NEWSLETTER

ON ENTERPRISE RESTRUCTURING

INFORMATIONAL BULLETIN

of the Financial Restructuring Project

funded by USAID

#4-5

December-January  2000-2001

INSIDE THIS ISSUE:
Lessons Learned Seminar
New Regulations and New Possibilities for the enterprises
Round Table
Useful information

Lessons Learned in the process of application the new bankruptcy legislation

That was the subject of the seminar held by a USAID-funded Deloitte Touche Tohmatsu Financial Restructuring Project in its Ivano-Frankivsk Training Center in mid-December. The participants of this seminar had the opportunity to exchange experience gained in course of practical application of the Law "On Restoration of Solvency of the Debtor or Declaring It Bankrupt". Formally the seminar consisted of two parts, the first of which was planned as a free discussion between the Project experts, lawyers, economists, practitioners and arbitration managers, and the second to include presentations on the most important subjects of restructuring in Ukraine.

In reality the two parts were organically interwoven. It was a discussion between all participants spurred by the presentations of the arbitration courts, the State Tax Authority and the Pension Fund representatives.

Enterprise managers and arbitration managers emphasized the need to advertise the successes in application of the new Law by Ukrainian enterprises.

These "success stories" are particularly useful, because many of the future users of the Law "On Restoration of Solvency of the Debtor or Declaring It Bankrupt" are unaware of its effectiveness and new possibilities.

The stories can be disseminated through similar seminars, training events and conferences. A special emphasis was given to the role of the state in restructuring large enterprises.

According to V.Petrenko, an arbitration manager, the large corporate and state-owned enterprises account only for 6% of all businesses that were declared bankrupt in previous years.

Other important topics were also discussed. Of special importance for arbitration managers and solvency restoration practitioners were the issues of their legal status, professional ethics and remuneration.

For this reason, the seminar pointed to the need to regulate the procedural issues of arbitration managers’ activity, their rights, obligations and responsibility to the debtor and the court of arbitration. For the first time the seminar participants discussed the idea of setting up a joint association of insolvency practitioners and arbitration managers and its purposes and tasks.

Participants from Rivne shared their experience of a similar regional association that is active in their oblast. Among the most considerable advantages provided by such an association is dissemination of information and lobbying and defending of its members’ interests, etc..

The major functions and objectives of the association would likely include coordination of activities, assistance on professional training programs for the members, making recommendation for improving Ukraine’s bankruptcy system and application of the effective methods of restoring the solvency of Ukrainian enterprises.

Moreover, the association will make things much easier for enterprises faced with bankruptcy problems that would rather consult an association than go searching for a particular arbitration manager. The experience of similar SRO’s in the USA, United Kingdom, Australia, Russia and other countries proves their significance.

General issues of application of the Law of Ukraine "On Restoration of Solvency of the Debtor or Declaring It Bankrupt" and prospects for its improvement were also discussed during the seminar. The pros and cons of Article 53 were discussed in detail from a debtor’s standpoint. Ms. Lilya Golyak, Ivano-Frankivsk arbitration judge shared her thoughts on litigation aspects of the new Law.

Regional tax administration and Pension Fund representatives told of their full support of the the Law as an effective mechanism for reviving production of Ukrainian enterprises that find themselves on the verge of bankruptcy.

Tax administration officials gave in-depth answers to the numerous questions of the audience.

A lot of attention was paid to the main stages of restructuring. There were examples of several successful cases that were assisted by the Project’s experts or Project trained practitioners in making financial analysis and preparation of sanation plans.

All seminar participants acknowledged the usefulness of the discussion for practitioners and arbitration managers, as well as for governmental, legal and international experts who carry out legal reform in Ukraine.

New Regulations and New Possibilities for Enterprises

On November 21, 2000, the State Tax Administration of Ukraine issued the Order "On Approval of the Procedure for forgiveness (writing-off) and Restructuring of the Taxpayers’ Debt in the Process of Conclusion of Amicable Settlement Agreement Within Bankruptcy Procedure". This order was registered in the Ministry of Justice on December 6, 2000 and will become effective on the day of its publication in the official media.

So, finally, the tax authorities received a mechanism approved by STA of Ukraine for application of the Law "On Restoration of Solvency of the Debtor or Declaring It Bankrupt" for forgiveness and deferral of corporate debts over two years old.

This Order defines the list of taxes and duties as well as the procedure for calculation of debt that is to be written off or forgiven. The document also identifies the powers the tax authorities have when making decisions pursuant to the Law of Ukraine "On the State Tax Authority of Ukraine".

Special forms to make a decision on debt forgiveness or debt deferral installment, as well as schedule for debt repayment, are provided in the appendixes.

We hope that approval of this Order will ensure closer coordination between the Tax Administration and enterprises in applying one of the most effective tools of the Law, namely, amicable settlement agreement.

Another extremely important tool introduced by the new Law is a moratorium on satisfying creditors’ claims. The moratorium is applied at all stages of bankruptcy proceedings and is extremely important for restructuring since it allows accumulating resources required for restoration of solvency. During the moratorium fines and penalties are not accrued and property may not be levied against.

Roundtable Discussion in Kiev

One of the biggest problems of the Ukrainian economy is solvency restoration of debtor- enterprises. That is why on December 11, 2000 these issues were discussed at the round table "Application of solvency restoration procedures as a way for financial rehabilitation of Ukrainian enterprises" held by Ukrainian Independent Centre of Political Studies funded by Centre for International Private Enterprise (USA), and Financial Restructuring Project.

The participants in this roundtable discussion were representatives of the Verkhovna Rada and the Government, experts, scholars and practitioners, arbitration managers from different regions of Ukraine.

The round table considered the following issues:

• What hinders improvement of financial and economic performance of Ukrainian businesses?
• What new opportunities for Ukrainian businesses are provided by the Law of Ukraine "On Restoration of Solvency of the Debtor or Declaring It Bankrupt"?
• Prospects for improving solvency restoration procedures.

The meeting was opened by Peoples Deputy V.A. Zachyosov, the author of the Law "On Restoration of Solvency of the Debtor or Declaring It Bankrupt". He analysed the current state of Ukrainian economy and highlighted the key problems of those 128 thousand enterprises that can be qualified as being at different stages of insolvency irrespective of the country’s growing GDP. These enterprises owe UAH 16 bl only in tax debt, and half of this amount are fines and penalties imposed by the State Tax Administration.

Mr M.V. Gotsulov, who represented Ministry of Economy Department of Ownership and Bankruptcy, told about the results of work of the

Ministry on development of database of enterprises against whom bankruptcy proceedings were initiated, licensing of arbitration managers and drafting of changes and amendments to the Law of Ukraine "On Restoration of Solvency of the Debtor or Declaring It Bankrupt" which would improve the application procedure.

Mr Rick Wolfe, FRP restructuring specialist, told the meeting of accomplishments of the project, namely technical assistance provided to 25 enterprises in different regions of Ukraine, development of Corporate Restructuring Model, and 4-day training seminars held for insolvency practitioners. Debtor-led sanation under Article 53 of the Law, approval of sanation plans and concluded amicable settlement agreements prove that the Law is working. Mr Wolfe also gave a detailed account of new opportunities provided by the Law for Ukrainian economy.

A heated debate was provoked by the issue of tax lien,

and Mr Turchin, Deputy Head of Department, Bankruptcy Agency, critiqued this mechanism. Andriy Volkov and Yuriy Vakhel, FRP lawyers, gave their opinion on this issue as well as the problems of regulation of professional activity of arbitration managers. It was suggested to use a more conventional tax lien approach based on experience of CIS countries, because the draft Law "On Payment of Debts of Taxpayers to the Budgets and the State Target Funds" is not only at variance with a number of laws but also allows for concentration of unlimited power in the State Tax Administration, which contravenes the Constitution of Ukraine.

In the previous issue we gave a more detailed outline of the problem points of this draft, which, contrary to Verkhovna Rada regulations, was put for consideration by the current session of the Rada and was passed. This issue indeed caused concern of many of the round table participants regarding possible effects of passage of this draft.

Mr I.M. Rizhok, Head of the STA Head Office, supported the need for existence of a tax lien, arguing that this tool for replenishment of the state budget helps the STA to protect the interests of the state.

Many ways for resolving the problems faced by arbitration mangers in the process of performing their duties were suggested during the round table. Specific examples were given when the problems of arbitration managers were caused not so much by deficiencies of the Law but by arbitrary construing of it by some officials in the regions.

Training Seminar in Kharkiv

Within the framework of the Project’s educational campaign, a one-week "Intensive Training for Solvency Practitioners" seminar will be held in Kharkiv from January 29 through February 2, 2001 for representatives of the business community (consulting, law and auditing firms), arbitration managers, representatives of tax agencies and the arbitration court.

The seminar will cover legal issues (structure and functions of Ukraine’s Bankruptcy Law, specific tools available at each stage of the Law, legal aspects of financial restructuring) and financial issues (development of a restructuring strategy utilizing concrete examples).Trainees will be acquainted with the Corporate Restructuring Model (CRM) developed by the Project’s financial analysts from Kyiv office. The CRM is an Excel-based spreadsheet model utilized by practitioners to analyze the debtor’s production operations and financial structure, develop a financial forecast, test various restructuring scenarios, determine whether sanation or liquidation is better for creditors, and prepare a sanation plan.

The seminar participants will be provided with a set of handout materials that includes the text of the Law "On Restoring the Solvency of a Debtor of Declaring It Bankrupt," and training material on legal and financial issues.

On February 2, 2001, an all-day seminar on enterprise financial restructuring will be held in Kharkiv for Enterprises and Creditor Institutions. The purpose of the seminar is to familiarise the participants with the restructuring opportunities under of the Law.

If you are interested in attending these seminars, please contact our Kharkiv Training Center.