When bankruptcy proceedings are opened against a Ukraine-registered debtor company, a register of creditors’ claims must be formed in order to decide on debt repayments. If a creditor does not file an application for entry into the register, its claim will be considered discharged. To be entered into the register, the creditor’s claim must be recognised by either the asset manager or the commercial court dealing with the case. At this claim recognition stage, an arbitral award creditor faces significant difficulties if the award did not go through recognition and enforcement proceedings before the courts of general jurisdiction pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Technically, such an award is not yet enforceable in Ukraine and the creditor may thus face the denial of its claim under the award in the bankruptcy proceedings. While current legislation is silent on how this problem should be resolved, Ukrainian courts have suggested their own solution – unfortunately, not a pro-arbitration one.
In bankruptcy proceedings against the Black and Azov Production and Operational Management of Sea Routes State Company, the Odessa Commercial Court of Appeal reversed(1) the trial court decision(2) and refused recognition of claims made by Clashmore Holdings Ltd that had been confirmed by three final arbitral awards delivered by an arbitral tribunal in London. Referring to the Commercial Procedure Code of Ukraine, the Law on International Commercial Arbitration and the New York Convention, the appeal court pointed out that an application to the court of general jurisdiction is required for the arbitral award to be recognised and enforced in Ukraine. Further, the appeal court concluded that since Clashmore Holdings Ltd filed no application for recognition and enforcement of the awards with the commercial court, corresponding claims could not be recognised in the bankruptcy proceedings or entered into the register of creditors’ claims.
The position taken by the appeal court does not answer the question of whether a claim confirmed by an arbitral award that is not yet enforceable in Ukraine will be recognised in bankruptcy proceedings, since it is based on the incorrect interpretation of the Commercial Procedure Code, the Law on International Commercial Arbitration and the New York Convention. Only the courts of general jurisdiction, rather than commercial courts, are competent to deal with proceedings on recognition and enforcement of arbitral awards in Ukraine.
However, in a bankruptcy case against another state company – the Pridneprovskiy Nonferrous Metals Plant(3) – the courts gave a deeper analysis and suggested that a certain approach should be taken where the debtor goes bankrupt before the arbitral award is recognised in Ukraine. The case concerned, among other things, recognition of a claim by Trans European Limited against the Pridneprovskiy plant that had been confirmed by an award of the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry.(4) The debtor went bankrupt before Trans European Limited, the creditor, could apply to Ukrainian courts for recognition of the award under the New York Convention.
Having considered the matter, the trial court issued its decision and partially recognised Trans European Limited’s claim.(5) The court found that pursuant to Article 35 of the Commercial Procedure Code, the facts proven in the course of arbitration proceedings should be considered res judicata (ie, conclusive and settled) for the purposes of the proceedings before national courts.
The trial court decision was quashed by the Dnepropetrovsk Commercial Court of Appeal.(6) The appeal court also rejected recognition of Trans European Limited’s claim under the October 10 2007 award and excluded the claim from the register of creditors’ claims.
In quashing the trial court decision and rejecting Trans European Limited’s claim, the appeal court referred first to a decision of the Highest Commercial Court(7) holding that all creditors’ claims – regardless of whether they have been confirmed by the decision of a jurisdictional body, recognised in a claim procedure or challenged by the debtor – are subject to verification (ie, recognition) by the court.
The appeal court then disagreed with the trial court conclusion and pointed out that the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry is a private arbitration tribunal, thus excluding its awards from the scope of Article 35 of the Commercial Procedure Code. The appeal court therefore concluded that the facts proven in the course of arbitration proceedings were not res judicata in the proceedings before the national courts and were subject to a general burden of proof.
The conclusion reached by the Dnepropetrovsk Commercial Court of Appeal means that in the absence of a judgment on recognition and enforcement of a foreign arbitral award by a Ukrainian court of general jurisdiction, a creditor’s claim under such an award must be proved again – before either the asset manager or the commercial court dealing with the bankrupt debtor’s case – on the basis of the primary documents concerning the claim (eg, the contract and payment documents). At the same time, the creditor runs the risk that upon submission of its claim to the commercial court dealing with the bankruptcy case, the commercial court may decline jurisdiction on the basis that the claim is governed by the arbitration clause.
Unfortunately, this approach discredits the entire arbitration proceeding, since the creditor is forced to re-prove the validity of its claims. Otherwise, the creditor is at risk of being excluded from the approved register of creditors’ claims and its claim will be considered discharged pursuant to the Law on Restoring Debtor’s Solvency or Declaring It Bankrupt.
Therefore, despite certain risks, in situations similar to those described above, it is recommended that creditors file an application for entry into the register of creditors’ claims not on the basis of the arbitral award confirming the claim, but rather on the basis of the primary documents confirming the validity of their claims.
Russian version of the article can be read here.
(1) Decision of the Odessa Commercial Court of Appeal, October 26 2011, Bankruptcy Proceeding 21-2/6-08-285.
(2) Decision of the Commercial Court of Odessa Oblast, September 14 2011, Bankruptcy Proceeding 21-2/6-08-285.
(3) No Б29/117-09.
(4) International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry, October 10 2007, АС 157у/2007.
(5) Decision of the Commercial Court of Dnepropetrovsk Oblast, December 8 2010, Bankruptcy Proceeding Б29/117-09.
(6) Decision of the Dnepropetrovsk Commercial Court of Appeal, January 31 2011, Bankruptcy Proceeding Б29/117-09.
(7) Decision of the Highest Commercial Court of Ukraine, Bankruptcy Proceeding Б-145/2-31.