What Kind of Businesses in Ukraine May Face “Postwar” Bankruptcy and How to Prevent It from Happening

Dmytro Moshenets, an attorney and the head of the Bankruptcies Unit of Investohills Vesta financial company, told Delo.ua what businesses in Ukraine faced bankruptcy after the war and how to prevent it from happening.

The war that has been going on in Ukraine for almost four months is becoming protracted, affecting our country’s financial and economic system. Losses and damage caused by the russian armed aggression to domestic businesses and civilians are estimated in billions of USD.

This force major can cause many domestic businesses to become insolvent for the inability to meet their obligations to creditors because the war affected the value chains of almost all manufacturing sectors.

Potentially, this situation can result in massive waves of corporate bankruptcies not only during the war but also after the war. Not everyone will be able to survive the postwar recovery.

Who faces the risk of bankruptcy in Ukraine now and in the future? Of course, it is difficult to predict it during the war. However, we can offer a forecast based on a systemic analysis of factors we have been monitoring during the four months of the war.

The following businesses face the highest risk of being declared bankrupt:

– businesses whose assets were damaged or destroyed;

– businesses that are located in the temporarily occupied territory not controlled by the Ukrainian government (also after February 24, 2022) or have offices/branches there;

– businesses that have been taken by russia’s armed forces and other unlawful armed formations;

– businesses unable to operate in the territory controlled by the Ukrainian government in the martial law environment due to restrictions and disruptions in logistics (transportation and supplies of raw materials, finished goods, etc.).

Let me bring up Ukraine’s largest industrial enterprises that have sustained huge losses caused by russia and are facing the risk of bankruptcy. They include the Mariupol giants – Azovstal and Illich Steel Plants, Kremenchuk and Odesa Refineries, some gas and oil producers in Kharkiv and Dnipropetrovsk Oblasts, Azot Plant in Sievierodonetsk, Avdiivka Coke Chemical Plant, Zorya Mashproekt in Mykolaiv, DP Antonov, Coca-Cola plant in Kyiv, and others.

The issue of grain exports has not been solved till now; it can make some agro-industrial companies and farms in our country insolvent. For instance, experts predict a 40 to 45% drop in Ukraine’s agroindustrial exports in 2022.

Every day, the number of companies facing the risk of bankruptcy grows exponentially.

Some owners of destroyed or extremely damaged plants are estimating their damage, preparing materials for the recovery of losses caused by russian troops via international commercial courts of arbitration.

They have an issue that it is practically impossible for such companies to “self-liquidate” by their owner’s decision due to their having obligations related to loans and taxes to banks, financial companies, and the state. Thus, many businesses will have to undergo a prolonged bankruptcy unless an investor comes to take part in the post-war reconstruction of the company. In the other case, it may take years for owners of the destroyed production facilities to recover damage by arbitration.

I also can imagine a situation where claims for the recovery of losses caused by the russian armed aggression will be submitted by a bankruptcy trustee (administrator, liquidator, rehabilitation manager) in the interests of the debtor if the company is unable to make use of compensation mechanisms on its own. In the future, it would make it possible to seize the property owned by the russian federation, russian companies, and citizens of russia in Ukraine in the case of the debtor’s bankruptcy to meet the claims of creditors.

Perhaps, such powers should be vested additionally in bankruptcy trustees by the Bankruptcy Code of Ukraine. On June 7, a draft law (No. 7442) to amend the Bankruptcy Code concerning the application of bankruptcy proceedings during martial law was registered in the Verkhovna Rada. The draft law somewhat adjusts the powers of a bankruptcy trustee but fails to vest the trustee with the functions mentioned above.

One hopes that the additional powers of bankruptcy trustees can be added in the course of the draft law discussion, together with proper legislative mechanisms for “preventing a mass-scale bankruptcy of the companies.”

In my opinion, the post-war bankruptcy procedure must be focused on offering the debtor company a maximum opportunity for its preservation using mechanisms of debt restructuring or rehabilitation while taking into account the worse financial standing of the creditors; to remain solvent, the creditors will also be forced to take action, for instance, by selling the bankrupt debtor’s property in a liquidation procedure or having their claims met at the expense of the pledged (mortgaged) collateral.

Thus, it is important to realize that not only debtors (business or property owners) but also creditors (pledgees) need compensatory mechanisms to recover from the damage caused by russia’s armed aggression. It will enable creditors to offer debtors debt restructuring terms that will not make the company insolvent and result in its subsequent liquidation. By doing so, Ukraine will avert the potential mass-scale bankruptcy among its businesses after the war.