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The initiation of bankruptcy procedures has become a low cost al ternative to a hostile takeover71. Corporate law provides numerous in struments for protection against takeovers, whereas the law on insol vency creates ideal conditions for an aggressor, which almost entirely exclude the possibility of a failure. Sometimes the views of some large business groups as to the economic role of bankruptcy are expressed by individual experts very explicitly and astonishingly frankly72. While quite justly pointing to the problems associated with Russias entry into the WTO and the need for increasing economic concentration in some Radygin A. Sobstvennost i integratsionnye protsessy v korporativnom sektore (Prop erty and integration processes in the corporate sector). Voprosy ekonomiki, 2001, No. 5.

Tsygichko A. Innovatsionnye pigmei, chlenstvo v VTO i zakonodatelstvo o bankrotstve (Innovational pygmies, membership in the WTO and bankruptcy legislation). See www.rsppr.ru, 2001.

sectors in order to ensure their competitive capacities on the interna tional markets, the experts come to a rather disputable conclusion that the existing institution of insolvency is on the whole quite adequate, since the State has the right to effectuate low cost property redistribu tion in order to improve the efficiency of societal production, while the largest enterprises and holdings have real opportunities to rapidly and cheaply expand their businesses On the whole, it can be stated that the institution of bankruptcy in Russia, as it has emerged so far, cannot be regarded as a stable and efficient corporate governance mechanism aimed at rehabilitating the management and finances of companies an overwhelming majority of private creditors are not in a hurry to apply the legal schemes offered by the Law on bankruptcy, preferring private enforcement.

The specific features of bankruptcies in certain groups of debtors In order to lower the risks associated with applying bankruptcy pro cedures to enterprises belonging to the category of subjects of natural monopolies, in mid 1999 the law On the peculiarities of insolvency (bankruptcy) of subjects of natural monopolies in the fuel and energy sector was enacted73. In fact, this law builds upon the principle of un payability. The introduction of an entirely new principle for defining in solvency increases the risk of debts being artificially knocked off or accumulated at the enterprises within natural monopolies by those en terprises in respect to which the old conditions for determining insol vency are applied.

It would be appropriate to comment here that even at the level of declarations, the state policy in respect to the development of the institution of bankruptcy was very controver sial. For example, in 1999, in order to receive credits from the IMF, the RF Government, in its Letter concerning development policy for the purposes of the third loan for restructur ing of the economy, declared its intention to intensify bankruptcy processes, in particu lar, by lifting the moratoria on bankruptcies of enterprises initiated by the State, by ex panding the possibilities for their liquidation, and by eliminating the practice of submitting draft laws concerning the specific features of insolvency in certain sectors. However, in the same year, the RF Government did submit two draft laws designed to regulate the specific features of insolvency in the sphere of natural monopolies and in the military es tablishment, and resulting was the enactment, on 24 June 1999, of the Law On the pecu liarities of insolvency (bankruptcy) of subjects of natural monopolies in the fuel and energy sector.

According to some eminent experts, the practice of applying the norms established for the bankruptcy of enterprises forming company towns deserves a rather positive estimation74. The bankruptcy proce dures designed for this category of debtors envisage the participation of an appropriate local self government body; in response to a petition filed by the bodies of executive authority, an arbitrage court, contrary to the decision of a creditors meeting, may impose external administra tion (when there is suretyship issued by such bodies in respect to the debtors liabilities); in exceptional cases, the period of external admini stration may be extended for up to 10 years. At the same time, experts have noted the imperfection of the procedure for granting suretyships by the bodies of executive authority. In some instances, such surety ships have the form of soft guarantees, are granted without any con ditions concerning the status of local budgets or an estimation of the financial possibilities for executing the suretyships, and are limited by the local leaders tenure of office.

Basic insolvency procedures The 2nd Law on bankruptcy, by way of augmenting the provisions established by the previous law, introduced a new procedure of super vision. This procedure was aimed at ensuring the safety of a debtors property during the period when the creditors were being identified, the register of the creditors claims compiled, and the debtor subjected to financial analysis. The essence of supervision was that the debtors CEOs continued to execute their powers; however, certain transactions could be effectuated by them only with the consent of a temporary ad ministrator. Besides, if a debtors director was not implementing ap propriate measures to safeguard its property or prevents the bank ruptcy commissioner from adequately executing his duties, the arbi trage court could dismiss the director from his post.

At the same time, the supervision procedure was not described pre cisely enough; the period of time established for this procedure was too In The Law on bankruptcy (Article 132), the enterprises forming company towns are understood as enterprises whereat the employees (including their families) constitute no less than one half of the total population of a given settlement. Besides, the provisions of the Law on bankruptcy concerning enterprises forming company towns are applied also to other enterprises whereat the number of employees is over 5,000.

short; while the register of the creditors claims was being prepared, manipulations were possible in respect to the recognition of certain creditors; the amounts of debts to those creditors could be distorted.

During the supervision procedure, creditors had the right to submit their claims to the debtor. The bankruptcy commissioner was responsible for identifying the debtors creditors and for sending to them notifications concerning their right to submit their claims to the creditor. The prac tice of implementing this law has shown that the bankruptcy commis sioner was unable to identify all of the creditors; in particular, this is true in respect to depersonalized creditors (bills, securities to bearer).

During the supervision procedure, neither the debtors administra tion nor the temporary administrator were protected securely enough from one anothers arbitrary actions75. In accordance with the 2nd Law on bankruptcy, the register was to be kept by the bankruptcy commis sioner alone. It sometimes so happened that the register of creditors was changed several times prior to a creditors meeting.

External administration has been established as one of the bank ruptcy procedures by the previous law as well, however the new law ex panded the debtors capacities for regaining solvency. When external administration was introduced, the powers of the debtors director were terminated, and a moratorium was imposed on satisfying the creditors claims (excepting those obligations, the time for the fulfilling of which came after the imposition of external administration).

During the period of external administration, creditors had the right to participate in the management of the debtor. Creditors were granted the right to approve the external administration plan, coordinate big transactions implemented by the debtor, as well as related parties transactions. In fact, during the procedure of external administration, the debtors administrative bodies were partly substituted for by the bankruptcy commissioner, creditors meeting and creditors commit tee. The debtors administrative bodies were dismissed from the proc ess of decision making concerning the debtors property, as well as from the reorganization (rehabilitation) of its business. The actual result of implementing such a concept of external administration quite often became an uncontrolled withdrawal of the debtors assets. In practice, Nabliudeniie novaia protsedura v zakone o bankrotstve. (Supervision a new proce dure in the law on bankruptcy). Rynok tsennykh bumag, No. 12. 1999.

quite frequently it happened so that during external administration all liquid property was sold, and the organization itself thereafter became non viable. There were instances when during external administration decisions were made regarding an issue of additional shares, which resulted in property redistribution.

Many disputes and questions were given rise to by the regime involv ing the States participation in bankruptcy procedures, especially within the framework of external administration. In principle, it is the State that ought to have represented public interests not only in respect to man datory payments but also to the reorganization or rehabilitation of large and socially relevant enterprises. However, the State in the part con cerning the recovery of tax debts and other mandatory payments had no right of vote at a creditors meeting in respect to most of the key is sues for example, regarding the approval of an enterprises external administration plan. As a result, in some instances the State, possess ing a high amount of tax claims, found itself, alongside other creditors, without any satisfaction, since the property complex had been sold un der a direct contract at an underestimated price to one of the creditors.

The exclusion of the State from participating in bankruptcy proce dures has been explained by the specific nature of the claims relating to taxes and other mandatory payments, however the degree of this ex clusion from bankruptcy procedures was obviously too high.

During bankruptcy proceedings, creditors had the right to partici pate in managing the debtors property (disposing of the mass of the bankrupts estate). The sale of the debtors property was effectuated under the creditors and the courts control. The norms establishing the procedure for disposing of a debtors property and the control over the sale of this property by the receiver were on the whole designed to pro tect creditors rights. At the same time, the sale of the debtors property was not public to a sufficient degree. As has been shown by practice, receivers were striving to create conditions under which a debtors most liquid property was to be sold to organizations related to those receivers.

It would have been wrong to affirm that the 2nd Law on bankruptcy as such offered no mechanisms for maintaining an enterprise as a go ing concern. One of attractive available methods was an amicable set tlement. However, the State was excluded from the number of potential participants in such an agreement due to the tax oriented character of its claims (Article 120 of the Law on bankruptcy). As a result, the inter est of other creditors in making such a settlement was dramatically di minished.

Within the framework of the measures envisaged by the 2nd Law on bankruptcy in order to prevent bankruptcy, pre trial reorganizationmay be noted, consisting in financial support to the debtor from aside, including from the owner of the debtors property and the debtors founders (or participants) (Article 27 of the Law on bankruptcy). In the course of pre trial reorganization, it was possible for the debtor or for other persons to take upon themselves liabilities to the benefit of the persons who had provided the financial support. Thus, there did exist certain possibilities for the State to prevent bankruptcy of especially relevant enterprises, but because of shortage of budget resources this method of bankruptcy prevention could be applied only in singular cases, when all other means had failed. The abovesaid does not mean that the State, when appropriate resources were available, could im plement pre trial reorganization whenever necessary. In accordance with Item 3 of Article 27, the terms for pre trial reorganization being im plemented at the expense of the federal budget and state off budget funds should have been established by the laws on the federal budget and the budgets of state off budget funds.

The third phase (from 2002 onward) The most important constructive criticism of the Russian institution of insolvency in recent years has been focused on the practices of bankruptcy of large, economically and socially relevant enterprises, as well as on the expansion of the scope of applying bankruptcy proce dures for dishonest purposes and the violation of the interests of the State as a creditor and owner.

In the second half of the year 2001, the preconditions necessary for fundamental reform of the institution of (or legislation on) insolvency emerged. The dominant position was thus given to the standpoint ori ented not so much to making amendments to the 2nd Law on bank Teliukina M. Osobennosti novogo zakonodatelstva o nesostoiatelnosti (bankrotstve) (The peculiarities of new legislation on insolvency (bankruptcy). Zakonodatelstvo (Leg islation), No. 5, 1999.

ruptcy, but rather to adopting its new version (or novellization77). At the governmental level, the following issues in the sphere of insolvency (bankruptcy) were stated as the most vital ones:

violation of the debtors rights and those of the debtors founders (initiation of bankruptcy procedures on the basis of fake documen tation; on the grounds of a negligible amount of debt, without grant ing to the debtor any opportunities for repayment; no opportunities for the debtors founders to rehabilitate their enterprise under the creditors control after the proceedings in bankruptcy have already been initiated);

violation of the States rights as a tax creditor;

withdrawal of the debtors assets in the interests of a specific group of creditors as part of the procedures of external administration and bankruptcy proceedings; a common practice of applying premedi tated bankruptcy as an instrument for an uncivilized property take over;

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