The Problem of Selling Pledged Property under Debtor’s Bankruptcy Proceedings or how to not Get 1% of the Property’s Real Value - ALEXANDROV&PARTNERS
The Problem of Selling Pledged Property under Debtor’s Bankruptcy Proceedings or how to not Get 1% of the Property’s Real Value

Colleagues acting for their clients in bankruptcy proceedings initiated against debtors of financial institutions and not only such institutions for certain know that even if the client has pledged highly profitable property there is no guarantee that pecuniary claims against the debtor will be adequately satisfied after the sale of such property.

Because of the special aspects of the Law of Ukraine On Restoring of Debtor’s Solvency or Declaring a Debtor Bankrupt (the “Bankruptcy Law”) and application thereof by Ukrainian courts, most often the creditor, whose claims are secured by a pledge, has only an insignificant impact on the sale price of pledged property.

The only relatively effective tool, which influences the process of sale of pledged property, granted by the lawmakers to the pledge creditor, is the ability to consent/non-consent the sale of such property if the same is requested by a respective liquidator.

However, as had been mentioned above, this tool is relatively effective because the provisions of Article 66 of the Bankruptcy Law allow to sell the property, at the second re-auction, at the price which is 10 and in certain cases 100 times less than the initial price of such property.

The court practice of appealing the results of such auctions does not please the creditors and the courts invalidate the results of auctions in exceptional cases when obvious violations of the procedure of such auction had been committed.

Creditors’ arguments concerning significant understatement of sale price of such property most often are not admitted by the courts and as the result the creditors, holding liquid property in pledge and being confident that they will be able to obtain substantial funds as the result of its sale, are left with nothing.

Such situation forces the colleagues in the legal business to look more globally at the sale of property within the bankruptcy proceedings and to develop different mechanisms to prevent possible sale of property at a price that is by several times lower than its market price.

Based on the results of providing legal support in more than 50 cases dealing with bankruptcy of debtors of one of Ukrainian leading banks, the associates of Alexandrov&Partners made respective conclusions and developed a mechanism that does not completely eliminate the risk of understating the sale price of the property but allows to mitigate such risk to the minimum extent possible.

What can be done to avoid the sale of the highly profitable pledged property at 1% of its value?

Many years of experience in the bankruptcy area shows that one should definitely not rely on the honesty and reliability of a liquidator, a debtor or an exchange.

A consent given by a secured creditor to the liquidator to sell the property at a price acceptable to the creditor or even exceeding its expectations also does not guarantee the sale of such property at a price that is even slightly close to the market price. If this property presents an interest to the debtor/entities related to it or just to a “quirky” businessman – be sure that the sale price of such property will be far from the market price.

The only thing that in our opinion can radically change the situation, no matter how trivial it may sound, is the competition.

The matter is that most often no one but the pledge creditor needs the presence of competitors at an auction.

In this connection we believe that even though the burden of securing this factor should be vested upon the liquidator, it must, however, be borne by no one else but the pledge creditor itself.

For this purpose, it is advisable to take the following actions after the valuation of the property:

  1. Place an advertisement on the creditor’s website (if any) stating that it is selling pledged property under bankruptcy proceedings, and include its specifications and location.
  2. Select companies engaged in a business similar to that of the debtor which would be interested in purchasing debtor’s assets and then send them letters with offers to participate in an auction. If such companies are interested in the purchase, then it would be advisable to meet with them and visit the property to show it to the potential buyer directly at where it is located.
  3. Also place advertisements in special sources about the sale of pledged assets and include its specifications and location.
  4. If the creditor is a bank it would also be advisable to check with bona fide borrowers or bank’s clients whether they would be interested in the sale of debtor’s property and even, if acceptable, in the purchase of the same under a loan.

Of course, these methods of securing competitiveness at an auction are not the only ones possible but are mandatory without any doubt.

Also, it is no secret that the process of bringing the property for sale under bankruptcy proceedings is not a quick process (it often takes six months at least).

In this connection, preservation of qualitative and quantitative characteristics of the pledged property is one of the most important elements. For this purpose, we recommend to bind the liquidator to ensure proper security of such property and if it is necessary and acceptable for the creditor – reimburse the costs of property safekeeping incurred by the liquidator.

Otherwise, if certain individuals wish, the highly profitable property will easily turn into an unwanted piece of metal (for example, if a few or even one of the electronic control boards are removed from a professional Heidelberg printing machine), and will be sold at a price corresponding to its condition.

The process of communication with the liquidator is also important, because according to the provisions of the Bankruptcy Law it is the liquidator that has all the necessary powers and is obligated to sell the property in such a manner so as to ensure maximum repayment of creditors’ claims. Many processes in the bankruptcy proceedings, including in the sale of property, depend upon the liquidator and if he is loyal or at least impartial to you or the client as the creditor, the likelihood of negative manipulation on his part will be minimal.

As one of our recent cases showed, negligence of the above actions often leads to negative results. So, now Alexandrov&Partners associates act for a client in a lawsuit related to appeal of results of the second re-auction in which debtor’s property, pledged in favour of one of the leading banks of Ukraine, was sold at a price of less than 1% of its initial value. For that purpose, two legal entities participated in the auction, which, according to the available information, are persons related to the debtor.

Thanks to prompt actions of Alexandrov&Partners associates and within the strategy elaborated by us, we managed to stabilise the situation by attaching the sold property, because the purchaser managed to resell the same to a third party 14 days after the purchase.

However, one should bear in mind that the process of appealing of the auction results in court is a lengthy process that requires time and significant labour efforts of legal personnel and this is despite the fact that the current owner of the property is not limited in the right to use the property at its own discretion and to profit from such use.

Of course, the implementation of all of the above recommendations in this article couldn’t have resolved the matter with the acquisition of property pledged in favour of the bank by persons related to the debtor, but the sale price of such property at the auction, provided there was/were competitor(s), would’ve had been definitely more than 1% of its initial value.

In the near future, namely starting from the end of October 2019, the situation with understatement of sale price of pledged property at second re-auctions should change for the better due to enactment of Bankruptcy Proceedings Code of Ukraine that provides for more opportunities for the creditors to influence the procedure of sale of property, including pledged property. However, we believe that before the abovementioned code is enacted, there is a high probability that certain individuals will not use the applicable provisions of the Bankruptcy Law in the interests of the creditors, including interests related to pledge.


Therefore, let’s not relax and let’s not indulge any “bottom-feeders”


  • leader

    Tkachuk Oleksandr


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