The order of property realisation in bankruptcy (insolvency) procedure under the law of Ukraine and Germany

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National Academy of Legal Sciences of Ukraine

Zaporizhzhia National University

THE ORDER OF PROPERTY REALISATION IN BANKRUPTCY (INSOLVENCY) PROCEDURE UNDER THE LAW OF UKRAINE AND GERMANY

O.D. Sviatotskyi, R.B. Poliakov

Kharkiv, Zaporizhzhia

Анотація

ПОРЯДОК РЕАЛІЗАЦІЇ МАЙНА В ПРОЦЕДУРІ БАНКРУТСТВА (НЕПЛАТОСПРОМОЖНОСТІ) ВІДПОВІДНО ДО ЗАКОНОДАВСТВА УКРАЇНИ ТА НІМЕЧЧИНИ

Олександр Дмитрович Святоцький, Національна академія правових наук України Харків,

Родіон Борисович Поляков Запорізький національний університет Запоріжжя

Стаття являє собою порівняльно-правове дослідження особливостей порядку реалізації майна боржника в процедурі банкрутства за законодавством України та Німеччини, що здійснене шляхом застосування герменевтичного (в межах проведення сутнісного аналізу нормативно-правової бази та судової практики); аксіологічного (при визначенні ціннісної бази) поряд з феноменологічним (та природи досліджуваних явищ); системного (моделювання функціонуючих і перспективних систем) методологічного інструментарію. Автори підкреслюють ключовий характер існуючих правових норм, що регулюють продаж майна боржника, в силу природної близькості наведеної стадії конкурсного процесу до фінансової складової, яка, зі свого боку, неминуче пов'язана з численними можливостями щодо зловживань. Новелою для досліджуваної сфери суспільних відносин в Україні стало введення системи електронних торгів, на яку покладалося багато надій і сподівань. Однак, на думку авторів, наведена система не впоралася з поставленими завданнями, доповнивши існуючий перелік проблем та неоднозначностей новими пунктами. У статті обґрунтовується позиція, що наявність проблемних питань у процедурі реалізації майна банкрута підтверджується, зокрема, судовою практикою. Однак судова практика і сама часто стає джерелом нових проблем і викликів. Особлива увага в статті приділяється дослідженню німецького законодавства, яке встановлює кардинально протилежну українській модель реалізації майна в процедурі банкрутства. Авторами представлено обґрунтовану позицію щодо внесення суттєвих змін і поправок до українського законодавства шляхом імплементації позитивного досвіду Німеччини. В результаті порівняльно-правового аналізу законодавства України та Німеччини автори пропонують принципово нові шляхи вирішення піднятих у статті питань. Реалізація рекомендацій, представлених у рамках даного порівняльно-правового дослідження, має на меті підвищення якості здійснення процедур банкрутства, зменшення можливостей і випадків зловживань з боку арбітражних керуючих, а також забезпечення захисту прав і майнових інтересів кредиторів

Ключові слова: процедура банкрутства, змагальність процесу, недієздатність, комітет кредиторів, окремі кредитори, аукціон, арбітражний керуючий

Abstract

legal debtor bankruptcy law

The article represents a comparative legal study of the specifics of the order of debtor's property realisation in the bankruptcy procedure under the law of Ukraine and Germany through the application of hermeneutic (used in accessing the essence of the legal framework and judicial practice); axiological (in determining the evaluative base) along with phenomenological (and the nature of the phenomena); systematic (modeling of the functioning systems) methodological toolkit. The authors emphasise the importance of legal provisions governing the sale of the debtor's property, due to the natural proximity of this stage of the competitive process to the financial component, which, in turn, is inevitably associated with various abuses. An electronic trading system had been recently introduced in Ukraine, on which therefore many hopes and expectations were relied upon. However, the electronic trading system did not cope with tasks set, and many new problems were added to the old ones. The article states that the existence of problematic issues in the procedure of bankrupt property realisation is confirmed, in particular, by the court practice. However, judicial practice in itself often becomes a source ofproblems. The article pays special attention to the German legislation, which uses a radically opposite model of property sale in insolvency proceedings. The authors justifiably propose to make certain changes to the Ukrainian legislation, by using the positive experience of Germany. As a result of a comparative legal analysis of the legislation of Ukraine and Germany, the authors provide ways of solving the raised issues in the article. The implementation of the recommendations submitted within this comparative-legal study should improve the quality of bankruptcy proceedings, reduce the number of abuses by insolvency trustees, as well as protect the rights and property interests of competitive creditors and creditors with the right of separate satisfaction

Keywords: bankruptcy procedure, competitive process, incapacity, creditors' committee, creditors with right of separate satisfaction, auction, insolvency trustee

INTRODUCTION

On October 21, 2019, the Code of Ukraine on Bankruptcy Procedures of October 18, 2018 No. 2597-VIII [1] was enacted. The main purpose of adopting this Code was to optimise and update the procedures established by the Law of Ukraine “On Reestablishing Debtor Solvency or Declaring Bankruptcy” [2] (replaced by the top-mentioned document). Clause 4 of the Final and Transitional Provisions of the Code established that “...from the date of entry into force of this Code further proceedings on bankruptcy cases are carried out in accordance with the provisions of the new Code, regardless of the date of opening of bankruptcy proceedings, except for bankruptcy cases, which at the date of entry into force of this Code are at the stage of rehabilitation, proceedings on which are continued in accordance with the Law of Ukraine “On Reestablishing Debtor Solvency or Declaring Bankruptcy” [1].

The entry into force of this codified act and its further amendments have generated increased scientific interest towards the specifics of its practical application, especially in the context of the launched program of Big Privatisation (concerning large state-owned enterprises). In essence, the stage of the sale of the debtor's property is the culmination of the competitive process, as it becomes clear whether there will be enough assets in the liquidation mass to meet the property claims of creditors. It is the onset of the stage of the sale of the debtor's property that creditors have been waiting for so long, gradually going through numerous and long stages of the competitive process. A prominent German lawyer and researcher of the competitive process of the XIX century, Wilhelm Endemann, noted that the distribution of the debtor's property is possible only after the indisputability and type of creditors' claims are finally approved [3, p. 425; 4, p. 543].

After all, the provisions of bankruptcy (insolvency) normative acts in both Ukraine and Germany, which regulate the procedure for selling the debtor's property, certainly arouse great interest. The latter is explained by the importance of this stage of the competitive process, in which property assets are converted into monetary assets, which later will be distributed among creditors. However, it is at this stage of the sale of the debtor's property that several abuses occur in practice. The famous French civilian of the XIX century. Edmond Eugene Thaller noted that “the mercantilism of bankruptcy trustees has always been considered by the governments of the Anglo-Saxon nations as a plague of bankruptcy proceedings, as well as an obstacle to the success of all bankruptcy statutes” [5, p. 182]. Thus, we get an inseparable symbiosis, which becomes a kind of stumbling block in the field of the competition process.

A similar position in this regard is taken by the eminent jurist-scientist Gabriel Shershenevich, citing a brilliant comparison of the already mentioned Edmond Eugene Thaller: “As much as the amicable agreement represents a picture of peace, the distribution of property is similar to a war that devastates the country” [3, p. 428]. Indeed, sometimes the creditors together with the insolvency trustee, in the pursuit of the greatest possible satisfaction of their own monetary claims, ruthlessly devastate the entire property of the debtor. However, the conversion of the debtor's property assets into monetary equivalent is a necessary step because otherwise, the proportional satisfaction of creditors' claims in conditions of the absence of the debtor's assets will be almost impossible.

The theoretical basis of the article is the works of such prominent multinational scholars and lawyers as B. Polyakov [6], G. Shershenevich [3], V. Endemann [4], S. Greif [7], E. E. Taller [5], O. Titova [8], K. Kalachenkova [8], N. Haverkamp [9; 10], and other scientists. At the same time, in the context of the recent reformation of the bankruptcy procedure in Ukraine [11], a comparative legal analysis of the procedure and conditions of sale of the debtor's property under the law of Ukraine and Germany, highlighting problematic aspects of this stage of the bankruptcy process and finding their solutions are very actual.

Given the standardisation of economic activity within states to ensure the stability of the internal market of the European Union, foreign scholars have also developed various aspects related to certain phases of insolvency proceedings. Elements of their research published in highly reputable journals were also drawn into the study of German practices because of the standardised approaches to the above-mentioned problems (and their specific elements) [12-18].

The purpose of the study is to conduct a comprehensive comparative legal analysis of Ukrainian and German legislation in the field of regulating the realisation of debtor's property in bankruptcy (insolvency) proceedings, determining the powers of representative bodies of creditors and insolvency trustees at this stage, clarifying the legally established conditions of sale of debtor's property, and also finding the ways to improve the bankruptcy procedure in Ukraine with the possible usage of the German experience.

1. MATERIALS AND METHODS

By setting a wide range of relations that arise around the procedure of the realisation of debtor's property in the legal practice of Ukraine and Germany as the object of research, the subject of this article included its elements: bankruptcy procedure, the principle of competitiveness in the process, structural features and characteristics of creditors' committees, mechanics of auctions and guarantors of realisation. The defined object and subject of the study are substantiated not only by the existing problems in terms of their regulation in Ukraine but also by the need for the cautious and incremental introduction of foreign legal models and mechanisms into the legislation and legal practice of our country. Moreover, the comparative-legal orientation of this research in itself already provides value for the domestic legal science because besides the main purpose of scientific search it also enhances the methodological and material framework for further branch and inter-branch investigations for Ukrainian lawyers-theorists and practitioners.

Within the general methodological framework of the given research inevitably was the use of all general methods of scientific cognition used in general science: observation (in conjunction with the other methods), comparison (of the significant common and different features in order to form regularities), abstraction (in the process of capturing phenomena and relations of interest to the researchers). Specifically, when researching the above elements, a variety of special scientific methods were applied: phenomenological (to reveal the nature of the elements), hermeneutic (to discover the essential nature of the texts when working with the legislative framework and judicial practice of Germany and Ukraine), axiological (focused on determining the evaluative base of the phenomena) and systematic (as the foundation) to construct a scientocentric model of interaction of the elements. Furthermore, the prognostic method provided an opportunity to form a series of perspectives and proposals for the reforming of the procedures under study in the national law of Ukraine.

The comparative legal approach and the use of the corresponding method became pivotal for the article. Currently, the interest in comparative law in Ukraine is on the rise. It is necessary to note that having a rather robust methodological basis for comparative studies in the Soviet Union, modern Ukrainian legal science uses a different toolkit. Distinctive features of Soviet comparative legal science were the use of Marxist-Leninist methodology, increased interest in general methodological issues, sharp ideological and political orientation of works of Soviet scientists, who critically evaluated the so-called bourgeois concepts of comparative law. In modern Ukraine, the development of contemporary comparative law has been greatly influenced by using of foreign law in the creation of new national laws and the benchmarking of different legal systems for a more in-depth study of the phenomenon of law. Considering European and Euro-Atlantic courses embodied in the Constitution of Ukraine, the improvement of legislation, and, accordingly, the introduction of fundamentally new practices and models is carried out considering the norms of foreign law.

The substantive basis of this paper constitutes classical European monographic studies, scientific articles with high credibility, codified legislation of Ukraine and Germany, as well as court practice materials.

2. RESULTS AND DISCUSSION

Domestic legislative innovations and court practice

Returning to the already mentioned statement of Edmond Eugene Thaller, the authors must state that, unfortunately, the “picture of peace” is not provided by the provisions of the Bankruptcy Procedure Code of Ukraine [1] (hereinafter - Bankruptcy Code), and therefore “devastating war” is an inevitable phenomenon, to which, actually, the section V of this codified act is devoted. However, in an incomprehensible way, Art. 63 with the name: “Sale of bankrupt property” appeared outside the mentioned section. In part 1 of Art. 63 of the Bankruptcy Code stipulates that the liquidator sells the bankrupt's property at auction. However, this method of property realisation is not always mandatory, as the legislator provides some exceptions. Thus, the liquidator has the ability to sell perishable goods at a reasonable price, and he is empowered to sell inventories and low- value items, provided that their market value is not more than one minimum wage.

The authors fully support giving to the liquidator the opportunity to sell the property without an auction in cases of its low value, as the public sale may be impractical. O. Titova and K. Kalachenkova take a somewhat similar position, noting that “... it is not very effective to sell low-value items, that do not belong to the category of perishable items, at auction. A possible option, in this case, could be to set a price limit for the property realisation outside the auction” [8]. One should consider that the formulation provided in the mentioned provisions of the Bankruptcy Code is too vague, as there is a possibility of abuse of that rule of law by dividing the property into small parts in order not to exceed the statutory value. This situation is most typical of insolvency proceedings against individuals.

Moreover, we cannot ignore the evaluation concept of “reasonable price”. Of course, providing the opportunity to quickly sell perishable goods is vital, however, at this stage, the situation with a “reasonable price” is reminiscent to us the ancient Rome, where, as noted by K. Malyshev, it was impossible to value property at market value, as there wasn't an established price for certain goods [19]. Of course, immediately selling perishable goods at their market value is an extremely difficult and almost impossible task, but the state of affairs described above needs to change. In particular, the authors propose to establish by law a special procedure for the realisation of perishable goods by the liquidator, as well as to clarify what price can be considered “reasonable”.

The provisions of part 3 of Art. 63 of the Bankruptcy Code [1] are quite ambiguous since they prohibit the provision of agreements to provide the buyer of the bankrupt's property in installments or deferral of payments. In accordance with part 1 of Art. 85 of the Bankruptcy Code, the buyer is indeed obliged to pay the price of the purchased goods within 10 working days from the date of publication in the electronic trading system (hereinafter - ETS) of the results of the auctions. However, surprisingly, in part 3 of the mentioned article, the legislator provides for the buyer to defer payment of the price for the goods for 10 calendar days if he pays more than 50% within the prescribed period. Thus, despite the prohibition to provide for deferrals at the contractual level, which, of course, is done both to expedite the bankruptcy proceedings and to obtain funds as soon as possible, the legislator decides to provide deferrals on the legal level.

The introduction of the sale of the debtor's property through ETS is one of the most important innovations in the bankruptcy procedure. A. Pidhoretska notes in this regard: “Regulations on the sale of all debtor's property exclusively at electronic auction at the highest price is a novelty of the Code, which aims to create competitive and favorable conditions for organising and conducting auctions for the realisation of debtors' property in bankruptcy cases, promoting expansion circle of potential buyers, increasing the level of repayment of creditors' claims” [20]. Therefore, Art. 68 of the Bankruptcy Code [1] stipulates that “... the sale of the debtor's property at auction takes place in ETS”. The procedure for the functioning of the ETS was approved by the Resolution of the Cabinet of Ministers No. 865 of October 2, 2019 [21] (hereinafter - the Procedure). Here it is necessary to note the position of B. Polyakov, who pointed out that the Bankruptcy Code provides a different name of the act, which should regulate the functioning of the ETS [22]. Indeed, in some strange way, instead of the title “Procedure for the functioning of the electronic trading system”, we received the “Procedure for organising and conducting auctions for the sale of debtors' property in bankruptcy (insolvency) cases”. If at the legislative level there is confusion with the name of the normative act, then, most likely, its provisions will also be far from perfect. No wonder they say: “as you name a ship, so it will sail”.

This Procedure clearly demonstrates the effectiveness of mentioned principle, and therefore the authors propose to consider some problematic issues.

In the analysis of the Procedure, the provisions of its paragraph 73, which allow holding an auction with only one buyer, are quite incomprehensible. Therefore, in the case of a bid, only one bidder is presumed to have submitted the highest bid. We fully share the opinion of B. Polyakov, who noted: “In the auction must always be at least 2 participants, otherwise there will be no competitive principle inherent”. Complementing the above-mentioned position, the authors note that in this case, between the concepts of “auction” and “sales contract” will be a sign of equality. The completely opposite situation arises in the case of an auction for smallscale privatisation of state property. Clause 49 of the Procedure for Conducting Electronic Auctions for the Sale of Small-Scale Privatisation Objects and Determining Additional Terms of Sale, [23] stipulates that the system automatically detects an auction as “failed” if less than two applications for participation or two bids were received.

Thereby, the legislator differentiates depending on the auction customer. However, it is unclear why the protection of creditors' interests during bankruptcy proceedings is not as high-priority as the protection of state interests during small-scale privatisation. Moreover, it is common for privatisation to occur at a loss. In accordance with part 5 of Art. 12 of the Law of Ukraine “On Privatisation of State and Municipal Property” bankruptcy cases against debtors - state enterprises or business enterprises, more than 50% of the shares of which belong to the state, are not opened if such enterprises are privatised. Bankruptcy proceedings against such enterprises must be terminated, except for liquidation by the decision of the owner [24].

Therefore, the state has the opportunity to “pull” a certain category of debtors out from bankruptcy by “redirecting” them to privatisation and hold a real auction, rather than concluding a regular sales contract with any buyer without any competition. This state of affairs somewhat reminds us of the competitive process of Kievan Rus, where the Knyaz' (prince's) property interests were satisfied primarily. Similarly, the sale of certain state property can take place on the terms of a more secure auction. Moreover, problems with the realisation of the debtor's property do not end. Let's pay attention to paragraphs 75, 76, 78 of the Procedure [21], which provide the legal consequences if holding the auction without determining the winner. Thus, when holding repeated and second repeated auctions, the initial price of the first auction will be reduced by 20%, as well as the initial price of the first repeated auction will be reduced by 25%. Furthermore, there is a possibility of holding the first repeated auction with a price reduction with the consent of the secured creditor or the creditors' committee. At the second repeated auction such consent is not required (p. 3 of Art. 80 of the Bankruptcy Code, paragraph 76 of the Procedure). The authors have to admit that the situation with the procedure in case if the second repeated auction would fail is not regulated by law. Moreover, the law does not exclude such a course of events. In particular, in p. 3 of Art. 81 of the Bankruptcy Code enshrines the right of the secured creditor to apply to the bankruptcy trustee regarding the purchase of collateral property within 20 days from the date of the end of the second repeated auction.

The authors are convinced that the above-described problem is unacceptable because at the legislative level there are provisions that allow holding an auction at incredibly low prices. The Northern Economic Court of Appeal rightly stated in the resolution in case No. 925/1500/17: “The repeated and second repeated auction are provided in the Law to prevent situations when the property cannot be sold due to its inflated initial value” [24]. However, unfortunately, the provisions on repeated auctions are currently used by arbitration trustees to achieve the exact opposite goal. The mentioned decision concerned the fact that the bankruptcy trustee tried to sell the debtor's property (right of claim) at the second repeated auction with the initial price of 600,000 UAH, with the number of reduction steps reaching 99 and the size of 1 step - 1%. All this provided that the right of claim is 719,968.00 UAH.

B. Polyakov noted that “... during the sale of property assets of the debtor creditors receive 50 times less than their book value” [6, p. 382], and, as further substantiated by this study, nothing has changed significantly in 10 years. Regarding this, the authors firmly believe that this situation requires some changes, the justification of which will be given below. For now, it is worth paying attention to the cases when the auction ended without determining the winner. According to paragraph 75 of the Procedure [21], such cases are the absence of participants of an auction, non-receipt of the price offer from any participant of the auction, non-performance by any of the participants of the auction at any step of auction. If the auction ends without determining the winner, it is considered “failed”. In addition, the auction is recognised as “failed”, in case of refusal or delay by the winner to make payment for the full amount for the goods (paragraph 90 of the Procedure), as well as in case of failure to sign a protocol or act of acquisition at the auction.

It should be noted that under certain conditions, the legislator provides some negative consequences for the auction participants or the winner of the auction if the auction is recognised as “failed”. Thus, in p. 3 of Art. 84 of the Bankruptcy Code [1] stated that guarantee fees are not refundable in case if the auction is completed without determining the winner, as well as in case of non-payment or late payment by the winner of the auction of the appropriate amount for the property. This legal regulation can be explained by the fact that, first, the legislator encourages auction participants to submit price proposals because if none is received, all participants will lose their guarantee fee. Secondly, the legislator tries to prevent all kinds of illegal manipulations by auction participants, which are committed to purchasing property at the lowest possible price.

Procedural problems in the implementation of key innovative mechanisms

However, these measures are not enough because even if the guarantee fee is lost, the unscrupulous participant still gets the opportunity to buy property at a low price. To realise this possibility, it is necessary that the first and the repeated auctions would be recognised as not having taken place. And this can be achieved either by not submitting a price offer to any of the participants or, if one of the participants has submitted it, submitting a higher price offer. In both cases, the unscrupulous bidder loses the guarantee fee but later comes the long- awaited auction with a much lower starting price, and the possibility of its reduction. To prevent such situations, the authors propose the following changes.

Firstly, in addition to depriving participants of the guarantee fee in the cases provided for in Art. 84 of the Bankruptcy Code [1], it is also necessary to limit their right to participate in subsequently repeated auctions. This can be justified by the fact that the participant is aware of the price of the property when making a guarantee fee, since this is a mandatory condition of sale (Article 75 of the Bankruptcy Code), and such information must be contained in the auction announcement (Article 77 of the Bankruptcy Code). If it is an auction with a price reduction, the bidder knows that the price is reduced by a maximum of 99 steps (the exception is only when the creditors' committee or secured creditor set a minimum price, but in this case, it is necessary to legally establish the obligation of the organiser to inform participants about the number of steps). Thus, the person who becomes a participant in the auction is aware of the initial price of the product, which is the minimum, and in the case of an auction with the price reduction - provides a potentially minimum price, and therefore agrees to the conditions. Therefore, the only reason for not receiving a price offer from any participant is to commit illegal acts in order to seize property at a meager price. Secondly, the authors consider it is necessary to increase the guarantee fee by auction participants to 50%.

The essence of the auction is that the winner pays the necessary funds for the debtor's property as soon as possible to let the debtor repay his debts. Therefore, it is illogical to leave the obligation to pay the full proper amount by the winner, as well as to prevent the auction from being declared “failed”, in case of nonpayment or incomplete payment by the winner. In this case, the payment of the proper amount by the winner possibly may be delayed, so, the bankruptcy procedure also will possibly be delayed. However, on the other hand, it is possible to ensure payment of at least a slightly larger part of the proper amount for the property by increasing the guarantee fee to 50%. At the same time, it will be at least unprofitable for the winner of the auction to refuse to fully pay the proper amount because a significant amount of money will be lost. Moreover, persons who do not intend or don't have the opportunity to purchase property at public auction will not participate in them. The authors also note that the guaranty fee does not provide any obligations for participants on purchasing the goods, and in case of their proper action, that fee is totally refundable.