2.4. Prospects for the modification of bankruptcy legislation After approximately one year since the adoption of the new Law on bankruptcy, the state authorities began to improve it and, no less im portantly, to bring the provisions contained in other legislative acts in conformity with this Law. Thus, the meeting of the RF Government on December 2003 on the whole approved the draft plan for the RF Gov ernment’s activity to implement, in 2004, the medium term program of socio economic development (2003–2005) submitted by the RF Minis try for Economic Development and Trade. This document, in particular, envisaged the following:
• the improvement of criminal and administrative legislation, as well as bankruptcy legislation in the part concerning the responsibility for law violations and crimes committed in the event of bankruptcy;
• the determination of the procedure and conditions for the participa tion of an empowered body in financial rehabilitation procedures and amicable settlement in bankruptcy, by means of making amendments to the Law on bankruptcy and adopting a special De cree by the RF Government;
• the improvement of the Law on bankruptcy in the part concerning:
• the refinement of the notion of current payments, • the clarification of the requirements to a bankruptcy commis sioner, • the clarification of the consequences of relief or dismissal of a bankruptcy commissioner, • the clarification of the status of compensation funds, • the clarification of the status of mutual insurance societies, • the clarification of the procedures for property sales during fi nancial rehabilitation and external administration, • the development of self regulation.
The implementation of the first measure was planned for October 2004 (submitting the corresponding draft laws to the RF State Duma of the Federal Assembly), of the last two – for November 2004.
Then, at the same meeting of the RF Government on 25 December 2003, the draft plan for the preparation of draft laws by RF Government in the year 2004, submitted by the RF Ministry of Justice, was ap proved. This document, in particular, envisaged the following:
• the consideration, by the RF Government, in March, and the submitting to the State Duma in April 2004 of the draft law “On intro ducing amendments to the Tax Code of the Russian Federation and the Federal Law “On insolvency (bankruptcy)” in the part determin ing the procedure for adopting the decision by the empowered body as to the timelines for debt redemption in respect to taxes, levies and fines during financial rehabilitation and amicable settle ment in bankruptcy procedures. In this connection, it was estab lished that the purpose of the draft law was to be as follows:
• to create the legal foundation for bankruptcy procedures, finan cial rehabilitation and amicable settlement, • to provide adequate opportunities for amicable settlements in bankruptcy procedures, when the main creditor is the Russian Federation;
• the consideration, by the RF Government, in March, and the sub mitting to the State Duma in May 2004 of the draft law “On introduc ing amendments to the Civil Code of the Russian Federation, the Budget Code of the Russian Federation, the Criminal Code of the Russian Federation, the Code of the Russian Federation on Admin istrative Violations”, in the part concerning bringing their norms in conformity with the Law on bankruptcy. In this connection, it was envisaged that the draft law would bring the norms stipulated in the said laws in conformity with the Law on bankruptcy in the part con cerning the following:
• expanding the range of juridical persons in respect to which the application of bankruptcy procedures is admissible, • bringing the issues concerning the priorities of satisfying credi tors’ claims in conformity with existing legislation on bankruptcy;
• the consideration, by the RF Government in September, and the submitting to the State Duma in October 2004 of the draft law “On introducing amendments to the the Federal Law “On insolvency (bankruptcy)” in the part concerning the following:
• the clarification of the requirements to a bankruptcy commis sioner, • the clarification of the consequences of relief or dismissal of a bankruptcy commissioner, • the clarification of the procedures for property sales during fi nancial rehabilitation and external administration, • the development of self regulation.
In this connection, it was determined that the purpose of the draft law should be:
• to eliminate the intrinsic contradictions in the Law on bankruptcy, • to eliminate the non conformities between the Law on bank ruptcy and the RF Civil Code and the RF Code of Arbitrage Pro cedure, • to refine the norms concerning some specific bankruptcy proce dures;
• the consideration by the RF Government in September, and the submission to the State Duma in October 2004 of the draft law “On introducing amendments to the Criminal Code of the Russian Fed eration and the Code of the Russian Federation on Administrative Violations” in the part concerning the clarification of the provisions on premeditated and fictitious bankruptcy, and unlawful actions in bankruptcy. In this connection, it was established that the purpose of the draft law was to be as follows:
• property protection from criminal infringements and violations of the law, • prevention of crimes and violations of the law through improving the efficiency of the provisions of the RF Criminal Code and the RF Code on Administrative Violations, which establish the re sponsibility for violations of the law during bankruptcy proce dures and in anticipation of bankruptcy.
Finally, at the RF Government’s meeting on 26.02.2004, the concept and draft technical assignment were approved for developing the draft Federal Law “On introducing amendments to the Tax Code of the Rus sian Federation and the Federal Law “On insolvency (bankruptcy)”. The changes envisaged in this document were oriented to eliminating the non conformities between the Law on bankruptcy and the RF Tax Code, the essence of those non conformities being that the former requires that the schedule of debt redemption in respect to mandatory pay ments in the course of financial rehabilitation and the terms of an ami cable settlement as to the redemption of arrears mandatory payments be compatible with the norms established by legislation on taxes and levies, while the latter established neither the foundation nor the proce dure for the empowered bodies to make decisions that would allow for the inclusion of such provisions in the schedule of debt redemption and an amicable settlement. This discrepancy, as stated in the concept, “not only prevents the restoration of a debtor’s solvency within the framework of the proceedings in bankruptcy and the application of such a rehabilitative procedure as financial recovery, or an amicable settle ment, but also may result in the debtor’s liquidation within the frame work of bankruptcy procedures”.
The modifications planned by the RF Government, in our opinion, “cover” almost the whole spectrum of the currently existing flaws and gaps in the Law on bankruptcy, and, in the event of their successful im plementation, will make it possible to considerably improve the quality of this document. However, we believe it important to note the following two circumstances:
• a number of important changes to the Law on bankruptcy, envis aged in the draft plan for the activity of RF Government in respect to the implementation, in the year 2004, of the medium term program of socio economic development (the years 2003–2005), were not reflected in the RF Government’s draft plan for preparing draft laws in the year 2004. In particular, this is true of certain changes aimed at improving the regulation of SROs’ creation and activity, e.g., a more precise definition of the status of compensation funds and mutual insurance societies;
• at present, the schedule for preparing draft laws is not being com plied with: by the autumn of 2004, none of the draft laws, intended for the submission to the State Duma in April May 2004, had actu ally been submitted.
Chapter 3. Bankruptcy issues in regional legislations The problems relating to bankruptcies of enterprises, absent debt ors, and enforced liquidation of juridical persons are typical of almost all Russian regions. This also accounts for the existence of the regional legislative base for the issues relating to enterprises’ insolvency (bank ruptcy), which seems, at a first glance, to be sufficiently well developed87.
All these normative acts can be conventionally subdivided into two groups: those addressing the prevention of bankruptcy and those de termining the bankruptcy procedure for enterprises. Nevertheless, it should be noted that the problem of preventing enterprises’ insolvency almost always is reduced to the state support for some of them, while the procedure of bankruptcy – to the issue of an enterprise’s arrears of debt to a region’s budget. Thus, the normative base in the Russian Federation’s regions in respect to enterprises’ insolvency is rather im perfect and uniform.
In many cases, the enterprises entitled to the state support are es tablished at a region’s level simply in the form of a list (e.g., in the Re public of Tatarstan88, the Republic of Khakassia89, Krasnoyarsk Krai90, etc.), however there also are some examples of regional normative acts, where the criteria for placing a certain enterprise in a group with the right to demand a special approach are clearly defined.
In some instances, the criteria for determining such enterprises are purely quantitative (“enterprises forming company towns”). For exam ple, in accordance with the Law of Volgograd Oblast “On enterprises Only the normative acts that came into force after the enactment of the 1998 Federal Law “On insolvency (bankruptcy)”, except those that are not in force or have lost their force, are taken into consideration.
Decree of the Cabinet of Ministers of the Republic of Tatarstan of 13 July 1999 No. “On preventing insolvency and the financial recovery of enterprises and organizations of the Republic of Tatarstan” (as of 13.10.2000 No. 723).
Decree of the Supreme Council of the Republic of Khakassia of 24 June 1999 No. 15 “On approving the list of socially relevant enterprises of the Republic of Khakassia” (as of 12.01.2000 No. 2 p).
Decree of the Administration of Krasnoyarsk Krai of 7 September 2000 No. 681 P “On approving the list of large organizations, economically and (or) socially relevant for the Krai”.
forming company towns”, state support may be granted to an enter prise or organization whereat no less than one half of a settlement’s population (including families), or no less than 30% of the total working population (employed at enterprises or organizations) of this settlement are employed, or if it lists, among its fixed assets, objects of the utilities or engineering infrastructure servicing no less than 30% of the munici pal entity’s population, or if the specific weight of its tax revenues con stitutes no less than 10% of the Oblast’s budget tax revenues, or no less than 15% of the city budget tax revenues, or no less than 30% of the regional budget tax revenues91. There is a special stipulation to the effect that “this Law shall also be applied to organizations whose num ber of employees exceeds five thousand persons in cities of Oblast level relevance, and one thousand persons in other settlements”.
Such enterprises are provided with state support, including “for pre venting their insolvency (bankruptcy)”, in the following forms: “restruc turing arrears of taxes and levies in accordance with the normative legal acts of the Russian Federation and Volgograd Oblast, restructuring the debts to organizations and enterprises – suppliers of fuel and electric power, granting deferrals of debt repayment and installment plans in respect to mandatory payments to the Oblast budget, granting tax credit or investment tax credit in the procedure and on the conditions as envisaged by existing tax and budget legislation, issuing Volgograd Oblast’s guarantees to organizations’ liabilities, including when grant ing credits and money loans, in accordance with existing budget legis lation”92.
In other cases, the criteria for categorizing enterprises are qualita tive. One of the most detailed normative acts of this type is the Provision “On reorganization of and state financial support to enterprises”, which is in effect in the Republic of Altai. Thereby, state support is granted to those enterprises “which would be capable of reviving economic activity in various branches of the economy, primarily in that part of the produc tion infrastructure that is needed for accelerating the technological transformation of the production process”; which manufacture “com petitive, import substituting and export products, including by applying Law of Volgograd Oblast “On enterprises forming company towns in Volgograd Oblast” of 19 April 2001 (Law of Volgograd Oblast, as amended on 13.06.2001, No. 550 OD).
unique “breakthrough” technologies”; “whose production to a signifi cant degree depends on supplies of raw materials, spare parts and equipment from the countries of near and far abroad, and where pres ently there are no guarantees of stable import due to shortage of hard currency and disrupted economic connections”; which “produce en ergy conserving equipment and implement new progressive technolo gies enhancing labor productivity, improving the social conditions of labor, relying on the application of innovative materials, automation, and promoting environmental safety of production”; which create ap propriate conditions for “increasing investment activity” and have “broad cooperative inter branch and inter regional connections”.
The selection of enterprises also takes into account the estimated “social consequences of the stoppage of certain enterprises and pro ductions in terms of the labor market’s formation and employment regulation”, including “the balances of credit and debit indebtedness, ratios of liabilities and reevaluated assets, the degree of asset liquidity”, etc 93.