August 18, 2023

Everything about insolvency (Part 5: External Management Procedure)

Table of contents:

Legislation
External management procedure
Consequences of introducing the procedure of external management
Moratorium
External manager
External management plan
Sale of Debtor’s Enterprise (Business) as Property Complex
Sale of Part of Debtor’s Property 
Replacement of debtor’s assets
Claims of creditors
Report of External Manager


Legislation 
1. Law of the Republic of Uzbekistan dated April 12, 2022, № ZRU-763 “On Insolvency” (the Law)

External management procedure 
The external management procedure is one of the restoration bankruptcy procedures. The basis for the implementation of this procedure is a petition of a meeting of creditors, or an application of a state body on the debtor (to find out which bodies are authorized to apply to the debtor go to the link and read the first part of the Memorandum). Meetings of creditors may decide to apply the procedure of external management both after the monitoring procedure and after the judicial sanitation procedure. This procedure is carried out for the financial rehabilitation of the debtor with the transfer of the management authority to an external manager. The procedure of external management is applied only in those conditions when the real possibility of restoration of the debtor’s solvency is established.
The court, on the basis of a petition or application, issues a ruling on the introduction of the external management procedure. The period of external administration is from 12 to 24 months. Depending on the passage of the procedure, the period may be extended or shortened, but in total, it may not exceed 30 months.

Consequences of introducing the procedure of external management 
The introduction of external management procedure has certain consequences, such as during the period of external management:
• the head of the debtor is suspended from his duties, and the management of the debtor’s affairs is entrusted to the external manager. The external manager must issue an order to terminate the employment contract with the head of the debtor or to transfer him to another job;
• the powers of the management bodies of the debtor shall be terminated. The powers of the head of the debtor and other management bodies of the debtor shall be transferred to an external manager, except for the powers transferred to other persons (bodies) in accordance with the Law. Management bodies of the debtor within three working days from the appointment of an external manager shall be obliged to ensure the transfer of accounting documentation and other documentation of the debtor, seals, and stamps (if any), material, and other valuables to the external manager;
• the measures previously taken to secure creditors’ claims shall be canceled;
• seizure of the debtor’s property and other restrictions on the debtor’s authority to dispose of his property may be imposed only within the framework of insolvency proceedings
• payment of all current tax debts (with the exception of payroll taxes and similar payments) incurred during the insolvency proceedings is suspended and paid after the term of the proceedings of external management. In this case, these tax debts must be paid in equal installments within 6 months from the date of court approval of the external manager’s report and the ruling on the termination of insolvency proceedings against the debtor;
• a moratorium is imposed on the satisfaction of creditors’ claims on monetary liabilities and taxes and levies of the debtor.

Moratorium 
Moratorium – the suspension of execution by a legal entity (debtor) of monetary obligations and or duties on taxes and levies. When monetary liabilities, taxes, and fees were accrued before the introduction of the external management procedure, then the moratorium applies to them. In addition, when they arose after the introduction of one of the procedures of restoration of solvency in relation to the debtor, the introduction of a moratorium does not apply to them.
During the moratorium procedure:
• no recovery under enforcement and other documents, the recovery of which is made in an undisputed manner;
• no penalties (fine, penalty) and other economic sanctions for non-fulfillment or improper fulfillment of monetary obligations arising after the introduction of the debtor’s supervision procedure or the judicial rehabilitation procedure, as well as interest payable, shall be accrued.

External manager 
The meeting of creditors, which has decided to introduce the procedure of external management, must choose a candidate for an external manager. His candidacy is submitted to the meeting of creditors by any of the creditors or by the authorized state body, and is elected on the basis of voting, the candidate with the most votes is submitted to the court. If the external management procedure is introduced by the court in the absence of a decision of the creditors’ meeting to apply to the court for introducing external management procedure, the creditors’ meeting has the right to consider, approve and submit a candidate for external manager to the court within 3 weeks from the date of the court ruling on introducing external management procedure. Thus, the external manager shall be appointed by the court by making a ruling, simultaneously with the introduction of the external management procedure.
The external manager during the execution of his duties performs the powers of the debtor’s manager and is competent:
• convene a meeting of creditors and a committee of creditors;
• dispose of the debtor’s property with the restrictions;
• enter into a settlement agreement on behalf of the debtor;
• receive remuneration;
• engage other persons for performing their functions on a contractual basis with payment for their activities from the debtor’s funds, unless otherwise provided by the Law or an agreement with creditors;
• apply to the court for early termination of the performance of their duties;
• submit to the court an application for invalidating the debtor’s contracts;
• receive loans from commercial banks, financial institutions to restore the debtor’s solvency, as well as receive financial assistance from legal entities and natural persons interested in continuing the debtor’s activities;
• request information and documents related to the debtor from the head of the debtor, the founders of the debtor, and (or) state bodies;
• use public services without prepayment, including through the Public Services Agency under the Ministry of Justice of the Republic of Uzbekistan, to ensure the fulfillment of their rights and obligations;
• declare a refusal to perform the debtor’s contracts.
The external manager has the following obligations:
• accept the debtor’s property and conduct its inventory;
• take measures aimed at searching, identifying, and returning the debtor’s property held by third parties;
• open a special account for external management and settlements with creditors;
• develop and submit for approval to the meeting of creditors an external management plan;
• maintain financial, accounting, and statistical records and provide reporting;
• raise objections to the claims of creditors against the debtor;
• take measures to collect the debt to the debtor;
• maintain a register of creditors’ claims;
• submit reports to the meeting of creditors on the progress and results of the implementation of the external management plan;
• provide, at the request of the creditor, within 10 days, information on the financial condition of the debtor and (or) their activities;
• provide information on the implementation of the external management plan to the meeting of creditors and the committee of creditors, as well as to the authorized state body, if there is a state share in the charter fund (authorized capital) of the debtor.

External management plan 
The external manager, along with all his duties, must also, within 1 month of his appointment, develop an external management plan, the main document, which includes a description of ways to improve the financial condition of the debtor. Since the external management is aimed at restoring the debtor’s solvency, the external management plan shall obligatorily reflect the measures for restoring the debtor’s solvency, the conditions and procedure of implementing the said measures, the costs of their implementation, and other expenses of the debtor. Approval of this shall fall within the competence of the meeting of creditors. When considering the issue of approving a plan of external management, creditors of the first and second groups shall participate in voting. Creditors, who voted against the approval of the plan of external management, in order to protect their rights can invite experts for inspection. The plan of external management is considered approved, if more than half of the creditors, present at the meeting, vote for it.
As a measure to restore the solvency of the debtor, one of the following may be applied on the basis of the plan of external management:
• re-profiling of production;
• closure of unprofitable manufacturers;
• collection of receivables;
• sale of a part of the debtor’s property;
• assignment of the debtor’s claims;
• fulfillment of the debtor’s obligations by third parties;
• placement of additional shares of the debtor;
• sale of the enterprise (business) of the debtor as a property complex;
• borrowing funds from commercial banks, financial institutions, as well as raising funds from persons interested in continuing the activities of the debtor;
• decision to increase the charter fund (authorized capital) of a joint-stock company at the expense of accounts payable (conversion of debt into shares) shall be adopted by a 3/4s majority (qualified majority) of the votes of shareholders who are the owners of voting shares present at the general meeting of shareholders;
• replacement of the debtor’s assets.
More detailed info on some of the measures to restore the solvency of the debtor is given below.

Sale of Debtor’s Enterprise (Business) as Property Complex 
The sale of an enterprise (business) may be included as a measure for restoring solvency and settling debts of creditors. According to the Law, in order to meet the claims of creditors in the framework of external management in the sale of a business, all types of property intended for the business activities of the debtor, including land, buildings, structures, equipment, inventory, raw materials, products, rights of claim, as well as the means of identifying the debtor (brand name, trademarks, service marks), its goods, works and services, other exclusive rights belonging to the debtor are alienated.
When selling a business, the debtor’s property appraisal is carried out by an appraisal organization with payment for its services at the expense of the debtor’s property. A meeting or committee of creditors shall approve the appraisal organization. If the external manager finds insufficient funds in the debtor, to pay the appraisers, he informs the meeting of creditors, and payment to the appraisal organization is imposed on the creditors.
The enterprise of the debtor in the form of a property complex based on the Law may be sold by sale in installments and online auction. The law provides that if the creditors’ meeting gave their consent to the realization of the business in installments, the external manager has the right to sell the business in installments for a period not exceeding 1 year if the buyer provides the respective guarantees of the servicing bank. The debtor’s enterprise as a property complex is usually sold by means of an online auction. The initial sale price of the enterprise (business) as a property complex, put up for auction in the form of an electronic online auction, shall be set by the decision of a meeting of creditors or a committee of creditors, taking into account the evaluation of the property of the enterprise, carried out by a valuation organization.
It is worth noting that during the sale of a debtor’s enterprise, all previously signed employment contracts are retained, and in the case of the purchase of an enterprise, all rights to manage the enterprise are transferred to this person.
Proceedings on the case of insolvency, on the procedure of external management shall be terminated at the request of the external manager in cases where at the expense of the proceeds from the sale of the enterprise as a property complex the debtor is able to satisfy the claims of creditors in full. The proceeds from the sale of an enterprise as a property complex are to be distributed in the order of priority established by law; we will discuss this in more detail in the last part of the Memorandum.

Sale of Part of Debtor’s Property 
The sale of part of a debtor’s property is one of the methods of financial rehabilitation of the debtor. In accordance with the plan of external administration, after an inventory and evaluation of the property, part of it may be sold at an auction in the form of an electronic online auction. The sale of the debtor’s property shall not lead to the impossibility of carrying out its business activities. The initial sale price of the debtor’s property put up for auction in the form of an electronic online auction shall be set by the decision of a meeting of creditors or creditors’ committee, taking into account the assessment of the debtor’s property conducted by a valuation organization, unless otherwise provided for by law. With the approval of the creditors’ meeting, the external manager has the right to sell a part of the property of the debtor in installments for a period not exceeding one year, if the buyer provides the appropriate guarantees from the servicing bank. The proceeds from the sale of a part of the debtor’s property shall be distributed in the order of priority established by law, more details on цршср will be provided in the last part of the Memorandum.

Replacement of debtor’s assets 
Replacement of the debtor’s assets serves as an alternative to the sale of the debtor’s property. When replacing the assets of a company, a new joint stock company or several joint stock companies are created based on the debtor’s property. Thus, the debtor’s property is contributed as share capital of the newly created joint stock company or companies, and the shares are tendered. Profit from the sale is used to pay the claims of creditors. The amount of the authorized capital of created companies shall be determined on the basis of the appraised value of a contributed property, determined by a valuation organization, taking into account the proposals of the owner of the property of the debtor or the management body of the debtor, authorized by the constituent documents to make a decision on the conclusion of relevant transactions. In replacing the debtor’s assets all employment contracts are in force prior to the decision to replace the debtor’s assets with the transfer of rights and obligations of the employer to a newly created joint stock company or joint stock companies. The debtor’s licenses to engage in certain types of activities shall be subject to reissuance in accordance with the procedure established by law.
In order to restore the solvency of the debtor joint stock company, in the process of external management the decision to issue additional shares may be taken. The possibility of increasing the authorized fund by placing additional shares may be included in the plan of external management only on the petition of the general meeting of the debtor’s shareholders, who made the necessary decision, sent to the external manager no later than 6 months before the date of termination of external management procedure. Additional shares of the debtor may be placed only by open subscription with payment only in cash. Shareholders of the debtor have a pre-emptive right to purchase placed shares of the debtor in the amount proportional to the number of shares of the joint stock company owned by them. Additional shares are placed among shareholders at a price not lower than the nominal value of the placed shares, provided that the sale of all placed shares at this price will lead to the accumulation of sufficient funds to fully repay the claims of all creditors. The price of placement of shares among shareholders is determined by the debtor’s external manager and approved by the creditors’ meeting. The term granted to the debtor’s shareholders to exercise the pre-emptive right to purchase additional shares of the debtor is determined by the creditors’ meeting, but may not be less than 30 days from the date of the start of the placement of shares.

Claims of creditors 
After the introduction of the external management procedure, at any time creditors can make demands of the debtor. All of their claims are sent to the external manager via email or postal address at the location. After reviewing all claims received from creditors, the external manager enters them into the register of creditors’ claims no later than two weeks after receiving the corresponding claim. If creditors have objections to the composition and order of satisfaction of their claims determined by the external manager, they can resolve this dispute no later than one month in court.

Report of External Manager 
At the end of the terms of the external management procedure, or if there are grounds for its early termination, the external manager must submit a report to the meeting of creditors. The report must contain the following:
• balance sheet of the debtor as of the last reporting date;
• cash flow statement;
• financial results statement of the debtor;
• information on the availability of free funds that can be used to satisfy the claims of the debtor’s creditors for monetary obligations and (or) the fulfillment of duties on taxes and fees;
• breakdown of the debtor’s receivables and information about the debtor’s unrealized rights of claim;
• other information about the possibility of paying off the debtor’s accounts payable.
• a register of creditors’ claims must be attached to the report of the external manager.
The register of creditors’ claims must be attached to the external manager’s report.
Simultaneously with the submission of the report, the external manager shall submit one of the following proposals to the meeting of creditors:
• on the termination of the external management procedure due to the restoration of the debtor’s solvency and the transition to settlements with creditors;
• on entering into an amicable settlement agreement;
• on extending the term of the external management procedure;
• termination of the external management procedure and petitioning the court to declare the debtor bankrupt and initiate liquidation proceedings.
After consideration of the external manager’s report by the meeting of creditors, the court, along with the minutes of the meeting of creditors, no later than 2 days after the date of the meeting, is sent to the court for approval. After considering the external manager’s report, the court may make one of the following rulings:
• on the termination of insolvency proceedings – if the claims of all creditors are settled in accordance with the register of creditors’ claims or if the court approves an amicable settlement;
• on the transition to settlements with creditors – if the creditors’ meeting petition to terminate the external management procedure in connection with the restoration of the debtor’s solvency is granted;
• on the beginning of settlements with creditors of a certain turn – if a request of a meeting of creditors or an external manager to begin settlements with creditors of a certain turn is granted;
• on extending the term of the external management procedure – if the petition for extending the term of external management is granted;
• on refusal to approve the external manager’s report.
The external management procedure is terminated by settlements with creditors, the satisfaction of creditors, or an amicable agreement with creditors.