Law Firm “KAVCHUK & PARTNERS” is providing comprehensive protection of the interests of a farmer whose business activity became impossible as a result of the temporary occupation of part of Ukraine. After long-term representation of the client in relations with banks, the Firm’s team initiated personal insolvency proceedings and secured the opening of a debt restructuring procedure.

This case also goes beyond an individual dispute. The client’s situation exposed a systemic problem faced by agricultural businesses in temporarily occupied territories: after losing access to land, agricultural machinery, other assets and the ability to operate, farmers remain debtors under loans obtained for the development of their farms before the full-scale war.

Case background

The client of Law Firm “KAVCHUK & PARTNERS” is the founder and head of a farming enterprise that operated in Zaporizhzhia Region before the start of the full-scale invasion.

The farm’s main activity was cultivation of agricultural crops on owned and leased land using agricultural machinery belonging to the enterprise.

It was an operating business with a positive credit history. In 2017–2019, the farm obtained bank financing to purchase agricultural machinery and develop its operations, and duly repaid those loans. In 2021, the farm again obtained credit financing, with repayment dates falling in 2022–2023.

Movable assets of the farm were pledged as security for the credit obligations, and surety agreements were entered into with the farm’s founder.

However, since 26 February 2022, the territory where the farm was located and conducted its activities has been under temporary occupation.

As a result of the occupation, the farm’s business activity effectively ceased. The farmer lost access to the agricultural land, machinery and other assets of the enterprise. Those assets remained in the temporarily occupied territory, while the loss of the ability to operate also meant loss of the main source of income from which the credit obligations were to be serviced.

The farm’s founder and his family were forced to evacuate from the temporarily occupied territory and rebuild their lives in a new location.

This created a situation in which the assets, productive resources and source of income remained in the occupied territory, while the farm’s credit obligations and the founder’s personal obligations as surety continued to exist.

A systemic problem for farmers from occupied territories

At an early stage of the matter, the team of Law Firm “KAVCHUK & PARTNERS” recognised that the client’s situation was not an isolated one.

Agricultural businesses that had obtained financing before the full-scale invasion to purchase machinery, fund sowing campaigns and develop production found themselves in similar circumstances: after occupation they lost actual access to their land, crops, production facilities and pledged assets.

Temporary occupation of the territory where a farm and its assets are located does not in itself terminate credit obligations.

The legislation did not provide a special mechanism of “credit holidays” for such businesses, an automatic deferral of principal repayment until de-occupation of the relevant territory, or suspension of interest accrual because of the objective impossibility of continuing business operations.

As a result, an agricultural enterprise may effectively lose the ability to operate and generate income for reasons beyond its control, while its credit obligations remain in force and creditors may seek recovery of the debt through court proceedings.

The issue was particularly acute for our client because of the surety agreements. The loans had been obtained by the farming enterprise for business purposes, but performance of those obligations was also secured by the personal surety of its founder.

The consequences of the farm’s inability to service its credit burden therefore extended directly to the individual founder.

Our team’s work

The team of Law Firm “KAVCHUK & PARTNERS” provided comprehensive protection of the client’s interests in legal relations connected with the farm’s credit indebtedness and his liability as a surety.

After the occupation and effective cessation of the farm’s activities, banks filed claims seeking recovery of the credit debt. The resulting judgments later became grounds for enforcement proceedings directly against the farm’s founder as surety.

A significant part of the client’s property remained in the temporarily occupied territory, while his ability to receive income from the farming enterprise had been lost.

At the same time, the client did not evade his obligations. Even after evacuation and loss of the ability to continue agricultural operations, he continued, within his financial capacity, to make payments to creditors and sought ways to settle the outstanding debt.

Initiating legislative changes

Recognising that the client’s problem could not be fully resolved solely through individual court disputes, the team of Law Firm “KAVCHUK & PARTNERS” also raised the need for a systemic legislative solution for agricultural businesses affected by temporary occupation.

On 5 October 2023, attorney Andrii Kavchuk submitted a separate appeal to the Minister of Agrarian Policy and Food of Ukraine. Using the client’s situation as an example, the appeal described in detail the complex problem faced by farming enterprises that, as a result of occupation, lost the ability to continue operations and service their credit obligations.

The appeal emphasised that, without special legislative regulation, agricultural enterprises objectively deprived of access to land, machinery and other productive assets due to occupation continued to bear their credit burden. At the same time, the law did not provide a mechanism for deferring performance of those obligations, while interest under the loan agreements continued to accrue.

The Firm’s team did not limit its work to identifying the problem but prepared specific proposals for amendments to Ukrainian legislation.

In particular, it proposed considering special “credit holidays” for legal entities, including farming enterprises, that as of the date of occupation were registered and operating in the relevant territories.

The proposed mechanism envisaged suspension of interest accrual under loan agreements and deferral of repayment of the principal until de-occupation of the relevant territory.

It was also proposed to require courts to stay proceedings involving a business entity that, as of the date of occupation, had been registered and conducting business activity in the relevant territory and had not relocated its operations to territory controlled by Ukraine, until de-occupation of that territory.

Together with the appeal, the Firm prepared a separate draft of amendments to the Civil Code of Ukraine and the Commercial Procedure Code of Ukraine intended to establish the relevant protection mechanisms in legislation.

Accordingly, the work on the client’s situation proceeded in two parallel directions: individual protection of his interests in specific relations with creditors and raising with the competent state authority the need for a comprehensive legislative solution to the problems of farmers who lost the ability to operate due to temporary occupation.

Personal insolvency proceedings

Against the background of accumulated credit debt, court judgments and open enforcement proceedings, the team of Law Firm “KAVCHUK & PARTNERS” used the mechanism for restoring the solvency of an individual provided by the Code of Ukraine on Bankruptcy Procedures.

An application to open personal insolvency proceedings was filed with the Commercial Court of Lviv Region.

In preparing the application, the Firm’s team compiled and documented a complete picture of the client’s financial position: the circumstances in which his business activity ceased as a result of occupation, the structure of the creditor claims, the existing enforcement proceedings, the composition of his assets and lack of actual access to a significant part of them, his current income, and his previous history of performance of credit obligations.

Together with the application, a draft debt restructuring plan was submitted to the court, aimed at settling the debt in light of the client’s actual financial position.

Result

The Commercial Court of Lviv Region opened insolvency proceedings in Case No. 914/577/26 concerning the client.

The court found that the statutory grounds for applying the insolvency procedure were present and introduced a debt restructuring procedure.

At the same time, a moratorium on satisfaction of creditors’ claims was imposed, a restructuring administrator was appointed, and the statutory procedure for settlement of the client’s indebtedness under the Code of Ukraine on Bankruptcy Procedures commenced.

When deciding whether to open the proceedings, the court took into account circumstances of fundamental importance: before the full-scale war, the farming enterprise conducted genuine business activity and had a positive history of servicing its credit obligations, while the inability to continue operations and service the debt burden arose only after temporary occupation of the territory and loss of access to land, agricultural machinery and other assets.

Opening the restructuring procedure became the next stage of the client’s comprehensive legal protection, which had begun with representation in relations with banks and, in parallel, efforts to raise the need for legislative regulation of the problems faced by farmers from occupied territories.

Case No. 914/577/26

Commercial Court of Lviv Region