Pre-Pack Proceeding in Ukraine

Currently, Ukrainian legislation does not provide for a separate “pre-pack proceeding” as outlined in the draft EU directive for harmonising insolvency law (“Directive Proposal”). However, selling a business is a legally feasible option under the Ukrainian Bankruptcy Code and related laws, both in a pre-bankruptcy phase and during bankruptcy proceeding.

During the pre-bankruptcy phase, which involves pre-bankruptcy rehabilitation measures in relation to a debtor, parties can agree, among other things, to sell the debtor’s assets and settle creditor claims through asset substitution, sell a portion of the debtor’s assets, or proceed with corporate restructuring. It is a debtor who can initiate these procedures, but creditor approval for the rehabilitation plan is mandatory. Further, although negotiation for such restructuring is voluntary, court approval is still required for the restructuring plan. During the bankruptcy proceeding, business sale and corporate reorganisation (including spinning-off a healthy segment of the business) are also possible measures, subject to creditor bodies' and court consent. Additionally, Ukrainian law provides for a separate out-of-court financial restructuring procedure, temporally in place until 2028, which also allows for business sale or reorganisation under certain conditions.

Summing up, while Ukrainian legislation provides for the possibility of business sale and debtor’s corporate reorganisation in different configurations and phases of the restructuring process, such measures have conceptual difference from the proposed “pre-pack proceeding” in the Directive Proposal. The core distinction is in their goals: pre-bankruptcy proceedings (including financial restructuring, as mentioned above) emphasizes on preserving the continuation of the debtor's business, shaping any business sale or corporate reorganisation measures around this purpose. On the other hand, the “pre-pack proceedings” eventually focus on selling off and liquidating business in the most efficient manner to maximise the effect of creditor claims satisfaction. Further, in all mentioned restructuring proceedings (both in pre-bankruptcy and bankruptcy phases), creditors possess broad powers to control and approve the sale/liquidation process. This is not the case for the “pre-pack proceedings” which seek to grant more rights and control to the debtor side.

Considering Ukraine's steps towards European integration, adopting the Directive Proposal (if and once passed at the EU level) into Ukrainian law would be a matter of time. To do that, legislators could potentially implement each phase of the “pre-pack proceeding” (i.e. the preparation and liquidation phases) into the existing restructuring proceedings provided by the Ukrainian legislation or, alternatively, establish the “pre-pack proceeding” as a standalone procedure. One of the main challenges would evidently lie in balancing creditors interests under the new procedure which inherently provides for a limited creditor involvement.