EU Project Pravo-Justice Supported a Roundtable Discussion on Jurisprudence on Joint and Several and Subsidiary Liability in Bankruptcy Proceedings

On December 19, there was a roundtable discussion "Joint and several and subsidiary liability. Development of jurisprudence". The event was initiated by the Ukrainian National Insolvency Trustees Association and was supported by EU Project Pravo-Justice and the Commercial Court of Cassation within the Supreme Court. Representatives of the Ministry of Justice, the banking community, judges, insolvency trustees, attorneys, and researchers contributed to the discussion.

"Joint and several and subsidiary liability in insolvency proceedings is a critical and complex topic. Such roundtable events are an opportunity to hear the opinions of different stakeholders and, through constructive discussion, reach a common solution that will positively impact insolvency procedures," said Viktoriia Vasylchuk, Deputy Minister of Justice of Ukraine.

Iryna Zharonkina, Enforcement and Protection of Property Rights Component Lead of EU Project Pravo-Justice, emphasised that the law introducing preventive restructuring procedures will come into force on January 1. The law implements EU Directive 2019/1023 into national legislation. The Directive, among other things, envisages new tools to ensure the responsibility of company management.

"The Directive establishes the obligation to ensure responsible management of the company during financial troubles to preserve assets essential for restructuring. The company management must avoid any actions that may deteriorate the company’s financial standing and prioritise the creditors’ interests," said Iryna Zharonkina.

In his turn, Oleksandr Bondarchuk, President of the Ukrainian National Insolvency Trustees Association, said that the dynamic development of legal relations in the area of handling insolvency, which is, in particular, related to the challenges of a full-scale war and Ukraine’s European integration commitments, leads to the fact that bankruptcy legislation is not keeping pace with current developments. Under such circumstances, the role of the Supreme Court is becoming increasingly important as it seeks to fill the legislative gaps through its chamber decisions. Meanwhile, he said, it is essential to constantly improve the professional skills of bankruptcy trustees to ensure proper implementation of jurisprudence.

"The UNITA puts a lot of effort into organising training events for our community. The high professional competence of bankruptcy trustees is the key to building trust in the UNITA and the bankruptcy trustee community as a whole," said Oleksandr Bondarchuk.

Speaking about the legal nature of subsidiary liability, Oleh Vaskovskyi, justice of the Commercial Court of Cassation within the Supreme Court, said that it is an additional tool that can be used when the debtor’s assets are insufficient to satisfy the creditors’ claims.

"In bankruptcy proceedings, subsidiary liability is a tool of last resort. In one of our rulings, we stressed that subsidiary liability cannot be applied prematurely. We talk about holding the wrongdoers accountable only after forming the liquidation estate, selling the debtor’s property, establishing its value, and finally setting the amount of creditors’ claims. Until then, any subsidiary liability claims are premature," said Oleh Vaskovskyi.

He also stressed that it would be advisable to create a single section in the Bankruptcy Code systemising all aspects of third-party liability to ensure clear and understandable application of the law.

"At present, the rules governing subsidiary liability are spread across different legislative acts and are often fragmented," said justice Vaskovskyi.

Vladyslav Filatov, Director of the Bankruptcy Department of the Ministry of Justice, also spoke about the need to expand the legislation on subsidiary liability mechanisms to ensure that it is complete, transparent and consistent.

"It is necessary to clarify the grounds for filing claims for subsidiary liability and the procedure for considering them. It is essential to ensure proper control over the actions of bankruptcy trustees to avoid unjustified claims. It is also crucial to review approaches to assessing the debtor’s financial condition to ensure transparent and efficient bankruptcy procedures," said Vladyslav Filatov.

Olena Volianska, a member of the Council of Bankruptcy Trustees of Ukraine, outlined the differences between applying subsidiary liability to the parties to a fraudulent transaction and ‘general’ liability in bankruptcy proceedings.

"The legislator has provided that damages under Article 42(5) of the Code may be recovered in full, but not as the amount of outstanding creditors’ claims. Furthermore, to file a claim, there is no need to wait for settlement of claims in the liquidation procedure. At the same time, the jurisprudence on the application of this rule is currently being developed and should balance the interests of the parties to the proceedings to achieve the objectives of the bankruptcy procedure," explained Olena Volianska.

Volodymyr Pohrebniak, justice of the Commercial Court of Cassation within the Supreme Court, focused on the legal nature of the joint and several and subsidiary liability and the scope of its application.

"Joint and several liability should only be applied where the debtor’s management or governing bodies have grossly violated the law," said Volodymyr Pohrebniak. Meanwhile, he added that in practice, there are difficulties in identifying the range of persons who may be brought to such liability (particularly when dealing with complex corporate structures) and proving the causal link between the actions or omissions of the debtor’s management and its bankruptcy. There are also discussions about the timeframe for filing joint and several liability claims. According to Volodymyr Pohrebniak, it is important to clarify all these aspects in the legislation.

ECtHR judgment in Fesenko v. Ukraine was another topic discussed at the roundtable event. Denys Lykhopok, bankruptcy trustee, presented the legal analysis of the case. He said that in this judgment, the ECtHR pointed to the excessive duration of the proceedings, inefficient procedural legislation, and no clear procedures for appointing bankruptcy trustees.

"This judgment is crucial for us as it not only reveals the essence of the problems in the national legal system but also recommends standards for us to be guided by," said Denys Lykhopok.