The new law "On Financial Restructuring" No. 1414-VII dated 14 June 2016 ("Law") has recently been adopted by the Parliament of Ukraine. The Law came into force on 19 October and is effective until 16 October 2019. This appears to be a temporary measure to overcome a huge volume of non-performing loans in the Ukrainian lending space.
The Law encourages debtor companies, being at the early stage of distress, albeit having a viable business, to restructure their outstanding exposure with creditors in an out-of-court order. It creates a comprehensive consensual restructuring regime, enabling domestic and foreign creditors to create stable platforms for discussion with borrowers. In particular, the Law deals with waivers of rights , grace periods, statutory moratorium, organising lender coordination committee and ultimately negotiating and implementing the restructuring agreed by the parties. Besides, this new legislation introduces a long awaited concept of standstill arrangements, governs debtor's disclosure process, defines voting thresholds and other aspects of restructuring democracy among lenders, trade creditors and fiscal authorities and even incentivises debtors and creditors with certain regulatory benefits and tax reliefs. Main features of the restructuring regime are set out below:
Commencement of consensual restructuring
The management of a debtor company (other than a bank or a credit institution) may voluntarily propose and promulgate an out-of-court restructuring procedure. The debtor company may restructure outstanding exposure if it involves debt owed by debtor to bank or other financial institution such as a leasing or factoring company. However, the whole pile of exposure is not necessarily comprised entirely of bank debt. The Law allows trade and commercial creditors to join the restructuring with their commercial debts.
It is noteworthy that the debtor company may avail itself of the financial restructuring if it can prove that its business is viable and remains at the very early stage of distress. For that purpose, an audit report over the debtor's business and accounts is to be submitted to the creditors. They are authorised to determine the viability of the debtor's business. Such report will provide all participating creditors with a fair picture of the business and secure a creditor's equal access to sensitive information thus representing vital component of disclosure in a restructuring process. Another requirement is to provide proof that more than 50 % of the financial lenders (by value) have been consented to restructuring suggested by the debtor.
A debtor company can have an advantage of a moratorium protection that prevents creditors from taking any enforcement actions against the debtor company or its assets. These also includes prohibition for satisfaction of creditors' claims, an entry into pledge or mortgage agreements (other than for refinancing purposes), making any set off and offsetting arrangement towards any claim, selling, disposal of any non-charged debtor's fixed assets available at the date of commencement of restructuring procedure. Additionally, moratorium suspends accrual of any penalties and assessment of financial sanctions for the debtor's failure to discharge its debt obligations and stops the running of limitation period for moratorium's duration. Ultimately moratorium is tied to a statutory timeframe of the financial restructuring which is 90 calendar days from the posting date, but in some cases it can be extended up to 180 days. It is worth highlighting that any claims of debtor's related parties are automatically captured with an operation of moratorium and are not capable of being discharged under the Law.
The Law affords creditors and debtors new contractual tool which stands in the centre of most work-outs and restructuring - standstill agreement. Such agreement typically arranges implementation of new restructuring strategy being commonly focused on business plan for a specific asset, individual task for debtor/lender along with timetable, detailed cashflow and budget, cash sweep arrangements, bank account limitations, reporting requirements and restrictions on disposal imposed on a debtor. The Law clearly specifies that standstill agreement may impose liability on non-compliant parties for its breach. Standstill is also known as a bridging device essentially serving as a negotiation plateau that ultimate aim is to push parties to the terms agreed in the restructuring plan.
The outcomes of the financial restructuring proceedings are typically documented in restructuring plan that requires approval of all participating creditors. However, if there is any dissenting creditor, than such plan is allowed to be pre-approved by more than two-thirds (by value of claims) of the majority of participating creditors with subsequent final approval by the arbitration to whom such plan is to be referred for final ratification. If approved, the restructuring plan is generally binding on all participating creditors, however certain reserved matters (explicitly envisaged by the Law) are not allowed to be imposed on a creditor without its express consent. Such matters include: a provision of additional financings to borrower, forgiveness of the secured debt, ceasing of accrual of interest etc.
The Law envisaged clear voting thresholds for creditors which are required to decide on each stage of the financial restructuring. Importantly, the Ukrainian legislator introduced a comprehensive definition of "related parties" and thus disfranchised the debtor's related party from voting to exclude any distorting effects in calculations. It is also quite a useful statutory provision limiting instances to seek a consent from the state tax authorities for commencement of restructuring if the liability before them is less than one third of the total exposure subject to restructuring.
Administration of new restructuring regime
Finally, to support smooth implementation of consensual restructuring, the Law sets out an institutional framework involving: (a) the Supervisory Council, that is responsible, among the other things, for selection of arbitrators for the recommended list and elaboration of requirements to independent auditors who must confirm viability of debtor's financial accounts and statements and (b) the Secretariat facilitating on-going restructuring proceedings. Another vital component of consensual restructuring is settlement of any contentious matter of the restructuring by means of arbitration, meaning that if the parties are unable to reach a consensus, they must refer it to arbitration which will resolve the dispute and such arbitral award will be binding on them.
For further details on the consensual workouts and restructuring, please contact the authors.