What if the counterparty is bankrupt?

In 2020, 400 to 2,000 companies went through bankruptcy proceedings every month. This means that about 14,000 companies went bankrupt last year. What should you do if you find out that your counterparty has started bankruptcy proceedings?

Determining the stage of bankruptcy proceedings

To begin with, you need to know that after your counterparty starts bankruptcy proceedings, all issues will be resolved through the commercial court.

The bankruptcy process for legal entities is divided into three stages:

1. Disposal of the debtor's property.
2. Sanitation.
3. Liquidation.

The bankruptcy process of individual entrepreneurs is divided into two stages:

1. Debt restructuring.
2. Declaration of bankruptcy and termination of business activities.

In 2020, only 35 individuals went through bankruptcy proceedings, and since the adoption of the Bankruptcy Code of Ukraine in 2019, a total of 38 people have been declared bankrupt. At the same time, according to official data, 760,000 Ukrainian citizens are listed as debtors. Individuals hardly ever resort to bankruptcy proceedings, as it is an expensive process. Therefore, if your counterparty has started bankruptcy proceedings, it is most likely a legal entity. We will talk about them further.

You can find out whether your counterparty is going through bankruptcy proceedings on the website:

• Judiciary of Ukraine;
• Ministry of Justice of Ukraine.

Determine what type of lender you are

Depending on what kind of lender you are, your options will vary:

1. Competitive creditor. This means that when the court decides whether or not to initiate bankruptcy proceedings, your counterparty's debt to you already exists and it is time to pay it, and the debt is not secured by collateral.
2. Current creditor. This means that your counterparty will become your debtor after the court opens bankruptcy proceedings.
3. Secured creditor. This means that your counterparty's debt to you is secured by collateral.

Stage 1. Disposal of the debtor's property

The first stage begins after the commercial court has made a decision to initiate bankruptcy proceedings. At this stage, the court decides whether to proceed with the rehabilitation procedure or to liquidate the company immediately.

If your counterparty is at the first stage, and you are:

1. If you are a bankruptcy creditor, then you need to file an application with the commercial court with your claims against the debtor within 30 days from the date of publication of information on the Judicial Authority of Ukraine website that your counterparty has started bankruptcy proceedings. If you file the application after 30 days, the court will accept your application, but you will not be able to participate in the meeting of creditors and will not have the right to vote. Your chances of receiving compensation will also be significantly reduced. In addition to filing an application with the court, you must send a copy of the application to the debtor and the property manager. And don't forget to pay the court fee. In 2021, it is 4540 UAH.
2. The current creditor, then to collect the debt from the counterparty, you need to file a lawsuit in a commercial court.
3. If you are a secured creditor, then you can be included in the first category of creditors only for those debts that are not secured by collateral or you can waive the collateral. You can receive compensation for debts secured by collateral only 170 calendar days after the first stage of bankruptcy.

Stage 2. Sanitation

Rehabilitation is the stage at which a debtor is attempted to avoid bankruptcy by restructuring, deferring or transferring debts.

If your counterparty is at the second stage, and you are:

1. If you are a bankruptcy creditor, then you need to file an application with the commercial court at the counterparty's place of registration with your claims. In this case, the 30-day filing period does not matter, since you cannot influence the rehabilitation procedure.
2. A secured creditor, then you will be able to receive compensation for debts secured by collateral 60 calendar days after the court approves the rehabilitation plan.

Stage 3. Liquidation

At the last stage, the decision to declare the counterparty bankrupt has already been made and the liquidation of the company begins.

If your counterparty is at the third stage, and you are:

1. current creditor, then you need to file an application with the commercial court. The sooner you file an application, the better your chances of receiving compensation. The court establishes the priority of repayment of debts in the order in which the application was submitted to the court. If you file too late, the debtor may no longer have the money or property to repay the debt by the time your turn comes. Along with the application to the court, you need to send a copy to the counterparty and the liquidator. And don't forget to pay the court fee. In 2021, it is 4540 UAH.
2. If you are a bankruptcy creditor, then you can only wait until your counterparty's other debts are paid off and you are in line. That is, it is highly likely that the counterparty will no longer have enough money or property to pay you. At the same time, your counterparty's debt to you will be considered repaid.
3. A secured creditor, then your claims have either already been repaid from the collateral or you have become a bankruptcy creditor.

How to write off a counterparty's debt?

Once you have learned about your counterparty's bankruptcy proceedings, you can write off the debt or participate in the bankruptcy proceedings and try to get your money back.

If you don't want to sue a bankrupt, the tax authorities allow you to write off the debt, referring to clause 14.1.11 of the Tax Code.