Analytics

The Rada may abolish the Commercial Code: whether a large-scale reform is needed and what it means for state-owned companies and business

Ukraine is on the verge of a major reform: The Commercial Code, which has been in effect for more than 20 years, may disappear. The Verkhovna Rada passed a bill to abolish it in the first reading almost two years ago, and it is now expected that the reform could be finalized by the end of this year. Although a five-year transition period is planned, there are doubts among lawyers and entrepreneurs about the advisability of such a radical step. Andriy Shabelnikov, Managing Partner of EvrikaLaw, Chairman of the National Bar Association’s Committee on Investment and Privatization, explained the reasons for this decision and whether it will meet expectations for Komersant ukrainskyi.

The issue of the need to abolish the Commercial Code of Ukraine has long been stirring up the legal community of our country.

The discussions began in the 2000s, when two codified acts were adopted at once: the Civil Code of Ukraine and the Commercial Code of Ukraine. As a result, a number of provisions related to business activities were removed from the Civil Code of Ukraine and were accordingly introduced into the Commercial Code of Ukraine.

Since then, civil law scholars have formed a clear position that there is no need for the existence of the Commercial Code of Ukraine, as it contains remnants of the Soviet era in the regulation of economic relations, duplicates the provisions of other laws, and in many respects contradicts the provisions of the Civil Code of Ukraine, which will have negative consequences for the regulatory regulation of economic activity. In practice, this is exactly what happened, and questions often arise as to which provisions of the Civil Code of Ukraine or the Commercial Code of Ukraine should be applied to regulate certain business relations.

It is worth noting that there have been several attempts to repeal the Commercial Code of Ukraine at the regulatory level. For example, in 2008, the Verkhovna Rada of Ukraine submitted the draft law “On the Basic Principles of Economic Activity” (Reg. No. 3060), which proposed to replace the Commercial Code of Ukraine with a specialized law. However, this draft law was heavily criticized by lawyers and scholars and was not adopted.

The next attempt to repeal the Civil Code of Ukraine took place in 2014 in the form of the draft law “On Amendments to the Law of Ukraine “On the Judiciary and the Status of Judges” and other legislative acts on improving the principles of organization and functioning of the judiciary in accordance with European standards”.

Currently, the Verkhovna Rada of Ukraine is considering the draft Law “On Peculiarities of Regulation of Business Activities of Certain Types of Legal Entities and Their Associations in the Transition Period” No. 6013 of 09.09.2021, which in clause 4 of the Transitional Provisions proposes to recognize the Commercial Code of Ukraine as invalid.

It should be emphasized that the Verkhovna Rada Committee on Economic Development at its meeting on October 24, 2024 considered the said draft law No. 6013 and decided to recommend to the Verkhovna Rada to adopt the draft law as a whole following the results of the second reading.

In this context, it is worth noting that during the martial law, the Supreme Court, the Commercial Court of Cassation and the Association of Commercial Court Judges organized special meetings with legislators, academics, government officials, judges and business representatives directly affected by the legislative changes. The subject of the meetings was a fundamental analysis of the advantages and disadvantages of draft law No. 6013, which, among other things, proposes to recognize the Commercial Code as invalid.

In conclusion, the participants agreed that Draft Law No. 6013 has significant flaws that cannot be resolved by technical and legal editing and can cause significant damage to the legal system of Ukraine.

Nevertheless, there is still a possibility that the draft law will be adopted and we will see fundamental changes in Ukrainian legislation.

So what was the reason for such a large-scale reform?

Objectively speaking, the current Commercial Code of Ukraine has a number of significant shortcomings that cause problems in law enforcement.

In particular, we are talking about the contradictory definitions contained in the Commercial Code and the Civil Code of Ukraine (for example, “invalidity of an obligation” and “invalidity of a transaction”, “economic sanctions” and “penalties”). At the same time, there are problems with the wording of definitions in the Ukrainian Commercial Code itself, which cause a number of problems in practice.

Also, the current Commercial Code of Ukraine has a significant number of “dead” and blanket provisions that refer to other legislative acts. In fact, these provisions do not regulate anything, but rather proclaim certain principles or indicate the application of special legislation.

An example is Article 172 of the Commercial Code of Ukraine, which provides that relations related to the management of the state’s corporate rights are regulated by the Law of Ukraine “On Management of State-Owned Property”, other laws of Ukraine and regulations adopted in accordance with them. This provision is the only one in Chapter 18 of the Commercial Code of Ukraine.

Special regulations have already been adopted with respect to certain relations regulated by the Commercial Code of Ukraine, for example, special antitrust legislation expands and supplements Chapter 3 of the Code to limit monopoly and protect against unfair competition.

However, the most important drawback of the current Commercial Code of Ukraine is its outdated nature and lack of compliance with modern business needs. In particular, the Commercial Code of Ukraine does not provide for legal regulation of such important business issues as IT business, cryptocurrency, virtual assets, etc.

At the same time, franchising is actively developing in Ukraine as a form of business organization in which a company (franchisor) transfers to a certain person or company (franchisee) the right to sell the company’s products and services. However, the Commercial Code of Ukraine does not contain the concept of franchising, and these relations are considered a commercial concession. This, in turn, can cause problems in practice and misunderstandings when establishing cooperation with international business partners.

Thus, today there is a real problem in improving the regulation of economic relations.

Is it advisable to take extreme measures and repeal the Commercial Code of Ukraine?

Experts’ opinions are divided: some believe that it is, since there is simply no point in the existence of the Commercial Code of Ukraine, while others insist on its substantial restructuring.

According to Shabelnikov, despite the shortcomings of the Commercial Code of Ukraine, its abolition under martial law could lead to significant destabilization of the sphere of economic relations. At the same time, the relations of application of administrative and economic sanctions and other relations of a public law nature will remain unregulated. It is worth mentioning that the current Commercial Code of Ukraine establishes the peculiarities of concluding commercial contracts (Chapter 20), defines the concept of fictitious activities of a business entity (Article 55-1) and regulates the institution of concession activities (Chapter 40). Therefore, the abolition of the Commercial Code of Ukraine is too radical a measure today.

The uncertainty of legal regulation in the event of the abolition of the Commercial Code of Ukraine may cause significant losses for business, as well as the outflow of investments from Ukraine, which will impede the country’s post-war recovery. Therefore, this would contradict the purpose of Draft Law 6013.

The reform also envisages the reorganization of state-owned enterprises into business companies. However, this may lead to the loss of state control over enterprises whose privatization is prohibited, which carries corruption risks of illegal transfer of control over such state-owned enterprises.

Author: Anastasia Fedor