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

Without any doubt, with such provided changes, the number of potential participants of auctions will decrease but will decrease only due to the refusal of unscrupulous participants, while those with bona fide will remain. In addition to the above-mentioned, the situation with the recognition of a transaction, made at an auction, as invalid in case of violation of the established procedure for preparing or conducting an auction, which prevented or could prevent the sale of the property at the highest price, is quite problematic. Article 73 of the Bankruptcy Code is devoted to this situation. In analysing the regulations of Art. 73 of Bankruptcy Code, B. Polyakov made some following important conclusions:

- to appeal the result of the auction, it is necessary to prove the fact of violation, the fact of obstruction or potential obstruction of the property realisation at the highest price, as well as the causal relationship between them;

- “... The drafters of the code did not consider that any agreement must meet the requirements of the law. Therefore, the agreement concluded at the auction can be appealed not only on special grounds, which are provided for in Art. 73, and in Art. 42 of the Bankruptcy Code (as a loss-making agreement for creditors), as well as on the general grounds, which are provided in the Civil Code” [22].

The identical position can be seen in the Resolution of the Supreme Court in the Judicial Chamber for bankruptcy proceedings of the Economic Court of Cassation of October 2, 2019, in case No. 5006/5/39б/2012, where it was stated that “... the legal nature of the property sale by auction gives grounds for recognising (if there are any grounds) the results of such auctions invalid under the rules of invalidation of transactions, and under the civil law regulations” [26].

It is also worth paying attention to the fact that under the p. 4 of Art. 656 of the Civil Code of Ukraine [27] to the contract of sale, which is concluded at auction, the general provisions of the contract of sale are applicable unless otherwise provided by law governing the procedure for concluding these contracts or does not follow from their essence. Consequently, the provisions of Art. 203 and 215 of the Civil Code of Ukraine are applicable. Therefore, it would seem, that a transaction entered into at an auction, which was held in violation of applicable law, should be declared invalid without the need to prove the fact of obstruction or potential obstruction to the sale of the property at the highest price and causal relationship between them. A somewhat similar position can be found in the Resolution of the Supreme Court of Ukraine of June 29, 2016, in the case No 6-370цс16, where it is stated that “. the legal nature of the sale of property by a public auction provides grounds, which are based on the norms of civil legislation (Articles 203, 215 of the Civil Code of Ukraine) on the invalidity of the transaction as not meeting the requirements of the law, in case of noncompliance with the procedure, bidding procedure provided by the Provisional Regulations on the procedure of public sale of seized property, approved by the order of the Ministry of Justice of Ukraine No. 68/5 of October 27, 1999...” [28].

However, the authors draw attention to the fact that since p. 4 of Art. 656 of the Civil Code of Ukraine [27] provides a certain exception and the provisions of Art. 73 of the Bankruptcy Code just fall under it, in which case it is necessary to apply a special rule of the Bankruptcy Code instead of the general rule of the Civil Code. Given the above-mentioned, it can be concluded that it is not necessary to recognise the transaction concluded at the auction as invalid in case of violation of the auction procedure if such violation did not affect the sale price. Moreover, confirmation of this position is found in Art. 74 of the Bankruptcy Code, which indicates the legal consequences in case of violation of the conditions of the auction, which prevented the person to participate in a public sale of the property. The authors note that among the specified legal consequences, the possibility of recognition of the transaction as invalid in this norm isn't provided. Probably, in this case, the legislator aimed to ensure the receipt of the funds in the maximum possible amount through the sale of the debtor's property, but at the same time in compliance with the condition of ephemeral bankruptcy proceedings.

However, despite all this, it must be stated that the fact that currently the provisions of the Bankruptcy Code do not sufficiently protect the inviolability of the agreement concluded at the auction. After all, as already noted, now there is an opportunity to recognise the transaction, made at auction, invalid also on the general basis which are provided in the Civil Code of Ukraine. Therefore, the authors consider it appropriate to introduce an additional article to the Bankruptcy Code, which would indicate an exhaustive list of subjects of appeal and the conditions under which the transaction made at auction for the sale of the debtor's property in bankruptcy proceedings may be declared invalid.

In addition, in this new article, it would be appropriate to provide a limited, non-renewable period for appeals by auction participants and participants in the bankruptcy procedure on the result of public auction. An example from the case law can serve as an illustration of the real need to introduce such novelty. As can be seen from the resolution of the Economic Court of Cassation in the Supreme Court of March 5, 2020, in case No. 14/325 “b”, in 2013 an auction was held for the sale of the debtor's property, in its result, there also was a payment of the proper funds by the buyer and the conclusion of a contract of sale between the buyer and arbitration trustee. In 2014, the buyer alienated the property he had purchased at auction. In 2018, the arbitration trustee was replaced by a new one, who, in turn, 5 months later decided to apply to the court to declare the results of the auction as invalid [29].

The first thing that comes to mind is the general limitation period of actions, which is established by Art. 257 of the Civil Code of Ukraine and is three years. Indeed, three years have passed, and it appears that no delays in the bankruptcy proceedings are planned. Of course, this statement is correct, but as it is already known, the case reached the court of cassation, and only in March 2020, namely almost 7 years after the auction, should reach its logical end. However, it didn't. In the mentioned resolution the court concluded that the buyer's application for the limitation period was not sealed with an electronic digital signature, as a result of which the case was sent for a new trial to the first instance [29].

This approach cannot be considered successful, as 7 years have passed since the auction, and the issue of declaring its result invalid has not been resolved because the court of cassation “decided to put a comma instead of a dot”. And most importantly: what exactly was the reason for sending the case for a retrial? Formality in the absence of an electronic digital signature in the application, the applicant of which does not challenge its validity. Maybe next time the court will remand the case for a retrial due to the absence of a punctuation mark or a spelling mistake in the application? However, the strangest thing in this situation is that the bankruptcy procedure was paralysed for such a long time due to only one proceeding.

To prevent such situations, the authors propose to set at the legislative level a monthly non-renewable period for appealing the results of the auction, given that:

- firstly, according to the Bankruptcy Code, the liquidation procedure itself should last no more than 12 months. Based on this, the one-month deadline for appeal is not so short. Moreover, in this case, there can be no question of the application of the general limitation period of three years;

- secondly, in the described dispute there is a limited subject composition. As the court noted in the above-mentioned resolution, “. the parties to the dispute over the recognition of the auction and its results as invalid are the seller, the winner of the auction and the organiser of this auction” [29]. Thus, it can be noted that, given the limited subject composition, the one-month time limit for appeal is sufficient. Furthermore, do not forget about such a possible course of events as the further alienation of the property by the winner of the auction. In the mentioned case, the bona fide purchaser was lucky that the winner of the auction announced the expiration of the limitation period, but what would have happened if he had not done so? Or, for example, let's simulate a situation where the property has been sold several times... Then what method of legal protection should the current owner of the property use, and how to further establish the whole “chain” of owners? Moreover, if the winner of the auction was liquidated, the bankruptcy trustee will be able to file a lawsuit in court without any restrictions on the limitation period. Do not forget that the application on the expiration of the limitation period is a right and not an obligation of the party. Considering the following circumstances, it can be said that the court of cassation has unreliably established the subjective composition of the parties to the dispute on the invalidation of the auction and its results. In the authors' opinion, in this case, the court must have also indicated the current owner of the property if the limitation period could be applied to such a dispute.

Therefore, the authors consider the establishment of a one-month non-renewable period for appealing the result of the auction in the bankruptcy procedure to be justified and necessary. The problematic issues related to the legal regulation of the sale of property in bankruptcy proceedings do not end there. Let's take a look at the situation with the realisation of the debtor's collateral property. Thus, from the system analysis of p. 6, 9 of Art. 41, p. 6 of Art. 64, p. 3-7 of Art. 75 and Art. 81 of the Bankruptcy Code, we can conclude that the sale of the collateral property is carried out by the bankruptcy trustee, and such property needs to be included in the liquidation estate. However, the creditor, whose claims were secured, will receive separate satisfaction at the expense of the realised collateral. In the second paragraph of p. 2 of Art. 45 of the Bankruptcy Code [1] it is stated that: “If the value of the collateral is insufficient to cover the entire claim, the creditor should be considered as secured only in part of the value of the collateral. The rest of the claims are considered unsecured”. It would seem that this legal norm is clearly formulated and totally understandable, however, the Judicial Chamber for Bankruptcy Cases of the Economic Court of Cassation of the Supreme Court will disagree with this statement, which in its resolution of February 4, 2021, in the case No. 904/1360/19 [30] comes to a rather unexpected decision. In paragraph 85 of this resolution, the court provides three approaches to understanding the number of claims of creditors with the right of separate satisfaction:

- “Approach I - the creditor's claims, unless otherwise stipulated in the contract, are recognised as secured only in the amount of the value of the collateral (mortgage), determined between the creditor and the debtor (property guarantor who is not a debtor in the principal obligation) in the pledge agreement (mortgage), which subsequently in practice results in cases of re-application of the creditor to the court with a statement of recognition of his claims secured in case of sale of the collateral (mortgage) at a price higher than that agreed in the pledge agreement...;

- Approach II - the creditor's claims, unless otherwise stipulated in the contract, are recognised as secured only in the amount of the collateral (mortgage) agreed between the creditor and the debtor (property guarantor who is not a debtor in the principal obligation) in the pledge agreement (mortgage), and in the other part, the claims are unsecured and are repaid in the order determined by the Bankruptcy Code. In this case, the creditor will be both secured and competitive and will have not only the right to participate in the creditors' assembly with a casting vote but also to obtain satisfaction of other unsecured claims at the expense of other property of the debtor, which is not subject to security.;

- Approach III - the creditor's claims, unless otherwise provided by the contract, are recognised as secured in the amount of the total number of claims against the debtor (property guarantor who is not the debtor in the principal obligation)” [30].

In paragraphs 110 and 111 the court concludes that the first and second approaches are erroneous, moreover, in paragraph 112 stated that “. these approaches are inconsistent with the purpose and principles of the competitive process, which include, in particular, the prohibition of individual satisfaction of creditors' claims; satisfaction of creditors' claims in order of priority; satisfaction of requirements of each line after full satisfaction of requirements of creditors of the previous line; satisfaction of creditors' claims in case of insufficiency of the debtor's funds to satisfy creditors' claims of one line proportionally to the amounts of their claims. Observance of this order is aimed at preventing the overwhelming satisfaction of the claims of some creditors to the detriment of others” [30]. Based on the analysis of the above-provided paragraph of this resolution, it appears that the court erroneously applies to secured creditors the principles of the competitive process, which apply only to competitive creditors. Currently, the current provisions of the Bankruptcy Code do not provide any order of priority of secured creditors' satisfaction. In addition, a separate and extraordinary satisfaction of the claims of secured creditors is clearly spelled out in p. 6 of Art. 64 of the Bankruptcy Code, and therefore, for a secured creditor, the privileged position compared to competitive creditors is established by law.

On the other hand, if the collateral is not enough to fully satisfy the claims of the secured creditor, the latter will be able to finally satisfy them in the status of a competitive creditor in the established order of priority. This position, in particular, is confirmed by the scientific opinion of the members of the Scientific Advisory Board of the Supreme Council Doctor of Law Professor. O. Belyanevych and Ph.D. in Law V. Belyanevych, who noted in it: “If the debtor is a mortgagor, the claim for the value of the collateral (mortgage) is considered secured, the rest of the claim must be entered in the register of creditors' claims as unsecured” [30]. However, in the end, the court concludes that the creditor is considered secured by the entire claim, regardless of the assessment of the collateral. Given the fact that the collateral property is sold by the bankruptcy trustee, the secured creditors are currently in a rather difficult situation. Previously, such creditors were not particularly interested in the amount of money that will be received from the sale of collateral because the difference with their claim will be included in the register of creditors' claims. At present, secured creditors have been deprived of such a prerogative.