July 28, 2023
Everything about insolvency (Part 3: Monitoring procedure)
Table of contents:
3. Consequences of the introduction of the monitoring procedure
5. Obligations of the debtor during the monitoring procedure
6. Analysis of the financial condition of the debtor
7. Register of creditors’ claims
8. Convening the first meeting of creditors
- Law of the Republic of Uzbekistan dated April 12, 2022, № ZRU-763 “On Insolvency” (the “Law”);
- Resolution of the Cabinet of Ministers dated August 14, 2013, №224 “On Approval of Rules for detecting signs of false bankruptcy, bankruptcy concealment, and premeditated bankruptcy”.
The monitoring procedure is the first judicial procedure applied by the court from the date of acceptance of a petition to declare the debtor insolvent. This procedure is used in order to ensure the safety of the debtor’s property, analyze the debtor’s financial condition, compile a register of creditors’ claims, as well as to hold the first meeting of creditors. As a rule, this procedure is valid until the first court hearing. After this court procedure, according to the decision of the creditors’ meeting and the temporary manager, it is possible to introduce such procedures as judicial rehabilitation, external management, liquidation management, and amicable settlement.
Consequences of the introduction of the monitoring procedure
When a court accepts a case of insolvency of a debtor, it issues a ruling on accepting the application for proceedings and specifies the introduction of observation procedures. The introduction of the monitoring procedure has certain consequences. From the moment this procedure is implemented;
- execution of enforcement documents on property penalties shall be suspended. The exceptions to these penalties are:
- execution of enforcement documents issued on the basis of judicial acts on the recovery of wage arrears;
- payment of remuneration under copyright contracts, alimony, as well as compensation for injury to life or health, and compensation for moral damage, which have entered into force before the court accepted the application for proceedings on insolvency.
- it is forbidden to satisfy the demands of the founders (participants) of a debtor-legal entity for a share (share) in the property of the debtor in connection with his withdrawal from the composition of its founders (participants);
- the payment of dividends and other payments on equity securities shall be prohibited.
During the monitoring procedure, the court appoints a temporary manager from among the candidates proposed by creditors or an agency, or a public association of court administrators. The temporary manager has the following rights:
- to apply to the court to relieve him of his duties;
- to submit claims to the court on his own behalf on the invalidation of transactions, as well as on the application of the consequences of invalidity of void transactions, concluded or executed by the debtor in violation of the requirements established by Law;
- to raise objections to the execution of creditors’ claims during the monitoring procedure in cases stipulated by Article 79 of the Law;
- to take part in the judge’s review of the validity of the debtor’s objections to creditors’ claims;
- to apply to the court to take additional measures to ensure the safety of the debtor’s property, including the prohibition to make, without the consent of the temporary manager, transactions not provided for in Article 81 of the Law, the transfer of property for safekeeping to third parties, as well as the cancellation of such measures;
- to apply to the court with a motion to remove the head of the debtor from his duties;
- to submit to the court objections to the claims of creditors, recognized in accordance with this Law if the temporary manager has sufficient grounds to believe that the actions of the debtor on debt recognition violate the rights and legitimate interests of other creditors and (or) unfounded;
- to receive any information and documents relating to the debtor’s activities.
In addition, in accordance with the Law, the temporary manager has the following duties:
- take measures to ensure the safety of the debtor’s property;
- to analyze the financial condition of the debtor;
- form and maintain a register of creditors’ claims;
- to identify creditors of the debtor and maintain a register of creditors’ claims, to notify creditors about the introduction of the monitoring procedure in relation to the debtor;
- to provide information on the financial condition of the debtor and (or) its activities at the request of a creditor within ten days;
- to convene and conduct the first meeting of creditors;
- within 3 days from the date of its appointment to send for publication in the mass media the announcement about the introduction of the observation procedure in relation to the debtor;
- not later than 10 days from the date of publication of the announcement about introducing the monitoring procedure, to notify all creditors of the debtor, except creditors for wage arrears, about the court’s decision to introduce the monitoring procedure;
- after the end of the monitoring procedure, but not later than 5 days before the date set for the court hearing, to submit to the court a report on its activities, information on the financial condition of the debtor, and proposals on the possibility or impossibility of restoring the solvency of the debtor, the minutes of the first meeting of creditors with the documents provided for in Article 16 of the Law.
Obligations of the debtor during the monitoring procedure
From the date of the court’s introduction of the monitoring procedure in respect of the debtor, unilateral refusal to perform or unilateral amendment of contracts by the debtor’s counterparty is not allowed, even if it is allowed by the agreement of the parties. Termination of monetary obligations of the debtor by mutual settlement of an alternative counterclaim is allowed only in the following cases:
- if the debtor and creditor’s monetary claims arose prior to the commencement of the insolvency proceedings;
- the debtor-creditor’s monetary obligations arose as a result of transactions made before the commencement of insolvency proceedings.
Analysis of the financial condition of the debtor
During the monitoring procedure, in order to determine the sufficiency of the debtor’s property to cover the court costs for the payment of remuneration to court administrators, as well as to identify the possibility or impossibility of restoring the solvency of the debtor a temporary manager carries out an analysis of the financial condition of the debtor. On the basis of this report and the results of the inventory of the debtor’s property, if any, and the analysis of documents certifying the state registration of property rights, a temporary manager prepares proposals on the possibility or impossibility of introducing subsequent insolvency procedures.
Based on the results of the financial analysis, the temporary manager draws one of the following conclusions on the financial condition of the debtor:
- on not establishing signs of insolvency;
- on the presence of grounds for introducing one of the restoration of solvency procedures, if the signs of temporary insolvency are revealed;
- on the presence or absence of the possibility of restoration of solvency, if the signs of permanent insolvency are revealed.
The procedure for determining the financial condition of a debtor is established by the Cabinet of Ministers of the Republic of Uzbekistan, in connection with which the use of deliberately false information is not allowed in the preparation of an analysis of the financial condition of the debtor.
Moreover, any form of unnatural bankruptcy – false bankruptcy, concealment of bankruptcy and premeditated bankruptcy, is considered to be created by a business entity, individual entrepreneur, official, founder or owner of the property is considered a crime and knowingly from the type of crime (false bankruptcy – from 150 to 250 BCA or compulsory community service from 300 to 360 hours or correctional labor from 2 to 3 years or restriction of freedom from 2 to 3 years or imprisonment from 2 to 3 years, concealment of bankruptcy – is punished by the penalty from 150 to 250 BCA (Basic Calculated Ammounts) or compulsory community service from 300 to 360 hours or corrective works from 2 to 3 years or restriction of freedom from 2 to 3 years or imprisonment from 2 to 3 years, Intentional bankruptcy – punishable by a fine from 150 to 250 BCA or compulsory community service from 300 to 360 hours or correctional labor from 2 to 3 years or restriction of freedom from 2 to 3 years or imprisonment from 2 to 3 years) is punishable by a fine, correctional labor, deprivation of a certain right and imprisonment.
A temporary manager maintains the register of creditors’ claims during this procedure.
The register of creditors’ claims contains information about each creditor, the size of his claims for monetary liabilities and (or) liabilities for taxes and fees, and the order of satisfaction of each of his claims. Before participating in the first meeting of creditors, creditors have the right to submit their claims within 30 days from the date of publishing the information about the introduction of the monitoring procedure in mass media. In the statement of claims, the creditor must indicate information about himself, including full company name, location (postal address), e-mail address (if available), personal identification number of an individual, as well as bank details (if available). A creditor may appeal against the decision of the temporary manager or the court to refuse to include his claims in the register of creditors’ claims.
The debtor, in turn, has the right to submit its objection to the court regarding the claims of creditors with grounds for their recognition as established if:
- there is a judicial act that has entered into legal force, which cancels or modifies the judicial act submitted by the creditor as a basis for the recognition of claims established, as well as suspends its effect or changes the manner and procedure for its execution;
- there is a document canceling or modifying the document (acknowledgment of debt, notary’s enforcement inscription, etc.) submitted by the creditor as the basis for recognizing the claim established, as well as suspending its validity;
- the agreement between the debtor and the creditor on changing the terms, procedure, and conditions of debt repayment under the document submitted by the creditor as proof of qualification of the claim as established;
- the debtor has made full or partial repayment of the debt;
- there is evidence of a change of person in the obligation under which the claim is made.
It is worth noting that the accounts of creditors’ claims in the register of creditors’ claims are kept in the national currency of the Republic of Uzbekistan. The claims of creditors, expressed in foreign currency are calculated at the official rate of the Central Bank of Uzbekistan on the date of the creditors’ meeting. Also, current payments are not shown in the register of creditors’ claims.
Convening the first meeting of creditors
In insolvency proceedings, as it appears from practice, there are often several creditors, and so that they do not address their claims to the debtor individually, they are united in a meeting of creditors, and it is this meeting that will protect the interests of all the debtor’s creditors in the procedure.
After collecting and combining all the claims of creditors, the temporary manager determines the date of the first meeting of creditors and notifies all identified creditors, the representative of the debtor’s employees, as well as other persons entitled to participate in the first meeting of creditors. It shall take place no later than 5 days before the date of the court session, established in the court ruling on the admissibility of the application for the initiation of insolvency proceedings against the debtor.
The first meeting of creditors shall decide on the following issues:
On petitioning the court for the introduction of the judicial rehabilitation procedure (must contain the proposed term of the judicial rehabilitation procedure and the approved schedule for repayment of debts) or external management (must contain the proposed term of the external management procedure and the candidacy of the external manager, as well as information about him/her);
- on petitioning the court to declare the debtor bankrupt and initiate liquidation proceedings;
- on the number of members of the creditors’ committee and their election;
- on the approval of the candidacy of a rehabilitation manager, external manager, or liquidation manager;
- on other issues stipulated by the Law.
A court on the basis of the decision of the first meeting of creditors, decides on the recognition of the debtor bankruptcy and the beginning of liquidation proceedings or issues a ruling on the introduction of judicial rehabilitation procedure or external management or approves a settlement agreement and terminate proceedings on the insolvency case. The monitoring procedure is terminated after one of the above decisions is applied.
