6. Establishing the necessary specific features of bankruptcy for certain debtor categories in a single law The draft law envisaged certain specific features of bankruptcy for organizations belonging to the defense industry and for subjects of natural monopolies. In particular, it was proposed, in respect to organi zations belonging to the defense industry, to establish the right for the State to suspend the sale of their property for a period of up to months, in order to develop proposals concerning the restoration of an organization’s solvency, including a transition into the procedure of fi nancial rehabilitation.
It is not feasible to establish specific features of bankruptcy for or ganizations belonging to other branches, because their introduction, as shown by practice, results in an unjustified withdrawal of enterprises belonging to certain branches from the sphere of the application of bankruptcy procedures, which is contrary to the principles of civil law.
The discussion of the new draft law on insolvency in the RF Federal Assembly was rather difficult79, for more than 3000 amendments were under consideration. As the most important ones, experts80 note the following provisions of the new (third) Law on bankruptcy:
The draft law was approved by the State Duma in the first reading on 6 March 2002.
When preparing a new version of the draft law for the second reading in the State Duma, more than 3,500 amendments were discussed. After three and a half months of delibera tions, on 20 June 2002, the draft law was approved in the second reading, and in less than two weeks thereafter, on 1 July 2002, in the third reading. Finally, on 10 July, the Council of the Federation approved the Law’s new version. However, on 6 August is became known that the RF President had rejected the new version of the Law “On insolvency (bankruptcy)”. After that, the necessary changes were introduced in the draft law, and it was adopted by the State Duma on 27 September in three readings during one session;
the Council of the Federation approved it on 16 October, and on 26 October 2002 it was signed by the RF President.
See, e.g., Skliarova I. Prezident nastaivaet na maksimal’nom usilenii roli gosudarstva v protsedure bankrotstva (The President insists on maximum strengthening of the State’s 1. Lower risk of law abuse on the part of creditors.
The Law envisages that the initiation of a bankruptcy procedure on a creditor’s petition can be possible only after the latter has produced a writ of execution stating that he has made an attempt to have the debts repaid within the framework of execution proceedings, and that all the attempts of a bailiff to recover the debt within 30 days from the moment of a court decision as to the debt recovery have failed, and only the bankruptcy procedure in respect to the debtor remains as the last re sort for the creditor to recover the money loaned.
2. Granting equal rights to the State and creditors in bankruptcy;
consolidating the State’s claims.
The Law equalized the State in its rights with the other creditors in bankruptcy. Now the State, through its empowered agency, has been granted the right of vote at all creditors’ meetings, while the State’s claims are given the same priority as the claims of creditors in bank ruptcy.
3. Expanding the mechanisms for protecting the rights of honest owners.
Now, the owners of a debtor enterprise have become participants in the bankruptcy procedure. The Law establishes the right for the repre sentative of the debtor’s owners to repeal in the court the creditors’ claims, as well as the right for the debtor, the debtor’s owners and any third parties, to terminate, with the bankruptcy commissioner’s con sent, the bankruptcy procedure at any stage, by repaying the enter prise’s debts.
The Law has established a new reorganization procedure – financial rehabilitation, designed to make it possible for a debtor’s founders (or participants), under certain conditions, to keep their control over the enterprise’s destiny, even during initiated proceedings in bankruptcy.
The mechanisms for preserving a debtor’s business have been ex panded, in particular, by the possibility for returning to external admini stration from the proceedings in bankruptcy when there exists a real opportunity for restoring solvency, and for an additional issue of shares role in bankruptcy procedures). See www.bpi.ru Dmitrii Arefiev. O Federal’nom zakone “O nesostoiatel’nosti (bankrotstve) (On the Federal Law “On insolvency (bankruptcy)” (new version). See www.bpi.ru.
in the course of external administration, on the condition that the debtor’s owner have given their consent thereto.
4. Protection of honest participants in bankruptcy procedures from dishonest actions committed by other parties The following innovations are envisaged:
• the impossibility to initiate new proceedings in bankruptcy against a debtor during the three month period after the moment of effectu ating an amicable settlement;
• the possibility to repeal the verdicts issued during bankruptcy pro cedures concerning the results of settling the disputes 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, is in excess of a certain threshold level.
5. Higher efficiency of the control over the activity of bankruptcy commissioners One of the main goals of the draft law was to introduce efficient su pervision over the activity of bankruptcy commissioners, due to the abolition of licensing their activity. The whole system of ensuring re sponsibility and supervision over the activity of bankruptcy commis sioners has undergone a fundamental change. The functions of super vising the activity of bankruptcy commissioners were transferred from the State, represented by the FSFRB, to non commercial self regulating organizations (SRO). The Law grants to the SRO the right to apply to their members disciplinary sanctions, the most serious being the expulsion from the membership in a SRO, as well as petitioning to the arbitrage court that their members be dismissed from participating in bankruptcy procedures as bankruptcy commissioners.
Income qualification has been established for bankruptcy commis sioners – a certain amount of money, to be transferred by each bank ruptcy commissioner as a lump sum, when entering a SRO, to that or ganization’s compensation fund. The Law established mandatory insur ance of the civil responsibility of bankruptcy commissioners by insur ance organizations accredited by a SRO.
6. Establishing the necessary specific features of bankruptcy for certain debtor categories in a single law The Law envisages certain specific features of bankruptcy for or ganizations belonging to the defense industry and subjects of natural monopolies. The Law, having abolished the previously existing (in re spect to subjects of natural monopolies) principle of unpayability, es tablished no special insolvency criterion for organizations of the mili tary industrial complex, subjects of natural monopolies and other or ganizations of high socio economic and strategic significance. Thus, in respect to the latter, the same insolvency criterion as for all the other categories will be applied, based on the principle of insolvency. Its specificity consists in external indicia of insolvency: in order to initiate proceedings in bankruptcy against the abovementioned organizations, it is sufficient to have debts in the amount of 500,000 roubles, with the delay in repayment of 6 months. Besides, in respect to strategic enter prises it was established that the State has the right to suspend the sale of their property for a certain period of time, in order to develop pro posals concerning the restoration of an organization’s solvency, includ ing a transition into the procedure of financial rehabilitation.
7. Restrictions against of bankruptcy procedures being too fre quently applied for the liquidation of absent debtors The Law has established that bankruptcy procedures be applied to absent debtors only when appropriate funds are available in the budget.
2.2. A general estimation of the provisions of the 3rd Law on bankruptcy When estimating the provisions contained in the 3rd Law on bank ruptcy, the following comments appear noteworthy:
1. On the whole, the provisions of the new law on insolvency stipulat ing that the State, in the part concerning the requirements in respect to mandatory payments, acquires voting rights equal to those of creditors in bankruptcy, but at the same time has the same priority as they do (third priority) regarding the satisfaction of their claims, appear to be reasonable. Besides, the State in the part concerning the claims in re spect to mandatory payments, now can participate in an amicable set tlement. However, this approach also has some limitations.
Firstly, without a considerable expansion of the institution of the State’s representatives in bankruptcy, there is a much higher risk of corruption growth, due to “trading” the State’s votes during the deci sion making process at creditors’ meetings; the risk of a growing activ ity of local authorities in respect to covert nationalization and property redistribution for the benefit of third parties. It seems necessary, when the State is participating in bankruptcy procedures involving large, so cially and economically important enterprises, to envisage the creation of Boards of Authorized Representatives of the State in order to guarantee a balanced representation of various interests of the State.
Secondly, the State’s direct participation in an amicable settlement can considerably increase the risk of unequal approaches to different enterprises. It is necessary to legislatively determine (at least the framework for) the conditions on which the State can agree to an ami cable settlement.
2. Certain norms contained in the new Law on bankruptcy, in the part dealing with the appointment and activity of bankruptcy commissioners, appear to be rather controversial. In particular, in accordance with the Law, it is mandatory that a bankruptcy commissioner be a member of one of the existing self regulating organizations. This stipulation in the Law, in its essence, contradicts the RF Constitution, wherein Article states: “Everyone shall have the right to association, including the right to create trade unions in order to protect one’s interests. The freedom of public associations activities shall be guaranteed”. Also, “No one may be coerced into joining any association or into membership thereof”.
In should also be noted that in accordance with the RF Civil Code, one of the fundamentals of civil legislation is the principle that citizens (physical persons) and juridical persons acquire and executte their civil rights by their own will and in their own interest. They are free in estab lishing their rights and duties on the basis of a contract and in determin ing any conditions of a contract which are not contrary to legislation. In this connection, it is clearly stated in Article 1 of the RF Civil Code that civil rights may be limited only in the instances specified in this Article, namely:
• the defense of the constitutional system’s fundamental principles;
• the defense of morality;
• the defense of public health;
• the defense of the rights and legal interests of other persons;
• to ensure the defense of the country and the security of the state.
The bankruptcy commissioners’ mandatory membership in SRO has no connection whatsoever to either of the abovementioned conditions.
It should be noted that the issue of mandatory membership in self regulating organizations (and not only for bankruptcy commissioners, but, e.g., for professional participants in the securities market, etc.) is presently the subject of hot disputes. Many experts, who argue that mandatory membership in SRO is legal, are referring to Ruling of the RF Constitutional Court of 28 January 1997 No. 2 P81 and Ruling of the RF Constitutional Court of 19 May 1998 No. 15 P82. In particular, as follows from the Ruling of the RF Constitutional Court on the case dealing with the verification of the constitutionality of certain provisions of Articles 2, 12, 17, 24 and 34 of the fundamental principles of RF legislation on the notariat, “it is especially due to the public purpose of notarial chambers that for their organization the principle of voluntary participation, char acteristic of the membership in other associations, which are created for the purpose of satisfying material and other non material require ments of citizens, exclusively on the basis of the unity of their interests, in unacceptable” (Article 30 of the Constitution of the Russian Federa tion, Article 117 of the Civil Code of the Russian Federation, Part 1 of Article 3 of the Federal Law “On public associations”).
The mandatory membership in a notarial chamber for notaries en gaged in private practice, as the condition for practicing the said pro fession, is contrary neither to the constitutional principle of equality, nor to the constitutional rights of free associations and free choice of activ ity or professions (Articles 19, 30 and 37 of the Constitution of the Rus sian Federation), since the State has no right to establish for all the citi zens, who are willing to pursue a public (notarial) activity, any manda tory conditions for being appointed to a post and for occupying a post.
From the abovesaid, it follows that, in accordance with the stand point of the Constitutional Court, the establishing of mandatory mem bership in self regulating organizations can be possible in those in stances when a certain activity, the pursuance of which is made de Ruling of the RF Constitutional Court on the case dealing with the verification of the con stitutionality of Part Four of Article 47 of the Criminal Procedure Code of the RSFSR, in connection with the complaints of citizens B.V. Antipov, P.L. Gitis and S.V. Abramov.
Ruling of the RF Constitutional Court on the case dealing with the verification of the con stitutionality of certain provisions of Articles 2, 12, 17, 24 and 34 of the fundamental prin ciples of RF legislation on the notariat.