In principle, local court in Ukraine can enforce or uphold termination and close-out provisions where termination is triggered by a non-insolvency event. The Ukrainian law expressly allows the parties to terminate an agreement in cases provided by law or by such agreement. Therefore, a termination provision should be enforceable in Ukraine irrespective of whether it is triggered by insolvency or by a non-insolvency event, provided that the agreement expressly states the grounds for the termination.
At the same time, under Ukrainian law there is no “clear-cut” concept of a close-out as being a right to terminate a contract upon an event of default. There is also no statutory provision for the computation of a termination value due to or from the defaulting party based on the market value of the contract or some other value. Therefore, a close-out provision should be enforceable merely as any other contract provision so this should mostly depend on its drafting. Specifically, the provision should explicitly determine the procedure for calculation of the close-out amount as well as clearly define the nature of any payment to be made.
No additional formalities would be necessary in order for the close-out to be enforceable. However, where a party to the agreement objects to its termination (even if it is unilateral and the consent of the other party is not required under the agreement), as a matter of practice under Ukrainian law, a court decision would still be required to enforce the legal consequences of the termination of the agreement.
A Ukrainian court should generally enforce and uphold termination of the agreement based on an insolvency event, provided that such grounds for termination are specified by the agreement. However, it is much less clear that the court would enforce the contract provision providing for a payment of a close-out amount upon the initiation of insolvency proceeding or that a non-defaulting party would be in a position to benefit from it.
In principle, the enforceability of a provision determining a close-out amount would depend on the precise wording of the provision and the resulting treatment of the payment under Ukrainian law. However, based on current Ukrainian insolvency legislation, it cannot be precluded that (1) court finds such a provision, however drafted, to be invalid; (2) the court invalidates the whole agreement containing such provision (which should be unlikely, since in principle under the Civil Code of Ukraine (the “Civil Code”) if a provision is invalid, it should be severed from the contract and not affect the remaining provisions, unless it is indispensable to the contract’s meaning, which a close-out provision should not be); or (3) the insolvency manager (a person acting to conduct an insolvency procedure based on a licence issued by an authorised state institution) refuses to perform this provision, based on the grounds discussed in more detail in item 2 (d) below.
In addition, even if the close-out amount is determined and it creates a fully binding and legally enforceable obligation of the defaulting party, the non-defaulting party may not be, as a practical matter, in a position to fully benefit from it. Under the Law of Ukraine “On the Restoration of the Solvency of a Debtor or the Declaration of it as a Bankrupt”, No.2343-XII, dated 14 May 1992 (the “Insolvency Law”), upon the initiation of an insolvency proceeding, an automatic stay (moratorium) is applied for all of a creditors’ monetary claims having a maturity that ended prior to the initiation of the insolvency proceeding, leaving all such claims to be satisfied in a rehabilitation (“cleansing”) procedure or, if the insolvent debtor is declared a bankrupt, in a liquidation procedure from the sale proceeds of the bankrupt’s estate, with payments being made based on the priority of the claims.
Should the close-out amount be considered as a current claim (i.e. arising after the commencement of the insolvency proceeding), then theoretically it may be paid off prior to the opening of the liquidation procedure. As a practical matter, however, current claims (in particular, where they involve substantial amounts or where the debtor does not have any funds available) are in practice satisfied in the liquidation procedure, as noted above. Where the bankruptcy’s estate is not sufficient to satisfy all of the claims having an equal priority, they are paid on a pro rata basis. Thus, the close-out amount, if recognized at all, is likely to be included in the register of the creditors’ claims and paid under the generally applicable rules.
Within three months from then commencement of a rehabilitation procedure, the insolvency manager may refuse the performance of any agreement of the debtor entered into prior to the initiation of the insolvency proceeding which is not yet fully performed, if:
- performance under the agreement would cause losses to the debtor;
- the agreement is a long-term (exceeding one year) agreement, or is intended to create positive results for the debtor in the long term, except if for the manufacturing of goods having a technological cycle exceeding the duration of the proceeding for the debtor’s rehabilitation; or
- the performance under the agreement otherwise creates conditions preventing the debtor from restoring its solvency.
Within 30 days following a decision of the insolvency manager, the other party to the agreement the performance of which has been refused has the right to demand indemnification of its losses caused by such non-performance. No specific procedure or terms are provided for the actual payment of such indemnification. To the extent of such losses, the other party to the refused contract would probably become an ordinary unsecured creditor.
In addition, a court may invalidate any agreement of a debtor if:
- the agreement is concluded with an interested party (which under the Insolvency Law is very narrowly defined) and results in the creditor bearing losses or the possibility of losses;
- the agreement is concluded with a particular creditor or another person within six months prior to the initiation of the rehabilitation procedure, and (a) provides an advantage to one creditor over other creditors; or (b) is related to the payment (distribution) of a share of the debtor’s assets as compensation for such creditor’s withdrawal as a share from debtor’s participant in the debtor.
The invalidation of an agreement on these grounds results in the mutual restitution to each party of everything received under such agreement by the other party.
Ukrainian law does not expressly provide for close-out netting as in the west. Thus, it is not clear how effective post-insolvency close-out netting can be. In principle, a general netting set-off probably would not be possible during the liquidation procedure, because settlements are then controlled by the statutory procedures. Thus, it should be preferable for termination and close-out netting to be conducted prior to the initiation of an insolvency procedure against a Ukrainian debtor.
For more information contact: Andriy Fedchyshyn, Head of Litigation