• non transparency and inadequate regulation of bankruptcy proce dures, which make it possible for bankruptcy commissioners and other participants in bankruptcy proceedings to take advantage of this inadequacy; the lack of efficient mechanisms for bringing to re sponsibility dishonest and inefficient bankruptcy commissioners;
• unjustified specific features established for bankruptcy of enter prises belonging to the fuel and energy complex, while no specific features of bankruptcy in the military industrial complex and natural monopolies outside the fuel and energy complex were consoli dated in legislation.
The problems listed above provided the grounds for fundamental re forming of the institution of (or legislation on) bankruptcy. In late 2001, the new draft law “On insolvency (bankruptcy)” was submitted to the State Duma, having been developed by the Ministry for Economic De velopment and Trade. The consideration of the new draft law on insol vency by the RF Federal Assembly was a complicated process, during which more than 3000 amendments were discussed. After lengthy dis cussions of the draft by the Federal Assembly, the new (third) Law “On V. Vitrianskii. Puti sovershenstvovaniia zakonodatelstva o bankrotstve. (Ways for improv ing bankruptcy legislation). – Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii (The herald of the Supreme Arbitrage Court of the Russian Federation No. 3, 2001.
insolvency (bankruptcy)” was enacted in October 2002. This Law con tains many new provisions, which have the potential for a cardinal trans formation of the entire existing bankruptcy practice.
During the discussion of the draft law’s provisions, all the parties in volved recognized the importance of reforming the following areas of insolvency regulation:
• strengthening the protection of the rights of honest owners;
• optimizing the methods for protecting creditors’ interests;
• increasing the State’s role in bankruptcy procedures;
• strengthening the protection of the participants in bankruptcy pro cedures from dishonest actions of third parties;
• increasing the responsibility and improving the qualification of bankruptcy commissioners.
However, the notions as to the possible ways for such reforming turned out to be quite different in some instances.
Firstly, the Ministry for Economic Development and Trade pro ceeded from the need to remove excessive administrative barriers im posed onto bankruptcy commissioners; to expand the possibilities for self regulation in this sphere; to develop a system for insuring the re sponsibility of bankruptcy commissioners. This standpoint was strongly opposed by the Federal Service for Financial Rehabilitation and Bank ruptcy (FSFRB), which was arguing in favor of the necessity to maintain and further strengthen the state control over the activity of bankruptcy commissioners.
Secondly, the FSFRB suggested that, in order to restrict the viola tions in respect to initiating bankruptcy procedures, it should be estab lished that the proceedings could be initiated only if a creditor’s claim is confirmed by a court decision that has entered into legal force. For its part, the Ministry for Economic Development and Trade declared that such a change would result in limited rights of small sized creditors.
Thirdly, the FSFRB and the Ministry for Economic Development and Trade, having recognized the danger associated with bankruptcy of or ganizations that are strategically significant in terms of national secu rity, differed in their opinions as to how to effectuate the rules determin ing the specific features of regulating the insolvency of this debtor category.
Fourthly, the Ministry for Economic Development and Trade sug gested that, as one of rehabilitative procedures, an additional issue of the debtor’s shares be established78. The basic argument against this measure on the part of the FSFRB was that this would result in a new spiral of property redistribution through bankruptcy procedures.
Finally, there were difficulties in respect to the State's participation in bankruptcy procedures in the part of its claims in respect to mandatory payments, because resulting from lengthy arguments was the following decision: the State was granted rights equal to those of other creditors;
however, at the same time it had the same priority for satisfying its claims as bankruptcy creditors. This suggestion, no doubt, will give rise to numerous violations, e.g., unpredictable terms for repaying debts to the State, as well as more intense struggle of private structures for making use of the administrative resource.
The main innovations introduced in the 3rd Law on bankruptcy By Regulation of the RF Government of 24 December 2001 No.
1696 r, the new draft Law “On insolvency (bankruptcy)” was submitted to the State Duma, elaborated by the Ministry for Economic Develop ment and Trade of Russia. This draft law, as compared to the then exist ing law, contained a series of significant changes in the sphere of legis lative regulation of bankruptcy procedures. According to the results of an interdepartmental coordination, in accordance with the draft law submitted by the RF Government to the State Duma, it was suggested that legislation on insolvency (bankruptcy) be reformed in the following main areas:
In principle, this mechanism is being applied in actual practice, and in some cases creditors receive shares in a newly created enterprise (which has received debt free as sets of a debtor enterprise), while in others they receive an additional issue of shares of a debtor enterprise. However, such mechanisms must be determined in sufficient detail in the law on bankruptcy. In order to lower the risk of a premeditated of fictitious bankruptcy aimed at property redistribution, it seems important, on the one hand, to envisage for shareholders an exclusive right to purchase the new shares being issued, and on the other, to establish the possibility to petition to the arbitrage court that a debtor be recog nized as bankrupt only on the condition that its creditor has exhausted all other means of debt recovery. Besides, it will be necessary to envisage norms against the possibility of dispersing the State’s share in a debtor enterprise’s share capital. The main problem is that the State, due to its specific features as a legal subject, cannot take advantage in an operative manner of its preferred right (as a shareholder) to purchase additional shares.
1. Optimization of the rights and methods for protecting creditor’s lawful interests In order to protect the interests of the State as a tax creditor and to grant equal rights to creditors in bankruptcy and the State as a creditor, it was suggested that an empowered federal agency be granted the right of vote in bankruptcy procedures, with a simultaneous placing of the claims concerning mandatory payments in the same category as other commercial creditors. Previously, the State as a creditor was a preferred creditor in bankruptcy proceedings, that is, its tax claims were given priority over the claims of commercial creditors; however, the State, as a tax creditor, had no right of vote at creditors’ meetings, excepting at the first meeting.
It was suggested that creditors secured by a pledge be granted a preferred right to the proceeds from the sale of the object of the pledge, as well as the right to veto such a sale. In this connection, the rest of the claims (in excess of the amount of the pledge) of such credi tors were to be satisfied in the ordinary procedure, on equal terms with the other creditors.
The draft law established the possibility of settlement before time with creditors in the course of external administration. The execution of the debtor’s obligations by a third party (or parties) is also possible.
Previously, settlements before time were possible only during the su pervision procedure.
2. Expansion and protection of the rights of a debtor’s honest own ers, including the State as an owner and shareholder In the draft law, it was suggested that a new reorganization proce dure be introduced – that of financial rehabilitation, designed to make it possible for a debtor’s founders (or participants), under certain condi tions, to keep their control over the enterprise’s destiny even during initiated proceedings in bankruptcy.
In order to eliminate the possibilities for law abuse on the part of dis honest creditors, the procedure for initiating bankruptcy was improved.
The observation procedure was to be initiated on the basis of a credi tor’s or an empowered agency’s petition that a debtor be declared bankrupt only after their claims had been verified in the course of a special court session. For the proceedings in bankruptcy to be initiated, the claims to the debtor were to be taken into consideration and were to be confirmed by a court decision that had entered into legal force, or by a document confirming the arrears of mandatory payments, or by an other document of execution, as well as the claims recognized by the debtor no less than one month prior to the date of submitting the peti tion in bankruptcy.
The draft law envisaged the possibility for representatives of a debtor’s founders (or participants) to participate in the proceedings in bankruptcy. The representatives of the debtor’s founders were granted all the rights established by arbitrage procedural legislation for persons participating in the proceedings (e.g., to know the results of the debtor’s property estimation made by a bankruptcy commissioner).
The debtor’s participants (or shareholders) were to have the right to be acquainted with the information concerning the proceedings’ develop ment, as well as the right to appeal against certain decisions and ac tions of the bankruptcy commissioner and creditors.
The mechanisms for maintaining a debtor’s business have been ex panded, in particular, by adding the possibility for returning to external administration from the proceedings in bankruptcy when there exists a real opportunity for restoring solvency; for an additional issue of shares in the course of external administration, on the condition that there was the debtor’s owner’s consent thereto.
3. Changes in the status of and the procedures for regulating the activity of a bankruptcy commissioner One of the main goals of the draft law was to establish efficient su pervision over the activity of bankruptcy commissioners, through the abolition of the licensing of their activity.
In order to maintain supervision over the activity of bankruptcy commissioners, it was suggested that the protection by the court of jus tice of the rights of interested persons be strengthened, the supervision effectuated by the court of justice be augmented by professional public control (on the part of self regulating organizations of bankruptcy commissioners). Due to the absence of uniform legislation on self regulating organizations, one of the goals of bankruptcy legislation was to establish legal prerequisites for the creation and development of self regulating organizations (SRO) of bankruptcy commissioners. The SRO’s main tasks were to become those of developing the standards for their activity, dealing with complaints and appeals of third parties concerning the activity of bankruptcy commissioners, as well as grant ing financial guarantees to creditors.
It was proposed to replace the administrative barriers in the way of entering the profession of a commissioner by exigent professional re quirements, thereby promoting the professional development of bank ruptcy commissioners. Besides, it was suggested that the financial re sponsibility of bankruptcy commissioners be established through their insurance.
4.Improvement of state regulation of bankruptcy procedures In order to ensure equal rights of the State and creditors in bank ruptcy, the draft law envisaged that the State as a mandatory payment creditor be granted the right of vote equal to that granted to creditors in bankruptcy, as well as equal priority for satisfying their claims in bank ruptcy proceedings.
The draft law envisaged that the rights of the State as a property owner be expanded. The representative of a debtor’s property owner (the debtor being a unitary enterprise), as well as the representative of a debtor’s founders (or participants) (the debtor being a juridical per son), were to be persons participating in the proceedings in bank ruptcy, with the right to appeal against the actions of a bankruptcy commissioner, the decisions of the creditors’ meeting and the credi tors’ committee, the decisions of an arbitrage court concerning the im position of external administration and management in bankruptcy, etc.
Besides, in order to eliminate the violations on the part of bodies of executive authority, the procedure of granting state guarantees was improved. In order to issue a suretyship, the presence of adequate re sources in the corresponding budgets was necessary, as well as the decision to this effect made by an appropriate body of legislative au thority.
5. Protection of honest participants in bankruptcy procedures from dishonest actions committed by other parties Among other mechanisms designed to protect the participants in the process from dishonest actions committed by other parties, the follow ing innovations were envisaged:
• it became impossible to initiate, against the debtor, new proceed ings in bankruptcy within three months after the moment of the effectuation of an amicable settlement;
• it became possible to appeal against the verdicts issued during bankruptcy procedures concerning the results of settling the dis putes between the persons participating in the proceedings;
• the procedure for selling the debtor’s property was improved, and mandatory public bidding in respect of its sale was established, in the event the balance sheet value of this property, confirmed by an independent expert, was in excess of 1 million roubles.