August 11, 2023

Everything about insolvency (Part 4: Judicial sanitation)

Table of contents:

1. Judicial sanitation
2. Consequences of judicial sanitation 
3. A sanitizing manager 
4. Judicial sanitation plan 
5. Report of a sanitizing manager

Judicial sanitation
The sanitation procedure may be either judicial or non-judicial. You can find out more about the latter by following this link. This memorandum will cover the judicial sanitation procedure. Judicial sanitation is a restorative procedure introduced by economic courts on the basis of a decision of a creditors’ meeting. This procedure is implemented in order to restore the debtor’s solvency, and repay debts to creditors, without transferring the power to manage the debtor’s affairs to the sanitizing manager.
If after convening the first meeting of creditors, they at the end of it have decided on the application of judicial sanitation, they apply to the court with a petition for the introduction of judicial sanitation procedure. The court, in its turn, having considered it, issues a ruling on the introduction of the judicial sanitation procedure. It shall specify the terms of judicial sanitation procedure, approved by the court debt repayment schedule, information about the persons who have provided security for the performance of obligations, the amount and forms of such security, the appointment of a sanitizing manager and the amount of his remuneration. A debtor’s petition for a judicial sanitation procedure shall be accompanied by a plan of judicial sanitation of the debtor with a proposed term of the judicial sanitation procedure and a schedule of debt repayment. The period of judicial sanitation shall not exceed 24 months.
Consequences of judicial sanitation
As in the case of a monitoring procedure, the application by the courts of the judicial sanitation procedure has certain consequences for the debtor. During the period of judicial sanitation:
• the measures previously taken to secure creditors’ claims are cancelled;
• seizure of the debtor’s property and other restrictions on the debtor’s powers to dispose of his property are imposed only within the framework of the insolvency proceedings
• payment of all types of current tax payments arising in the insolvency process (with the exception of payroll taxes and similar payments) is suspended and paid after the end of the judicial sanitation procedure. In this case, these tax debts are payable in equal instalments within 6 months from the date of court approval of the report, sanitizing manager and the ruling on the termination of the insolvency proceedings against the debtor;
• no penalties (fine, interest) and other economic (financial) sanctions for non-fulfilment or improper fulfilment of monetary obligations and on taxes and fees, which arose at the time of the judicial sanitation procedure, as well as the interest payable.
Founders (participants) or the owner of a debtor’s property may not, without the consent of a creditors’ meeting or a creditors’ committee, decide on the reorganization (merger, consolidation, division, separation, reorganization) and liquidation of the debtor, and the debtor shall not make transactions
related to the transfer of immovable property for lease, pledge, with the introduction of the said property as a contribution to the charter capital of business companies and companies with limited and additional liability, or the disposal of such property in any other way;
• major transactions;
• related to receipt and issue of loans (credits), issue of guarantees and warranties, assignment of rights of claim, transfer of debt, and the conclusion of an agreement of trust management of the debtor’s property;
• transactions in which the sanitizing manager or creditors have an interest in accordance with the procedure established by law.
A sanitizing manager
As soon as the procedure of judicial sanitation is initiated, a sanitizing manager is appointed by the court for its enforcement. He is nominated to the court by the meeting of creditors. He may be released by the court upon his own application or upon the petition of the meeting of creditors or the persons who presented the security for the fulfilment of obligations, as well as in other cases stipulated by the law.
During the performance of his obligations, the sanitizing manager has the right to:
• demand information from the debtor’s head about the debtor’s current activities, the progress of the implementation of the measures provided for in the plan of judicial sanitation, and the implementation of the schedule of repayment of debts;
• demand from the head of the debtor a timely and complete transfer of funds for the repayment of creditors’ claims;
• take part in the stocktaking of assets, should the debtor conduct it;
• exercise control over the timely fulfilment by the debtor of its current claims of creditors;
• coordinate the transactions and decisions of the debtor in the cases related to (i) the transfer of immovable property for rent, pledge, with the deposit of the specified property as a contribution to the authorized capital (authorized capital) business companies and limited and additional liability companies or the disposal of such property in another way; (ii) large transactions; (iii) with the receipt and issuance of loans (credits), the issuance of sureties and guarantees, the assignment of claims, the transfer of debt, as well as with the conclusion of a contract of trust management of the debtor’s property; (iv) with transactions in which there is an interest of the sanitizing manager or creditors;
• provide creditors with information on the above transactions and decisions;
• appeal to court against the actions of the debtor on the recognition of claims or confirmation of the grounds for claims’ recognition, or the debtor’s inaction in terms of handling the creditors’ claims;
• apply to the court with a request for removal of the head of the debtor from his duties;
• request from the head, founders (participants) of the debtor and/or state bodies the information and documents related to the debtor;
• use public services, including through the Agency of public services under the Ministry of Justice of the Republic of Uzbekistan in order to ensure the fulfilment of their powers without prior payment
• apply to the court with a petition to take additional measures to ensure the safety of the debtor’s property, including the transfer of property for storage to third parties, as well as the cancellation of such measures.
In addition to the above rights, the sanitizing manager has the following duties:
• to keep a register of creditors’ claims;
• to convene a meeting of creditors;
• to review reports on the progress of the plan of judicial sanitation and debt repayment schedule provided by the debtor, and provide appropriate conclusions to the meeting of creditors;
• to provide, within ten days, information about the financial condition of the debtor and (or) his activities at the request of a creditor;
• to provide information on the implementation of the judicial sanitation plan to the creditors’ meeting and the creditors’ committee, as well as to the authorized state body, if the debtor has a state share in the debtor’s authorized fund.
After the termination of insolvency proceedings and the restoration of the debtor’s solvency, the rights and obligations of the sanitizing manager cease. In cases where the insolvency proceedings have passed to the next stage – the court ruling on the introduction of external management procedures or on declaring the debtor bankrupt and starting liquidation proceedings, the sanitizing manager continues to perform his duties until the external manager or liquidation manager is transferred to the proceedings.

Judicial sanitation plan
In order to restore the debtor’s solvency and pay off debts to creditors, a plan of judicial sanitation is drawn up. It is prepared by the head, founders of the debtor or the owner of the debtor’s property. It must specify:
• measures to restore the solvency of the debtor, the conditions and procedure for implementing these measures, the costs of their implementation and other costs of the debtor;
• schedule of debt repayment;
• the amount and term of guaranteed compensation, which can be received in case of liquidation of the debtor by the creditor who voted against the approval of the plan of judicial sanitation, or by the creditor not entitled to vote for the approval of this plan;
• the period of restoration of the debtor’s solvency.
The period of implementation of the plan of judicial sanitation, shall not exceed the period provided in the court ruling on the initiation of the judicial sanitation procedure. In the elaboration of the judicial sanitation plan approval, there will be held a vote with the participation of (1) creditors from the debtor’s obligations secured by collateral and (2) creditors from the debtor’s claims from contracts, not secured by collateral, contracts of supply, performance of works and rendering services and from contracts of compulsory insurance and insurance of bank loans. Their decision shall be deemed approved, if the majority of creditors from the first group (creditors for secured obligations of the debtor) and the second group (creditors for claims against the debtor, arising from contracts, not secured by collateral, contracts of supply, performance of works and provision of services, as well as from contracts of compulsory insurance and insurance of bank credits) voted for it. Also, the judicial sanitation plan may provide for:
• reduction of the debtor’s authorized capital;
• the issue and placement of an additional issue of the debtor’s shares;
• contribution of an additional share in the debtor’s authorized capital and conversion of creditors’ claims into shares;
• sale of the enterprise (business) or part of the debtor’s property in accordance with the procedure of this law.
If, creditors determine the lack of possibility to fully or partially implement the plan of judicial sanitation and debt repayment schedule or consider the possibility of their implementation only by making changes, they apply to the court for approval of changes in the schedule of debt repayment and the court may make changes to the plan of judicial sanitation and debt repayment schedule.

Report of a sanitizing manager
No later than 15 days before the end of the prescribed period of the judicial sanitation procedure, the head of the debtor is obliged to submit to the court a report on the results of the judicial sanitation procedure. The following documents shall be attached to it:
• the debtor’s balance sheet as of the last date
• a report on the financial results of the debtor
• register of creditors’ claims, indicating the amount of redeemed claims and documents confirming the redemption;
• conclusion of the sanitizing manager on the report of the debtor’s head;
• complaints from creditors whose claims have not been repaid.
The grounds for early termination of judicial sanitation are cases when the debtor, during the judicial sanitation period, repaid all the debtor’s claims stipulated by the debt repayment schedule before the expiration of the judicial sanitation procedure established by the court, or if the debtor significantly (for a period of more than 1 month) violated the repayment terms of creditors’ claims and if there are circumstances indicating the inability to fulfil the schedule repayment of debt.
In the first case the sanitizing manager is obliged to notify all creditors, whose claims were included in the repayment schedule, about the date, time and place of the court session to consider the report of the debtor’s head on the early termination of the judicial sanitation procedure. After reviewing the report of the debtor’s head and creditors’ complaints about the early termination of the judicial sanitation procedure, the court:
• approves the debtor’s head’s report and terminates the insolvency proceedings if it is found that there is no outstanding debt and the complaints of creditors are found to be unjustified;
• refuses to approve the report of the debtor’s head, if it is found that there is no outstanding debt and creditors’ complaints are found to be groundless.
Based on the results of a review of the sanitizing manager’s report and creditors’ complaints, the court:
• approves the report of the sanitizing manager and issue a ruling on the termination of insolvency proceedings, if it is found that there is no outstanding debt, and the complaints of creditors are found to be unjustified;
• refuses to approve the report of the sanitizing manager, if the existence of outstanding debts and creditor complaints found to be justified, and issue a ruling on the introduction of external management procedures, or decide to declare the debtor bankrupt and the beginning of liquidation proceedings.
This stage completes the process of judicial sanitation.