How to enforce an arbitral award against a Ukrainian company going bankrupt
Author: Dmytro Monastyrskyi, Oleksii Hlovatskyi
Source: The Ukrainian Journal of Business Law, November-December 2020

Complicated economic situation and military activity in the industrial Eastern Ukraine has made insolvent a large number of Ukrainian companies operating in the region. Needless to say that recurrent economic shocks and multiple other factors can pose risks of going bankrupt for businesses not directly affected by the war as well. Companies engaged in commercial relations with foreign partners typically prefer to resolve disputes via international commercial arbitration. A situation that a foreign business may face is winning an arbitration proceeding and having an arbitral award against a company starting insolvency proceeding in Ukraine, which makes it considerably harder to achieve actual recovery. So let’s have a look at what a foreign creditor should undertake to enforce one’s arbitral award in this situation.

Recognition of award

In order to make an arbitral award legally binding in Ukraine the creditor has to seek its recognition and permit for enforcement before Ukrainian court. Ukraine is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) and has special rules for proceedings on recognition and enforcement of foreign and domestic arbitral awards.

Such proceedings are held by the civil courts. They have no right to review the case on the merits or analyze whether an arbitration court had correctly applied the law and resolved the case. This was repeatedly pointed out by Ukraine’s Supreme Court, which in itself shows that state courts occasionally tend to opine on conclusions of arbitration courts. Rather, the court must assess whether the arbitration award and request for its recognition meet certain procedural requirements.

Requests for recognition and enforcement of arbitral awards are considered by the court of appeals in Kyiv as a court of first instance. The ruling on enforcement of arbitral award does not become final and binding once issued and may be appealed to the Supreme Court as an appellate and last instance in such cases. Being upheld by the Supreme Court, the ruling enters into legal force and the arbitral award can be enforced through bankruptcy proceedings.

Bankruptcy proceedings

Bankruptcy cases belong to the jurisdiction of commercial courts of Ukraine and are considered by the local commercial court in the region where the debtor has its registered office. Once a bankruptcy proceeding has been commenced upon the request of the debtor or one of its creditors, the court appoints an insolvency administrator and rules to publish a relevant announcement on the official website. Creditors will then have to file their claims with the court within a 30-day deadline in order to have the best positions and widest range of rights during the proceeding. Claims filed after the deadline are also accepted, but, if recognized, give creditors a narrower range of rights.

The court considers each claim and rules to either recognize or deny it. The Supreme Court of Ukraine clarified that creditor’s claim may rest on (1) primary evidence or (2) decision of an institutional body having a jurisdiction over a dispute (e.g. arbitration court). Hence, an arbitral award supported by final and binding ruling on its recognition and enforcement must suffice for the claim to be recognized in bankruptcy proceedings.

Recognized claims are divided into six lines based on the nature of origination. Creditors with the highest credit amounts recognized by the court form a creditors committee, which has authority to decide on further course of bankruptcy proceedings based on the reports of an insolvency administrator. If the debtor is declared bankrupt, the liquidation procedure begins. The funds received from disposal of bankrupt’s property are used to satisfy creditor’s claims line after line in a hierarchical order. If there are not enough funds to cover all claims in the line, such claims are satisfied proportionally.

If award was not recognized

It happens that time is against the creditor and recognition can’t be accomplished before it’s late to file an insolvency claim. In this case the creditor will have to prove one’s case by primary evidence. Ukraine’s Supreme Court confirmed that arbitral award without a ruling granting its recognition and enforcement which came into legal force does not release the creditor from a burden to prove one’s claims. In other words, the creditor will have to win the case once again.

However, there is no guarantee that the court proceeding in a bankruptcy case will resolve the dispute in the same manner that the arbitration court did. This is particularly relevant when the disputed relations between the creditor and the debtor are governed by foreign law. Ukrainian law on private international law provides that the parties to the case shall facilitate the court in establishing the content of applicable foreign law. As a matter of practice, the parties may provide the court with duly certified extracts from foreign legislative acts, legal opinions of foreign experts regarding correct application of law in the disputed situation, etc. However, if court considers such filings inadmissible or unconvincing, it will have a right to apply the substantive law of Ukraine. This particularly concerns the limitation periods. If Ukrainian laws provide shorter limitation period which elapsed, the claim will likely be denied.

As evidenced by recent Supreme Court’s case law, final and binding ruling on recognition and enforcement of arbitral award must be presented to the court of first instance only. Thus, if recognition is granted after the local court dismissed the claim, this would not be an appropriate ground for an appeal.

What to be aware of

Despite Ukrainian procedural law is permanently being improved to reach higher efficiency of judiciary, there are still enough instruments for debtors acting not in good faith to drag the case or otherwise obstruct bankruptcy proceedings.

A widespread tactic is multiple appealing of a ruling to commence bankruptcy proceedings or other procedural court decisions. Once an appeal is filed with the court, the case file has to be transferred to court of higher instance. This might result in a situation when the case file passes the instances while the local court is not able to proceed with considering creditor’s claims. Furthermore, even if claims were considered and recognized, there would still be a possibility that appeal will be satisfied and the whole bankruptcy proceeding will be shut down.

Another problem is having a debtor which belongs to a group of companies with common owner(s). These companies can create sufficient amounts of false indebtedness, which allows them to obtain a majority of votes in a creditors committee and turn the proceedings in the most favorable way to them.

Competent representation of a faithful creditor can reduce or prevent negative effects from such actions. The key point is to accurately identify the participants of the case acting unfair, and effectively use all available procedural instruments in the best interest of the creditor.

* * *

Bankruptcy proceedings complexify the enforcement of arbitral awards, which requires specific expertise and experience in order to successfully deal with the issue. Nevertheless, if properly represented in the bankruptcy proceedings, the creditor will have the best chances to succeed and reach actual execution of an arbitral award.

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