May 4, 2023
Everything about insolvency (Part 1: General overview)
The following normative-legal documents were used when preparing this memorandum:
- Law of the Republic of Uzbekistan dated April 12, 2022, № ZRU-763 “On Insolvency”;
- Law of the Republic of Uzbekistan dated May 5, 1994, № 1054-XII “On bankruptcy”;
- Law of the Republic of Uzbekistan dated April 24, 2003, № 474-II “On bankruptcy”;
- Economic Procedural Code of the Republic of Uzbekistan dated April 1, 2018.
The institution of bankruptcy in our Republic, began to form with the adoption of the very first law “On bankruptcy”, dated May 5, 1994 №. 1054-XII. This law included only 35 articles and was not that effective, because according to statistics in the first year of its entry into force, only two companies were declared bankrupt. Now, 28 years later, on April 12, 2022, a new Law of the Republic of Uzbekistan “On Insolvency” (hereinafter referred to as Law) has been adopted with a view to regulating the relations in the sphere of insolvency of legal entities, individuals, and individual entrepreneurs. Before the adoption of this Law, the Law “On Bankruptcy” dated April 24, 2003, was in force in the Republic of Uzbekistan. At present, the name of the new law is used meaning – insolvency, and in the old law – there was a concept of bankruptcy. In this regard, the reader may have some confusion in understanding their meaning. In the law “On bankruptcy” dated April 24, 2003, the concept of bankruptcy is interpreted as follows – economic insolvency – is the debtor’s inability to satisfy in full the creditors’ claims concerning monetary obligations and (or) fulfil obligations on obligatory payments admitted by the economic court. Under the new law, the definition of insolvency is identical to the concept of bankruptcy, only a different designation is used to fix it.
Its signs are:
- temporary insolvency – the debtor’s temporary inability to meet the claims of creditors on monetary obligations on the date of application to the court, if the debtor has not fulfilled its obligations arising from the contract within 3 months from the date of occurrence; and
- permanent insolvency – when the debtor’s obligations exceed the value of its assets on the date of application to the court and in the reporting period at the beginning of the year in which the application was filed.
The law also outlines the concept of a bankrupt – a debtor recognized as insolvent on the basis of a court decision, in respect of which the liquidation proceedings or sale of his property are applied. In other words, if a debtor is recognized as bankrupt on the basis of a court decision, after which all the obligations towards its creditors are terminated, and insolvency is the debtor’s state from which it can be gradually removed by applying one of the rehabilitation procedures, and in cases when it is impossible to recover by applying liquidation proceedings, it can be declared a bankrupt.
It is worth noting that this Law does not apply to public institutions and other non-profit organizations, with the exception of legal entities operating in the form of a consumer cooperative or public foundation.
In order to restore solvency, the debtor – a legal entity and a natural person, as well as an individual entrepreneur, depending on the situation, measures aimed at restoring his solvency are applied. They are divided into two types – judicial and non-judicial. The debtor and creditor, in their application for insolvency proceedings, may indicate the need for one of the restoration procedures, or liquidation proceedings.
Non-judicial insolvency proceedings include:
- Pre-trial sanitation; and
- Voluntary liquidation (termination of activities).
Pre-trial sanitation, measures applied by the founders (participants) or the owner of the property of the debtor-legal entity, creditors and other persons to restore the solvency and prevent the debtor’s insolvency, before the initiation of the insolvency proceedings. The object of pre-trial rehabilitation is a debtor-legal entity, and the subject is the debtor’s founders (participants) and state bodies.
The pre-trial sanitation procedure is used to take the following measures:
- full or partial redemption of overdue debts;
- re-profiling of production for the production of competitive products;
- the attraction of highly qualified specialists from outside;
- training, retraining and advanced training of personnel;
- providing financial assistance by legal entities and individuals interested in the restoration of the debtor’s solvency and continuation of his activities;
- an agreement between a debtor and creditors aimed at reaching an agreement between them on deferral and/or instalment of payments due to creditors or a discount on debts in order to continue the debtor’s activities;
- deferment of payment of taxes and fees and repayment of loans for the period of pre-trial reorganization;
- reorganization of the debtor-legal entity.
In some cases, pre-trial sanitation is carried out with the provision of state support, based on the decision of the authorized body of the Cabinet of Ministers. Under such conditions, the term of pre-trial sanitation is introduced from 12 to 24 months.
Legal insolvency proceedings against legal entities include the following procedures:
- Supervision;
- Legal sanitation;
- External management;
- Liquidation proceedings.
When an insolvency case is considered against a debtor who is an individual, the following procedures are applied:
- Debt restructuring;
- Recognition of bankruptcy and sale of property.
In addition to this, in cases of consideration of the case of insolvency of an individual entrepreneur applies – liquidation proceedings.
The grounds for the initiation of insolvency proceedings are:
- An application by creditors, the debtor and persons authorized by law;
- Temporary insolvency of the debtor (one of the restoration procedures is applied);
- Permanent insolvency of the debtor (the debtor is declared bankrupt and liquidation proceedings are commenced);
- Evidence confirming the validity of the creditor’s claims, including a valid court decision, evidence of recognition of these claims by the debtor, a letter of execution from a notary public is the basis for the creditor to apply to the court for initiation of insolvency proceedings against the debtor and declaring him bankrupt, as well as the beginning of liquidation proceedings.
In accordance with Article 7 of the law, the right to apply to the court for the institution of insolvency proceedings against the debtor-legal entity, which has a state share or debts to the Republic of Uzbekistan, has the right:
- The debtor itself;
- Bodies of the State Tax Service on cases of insolvency;
- The State Assets Management Agency of the Republic of Uzbekistan and its territorial office.
At any stage of an insolvency case, a debtor and creditor are entitled to conclude a friendly settlement for peaceful resolution and elimination of debts. Decision on a friendly settlement agreement on behalf of creditors is taken by a creditors’ meeting, and on behalf of the debtor – by the debtor himself, his manager, an external manager, a liquidation manager or a financial manager. A settlement agreement is subject to approval by the court, after which it enters into force. It shall be concluded in writing. On behalf of the debtor it is signed – the debtor himself – an individual entrepreneur the head of the debtor, or a court administrator. Moreover, on behalf of creditors, a person authorized by the creditors’ meeting signs a settlement agreement.
A settlement agreement may contain the following conditions:
- On the deferral or instalment payment of monetary obligations;
- On the assignment of the rights of claim of the debtor in favour of another;
- On the fulfilment of monetary obligations of the debtor by third parties;
- On a discount on the debt;
- On changing the timing and order of payment of taxes and fees;
- Satisfaction of creditors’ claims by other means not contrary to the law.
In cases where the value of the property of the legal entity, in relation to which the decision was made on the liquidation due to the failure of its financial and economic activity and (or) the formation of its statutory fund in the terms established by law, is not sufficient to meet the requirements of creditors, it is liquidated in a simplified procedure. That is, this procedure has its own peculiarities. The court makes a decision on declaring the liquidated legal entity bankrupt and the beginning of liquidation proceedings, appoints a liquidator. Procedures of supervision, judicial rehabilitation and external management in the insolvency of the liquidated legal entity do not apply. Creditors have the right to present their claims to the liquidated legal entity within one month from the date of publication of the announcement on the liquidation of the legal entity bankrupt.
Cases of insolvency are considered only in the Economic Courts of the Republic of Uzbekistan, at the place of state registration of the debtor – a legal entity, and at the place of residence of a natural person and an individual entrepreneur. On the basis of Article 211 of the Economic Procedural Code of the Republic of Uzbekistan (hereinafter – EPC), and Article 7 of the Law, the right to apply to the court with the statement on the initiation of the proceedings on the insolvency of the debtor (hereinafter the application) have:
- the debtor; and
- creditor.
The debtor’s application for insolvency proceedings must include:
- Name of the court where the application is filed;
- Applicant’s name (surname, first name, patronymic) and location (mailing address), electronic mailing address (if any);
- The amount of creditors’ claims on monetary obligations admitted by the debtor;
- The amount of the debtor’s indebtedness on compensation for the employee’s life or health damage, labour remuneration and severance pay payable to the debtor’s employees;
- The amount of remuneration payable under copyright agreements;
- The amount of tax arrears;
- Justification of inability to satisfy the creditors’ claims in full;
- Information on claims accepted by the courts against the debtor, as well as on writs of execution filed for undisputed (non-acceptable) write-off;
- Information about the debtor’s property, including cash, receivables;
- Numbers of the debtor’s bank accounts, bank-mailing address;
- List of attached documents.
The application of the debtor of an individual must include the same list of information.
Documents to be attached to the application of the legal entity:
- Foundation documents of the debtor-legal entity, documents of the state registration of the legal entity or individual entrepreneur, as well as a copy of the passport of an individual;
- The list of creditors and debtors of the debtor with the deciphering of accounts payable and receivable and an indication of the location (postal address), e-mail address (if any) of creditors and debtors of the debtor;
- Balance sheet or substituting documents of the debtor-legal entity as of the last reporting date;
- Documents on the composition and value of the property of the debtor-individual or individual entrepreneur;
- The decision of the founders (participants) or property owner of the debtor-legal entity on the application of the debtor to the court on the institution of the insolvency proceedings against him;
- Minutes of the meeting of the debtor’s employees, which elected a representative of the debtor’s employees to participate in the insolvency proceedings, if such meeting was held before the filing of the application for the institution of insolvency proceedings.
The debtor submits an application to the court either in writing or electronically. Then, the head of the debtor – a legal entity, an individual or their representatives and an individual entrepreneur, sign it. A statement of the debtor-individual entrepreneur of his insolvency shall also include information about the debtor’s obligations, not related to entrepreneurial activity. The debtor after filing the application to the court is obliged to send a copy of the application to creditors and other persons involved in the case.
Documents to be attached to the application of individuals:
- Information confirming the existence or loss of the status of the individual entrepreneur (if engaged in such activity);
- The list of property of an individual (with an indication of the price), which the debtor is ready to provide to satisfy the claims of creditors, the location or storage of property with indication of the name or name, surname and patronymic of the owner of the property, which is the subject of pledge;
- Copies of documents (if any) confirming the individual’s right to own the property and the individual’s exclusive rights to the results of intellectual activity;
- Copies of documents of real estate, securities, shares in the authorized fund (authorized capital) of the legal entity, vehicles, as well as transactions entered into by an individual in the period of three years prior to the date of application;
- Extract from the register of shareholders (participants) of the legal entity, in which the individual is a shareholder (participant) (if available);
- Information on the income received by the individual, on taxes and fees accrued and paid during the three years preceding the date of application submission on recognizing the individual insolvent;
- Certificate issued by a commercial bank on accounts in commercial banks and balances, savings (deposits), as well as information on operations, deposits on accounts of an individual, including individual entrepreneur for the period of three years before the date of application submission on recognizing the individual insolvent (if any);
- Information on the status of the insured person’s personal account (if any);
- Copy of the decision of the territorial Department of Employment and labour relations on the recognition of an individual as unemployed (if any);
- Copy of the marriage certificate (if concluded on the date of application or divorce is not registered) and (or) the divorce certificate (if it was issued earlier within three years before the application), as well as a copy of the marriage contract (if any);
- copy of the agreement or court document on the common property of the spouses concluded and accepted within three years before the date of filing the application, respectively (if any).
A creditor’s application to initiate insolvency proceedings against the debtor must contain the following:
- The name of the court to which the application is filed;
- name (surname, first name, patronymic) of the applicant and its location (postal address), e-mail address (if any);
- Name (surname, first name, patronymic) of the debtor and his location (mailing address), e-mail address (if any);
- The amount of the debtor’s monetary obligation to the creditor from which the claim arose, as well as the deadline for its fulfilment;
- Evidence of the validity of the creditor’s claims, including the effective court decision, evidence confirming the recognition of these claims by the debtor, and executive inscription of a notary;
- The list of attached documents.
An application by a creditor, state tax service or other authorized body for recognition of an individual as insolvent shall include the same list of documents.
Documents to be attached to the creditor’s application:
- A power of attorney confirming authority to sign the application, if the creditor’s application is signed by a representative;
- The decision of the court that considered the creditor’s claims against the debtor;
- Executive document (executive sheet, payment requests accepted by the debtor, notary’s enforcement inscription) or evidence confirming the debtor’s recognition of the creditor.
The creditor, as well as the debtor, files an application to the court, either in writing or in electronic form. The head or representative – a legal entity, a natural person and an individual representative or their representatives, signs it. The creditor is obliged to send a copy of his application to the debtor.
