by B. Polyakov, "Bankruptcy Procedure in Ukraine: Theory and Practice," is a very timely and good review of Ukrainian bankruptcy legislation and the practice of its application. Unfortunately, this is the first such book that explains the Law of Ukraine "On Restoration of Solvency of the Debtor or Declaring It Bankrupt." Such books are very much needed for understanding enterprise solvency restoration procedure in Ukraine by managers, investors, and shareholders.
Bankruptcy Procedure for Practitioners and Theoreticians Review of B. Polyakov’s book "Bankruptcy Procedure in Ukraine: Theory and Practice" Anatoliy Zhukov, Head of the Lawyers Group, Ukrainian Association of Banks, Kiev Donbass Publishers has published a book by B. Polyakov, Candidate of Law, Judge of Donetsk Commercial Court, "Bankruptcy Procedure in Ukraine: Theory and Practice." In my opinion, the author has written a book of interest to both practitioners and theoreticians who study the problem of bankruptcy. Along with comprehensibly presented theory, practitioners will find in the book the author’s practical recommendations for carrying out bankruptcy procedures, the text of the Law of Ukraine "On Restoration of Solvency of the Debtor or Declaring It Bankrupt" of 30.06.99 (hereinafter, the Law), texts of other Laws that contain provisions regulating bankruptcy procedure: the Law of Ukraine "On Banks and Banking" of 07.12.2000, the Law of Ukraine "On Procedure for Paying-Off Taxpayers’ Obligations to the Budgets and the State Proprietary Funds" of 21.12.2000, and over 40 legislative acts related to bankruptcy procedure. Theoreticians will be interested in the interesting and persuasive position of the author on a number of insolvency issues, his references to the classic of jurisprudence by G. Shershenevich, and the comparison of Ukrainian bankruptcy procedures with those in the U.S., Germany, and Russia. In particular, presenting the history of bankruptcy proceedings as a competition between several creditors that have submitted their claims against the same debtor will be useful for both practitioners and theoreticians. Depending on the status of the debtor, the author distinguishes general, special, and simplified proceedings, subdividing the creditors into petitioning, compelled, secured, priority, registry creditors, and creditors under current debts. When describing the procedure for initiating bankruptcy proceedings, the author rightly points to the negative consequences for a creditor of the minimal level of debt of 300 minimum salaries set by the Law, below which a creditor is not entitled to file a bankruptcy petition, and who as a result, because of the tax legislation, cannot write off this debt as an expense. Of interest is the author’s proposal to move the introduction of the moratorium (the temporary bar against satisfying creditors’ claims) from the moment that property administration is initiated, as is now provided by the Law, to the day a notice on initiation of bankruptcy proceedings is published. Judicial practice has suggested another proposal of the author’s – to introduce a requirement to serve a court ruling on the introduction of the moratorium on banks and enforcement authorities. Commenting on the debtor’s sanation, the author justly writes that a sanation plan may include a debt-for-equity swap provision, which gives a sanation manager the right to issue shares in the debtor enterprise. The author rightly believes that a debt-for-equity swap is possible at all stages of bankruptcy proceedings. The author points out that if the debtor’s going concern is sold during sanation, not all the rights and obligations of the debtor are transferred to [assumed by] the buyer. A semantic contradiction in the Law is that sale of a going concern, logically, may not be viewed as a measure of financial rehabilitation of the debtor. When describing liquidation, the author regrets that, compared with the old Law, the new Law does not provide for finding contracts concluded by the debtor invalid, which reduces the effectiveness of liquidation. When describing an amicable settlement procedure, the author provides an interesting assessment of one of the most attractive provisions of the Law – the provision on forgiveness of the debtor’s tax debts. The author regards debt forgiveness as a form of cancellation of obligations by agreement of the parties, which is different from novation [replacement of an old obligation with a new one] and accord and satisfaction. Analyzing the possibility of resuming bankruptcy proceedings after an amicable settlement agreement has been found to be invalid under Article 39 from the standpoint of procedural law, the author believes that resumption of proceedings should be regulated by the procedural rules applicable to newly established circumstances [facts] of the case. Like any research paper that merits attention, the book under review can provoke debate. In particular, I should like to disagree with the author about the countdown of the three-month term, on expiration of which the creditor acquires the right to file a bankruptcy petition. The author proposes to count this term from the moment an enforcement authority or a bank accepts a writ of execution. In our opinion, this conclusion is not grounded in provisions of the Law. Under Article 1 of the Law, the creditor acquires the right to file a bankruptcy petition on expiration of the term to discharge an obligation (or duty) stipulated by an agreement [a contract] or by the Law. A similar countdown procedure exists in Russian and U.S. bankruptcy legislation. To a creditor’s bankruptcy petition shall be attached proof that the creditor tried to collect the debt in accordance with the established procedure, however, these proofs must not be used for the countdown of the three-month term. The author also proposes to consider a one-month term for filing the creditors’ claims that were received after publication of the notice on initiation of bankruptcy proceedings, established by Article 14, as a final bar. This proposal requires a differentiating approach, since, as the author rightly mentions, this term may not be a final bar for all creditors. In my opinion, only the term for filing the creditors’ petitions in liquidation, as established by Article 31, should be a final bar. I believe that even a short review reveals enough reasons to believe that the author managed to write an interesting and topical book, which, along with practitioners, can be used by law-makers when drafting changes to the Law. OUR INTERVIEW Interview with Boris Polykov Judge Boris Polyakov, Candidate of Law, actively involved in developing bankruptcy legislation since 1992. Member of the Bankruptcy Judicial Panel of Donetsk Commercial Court, author of a number of specialized articles. Mr. Polyakov, we know that you are the author of the book "Bankruptcy Procedures in Ukraine: Theory and Practice." Could you please tell our readers about the history and purpose of writing this book? The first impetus for writing the book was my long conversation with U.S. consultant Mr. Olin McGill. He simply pulled me out of the grind of hearing bankruptcy cases and made me see the Law with different eyes. That is, he managed to convince me that the most important elements are knowledge and information. And the second incentive was a number of publications in the press that commented on the Law, but which did not always completely and adequately reflect existing problems with the legislation. Unfortunately, those who apply the Law do not give consultations, and everybody, mostly, has to solicit the opinion of participants in the proceedings, who see the problem only from their point of view, and cannot explain it overall. Consequently, it is important for active judges or practicing attorneys to share their experience in applying the Law. And we experience a hunger for information in the context of bankruptcy. Indeed, only those people have complete and considerable information on this issue who have hundreds of actual bankruptcy cases under their belt. Sometimes it can take several years to consider a single case. And only after accumulating experience through hearing a great number of cases can one say which provisions are efficient and which are not. You cannot possibly accumulate experience after considering one or two cases. A beginner should be given an opportunity to understand the substance of relations between the parties in the case and other practical issues of bankruptcy. And this is precisely the purpose of this book. Whom do you think this book is for, who will be its main readers? You know, I was surprised, no matter how strange it sounds, that first among those willing to read this book were the state tax authorities. In spite of the fact that this book is at variance with the main task of the tax authorities – collection of revenues, as in the case of signing an amicable settlement agreement, representatives of local tax authorities were unanimous in appreciating the importance of this book for them. An interesting point. When the clean copy of the book was ready, we took it to one publishing house, and they rejected it. I was told that the book was not suitable for a mass audience. But we decided to publish it anyway and found that the contrary was true. Now I have a great urge to go to the publisher that rejected the book and to give it to him as a present with an inscription, "Thank you for the lesson." When I was young I had a similar experience when my coach told me that I was not good at wrestling. But I proved that this was not true, and became Candidate Master of Sports [former Soviet sports title awarded for special merits in a particular field of sports]. History repeats itself. I reached the conclusion that one should be persistent in achieving the goals set. I gave the clean copy to practicing attorneys, experts on these issues, so that they could give me their comments. And they gave a positive response: the book was recommended to be published. Now I am getting many positive comments, and orders both from government agencies and individuals. I should say that the first edition is somewhat imperfect, but in the second edition I am planning to take into account all the comments and proposals that I am receiving from readers. Mr. Polyakov, now we come to the issue of your future plans. Could you please tell us about them? Creative work is so exhilarating, it literally makes you feel heady. It is nice to see the results of your labor. I started my creative and research work quite a while ago, defended my Candidate’s of Law thesis over ten years ago, and I always remember what my scholarly adviser once said: "No matter how intelligent the words and thoughts you might have are, unless they are materialized on paper, they will keep hanging in mid air". When I was writing the book, I recalled these words and the benefit that the book could bring. We have many highly qualified judges who could tell and write a lot about their experience; however, this has not been the case so far. I think I’ve made the first step, and in the future we shall have many wonderful books on bankruptcy by different authors. Addressing matters of practice, we should like to know what you think the main problems in applying bankruptcy procedures in Ukraine are? First and foremost, many place an equal sign between enforcement and bankruptcy proceedings. But the point is that there should not be any such equality. Even if bankruptcy proceedings were born in the depths of enforcement proceedings, there is a substantial difference between them. The thing is that enforcement proceedings apply only to those creditors that are parties to the enforcement proceedings; as far as bankruptcy proceedings are concerned, they apply to all creditors, and the consequences of bankruptcy are mandatory on all creditors. If for some reason a creditor did not participate in the bankruptcy case, his claims should be satisfied automatically. When a debtor withdraws from the bankruptcy proceeding, this means that all his debts have been satisfied: they were either repaid, or an amicable agreement was signed, or they were otherwise cancelled. We can often observe that a creditor that did not participate in the proceedings begins to assert his pecuniary claims once the case is closed. This is the main problem that needs to be resolved. There is also a number of other problems, in particular, that the moratorium applies to the claims [actions] of creditors that did not resort to bankruptcy procedures, i.e., civil and bankruptcy proceedings operate independently. It should work this way: once bankruptcy proceedings are initiated, all property and pecuniary claims should be determined in the bankruptcy case. This problem should be solved at the legislative level, like the need to introduce a final bar for filing claims against the debtor, because now there is no final bar and this period is construed as a procedural one. But it cannot be procedural. Although this provision is somewhat procedural in its nature, it is first of all a substantive one. If we are talking about law in general, about property law, our position should be quite firm. As, for instance, in the situation with an inheritance – if an heir did not present the documents within the prescribed period, the heir loses the right to inherit. If we introduce such requirements, this will resolve the situation when, in parallel with any bankruptcy proceedings, there is an ongoing process of reinstating claims, which undermines the balance of forces, and places the creditors in an uncertain situation. To what extent are these issues you were referring to reflected in the draft Law "On Changes and Amendments to the Law of Ukraine ’On Restoration of Solvency…’"? This Law requires not just a few modifications; it needs to be developed substantially further. The Law now in effect does not elucidate the main principles of the relations between the parties to bankruptcy proceedings; instead, it sets out managerial relations. Therefore, the creditors’ committee is granted considerable powers. And, in my opinion, some of these powers should be given to the Court. The complete freedom of action for the arbitration manager suggested by the draft Law is also unjustified. An arbitration manager, perforce, is a foreign body in the debtor-creditor chain: we necessarily have a conflict of interests. Also, an arbitration manager is a person dependent on the creditors’ committee whose actions can be predicted. In my opinion, in order to raise the level of responsibility, legal entities could be appointed to act as arbitration managers at large enterprises. Additionally, a mechanism should be introduced for security in case an arbitration manager causes damage, as exists, for instance, in the U.S. The final say in the selection process, appointment, and dismissal of an arbitration manager should belong to the court, as well as the authority to interfere in the activities of the arbitration manager. It is also obvious that in developing the legislation it is important and necessary to identify the goal and take into account the economic and political situation in our country. And the last question: where and how is it possible to buy your book? One of the conditions of the contract with Donbass Publishers was that the book shall not be sold by retailers because in this event many interested people would not be able to buy it. Instead, those who are directly involved in using the Law should be able to obtain it. The book should have some effect. Therefore, I should like to give the telephone number of Donbass Publishers, where readers can order the required number of copies: +062 337 14 00. Thank you very much for this conversation and for your book. We wish you good luck, and will be looking forward to your future books. |
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