More and more companies in Ukraine are pushed by their creditors into bankruptcy, whereas bankruptcy proceedings open various opportunities for investors either to invest into distressed companies or purchase distressed assets of such companies.

In Ukraine opening of bankruptcy proceedings do not automatically lead to the liquidation of a company. According to the Law of Ukraine on Recovery of the Debtor's Solvency or Declaring It Bankrupt dated May 14, 1992, No. 2343-XII, as amended (the "Bankruptcy Law"), a debtor may restore its solvency either during a reorganization stage or in case of conclusion of an amicable agreement. In the course of these two 'rehabilitation' stages investors may help to restore debtor's solvency and either acquire certain debtor's assets in consideration thereof or become shareholders of the debtor. Alternatively, investors may simply purchase assets of companies undergoing bankruptcy.

Investment into a company undergoing reorganization

Reorganization is a special procedure under the Bankruptcy Law allowing the debtor to restore its solvency through restructuring, write-off of its debts, approval of payment of restructured debts by investors, sale of all or part of the debtor's assets, etc.

The Bankruptcy Law specifies that the investor may acquire title to debtor's property subject to performance of its obligations specified in the reorganization plan. In practice, the investor may derive other benefits from investing in the debtor, e.g., stake in the share capital of the debtor. In any case, obligations and benefits of the investor should be prescribed in the reorganization plan.

It is important to note that the reorganization plan is a legal ground for transfer of the ownership from the debtor to the investor. No other documents, such as a sale agreement, a transfer deed, an investment agreement, are needed (Ruling of the High Commercial Court of Ukraine dated February 17, 2005, case No. 15/92пн).

The advantage of this type of investment is that the investor may acquire certain debtor's assets without an auction and at a lower price, or to become a shareholder of the debtor and restore its solvency to continue the business.

At the same time, the Bankruptcy Law left investors unsecured in the course of reorganization. In particular, the Bankruptcy Law does not provide for investors' guarantees in case the rehabilitation plan is changed or the creditors' committee decides to engage another investor. In such case, the affected investor may only become a creditor of the debtor on the general basis.

Investment by participating in the amicable agreement

The amicable agreement constitutes an arrangement between the debtor and its creditors on deferral of payments, settlement by installments, or write-off of its debts. However, the Bankruptcy Law states that the amicable agreement may specify performance of certain debtor's obligations by third persons - investors.

Please note that this way of investing is rather uncommon in Ukraine due to very poor legislation. The Bankruptcy Law does not even contain provisions regarding benefits which such third persons – investors may receive in exchange for their participation in the amicable agreement. Moreover, in practice, courts refuse to apply analogy of law and deprive third persons who conclude the amicable agreement from the right to acquire title to debtor's assets in consideration of performance of their obligations under amicable agreements (Resolution of the High Commercial Court of Ukraine dated March 22, 2006, case No. 15/20Б).

Although being declared, this way of investing is rather theoretical.

Purchase of assets of a company undergoing bankruptcy proceedings

At the time being, purchase of the assets of a company undergoing bankruptcy proceedings is the easiest and the most common way of investing.

According to the general rule, the debtor's assets are sold at a public auction, unless otherwise provided for by the reorganization plan or a decision of the creditors' committee. The debtor's assets, which circulation or possession is restricted by virtue of the law, are sold at a private auction.

It is worth mentioning that the Bankruptcy Law provides for an opportunity to sell the debtor's assets as an entire property complex, comprised of all types of the debtor's assets used for its business (including, but not limited to, buildings, premises, equipment, raw materials, goods, claims, trade marks). Acquisition of the entire property complex is always of interest for investors because such transaction is not subject to 20% VAT. However, in practice, the debtor's assets could be sold as an entire property complex only if they are registered with a governmental authority as the entire property complex and the debtor has a respective certificate.

In this option, investors may benefit from a low price of the debtor's assets being sold. Also, this way of investing is more secured for investors since they are actually acquiring the assets itself rather than taking part in an investment project.

Among the disadvantages, we may mention that the investors are restricted by procedural requirements for participation in the auction and conclusion of the sale agreement, as well as general supervision of the court over this procedure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.