The term "bankruptcy" has a very ambiguous reputation in Ukraine. With the hope that everything will "dawn on itself" or a magician in a blue helicopter will come, the director and business owner live to the last. However, they can be understood: for any manager, recognizing their business as a failure is difficult, first of all, emotionally. We love success stories, but we prefer to keep quiet about failure stories. Moreover, bankruptcy in our country is perceived as a synonym for a business funeral rather than a procedure for its recovery. Yulia Kurylo, attorney at law, expert on personal liability of business owners and managers, told Mind about how bankruptcy can become a starting point for the company's «second life».
When does liability come?
The more people know about the opportunities provided by the bankruptcy procedure for the restoration and financial recovery of business, the less fears they will have. Especially if we take into account that the legislator simplifies the entry into the procedure, speeding it up. At the same time, the company, by dishonestly concealing its insolvency, drives itself deeper into a debt hole, which upsets the balance of interests between the debtor and the creditor.
The latter, unaware of the difficulties of its counterparty, will plan its business, counting on fair compensation. And without receiving it, it will face a cash gap and, as a result, the threat of insolvency. And then there is a domino effect.
The fight against this phenomenon began at the legislative level. The main legal document that protects economic security is the Bankruptcy Code. It obliges the director of the debtor company to apply to the Economic Court within one month from the moment when settlement with one or more creditors will mean the impossibility of fulfilling monetary obligations to other business partners.
Simply put, this is the moment when the director realizes that the company's working capital is insufficient to pay off current liabilities.
How does it work?
The incentive to comply with this requirement of the law is liability for breach of the obligation to notify the company of insolvency in a timely manner. The director will be liable for the company's obligations as a joint and several debtor if the court finds that the company has not applied to the court within one month after the onset of signs of insolvency.
Let's look at a specific example from practice. The Kyiv Commercial Court was considering the bankruptcy procedure of one of the enterprises. The debtor company systematically failed to fulfill its obligations to its counterparties, as evidenced by a number of previous court losses.
The audit confirmed that the director had been submitting false information to the tax administration for a long time - overstating the balance sheet profit, although in fact the company was suffering losses. As the court found out, the critical situation with the debtor's solvency arose in the reporting period that ended at the end of 2018. At the same time, the company's bankruptcy proceedings were opened only on May 19, 2020, at the request of one of the creditors. By misrepresenting the financial statements, the director concealed the actual bankruptcy, which ultimately significantly affected the rights and interests of his creditors. It turned out that, while increasing its debts, the company had no assets to pay off its creditors.
This, in the court's opinion, was the reason for imposing joint and several liability on the director for the debts of the company he had previously headed. It is worth noting that it is the decision of the Commercial Court that, in accordance with Ukrainian law, can establish such a fact of violation and become the basis for collecting the company's debts from the director in favor of creditors.
When does the rule on joint and several liability apply? One conclusion can be drawn from this court precedent: a condition for the application of joint and several liability to a director is access to the debtor's financial statements in bankruptcy proceedings.
How to prove the time limits of the actual deterioration of financial indicators and identify signs of critical insolvency of the debtor if the court does not have the accounting documents? Lawyers are still unclear. However, one thing is certain: unfair behavior related to the destruction/distortion of accounting documents cannot serve as an indulgence from the elements of protection of the stability of economic turnover introduced by law.
As part of the bankruptcy procedure, creditors are provided with other tools that allow them to impose the burden of debts on the managers and business owners of the debtor company. Their competent and timely use increases the chances of creditors to get their money.
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