Debt recovery became issue No.1 in Ukraine for the past year. In particular, it is of special concern for Ukrainian banks. Due to non-repayment of loans the banks have to apply to courts and start lawsuits to ensure the return of their funds and recover debts from pledged property. However, even when a court grants a decision in favor of a bank, there is no any guarantee that the said decision will be executed. This is because debtors quite often try to take advantage of the bankruptcy procedure, which gives them the opportunity to block for a rather long period enforcement of court decisions on debt recovery.

In accordance with the On Restoration of the Debtor's Solvency or Recognition as a Bankrupt Act of Ukraine (hereinafter — Bankruptcy Act) a court, when adopting a decision to launch a bankruptcy lawsuit simultaneously imposes a moratorium on debt recovery. From that moment a debtor is prohibited from paying any debts, taxes or duties which arose before the moratorium was set. In addition, any collaterals (pledge, surety, etc.) used to secure the debtor's obligations expire after the date of the moratorium and any fines are not charged either.

Pursuant to the On Enforcement Procedure Act of Ukraine, an enforcement officer is obliged to stop enforcement of all court decisions against a debtor which come under the purview of the moratorium. The enforcement officer is also obliged to stop any actions aimed at recovery from pledged property for the bank's benefit.

Thus, a creditor that obtained a court decision on debt recovery has no possibility to return its funds as long as a moratorium is in force, and the debtor may not worry about its property and continue its activity.

It should be said that the moratorium was introduced by legislation not to protect debtors against their creditors but to ensure repayment of debts. For the moratorium period all the assets of a debtor must be revealed and the appropriate measures must be taken to prevent any increase in the debtor's debts.

Unfortunately, the current moratorium is not always helpful for creditors. A debtor enjoying the right provided for by Article 6 of the Bankruptcy Act may file to a commercial court an application to start a bankruptcy procedure in respect of itself.

Furthermore, the debtor is not required to file along with the application any evidence of insolvency. The debtor's decision is sufficient to make a bankruptcy filing.

When the commercial court receives the debtor's bankruptcy application, it must start bankruptcy proceedings and impose a moratorium. Simultaneously, the court decides on the date of the preliminary session. During that session the court considers the documents presented by the debtor and whether there are grounds to continue bankruptcy proceedings. And this is the stage where it gets very interesting. The debtor, with any means available, tries to delay consideration of the case about its bankruptcy. For instance, the debtor may challenge in the High Commercial Court the decision of the court of first instance to start bankruptcy procedures even though such a decision cannot be challenged. Following Article 109 of the Commercial Procedure Code of Ukraine the commercial court is obliged to forward the cassation and the case materials to the High Commercial Court. As a result the bankruptcy proceeding is halted. By using methods like this the debtor may delay consideration of the case for half a year or even longer. In the meantime the moratorium will remain in effect.

The worst thing is that the creditor has no possibility to influence these measures undertaken by the debtor. The only way out in such a case is to file a letter to the commercial court considering the debtor's case. This letter must contain information about the unlawful actions of the debtor aimed at delaying consideration of the case and non-payment of debts. It must also be specially stressed in the letter that commercial courts have the right not to forward cassations of such a nature to higher courts.

The Supreme Court of Ukraine in its letter of 10 September 2009, No.3.2.-2008 recommended commercial courts and courts of appeal to reject complaints against decisions which cannot be contested and not to forward these complaints and case materials to higher courts.

Unfortunately, the letter is just a recommendation and the courts are not obliged to strictly comply with it. The other method commonly used to delay consideration of a bankruptcy case is through an expertise. In accordance with Article 11(7) of the Bankruptcy Act the debtor has, during the preliminary session of a court, the right to file a motion to schedule a financial and economic expertise. In most cases courts satisfy such motions for the purposes of detailed consideration of the case. As a result consideration of the case is halted. The maximum length of the expertise can be up to three months. If we add the time needed for forwarding case materials from the court to an expert institution, consideration of a case can be delayed for approximately half a year. Unfortunately for creditors they have no means to resist these actions of a debtor.

It sometimes happens that bankruptcy cases are delayed for a year or even more. Meanwhile, debtors attempt to hide their assets and leave only illiquid property which creditors may recover from.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.