‘A Hollywood Blockbuster’, or the Problems of Liability in Ukrainian Bankruptcy Proceedings

Among the legal mechanisms directly involved in resolving the issue of debtors’ insolvency and the settlement of creditors’ monetary claims are the institutions of joint and several liability and subsidiary liability of the debtor’s owners and officers for failing to initiate proceedings promptly and for driving the company into bankruptcy. Unfortunately, these institutions currently operate ineffectively, with the result that creditors are unable to satisfy their claims for a long time and by far not in full. One gets the impression that the institutions of joint and several liability and subsidiary liability within the domestic legal framework are predominantly ‘virtual’ in nature. This article aims to examine the legal nature, essence and characteristics of the existing institutions of joint and several liability and subsidiary liability of the debtor’s owners and officers in bankruptcy proceedings; to justify, on this basis, a model of insolvency liability under bankruptcy law; to define the concept of such liability, its subjects, types, grounds, legal consequences and procedure for application, as well as to formulate proposals for its systematic enshrinement in Ukrainian legislation, taking into account the case law of the Supreme Court, foreign legislation and the latest provisions of EU law regarding the liability of directors in insolvency proceedings. The article emphasises that the application of general civil law instruments in cases of wilful insolvency in Germany is due to the absence of specific substantive provisions in the relevant insolvency legislation. It is noted that in France, the provisions of the Commercial Code provide for the possibility of a court imposing civil liability on the debtor’s directors in the form of compensation for the shortfall in assets in the event of a lack of assets to fully satisfy creditors’ claims in judicial liquidation proceedings (liquidation judiciaire), provided that such a shortfall is the result of mismanagement. It is emphasised that the position adopted in the domestic case law of the Supreme Court is not entirely appropriate, as it consists of applying general criteria of civil liability to specific torts in the field of insolvency. This approach is inconsistent with the experience of developed European countries—for example, the French model, where a specific form of special legislative regulation is provided for these legal relationships, or the German model, where the general civil tort is applied by the courts whilst taking into account the corporate specifics of insolvency law. It is argued that, unlike the classical civil law approach, the legal nature of such an institution of bankruptcy (insolvency) law as subsidiary liability is based not on a tort but on a ‘quasi-tort’. It is argued that for subsidiary liability to arise, a specific legal offence must be present, which takes the following form: unlawful conduct + the absence of sufficient assets to fully satisfy creditors’ claims = a presumption of fault. A distinctive feature of this type of liability is that there is no need to prove the actual amount of damage caused (since it is equal to the amount of creditors’ unsatisfied claims), as the fundamental principle underpinning subsidiary liability in bankruptcy proceedings must be the principle of universality. It is argued that, in bankruptcy proceedings, the mere fact that the debtor lacks accounting and other reporting documentation should be entirely sufficient to impose subsidiary liability on the debtor’s owner and officers, regardless of whether it is proven that their actions were intended to destroy or conceal such documentation. It is argued that acts which, in the Code of Commercial Procedure, are distinguished as separate institutions of joint and several or subsidiary liability, in fact share a single legal nature. The article points out that, unlike the domestic framework of joint and several liability for the failure to initiate bankruptcy proceedings in a timely manner, in Germany, a fundamentally different liability is imposed on members of the debtor’s management bodies for such an offence, which consists of the restitution of funds that left the debtor company during the period when, contrary to the procedure established by law, they failed to file an application to open insolvency proceedings. The article justifies the need to introduce a fundamentally new concept of liability, termed ‘insolvency liability’, which is directly linked to the bankruptcy procedure, applies exclusively within the framework of the bankruptcy procedure, and meets the criteria of simplicity, speed and effectiveness. The article proposes introducing into legal doctrine and legislation a new term for a subject of insolvency liability — ‘ debtor’s manager’ — which should be understood to mean a natural person (including a founder, partner or shareholder) who, legally (on the basis of the law, the articles of association or a contract) or de facto, exercised direct or indirect (through one or more natural or legal persons) control over the debtor in respect of whom bankruptcy proceedings have been initiated, with the relevant legal definition being enshrined in Article 1 of the Code of Bankruptcy Proceedings. It is argued that insolvency liability should be divided into three distinct types: non-property, supplementary and property liability, each of which has its own grounds, conditions for application and legal consequences. Non-property insolvency liability may be imposed at any stage of bankruptcy proceedings. Supplementary liability may be imposed after the commencement of proceedings and before the conclusion of the asset disposal procedure. Property-based insolvency liability may be imposed only in liquidation proceedings. It is argued that, under certain circumstances, several types of insolvency liability may be applied simultaneously to a single person. The article argues that a person may be released from insolvency liability provided that all monetary claims of creditors recognised by the commercial court have been fully settled and all costs associated with the bankruptcy proceedings have been fully reimbursed. A definition has been formulated of non-pecuniary insolvency liability as the application by a commercial court, within the context of bankruptcy proceedings, of restrictions — in the form of a prohibition (disqualification) — on the holding of certain positions, or from holding, managing, representing or exercising the corporate rights of a founder (member, shareholder) of any legal entity, for acts or omissions that impeded the proper formation of the insolvency (liquidation) estate. A definition of additional insolvency liability has been formulated, which consists of managers compensating the body of creditors for the damage caused as a result of a delay in bringing proceedings before the commercial court, by reimbursing the debtor for the sums of money paid on its behalf during the specified period of delay in initiating the proceedings. A definition of financial insolvency liability has been formulated as the imposition by the commercial court on the debtor’s administrators of the obligation to pay into the liquidation (insolvency) estate an amount equal to the shortfall in the liquidation (insolvency) estate required to fully satisfy the creditors’ claims recognised by the commercial court, as established following an inventory and valuation, provided that such shortfall arose as a result of the debtor’s improper management, where there is a presumption of fault (in the event that a person is held liable for non-property insolvency liability in these proceedings) or where their fault has been proven. A definition has been formulated of competitive liability itself as an independent, autonomous institution of bankruptcy (insolvency) law, which consists in the commercial court applying, exclusively within the context of bankruptcy (insolvency) proceedings, to certain entities specified in the Code of Insolvency Proceedings, special measures of a pecuniary or non-pecuniary nature in the form of a prohibition (disqualification) from holding certain posts or carrying out certain activities, the recovery of compensation for the untimely initiation of bankruptcy proceedings or the imposition of an obligation to cover any shortfall in the liquidation (bankruptcy) estate, with a view to protecting the property rights of the body of creditors from the consequences of the debtor’s mismanagement. It is proposed to supplement the Code of Ukraine on Bankruptcy Proceedings with a Book Six entitled ‘Liability in Bankruptcy (Insolvency) Proceedings’, which would systematise the substantive and procedural rules governing the imposition of liability on the debtor’s managers, the debtor (an individual entrepreneur), and the insolvency practitioner to non-pecuniary, supplementary and pecuniary insolvency liability.