Ukraine: Debt Restructuring and Insolvency: Ukrainian Trends

Last Updated: 21 July 2010
Article by Yaroslav K. Tekluk and Yulia S. Kyrpa

During the period of financial crisis in Ukraine, debt restructuring became a question of great importance which is being broadly discussed and implemented by banks, other financial institutions and corporate borrowers with significant debt portfolio. In the new financial reality all interested parties realised that, in most cases related to the debtor's insolvency, better results could be achieved outside any formal insolvency (bankruptcy) proceedings. This often requires implementation of certain restructuring arrangements aimed at the improvement of the debtor's financial position and its rehabilitation.


Typically, corporate debt restructurings, also known as workouts, are implemented outside any formal insolvency (bankruptcy) procedures. Out-of-court debt restructuring procedures in Ukraine are usually less expensive and represent a preferable alternative to bankruptcy. The main costs associated with such procedures are time and effort to negotiate restructuring arrangements with the lenders or their representatives. Debt restructurings typically involve a reduction of debt and an extension of payment terms.

Debt Restructuring Instruments used by Corporate Borrowers

Except for plain vanilla restructuring arrangements usually implemented to either extend payment terms, change a debt's currency or to set forth a grace period for a debt's repayment, the following instruments (either separately or in a combination) are often utilised by Ukrainian corporate borrowers within the process of their negotiations with the lenders to implement efficient restructuring arrangements.

Debt-to-Equity Conversion. Some restructurings could be done through debt-to-equity conversion whereby a creditor or a group of creditors agree to release the company from its debt claim in exchange for the issue of new shares in the company. A debt-to-equity conversion usually requires cooperation of existing shareholders with the lenders who become new shareholders of the debtor once the restructuring mechanism is implemented. Special attention in this respect should be given to the legal structure of a debt-to-equity conversion transaction, considering peculiarities of each specific deal (including parties thereto, terms for implementation of restructuring and, and other conditions for capital increase), as such a mechanism is not directly prescribed by the Ukrainian law. It should, however, be taken into account that direct debt-to equity conversion for limited liability companies is prohibited by Ukrainian law.

Set-Off. Set-off requires the parties to the transaction to have single-currency mutual and matured contractual obligations.

Given that a set-off under Ukrainian law could be implemented through submission of the respective application by one of the parties to the transaction only (e.g. application of the debtor), it has been widely used to terminate mutual obligations under loans and deposits since early 2009. Besides, set-off is often used by debtors to terminate their obligations under loans through acquiring Eurobonds (including loan participation notes) in the international capital markets with a substantial discount (due to the issuer's rating downgrade and/or the issuer's country rating downgrade). Such Eurobonds are further used by a debtor to set-off its obligations under the loan previously granted by the issuer to such a debtor, being a bondholder as a result of acquiring the bonds.

Subordination. Subordination is a sort of intercreditor arrangement whereby one creditor (the junior creditor) agrees with another creditor (the senior creditor) that it will not receive a repayment of its debt unless and until the senior creditor has been repaid its debt in full. Ukrainian law allows implementation of two types of subordination: (a) contractual subordination; and (b) structural subordination.

In the case of contractual subordination, two loans are granted to the same company, but the junior creditor and the senior creditor agree the priority of payments by the deed of subordination, i.e. a special intercreditor agreement.

Structural subordination arises where the senior creditor lends to a company (Holdco 2) which is lower in the group structure than the company (Holdco 1) into which the junior creditor lends.

In the case of winding-up of Holdco 2 due to insolvency of the latter, Holdco 1, as its shareholder, will not receive dividends in a liquidation procedure and if Holdco 1 has no assets, the junior debt will not be repaid to the junior creditor.

Subordination, however, is a less common restructuring instrument in Ukraine compared to the abovementioned debt-to-equity conversion and setoff, since a number of creditors are not usually willing to be in a position of junior creditors, whose claims are to be satisfied in the last turn. Therefore, this instrument is mostly implemented in a case where a debtor's majority shareholder agrees to subordinate its debt and to make it junior due to a lack of any other options to get comfortable restructuring conditions for its subsidiary, having indebtedness split towards several creditors.

Debt Restructuring Instruments of Ukrainian Banks

Ukrainian banks within the period of financial crisis started the implementation of various SPV structures, allowing them to sell non-performing loan portfolios and to release provisions as a result of such a sale. Given the above, distressed debts trading quickly became a very popular trend in the Ukrainian financial market.

In terms of distressed debts sale and implementation of SPV structures by Ukrainian banks the following should be observed.

Legal Structure of Distressed Debts Sale Transactions. Ukrainian legislation provides for two possible options of loan claims' sale: through entry into either factoring or an assignment agreement (both are governed by the Civil Code of Ukraine).The main difference between the following options is described in Figure 1.

In the case of loan claims' sale through either factoring or an assignment, pledge claims will be automatically transferred to the factor (the assignee) by operation of law. However, to enhance security, certain additional contractual arrangements in respect of pledge claims could also be made.

Besides, in the case of both scenarios/options of loan claims' sale to the SPV, re-registration of contractual encumbrances in the State Register of Encumbrances of Movable Property will be required.

Figure 1: Loan Claims' Sale


Factoring Agreement

Assignment Agreement

1. Loan claims value

Discounted value of the loan to be paid by the assignee (the factor).

No less than the par value of the loan to be paid by the assignee.

2. Acquirer of loan claims

The assignee (the factor) should be established as a bank, or a non-banking financial institution (registered by the State Commission for Regulation of Financial Services Markets).

No special requirements to the assignee are envisaged by the Ukrainian law.

3. Consent of the debtor/ restrictions envisaged by the loan agreement

No consent of the debtor is required. Restrictions for an assignment stipulated by loan agreements (if any) are not applicable to the given case, therefore, factoring could be made even in case of the said contractual restrictions.

The debtor's consent is not required, unless otherwise stipulated by the loan agreement.

4. Further (secondary) assignment

Can be performed through further factoring agreement only.

Can be performed through further assignment or factoring agreement.

Banking Secrecy Issues. No complications with disclosure of banking secrecy information will arise if the loan agreements with the banks' clients envisage the banks' rights to make the respective disclosure of banking secrecy information in the case of loan claims' sale (either through assignment or factoring). Should no such clauses be contained in the loan agreements, a prior written consent from the client would be required to observe banking secrecy rules prescribed by Ukrainian law.

Foreign Currency Control Implications. Given that Ukrainian foreign currency control regulations prohibit settlements between Ukrainian residents in any currency other than Ukrainian hryvnias ("UAH"), assignment of foreign currency loan claims will require: (i) an individual licence (permit) from the National Bank of Ukraine for settlements between Ukrainian residents in a foreign currency; or (ii) special contractual arrangements – to allow the foreign currency loan claims to be paid in UAH.

Transfer of overdue loans together with the underlying security to solvent borrowers with sound financial reputation is also currently being used by certain Ukrainian banks as part of their strategy to deal with distressed loan portfolios. Such a transfer is always done under the consent of the lender and its borrower, being in default.


At least one of the current trends in bankruptcy proceedings in Ukraine is of immediate interest: the world economic crisis has given rise to a movement towards reforms of bankruptcy proceedings in Ukraine.

One of the main reasons for the Ukrainian legal community to start seriously discussing the issue of bankruptcy proceeding reforms is the fact that debtors in Ukraine recently started using and often abusing bankruptcy proceedings as a way of getting rid of their debts.

As in the rest of the world, the global economic crisis caused many defaults under loan agreements in Ukraine. As a result, a number of bankruptcy proceedings were initiated by creditors and debtors. Usually, bankruptcy proceedings result in the following consequences: (i) a bank or another creditor gets partial repayment of the debt through the procedure of the sale of debtor's assets held within the bankruptcy proceedings; (ii) a debtor gets rid of its debts and gets a chance to "restart with a clean conscience"; or (iii) the state gets a solvent taxpayer, i.e. the debtor which passed through bankruptcy proceedings.

However, it became quite popular in Ukraine for bad faith debtors to initiate bankruptcy proceedings in respect of themselves after they were willfully stripped off their valuable assets. In such cases banks or any other creditors "fight for nothing".

Bankruptcy proceedings in Ukraine are hardly advisable to be entered into by creditors because: (i) Ukrainian legislation does not prescribe any special out-of-court procedures, therefore they are always used at the discretion of the parties thereto; and (ii) bankruptcy proceedings are usually multistage, time and cost consuming.

However, as a matter of practice, bankruptcy proceedings could be an efficient instrument available to creditors for the recovery of debts, subject to thorough control of the whole procedure from the creditors' side.

The following key issues are to be noted prior to commencement of bankruptcy proceedings in Ukraine.

Procedures to be Applied Within a Bankruptcy Proceeding

According to Ukrainian insolvency legislation, the court is entitled to apply the following procedures to the debtor within bankruptcy proceedings:

  • administration of assets;
  • amicable agreement;
  • financial rehabilitation; and
  • liquidation.


The Ukrainian Bankruptcy Act provides for specific terms for the procedures defined in p. (A) hereinabove to be applied within Ukrainian insolvency proceedings. In particular, the term for administration of assets must not exceed seven months, the term of financial rehabilitation – 12 months, and liquidation procedure – 12 months.

Although the terms for the above procedures are determined by the Bankruptcy Act, the same Act also entitles the court to extend such a term.


According to Article 12 of the Bankruptcy Act, a court after opening a bankruptcy proceeding imposes a moratorium for satisfaction of creditors' claims in respect of any and all creditors' claims before commencement of the bankruptcy proceedings.

During the moratorium period, the creditors are not allowed to recover their debts under enforcement documents, as well as under any other documents, granting creditors the rights to recover debts. Penalties are not charged during the moratorium period.

One shall bear in mind that the moratorium covers only pre-bankruptcy claims (i.e. the claims which arose before commencement of bankruptcy proceedings).

The moratorium lasts until the date of termination of bankruptcy proceedings.

Insolvency Administrator

In accordance with the Bankruptcy Act, the insolvency administrator is a general definition for a person who is properly licensed to provide the insolvency administration procedure and is one of the key players in it.

According to Article 31 of the Bankruptcy Act, the insolvency administrator is empowered:

  • to convene creditors' meetings and sessions of the creditors' committee;
  • to participate in the creditors' meetings and sessions of the creditors' committee with an advisory vote;
  • to take measures in order to protect assets of the debtor (i.e. to file with the court an action claiming invalidation or termination of some contracts of the debtor affecting its financial standing, etc.); and
  • to prepare and keep the creditors' claims register, etc.

At the stage of administration of assets, the insolvency administrator acts as the administrator of assets along with the management of the debtor. At the stages of financial rehabilitation and liquidation, the insolvency administrator substitutes the debtor's management and exercises all respective powers and authorities.

Therefore, it is critical to pay special attention to the process of appointment of the insolvency administrator.

Creditors' Claims

A court shall start bankruptcy proceedings in respect of the debtor, if the amount of indisputable claims of creditors to such a debtor equals 300 minimal wages, and such claims have not been satisfied within three months from the maturity date.

The Bankruptcy Act differentiates pre-bankruptcy creditors' claims and current creditors' claims.

An initiating creditor is always obliged by the respective court ruling to publish in the official media a notice regarding commencement of bankruptcy proceedings. Such a notice is to be published to identify all debtor's creditors, having pre-bankruptcy claims against it. Such creditors have to file their applications, describing the claims against the debtor, within 30 days from the date of the above publication, with the commercial court which is considering the case in order to be able to participate in the bankruptcy proceedings.

Pre-bankruptcy claims of the creditors not filed with the commercial court within such a 30-day period will be dismissed by the court.

Creditor's Committee

Creditors' committee is supposed to be one of the key bodies in the bankruptcy proceeding.

Members of the creditors' committee are elected and appointed by the creditors' meeting.

Creditors' committee shall convene creditors' meetings, file a motion on opening of financial rehabilitation procedure and/or liquidation procedure with the respective commercial court, approve an amicable agreement (as the case may be), file a motion on extension or reduction of the terms for special procedures within bankruptcy proceedings with the court, etc.

Considering the above powers and authorities, and the fact that not all creditors are usually represented in the creditor's committee, it is recommended to use all available efforts to be elected to the creditors' committee.

Amicable Agreement

According to Article 35(2) of the Bankruptcy Act, an amicable agreement may be entered into at any stage of the bankruptcy proceedings.

On the creditors' side, a decision on entering into the amicable agreement must be taken by the creditors' committee. To take such a decision no less than 50% of the creditors' committee members have to vote for entering into the amicable agreement, provided however that all creditors having secured claims agreed to enter into the amicable agreement.

From the debtor's side, a decision on entering into the amicable agreement should be taken by the debtor's management or its insolvency administrator.

The amicable agreement entered into by the creditors and the debtor needs to be approved by the commercial court considering the case.

It should also be noted that the Ukrainian Government has recently initiated amendments to the effective Bankruptcy Act aimed at (i) facilitation of terms for bankruptcy proceedings which are currently prescribed by the law; and (ii) establishment of bankruptcy proceedings for individuals. Those amendments are expected to be adopted by Ukrainian Parliament by the end of 2010 and most probably will introduce (i) a reduction of bankruptcy proceeding's terms; (ii) certain measures to prevent abuse of rights through challenging of court's rulings to delay and postpone court proceedings and hearings; and (iii) new solutions of some existing legislative discrepancies.

Vasil Kisil & Partners

Through relentless focus on client success, the Vasil Kisil & Partners team delivers integrated legal solutions to complex business issues. In Ukraine, the Vasil Kisil & Partners brand is synonymous with great depth and breadth of legal expertise and experience, which has created superior value for our clients since 1992.

Vasil Kisil & Partners is a Ukrainian law firm that delivers integrated business law, dispute resolution services, tax law, energy and natural resources law, intellectual property law, international trade law, labour and employment law, real estate and construction law, as well as public private partnership, concessions & infrastructure law.

The firm serves international and domestic companies, as well as private individuals, dealing in agriculture, banking, chemical, construction, financial, energy, high-tech, general commodities, insurance, IT, media, metallurgy, pharmaceutical, real estate, shipbuilding, telecommunication, trading, transport, and other industries and economy sectors.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions