Until now, there has been no effective mechanism to sell the property of bankrupt entities in Ukraine. This complicated things both for potential buyers and for creditors. It took a creditor years of exhausting procedures to recover less than 10% of money invested in the company that went bankrupt. The mechanism itself was complicated and opaque, which definitely scared off potential buyers. But all of this can change.

In April this year, we got a new Code on Bankruptcy Procedures. It offers a wonderful solution: to sell money of bankrupt entities in an electronic trade system through online auctions.

Auctions alone don’t work. There have to be clear, accessible rules for market participants. So, based on the Code, the Ministry of Justice of Ukraine developed a draft regulation which would specify the procedure of property sale and select the administrator of the system that will be used to sell everything. This regulation must be reviewed and approved by the Cabinet of Ministers.

However, the document that has been put forward by the Ministry of Justice, can effectively make the bankruptcy reform fail.

First, the Ministry refused to summon a working group to develop the regulation. Ministry representatives alleged they did not need the expertise and vision of market participants, and ended up creating the draft alone. Interestingly, they decided to hide the draft regulation from the public, turning the search for the document on their website into a scavenger hunt. When you finally get there, however, you will end up very disappointed.

The regulation has four issues that may lead to failure of the bankruptcy reform in Ukraine.

1. A competition to select the trade system administrator will be held for “insiders.”

They suggest appointing a special selection board of the Ministry of Justice to identify the administrator. The terms of the competition are not defined, however. Creating this commission and organizing a selection procedure will definitely take some more time.

We remember how one commission of the Ministry of Justice was selecting the organizer of bidding on seized property. All the terms were specified in a way that would lead to the victory of one specific competitor, with MoJ-controlled SE “SETAM” winning the competition. It was the only enterprise on the market that complied with all competition criteria: UAH 5 million of capital, at least three years of experience, subsidiaries in 2/3 of Ukrainian oblasts.

Ministry of Justice of Ukraine developed a draft regulation which would specify the procedure of property sale and select the administrator of the system that will be used to sell everything. This regulation must be reviewed and approved by the Cabinet of Ministers. However, the document that has been put forward by the Ministry of Justice, can effectively make the bankruptcy reform fail.

Khrystyna Zelinska, Innovation Projects Program Manager

2. Complaint Review Commission will be a closed “club”

The draft regulation stipulates creation of another special commission by the MInistry of Justice. If the commission included representatives of other public authorities and the public, it would prevent all the leverage ending up in MoJ’s hands. But currently, there is a risk that the commission will become some sort of club for the ones handpicked by the Ministry of Justice.

3. There is no electronic auction procedure

The draft regulation contains no provisions that would govern the auction procedure for price increase or reduction. Instead, the auction procedure will be determined by the administrator.

This regulation will be basically an internal document of the organization that will administer the electronic trade system. This means that all property of bankrupt entities that will be sold in Ukraine will be sold with unclear, obscure rules. These rules will be established not by the Cabinet of Ministers, which would make more sense, but by the administrator exclusively. But what if the administrator decides to adopt regulations that are not consistent with the Code on Bankruptcy Procedures and it will lead to negative consequences?

For instance, when the Regulation on Electronic Auctions for Small-Scale Privatization was passed, it included detailed procedures for every auction, as well as all risks, deadlines and liability.

The draft regulation stipulates creation of another special commission by the MInistry of Justice. If the commission included representatives of other public authorities and the public, it would prevent all the leverage ending up in MoJ’s hands.

Khrystyna Zelinska, Innovation Projects Program Manager

4. Sales without competitive auctions

The draft regulation contains a provision that is directly in conflict with the Code on Bankruptcy Procedures. It is about disclosure of the number of participants and their unique codes even before the auction. Publication of such data can lead to distortion of auctions results, reduction of the competition and further decrease of price offers of potential participants.

How can the risks be mitigated?

It would be absolutely irresponsible of the government to just pass this document in this version. The only smart way out of the situation is to summon a working group including market players and experts, which is something that has been brought up for a long time and disregarded by the Ministry of Justice.

The current Cabinet of Ministers will probably not have enough time to pass the regulation. Soon enough, the new Parliament will start working, and within two months they have to determine who will be in the Cabinet of Ministers. It is the new government and the Prime Minister that will make or break the bankruptcy reform. The future regulation should become the document that will help to sell the property of bankrupt entities through a transparent and convenient online system. Public online auctions and fair play rules will prevent the property of bankrupt entities from being sold for next to no money at all. Reliable rules and opportunities of the bankruptcy reform will help Ukraine do better in the Doing Business rating.

The destiny of hundreds of thousands of investors will depend on the new government. That is why it is necessary to select a reliable, capable trade system administrator that already has all the technical capacity that is needed. But without adequate rules, this may never happen.

The draft regulation contains a provision that is directly in conflict with the Code on Bankruptcy Procedures. It is about disclosure of the number of participants and their unique codes even before the auction.

Khrystyna Zelinska, Innovation Projects Program Manager