February 2, 2024

Everything about insolvency (Part 6: Liquidation proceeding)

Table of contents:

Liquidation proceedings 
Consequences of the opening of liquidation proceedings
Liquidation manager
Liquidation plan
Sequence of satisfaction of creditors’ claims
Sale of debtor’s property
Release of liquidation manager

 
Legislation
1. Law of the Republic of Uzbekistan dated April 12, 2022, № ZRU-763 “On Insolvency” (hereinafter – Law);
2. Civil Code of the Republic of Uzbekistan dated December 21, 1995 (hereinafter – CC);
3. Law of the Republic of Uzbekistan dated December 6, 2001, № ZRU-31O-II “Law on Limited Liability Companies and Additional Liability Companies”.

Liquidation Proceedings
Liquidation of a legal entity entails its termination without the transfer of rights and obligations in the order of legal succession to other persons. Before detailing the procedure of liquidation proceedings, we would like to note that the process of liquidation of a legal entity in the territory of the Republic of Uzbekistan is divided into two types; voluntary (you can find out more about this procedure in the memorandum prepared by our team) and compulsory (when a legal entity is liquidated based on the decision of authorized body). Liquidation proceedings, which will be discussed below, are conducted in the case of insolvency of the debtor, and the court applies to the debtor, in order to proportionately satisfy the claims of creditors and declare the debtor free of obligations and its liquidation. This proceeding begins after the court decides to declare the debtor bankrupt. The term of liquidation proceedings may not exceed 12 months. In some cases, based on a petition of the persons involved in the case and on its own initiative, the court is entitled to extend the term of the liquidation proceedings up to 3 months.
The basis for the commencement of liquidation proceedings with regard to a debtor is his permanent insolvency. The liquidation procedure may be applied after the stages of monitoring procedure, judicial sanitation, and external management, in cases where the court administrator, the meeting of creditors or the court decides based on the financial situation of the debtor.

Consequences of the opening of liquidation proceedings
On the basis of the CC, the court, after adopting a decision on declaring a debtor-legal entity bankrupt and starting liquidation proceedings, is obliged to immediately notify the body responsible for state registration of legal entities, that the legal entity is in the process of liquidation. The court’s decision must contain instructions on declaring the debtor bankrupt and starting liquidation proceedings, appointing a liquidator, and paying him/her remuneration.
By applying the liquidation proceedings, the debtor bears certain consequences. From the moment, the court decides to declare the debtor bankrupt and commence liquidation proceedings:

• making transactions related to the alienation of the debtor’s property or entailing the transfer of its property for use to third parties shall be allowed only in the manner prescribed by Chapter 11 (Liquidation procedure);
• deadline for the fulfillment of all monetary obligations of the debtor, as well as deferred obligations for taxes and fees of the debtor, shall be considered to have come;
• accrual of penalties (fines, penalties) and interest shall be terminated for all types of the debtor’s debt;
• accrual of property tax, land tax, as well as penalties and fines on previously accrued and uncollected obligations on taxes and fees shall be suspended;
• part of the proceeds from the sale of the debtor’s property, aimed at repaying the debt, shall be exempt from value-added tax and tax on income;
• information about the financial condition of the debtor shall cease to be classified as confidential, including commercial secrets;
• all restrictions on foreclosure on the debtor’s property shall be removed;
• execution of enforcement documents shall be terminated. All claims for monetary obligations, obligations for taxes and fees, and other property claims, with the exception of claims for recognition of the right of ownership, compensation for moral damage, for the recovery of property from someone else’s illegal possession, for the return of unjust enrichment, for the invalidation of transactions and the application of the consequences of their invalidity, as well as claims for current payments can be presented to the debtor only within the framework of liquidation proceedings.

Liquidation manager
When the court decides to declare a debtor bankrupt, it appoints a liquidation manager. When a company with a state share in the charter fund is declared bankrupt, the authorized state body may also nominate a liquidation manager.
The liquidation manager has the right to:
• dispose of the debtor’s property in accordance with law;
• terminate employment contracts concluded with employees, including with the head of the debtor;
• refuse to execute the debtor’s contracts;
• receive loans to finance current expenses associated with liquidation proceedings, in agreement with the meeting of creditors;
• file claims for the invalidation of transactions made by the debtor, if there are grounds provided for by legislation;
• use public services, including those provided through the Public Services Agency under the Ministry of Justice of the Republic of Uzbekistan, without prepayment;
• carry out preparation, and re-preparation for state registration of cadastral documents for the real estate of the debtor without advance payment;
• use reports, acts of inspections, and other materials related to the financial and economic activities of the debtor enterprise, available to the bodies of the state tax service.
Also, the liquidator shall be obliged to:
• take control of the debtor’s property, conduct an inventory of it and organize an appraisal, and take measures to preserve it;
• analyze the financial condition of the debtor;
• convene a meeting of creditors and a committee of creditors;
• take measures to recover the debt to the debtor;
• protect the rights and legitimate interests of the debtor’s employees during its liquidation and notify them of the upcoming termination of the employment contracts concluded with them;
• maintain a register of creditors’ claims and consider their claims;
• provide within 10 days information on the financial condition of the debtor and (or) its activities at the request of the creditor;
• take measures aimed at searching, identifying, and returning the debtor’s property held by third parties;
• transfer for storage of the debtor’s documents subject to mandatory storage.
During the liquidation proceedings, the liquidation administrator makes an inventory to determine the value of the debtor’s property, for this purpose he may also involve a qualified appraisal organization if the debtor is a legal entity, in the statutory fund of which there is a state share, the involvement of such an organization is mandatory.
During the liquidation proceedings, the liquidation manager must use a unified soum and foreign currency account of the debtor. The unified soum accounts of the debtor are credited with the funds received in the course of liquidation proceedings, from this account also, payments to creditors are made, provided with:
• expenses related to the payment of remuneration to the liquidation manager;
• current payments of the debtor for utility and operating expenses;
• costs associated with the publication of information produced in the course of insolvency proceedings, as well as with the notification of the debtor’s creditors;
• other expenses related to the implementation of liquidation proceedings.

Liquidation plan
A liquidation plan is a document that defines the sequence of actions and measures necessary for the termination and liquidation of the organization. The liquidation plan is adopted at the meeting of creditors and is considered approved if supported by the creditors, representing at least 2/3 of the amount of claims. It must reflect the following:

• information about the debtor’s financial condition;
• conditions, order, priority, and proportionality of satisfaction of creditors’ claims;
• consideration of the interests of the owner of the debtor’s property, the labor collective;
• list of property to be sold;
• date, time, place, and method of sale of the property;
• terms of payment of court costs, remuneration of the liquidation manager, activities of experts and other persons.
All assets of the debtor, regardless of whether they are shown in the balance sheets or not, are the liquidation estate.

Sequence of Satisfaction of Creditors’ Claims
The order of satisfaction of creditors’ claims is the process on the basis of which the debtor’s creditors are paid, according to the procedure laid down by law, the amount of the debtor’s debt. The satisfaction of creditors’ claims is carried out in five turns. Below we will consider in detail in which order the creditors are located.

The following expenses shall be covered out of turn;
• court expenses;
• expenses related to the payment of remuneration to judicial managers;
• current utility and maintenance payments;
• expenses for insurance of the debtor’s property;
• claims for the debtor’s obligations that arose after the initiation of an insolvency case; and
• the claims of citizens to whom the debtor bears liability for causing harm to life or health in accordance with the law.
First of all, shall be satisfied the following expenses:
• under the payment documents providing for the issuance of funds for the payment of wages, under the enforcement documents providing for the transfer or issuance of funds from the single account of the debtor;
• on the collection of alimony, on payment of remuneration under the copyright contracts, ensuring equal fulfillment of the debtor’s obligations under the payment and claims arising from labor and similar legal relations;
• citizens to compensate for damage to their property caused by a crime or administrative offense.
In the second order of priority are satisfied claims:
• for taxes and levies;
• on compulsory insurance;
• for bank credits and bank credit insurance;
• secured by pledge, in the part of the uncovered debt due to insufficiency of the amount received from the sale of pledged property;
• not secured by collateral.
In the third turn, the demands of the owners of shares on the accrued dividends shall be satisfied.
In addition, in the fourth turn, all other claims shall be satisfied.

Sale of Debtor’s Property
The debtor’s property shall be sold at an auction by the liquidation manager after conducting an inventory and appraisal. A meeting of creditors must approve the procedure and timing of the sale of the debtor’s property. The liquidation manager shall conduct the auction in the form of an electronic online auction on the basis of a contract with a specialized organization.

Release of Liquidation Manager
After completing the settlements with the creditors, the liquidator is obliged to submit to the court a report on the results of the liquidation proceedings.
The report on the results of the liquidation proceedings shall be accompanied by:
• documents confirming the sale of the debtor’s property;
• register of creditors’ claims, indicating the amount of repaid creditors’ claims;
• documents confirming the repayment of creditors’ claims;
• information on the property of the debtor.
The court shall consider the liquidation manager’s report on the results of the liquidation proceedings, issue a ruling on the completion of the liquidation proceedings, and oblige the liquidation manager to submit this ruling within 10 days to the body responsible for state registration of legal entities. The court’s ruling is the basis for making an entry in the unified state register of legal entities on the debtor’s liquidation. A corresponding entry shall be made in the Unified State Register not later than 3 working days from the date of submission of the court ruling.
From the moment an entry on the debtor’s liquidation is made in the Unified State Register of Legal Entities, the powers of the liquidation manager shall cease, the liquidation proceedings shall be deemed completed, and the debtor shall be deemed liquidated.