Bankruptcy of Individuals in Ukraine: Reality and Prospects
Мария Гордиенко
Юрист ЮФ "Вронский, Вронская и Партнеры"  
Ukrainian Law Firms 2011

Since March 2009, no meeting of lawyers and scientists has passed without discussing the subject of introduction of the institution of bankruptcy of individuals in Ukraine.

Due to the large number of consumer loans, received several years ago, with escalation of the economic crisis the number of cases of non-repayment to banking institutions has increased. People without legal or economic background began to deal with bankruptcy of individuals. Their enthusiasm is argued the desire to assist people in financial trouble and exclude total “debt pits” on the territory of Ukraine.

In recent years a number of articles for and against bankruptcy of individuals were published in the mass media and Internet.

The author would like to consider some of the problems of a bankruptcy of individuals through the prism of foreign experience.

The bankruptcy of an individual without reference to business activity is provided by the legislation of many countries such as Italy, United Kingdom, USA, Russia, etc.

In the United States bankruptcy cases are regulated at federal level by the Bankruptcy Code of 1986. The 1986 Code contains Chapter 13, which is applicable only to individuals with a regular income. It was developed for allowing a debtor to get a debt despite with the permission of the court. The procedure is carried out by a debt repayment plan.

The main legislative act regulating bankruptcy in the United Kingdom are the Insolvency Act of 1986, the Insolvency Rules of 1986 and Company Directors Disqualification Act of 1986. In UK a company or an individual is considered to be insolvent if it doesn’t have enough assets to cover debts or is unable to pay these debts within specified terms.

Since 1 March 1998 the On insolvency (bankruptcy) Federal Act is in operation in the Russian Federation. The Act is eligible for individuals who are not entrepreneurs, and legal entities. According to the Federal Act, the total debt liabilities of an individual, including those who are registered as private entrepreneurs, has to exceed the value of his/her property.

Therefore, in many countries any citizen can be recognized as a bankrupt if he/she does not pay debt obligations because of lack of assets. For example, an individual who doesn’t pay for communal services, loan payments, etc.

At present, according to the On Restoring a Debtor’s Solvency or Recognizing it as a Bankrupt Act of Ukraine ( hereinafter – Bankruptcy Act), only legal entities and private entrepreneurs can be recognized as bankrupts.

Lawyers attempt to manipulate with the term "private entrepreneur” for release from loans by private individuals.

In order to prevent the negative consequences of bankruptcy procedure, it necessary to draw attention to some features of the proceedings in the bankruptcy of private entrepreneur.

The bankruptcy of private entrepreneurs is regulated by the general provisions of bankruptcy of legal entities unless otherwise is not stipulated by the provisions of Articles 47-49 of the Bankruptcy Act.

The criteria of recognition of a private entrepreneur as a bankrupt are as follows:

- indisputability of money claims;

- failure to pay a debt within three months;

- a debt of 300 minimum wages;

- a debt related to carrying out business activity or finance received “on business development” purposes, as lawyers indicate.

In accordance with Article 47 of the Bankruptcy Act the schedule of debts payments can be added to the application of private entrepreneur on initiation of a bankruptcy procedure (adopted from foreign legal systems).

A debt repayment schedule should include: the period of its performance, amount of sum that remains monthly to a debtor - private entrepreneur and members of his family for consumption costs, monthly sum liable for satisfying creditors claims.

According to Article 48 of the Bankruptcy Act, with the initiation of the bankruptcy procedure a court must impose sequestration on the property of private entrepreneur who is a bankrupt. In other cases under the Bankruptcy Act the application of a pledge is a right of a court and is applied under at its discretion. However, pursuant to Article 48 of the Bankruptcy Act is a court’s duty.

The specific order of displaying creditors is applied towards the bankruptcy of a private entrepreneur. Article 48 of the Bankruptcy Act stipulates that the Commercial Court sends to all known creditors a copy of the decision on recognition of the private entrepreneur as a bankrupt and information regarding opening of the liquidation procedure with a notification of the period (which can not exceed two months) for presenting creditors` claims.

Article 48 doesn’t provide for creditors’ claims registry approval, a meeting of creditors or election of a creditors` committee.

The conclusion of bankruptcy proceedings of a private entrepreneur differs from the conclusion of the general procedure.

The second paragraph, Part 2 of Article 49 of the Bankruptcy Act, stipulates that creditors claims concerning redress of damage, caused to life and health of citizens, requirements regarding recovery of alimony and other personal requirements, which were not satisfied in the course of enforcement of the decision of a commercial court concerning recognition of a private entrepreneur as a bankrupt, can be predicated after the finalization of enforcement in the bankruptcy procedure of a private entrepreneur in full force or in their dissatisfactory part pursuant to the order prescribed by Ukrainian civil legislation.

With regard to the practical usage of this term, the claim of a personal nature is a claim belonging inseparably to an individual, and nobody else is able to satisfy this claim.

In the Resolution of the Highest Commercial Court of Ukraine of 20 September 2009 in case No.01/1876, the court determined the sphere of regulation of the On restoring a Debtor`s Solvency or Recognizing it as a Bankrupt Act of Ukraine and limited it to entrepreneurs (legal entities and individuals engaged in business activities). Individuals – private entrepreneurs with debts that are not the results of carrying out business activity do not apply to this Act and according to the provisions of the Bankruptcy Act are not subjects to bankruptcy.

The Supreme Court of Ukraine agrees with this statement (Decision of 20 November 2007, No.07/307 in Case No. 6/33).

Thus, the personal requirements that do not have any connections to business activity, including received consumer loans, can be filed even after the conclusion of the bankruptcy procedure. Hence, articles in the Internet cannot be a reliable source. Before initiation of the bankruptcy procedure it is highly recommended to seek advice from a competent lawyer.

An attempt to regulate the institution of bankruptcy of individuals was undertaken in 2009. The Draft Act On Changes to Some Acts of Ukraine (concerning bankruptcy of an individual.) The author would like to consider the main points of the Draft.

It was suggested that the bankruptcy lawsuits of individuals are to be initiated by commercial courts unless indisputable requirements of creditor (creditors) to the debtor in total exceed the aggregate value of the debtor’s property or if indisputable requirements of creditor (creditors) in total come to at least one hundred and fifty minimum wages, which were not satisfied by the debtor within three months after a determined payment period; or if indisputable requirements of a creditor (creditors) result from the obligations followed by damage to life and health of citizens , creditors who claim for recovery of alimony that were not satisfied by the debtor within two months after a determined term of maturity.

It was suggested that the consequences of bankruptcy of an individual be stipulated by the provisions of the Civil Code of Ukraine: for five years after recognition of an individual as a bankrupt such an individual cannot be registered as a private entrepreneur, to become a founder (participant) of a legal entity (except acquisition of a partnership right in a legal entity in order of succession), to be a member in the collegial body of a legal entity, cannot be appointed or elected as an individual of a legal entity’s executive body, acquire property or receive funds on credit, become bail, put property into pledge.

The authors of the Draft Act strictly limited civil rights for those who have become bankrupt. The principal provisions were taken from Italian legislation but, in the author’s opinion, they are quite categorical for people who are really in a deplorable condition.

Draft No.4273 has not been submitted to the Ukrainian Parliament. Ukrainian society is probably not ready for such radical changes yet.

However, in general, the introduction of the bankruptcy of individuals would enable citizens who are in a "debt pit", to improve their situation by remission of a part of debts. But lawyers and scientists need much more to draft such a legislative act, which provides for protection of both debtor and creditor ensuring maintenance of a person’s basic rights as provided by the Constitution and prevailing acts of Ukraine.

In conclusion the author would like to underline that Ukrainian legislation on bankruptcy requires accurate examination for further improvement of the mechanism of re-establishment by market participants that were in crisis and their solvency.

A deliberated and scientifically proved synthesis of the achievements of several foreign countries would allow in the prospect of creating a more efficient and effective institution of bankruptcy preventing criminal forms of bankruptcy in Ukraine.

It should be noted that, while reform of bankruptcy proceedings is the central objective, restoring the debtor’s status should not be set aside.

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