This reform is aimed at protecting businesses and individuals from hostile takeovers and fraud, promote Ukraine’s investment climate and improve its investment appeal by ensuring the sanctity of rights to assets.
Systemic hostile takeovers have been stopped
Registrars who according to the statistics carried out 95% of hostile takeovers have been delisted. Stricter liability for these violations has been introduced together with higher eligibility criteria for state registrars.
A lifetime disqualification has been issued to state registrars who facilitated the misappropriation of assets and business. Access to state registers is now ensured through multifactor authentication of state registrars.
The composition of the State Registration Complaints Panel has been updated. The Anti-Hostile Takeover Office has been established. Complaints about illegal registration can be filed to the Panel in electronic form.
If acts/omissions of a state registrar are found to have breached the law, the complaint will be immediately reviewed by the Ministry of Justice without the need for a panel hearing.
These steps have significantly reduced the amount of fraud with legal data and the number of hostile takeover attacks on businesses, and the Panel ensures rapid and effective review of state registration complaints.
Over the first six months of 2020, the Panel of the Ministry of Justice has reviewed 1,267 state registration complaints, of them:
• 542 have been satisfied;
• 725 have been essentially dismissed;
• 0 have been rejected on formal grounds (without examining the merits of the case).
For reference: in the same period 2019, the Anti-Hostile Takeover Committee reviewed 1,618 complaints, of them:
• 198 have been satisfied;
• 321 have been essentially dismissed;
• 1,099 have been rejected on formal grounds (without examining the merits of the case).
Defence of creditor rights has been improved
The Government has ensured regulation of the matters required for enactment of the Bankruptcy Code of Ukraine, including respective resolutions of the Cabinet of Ministers of Ukraine and orders of the Ministry of Justice.
Competitive and favourable conditions have been created for selling debtor assets at auctions as part of bankruptcy (insolvency) cases. This was achieved by the authorisation to sell debtor assets only at electronic auctions.
Registration of transfer of ownership of mortgaged property has been changed (previously, failure to serve a creditor claim to a debtor essentially blocked state registration because debtors abused their right unreasonably refusing to receive the claim).
The place of residence registration process has also been changed to create favourable environment for the development of mortgaging in Ukraine and to improve the defence of mortgagee property rights and mortgagor housing rights. As a result, if housing property is mortgaged or held in trust to secure obligations, the place of residence of the mortgagor is only registered with the consent of the mortgagee or trustee. These new regulatory measures will remove barriers to foreclosure of mortgaged or held in trust housing property thereby facilitating access to mortgaging.
The regulatory framework for dispute resolution alternatives has been developed
The Verkhovna Rada of Ukraine has registered draft legislation — Law of Ukraine “On Mediation” (registration No. 3504 of 19 May 2020) and Law of Ukraine “On Amendments to Certain Laws of Ukraine to Improve the Establishment and Operation of Arbitration Courts for Rebuilding Trust in Arbitration” (registration No. 3411 of 29 April 2020).
The fact that owners of real property and other valuables, managers and founders of legal entities are not protected from crime poses a risk to property rights. The frequency and scale of hostile takeovers cause high social tension forcing entrepreneurs to divert significant resources for the protection of their interests. A favourable investment climate under such conditions is out of the question.
Bankruptcy proceedings are inefficient due to several factors, including their high cost (40.5%) and low debt repayment index (DRI). According to the Doing Business ranking for the respective years, the DRI in Ukraine increased from 8.6 in 2015 to only 9 in 2019, while the best performing country in 2019 was Norway with its DRI 92.9.
The long duration of bankruptcy proceedings is another cause of the problem. It is partially conditioned by the extremely low automation of work of insolvency receivers and poor communication with parties to insolvency cases. Over the period from 2015 to 2019, the duration of proceedings has not change and was 2.9 years. For reference, in Ireland each process of this type in 2019 only took 0.4 years, the shortest duration compared to other countries.
There is no practice of using dispute resolution alternatives, referring to an arbitration court or applying for mediation to settle relations, therefore, disputing parties have very low trust in out-of-court dispute resolution. Dispute resolution alternatives are hardly ever used because civil society institutions have insufficient information as to how to settle disputes without going to court.
Building a secure state registration system
Introducing a risk-oriented model to prevent hostile takeovers;
Providing the option of performing some registration processes automatically without involving a state registrar;
Streamlining the registration of affiliates and representative offices of foreign legal entities.
Launching effective solvency restoration procedures
Reducing the duration of bankruptcy proceedings by the automation of work of insolvency receivers;
Increasing restoration of solvency of business entities and individuals in bankruptcy proceedings;
Adapting Ukrainian bankruptcy (insolvency) legislation to the EU laws.
Increasing the role of dispute resolution alternatives
Legislating the mediation option;
Raising public awareness of mediation-based methods of out-of-court dispute settlement;
Rebooting arbitration courts and improving arbitration regulation.
To develop and submit to the Verkhovna Rada of Ukraine the bills to enhance the defence of property rights of individuals and legal entities, build effective mechanisms to prevent hostile takeovers, provide the option of performing some registration processes automatically without involving a state registrar, and streamline the registration of affiliates and representative offices of foreign legal entities.
It is planned to launch updated software for the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organisations (USR), including additional control measures and security modules to help combat hostile takeovers, improve the quality of ultimate beneficial owner data through clear structuring and separating them from information about founders. The implementation of the updated USR will allow for further integration with other governmental registers and systems as part of the digitalisation programme, strengthening anti-hostile takeover solutions and the introduction of the latest cybersecurity tools.
Improving the legislation because of the adoption of the Bankruptcy Code of Ukraine is one of the key tasks for 2020. Submitting a respective bill to the Verkhovna Rada of Ukraine to help eliminate technical inconsistencies and shortcomings, address controversies and harmonise some of the Code provisions.
Following up in the Verkhovna Rada of Ukraine the bills aimed to raise public trust in dispute resolution alternatives and reduce the burden on state courts.
Legislating the institution of mediation in Ukraine will help promote the resolution of conflicts (disputes) by mutual agreement which is achieved with the involvement of a mediator and serves the interests of the parties to the conflict (dispute), reduce the burden on state courts and reduce the number of refusals to abide by judgements.
The key priority is to improve the formation and operation of arbitration courts by the introduction of regulatory changes which will considerably relieve the burden on the judicial system as arbitration will become more popular with contractual parties (due to broader jurisdiction of cases, updated process of state registration of an arbitration court, and empowerment of arbitration agencies).
It is also planned to develop a bill to improve the regulation of arbitration with the purpose of building the system of prompt and effective protection of rights and legitimate interests of residents and non-residents by the use of dispute resolution alternatives.
The Ministry of Justice of Ukraine, State-owned Enterprise “National Information Systems”, PRAVO-JUSTICE, the World Bank’s project Supporting Transparent Land Governance in Ukraine, the Transparency and Accountability in Public Administration and Services (TAPAS) project.