The essence of sanation as one of bankruptcy procedures
Мария Гордиенко
Юрист ЮФ "Вронский, Вронская и Партнеры" 
Ukranian Law Firm 2008

The Law of Ukraine “On Renewal of Debtor’s Solvency or Its Acknowledgement as a Bankrupt” foresees four different stages of a bankruptcy proceedings: managing of property, sanation, liquidation and amicable agreement.

The financial recovery of a debtor can be carried out in two mentioned procedures – sanation and amicable agreement.

The sanation differs from other legal stages in a bankruptcy proceeding by the list of the members, presence of the special mechanism, which is being realized by the special officer on the basis of sanation plan, affirmed by the court.

Article 1 of the Law states that sanation is the system of measures which are carried out during proceedings in a bankruptcy case with a purpose to prevent the acknowledgement of debtor as a bankrupt and his liquidations. The sanation is directed on the recovery of financial position of a debtor, as well as satisfaction in full or partly creditors claims by means of loan allocations, restructuring of the enterprise, debts and capital and (or) change of organizational legal and production structure of a debtor.
Duration of sanation procedure takes 12 months and can be prolonged not more than for six months. Article 17 part 1 of the Law states that the term prolongation is possible only under the petition of creditors` committee or sanation assignee.
The sanation is introduced by the ruling of a commercial court under the petition of creditors’ committee and follows on the procedure of managing of property. In accordance with Article 17 part 1 of the Law the commercial court ruling on the sanation procedure should be passed in term not overriding the validity of the procedure of managing of property.
In the procedure of sanation is important to decide three tasks. At first, it is necessary to choose the means for debtor’s solvency recovery. Secondly, to arrange the terms for realization such means. And, thirdly, to execute all the tasks which are set and to pay debts before all creditors.
Based on the above, it is possible to differ such types of the sanation, as unplanned and planned. The unplanned sanation is a complex of measures, directed on the removal of negative legal consequences, carried out by a debtor that was a result of a bankruptcy, and also support in the normal economic mode of production and commercial activity of the debtor’s enterprise. While, the planned sanation is realization of the planned means of a bankruptcy proceedings of debtor and payment of debts before all creditors.
The measures on renewal of debtor’s solvency that are realizing in the sanation procedure listing in the Article 18 part 2 of the Law. It could be: restructuring of the enterprise, reprofiling, closing of the unprofitable industries, accounts payable liquidation, debtor’s property part sale and other measures. The above article includes a wide range of measures but it is not all out.   
A special place in the process of sanation is taken by the measures of financial and economic character, which render financial relations that arise in the process of mobilization and using of internal and external financial sources of recovery of enterprises.
The primary objective of the financial sanation is mobilization of the financial resources for:
1. Improvement of the enterprise solvency and liquidity.
2. Forming of the financial capital for the leadthrough of sanation measures of the production and technical character.

The total capital of the enterprise consists of the proper and borrowed assets. Thus, financing of the sanation can be carried out due to the own funds of the enterprise (self-finance), financial means of proprietors, by creditors and, in exceptional cases, through the receipt of the state sponsorship. Some measures on the attraction of financial resources in the sanation procedure denoted in the Article 18 part 2 of the Law. The sanation can be directed on the restructuring of assets or on the restructuring of liabilities. On the formal signs distinguish two types of the sanation:
a) the sanation without involvement of additional financial resources on the enterprise;
b) the sanation with involvement of a new financial capital.

In first case the sanation can be carried out in such forms:
• the recession of a nominal capital of the enterprise;
• the conversion of a property in a debt;
• the conversion of a debt  in a property;
• the prolongation of the terms of a debt payment;
• the voluntarily recession  of a debt;
• a self-finance.
The sanation with involvement of a new financial capital can be carried out in such forms:
• the alternative sanation;
• the recession of a nominal capital  with following increase (two-level sanation);
• the irretrievable financial help of the proprietors;
• the irretrievable financial help to a personnel;
• the emission of a conversion state bonds;
• the involvement of an additional loans.
On the sources of mobilizations of the financial resources distinguish an autonomous sanation (own funds of an enterprise and a capital of his proprietors) and an external sanation (the facilities of the creditors and states). The investor appearance as a procedural person in a bankruptcy proceeding is possible under the condition of the filing application by the investor for the permission to take part in the sanation of a debtor. In accordance with Article 14 part 7 of the Law such applications are filed to the property manager. One can select a separate type of the enterprises sanation — with the help of a state sponsorship. The financing of sanation measures by the state can be carried out on the turning or irretrievable basis. In addition, in separate cases the state can resort to the indirect methods of the sanation assistance of the subjects of management: tax deductions, creation of special terms of an entrepreneurial activity and etc.

The sanation measures of the organizational and legal character are directed on the improvement of organizational structure of the enterprise, organizational and legal forms of business, upgrading management, and liberation of the enterprise from the unproductive production structures, improvement of production relations between the members of the labor collective. In this context the sanation can be conducted, both with the maintenance of existent legal status of an enterprise-debtor and with the change of a legal form and legal status of the state-owned enterprise (reorganization). The realization of the organizational and economic, financial, legal, technical measures directed on the reorganization of the enterprise in the Article 1 of the Law was named “restructuring”. The sanation without the change of status of the enterprise legal entity has such forms, as debt of the enterprise repayment due to the facilities of a budget, debt of the enterprise repayment due to a having a special purpose bank credit, translation of a debt on other legal entity, bonding and other promissory securities under the guarantee of turnaround company (investor). The sanation with the change of status of the enterprise legal entity under the sanation has such forms: confluence, absorption, division, converting into an open joint-stock company, transferring in a lease.
Production and technical sanation measures are related above all things to modernization and updating of the production funds, with recession of outages and increase of a quality of production, reduction of a technological time, improvement of a quality of products and decline of its prime price, perfection of assortment of the products which is produced, by a search and mobilization of the sanation backlogs in the field of production. As the sanation of the enterprise is connected, as a rule, with reduction of superfluous personnel, the sanation measures of a social character have a large value. Especially it touches the financial recovery of the enterprises-giants or enterprises-cities. At that rate the dismissal of workers can result in a social instability in a region. For this reason it follows to conduct the moderate policy of the dismissal in intercommunication with realization of a social plan of the sanation project. Such measures can be foreseen here, as creation and financing of the system of retraining of shots, search and suggestion of the alternative workplaces, additional payments from the unemployment, grant the exempt workers of loans and others like that.

The basic measures of a bankruptcy proceeding: restructuring of the enterprise, reprofiling, closing of unprofitable productions, and recovering the creditor debt, sale of a part of property of a debtor, fulfilling the commitments of a debtor by a proprietor or investor, sale of the debtor property as an integral property complex and other attempts.

The sanation is not possible without restructuring of the debts. The restructuring of the debts is preparation and realization the number of agreements between the enterprise, its creditors and debtors, where an enterprise searches possibilities of receipt from the side of creditors of certain concessions: recession of a debt size, debiting of percents, and reduction of an interest rates, postponement or arranging on the installment system of payments without penalty approvals and others like that.

The problem of the enterprise debt is very sharp, however most questions have the possibility to be settled, if to examine them gradually. That is why on the first stage of the debts restructuring process the accomplished study of the state of matters of an enterprise is needed, that is the debt size, terms of its redemption, interest rates. In addition, an enterprise must count up the sum of claiming to the debtors. As a result of an attentive study of this information, size of the real credit backlog can be considerably reduced.

The choice of a concrete measure of the financial recovery of debtor depends on the row of the factors: type of production, presence of social sphere, wearing out of the fixed assets, sum of credit backlog, organizational and legal form of debtor and others like that.

Thus the sanation combines in itself actually the financial sanation and the production and economic restructuring, here the last is impossible without the leadthrough of the valuable and all-embracing financial sanation. From other side the financial sanation will not be effective and will not enable to attain of a long duration positive changes without the leadthrough of the proper measures on the restructuring.

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