On the Interestedness of a Person in Relation to the Debtor in Bankruptcy Proceedings through the Prism of Control Relationships

Abstract

The article is devoted to the study of the essence of control, which is key for the legal definitions of an “interested person” and “transactions involving interestedness” in bankruptcy legislation. It establishes that the current regulation of bankruptcy relations is marked by increasing restrictions on interested persons in bankruptcy proceedings. It is argued that the concept of “control”, which is used in defining the notion of “interested persons” in the Code of Ukraine on Bankruptcy Procedures, is intrinsically connected in Ukrainian commercial and corporate legislation with the actual and/or legal ability to influence a company’s business activities through management decisions adopted by corporate governance bodies and participants / shareholders as holders of corporate rights. Therefore, in the absence of its definition in the Code of Ukraine on Bankruptcy Procedures, the concept of control should be interpreted in accordance with the provisions of commercial legislation, for the purposes of bankruptcy legislation. The opening of bankruptcy proceedings and the introduction of arbitration management change the legal regime of the debtor’s activities. In particular, the possibilities for interested persons to exercise control are legally “blocked”. The legal status of a legal entity declared bankrupt and undergoing liquidation proceedings is characterized by the fact that such entity completely loses the ability to influence related persons, even though it may formally retain certain characteristics of an interested person. The article concludes that one of the legal consequences of bankruptcy proceedings at the liquidation stage should be the termination of legal ties with related or interested persons that previously existed in the form of corporate governance relationships. A legal entity that shares the same beneficial owner as the debtor, but has itself been declared bankrupt and is in undergoing liquidation, whose management bodies and chief executive have been removed from office (Part 1 of Article 59 of the Code of Ukraine on Bankruptcy Procedures), and whose powers have been transferred by law (Part 1 of Article 61 of the Code of Ukraine on Bankruptcy Procedures) to an independent arbitration manager (liquidator in bankruptcy proceedings), cannot be regarded as an interested person in relation to the debtor in bankruptcy proceedings. The liquidator remains legally “distanced” from the debtor and the respective interested persons and cannot be identified with them. If a liquidator represents a creditor that is itself bankrupt and does not have a decisive vote at creditors’ meetings or in the creditors’ committee, such liquidator will be unable to effectively exercise powers aimed at forming the liquidation estate and satisfying creditors’ claims through the sale of the bankrupt’s assets.