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In our opinion, the practice of applying the 3rd Law on bankruptcy in 2003 has demonstrated the wrongness of the postulate (actively dis cussed in 20012002) that within the framework of bankruptcy proce dures there occurs mass scale violation of the rights of debtors and their owners who in the course of the implementation of bankruptcy procedures are being prevented from rehabilitating their enterprise and repaying its debts.

In 2003, there was sharp rise in the number of applications and complaints within the framework of bankruptcy cases, and the level of disputability of these cases also became higher, this being the con sequence not only of the novelty of the Law on bankruptcy. The norms established by the 3rd Law on bankruptcy have considerably expanded the opportunities for bringing protests during bankruptcy proceedings for example, the right for an owners representative to protest in the court against creditors claims was introduced, as well as the possibility for appealing against the rulings made during bankruptcy procedures in respect to disagreements between the persons participating in the case.

100,0 90,80,70,60,50,0 40,30,20,10,0,0 1998 1999 2000 2001 2002 proportion of disputes, as % of total number of cases being considered (left scale) proportion of disputes, as % of number of cases being considered, without instanced of simplified procedures being applied (left scale) number of petitions, complaints and claims filed during one year (right scale) Fig. 13. Estimated disputability level of bankruptcy procedures At the same time, it should be noted that among all the applications and complaints filed within the framework of bankruptcy procedures being applied to organizations in 2003, more than 60% were relating to the determination of the amounts of creditors claims. Thus, despite its declared intentions, the 3rd Law on bankruptcy has left open rather extensive opportunities for different interpretations of the principles for determining creditors claims.

In conclusion, we believe it important to offer in this section the gen eral estimates of the influence of the institution of insolvency on the demography of organizations160. In the period from 1 July 2002 to 1 July 2004, a total of about 145,000 organizations terminated their activity, while at the same time almost 600,000 were created anew. In 77% of The estimations were based on the RF MTLs data concerning State registration of Russias juridical persons in the Single State Register of Juridical Persons.

cases, the termination of the activity of juridical persons during that pe riod was due to their liquidation, and only in 20% of cases to their reor ganization.

The liquidation of organizations in the majority of cases (72% of the total) was associated with the application of bankruptcy procedures. On the whole, bankruptcy procedures during the two years resulted in the liquidation of 4.7% of all organizations as of 1 July 2002.

The importance of bankruptcy procedures for the liquidation of or ganizations varies considerably depending on their organizational and legal forms: there processes were more actively developing among in dustrial cooperatives and joint stock companies.

Table Number of bankruptcy procedures Proportion of organizations Number of juridical liquidated in bankruptcy persons liquidated procedures, in bankruptcy as percentages in total procedures during period: number of organizations, as of beginning of period:

1 July 2002 1 July 2002 1 October 1 October 2003 30 September 30 September 2003 1 July 2003 2003 1 July All juridical per 47 531 32 729 2.8 1.sons Limited respon sibility and addi 14 035 9 575 1.6 0.tional responsi bility societies Joint stock so cieties (closed, 3 760 3 223 2.5 1.open) Industrial coop 1 346 1 302 5.5 5.eratives Unitary enter 241 228 1.7 1.prises The lowered relevance of bankruptcy procedures for the liquidation of organizations in the period between 1 October 2003 and 1 July was due both to the shorter period of observation and to the fact that this period (in contrast to the previous one) fully corresponds to that after the coming in force of the 3rd Law on bankruptcy, and so fully re flects the dramatic limiting of the practice of filing petitions against ab sent debtors. It can be noted that this reduction of the role of bank ruptcy procedures in the liquidation of enterprises was not uniform throughout the categories of juridical persons. In depended on their organizational legal form: the decrease in the intensity of applying bankruptcy procedures became most relevant for limited responsibility societies (among which the number of abandoned and fly by night companies is the greatest), and least relevant for industrial coopera tives and unitary enterprises.

Chapter 5. The practice of applying bankruptcy procedures for control takeover and property redistribution This section deals with important applied aspects of the institution of bankruptcy consisting in the use of the procedures involved as a method for low cost hostile takeover of a debtor, or, on the contrary, as an instrument for hiding a debtors assets from the creditor and creditors claims.

5.1. 1998 late According to some authors161, during the period of the 2nd Law on bankruptcy being in force, bankruptcy became the type of business activity whose main purpose was the redistribution of ownership rights and of the control over enterprises. Moreover, in Russia some powerful groups emerged, which specialized in this specific business. As a rule, the core of such a group was constituted by lawyers with an in depth knowledge of the nuances of bankruptcy legislations. Quite often, such groups were joined by former judges and officials from law enforcement agencies and other state structures directly related to economic regulation.

A sufficiently powerful group could have its own sources of financ ing; however, most often the necessary funds were provided by a client.

The primary goal of such a group was to look for a victim enterprise and for potential clients who would order its bankruptcy. As a potential victim, a company owning attractive real estate or other valuable or liquid assets was usually chosen. Its real solvency, in this connection, was not a relevant factor, because the economic situation faced by a majority of Russian enterprises was quire often uneasy, and it was not difficult to find stale debts among the victims liabilities.

See, e.g., Volkov A., Gurova T., Titov V. Sanitary i marodiory (Orderlies and marauders). Ekspert (Expert), No 8 of 1.03.1999; Butrin D. Neupravliiaemyi upravliiaushchii (Unman ageable manager). Dengi (Money), No 32 of 16.08.2000; Chernigovskii M. Bankrotstvo zakazyvali (Have you ordered bankruptcy). Kommersant No 103/P of 18.06.2001, etc.

Having unearthed the necessary debts, the group usually bought them out in the form of a bill of exchange (assignment of right of de mand). Such an agreement is convenient in that it does not require a debtors consent for the right of demand being assigned to another person just a notification is sufficient. However, the very fact of as signing debt to an unrelated person could give rise to the debtors sus picions and induce the company in question to resort to certain meas ures in order to repay the debt. Therefore, instead of the notification as required by the law, the company which have bought out the debt quite often would send to the debtor, in a registered letter, some advertising materials or just a blank sheet of paper. Then, in a similar manner, a claim for the payment of the debt would be sent to the debtor. Later, postal receipts and copies of the documents presumably contained in the letters thus mailed served as important evidence in the course of a court trial162.

The key role in bankruptcy business was to be played by arbitrage managers temporary and external administrators, and receivers. A temporary administrator, appointed by an arbitrage court simultane ously with introducing the supervision procedure, among other things, was to check whether the attempt to effectuate bankruptcy had not been a premeditated one. However, in actual practice the administra tors would often ignore even the most obvious indicia of premeditated bankruptcy.

Supervision was introduced at the Joint Stock Company Plast polimer as a result of a suit brought by the Closed Joint Stock Com pany Firma RDK and the Closed Joint Stock Company UPTK Khim prom. The temporary administrator appointed by the court, P.

Panasenko, did not find out any indicia of premeditated bankruptcy.

However, as it was revealed later, Firma RDK and UPTK Khimprom had simply given incorrect bank requisites for the payment for their supplies, and so it was, in effect, impossible to repay the debt.

One of the main tasks for a temporary administrator was to form a register of the creditors in bankruptcy. In this connection, the adminis trator actually was determining the number of votes assigned to each creditor at a creditors meeting. At this stage, the administrators quite often resorted to various violations and machinations.

Chernigovskii M., ibid.

The temporary administrator of the Joint Stock Company Kuz bassenergo, V. Zubkov, incorrectly stated the amount of credit indebt edness of the Joint Stock Company to the Russian Joint Stock Com pany UES of Russia as being 432 million roubles, instead of 1202 mil lion roubles, and a month later increased its total debt from 2.9 billion roubles to 5 billion roubles. Resulting from these actions of the admin istrator, the share of UES of Russia at the creditors meeting was arti ficially diminished approximately fivefold.163.

A temporary commissioner had no full control over an enterprise the powers were limited to observation and analysis of the debtors sol vency status. However, if the administrator succeeded in proving that an enterprises CEOs had set obstacles to his activity, these CEOs could be dismissed by the arbitrage court. Quire often the CEOs were, indeed, opposed to the interference of the temporary administrator.

But even in absence of any opposition on their part, the administrator could simply fabricate appropriate evidence. Thus, instances have be come known when, on the demand of temporary administrators, all ac counting documentation was transferred to them, including the list of creditors. And after a certain period of time, the enterprises CEOs would receive the request that the same documents be transferred once again. As a result, if no transfer act had been drawn up in confir mation of the temporary administrator having received such docu ments, the CEOs could not provide to the court an evidence that the demands of the administrator had already been satisfied, and therefore were dismissed from managing the enterprise164.

In the event of CEOs dismissal, the temporary administrator would become a fully fledged master of the enterprise. In this connection, the managerial costs of the activity of the administrator and of his team were to be covered by the enterprise as a first priority. Taking advan tage of this circumstance, the administrators quite often would blow up their expenditures, including therein, for example, the cost of trips to foreign shareholders, or even of the redecoration of their own office.

There were instances when, in order to provide funding for these ex penditures, an administrator would sell the supervised enterprises equipment and whole workshops.

Butrin D. Neupravliiaemyi upravliiaushchii.

Chernigovskii M. Bankrotstvo zakazyvali It should be noted that the owners of enterprises did find, early enough, the ways and instruments for minimizing bankruptcys negative effects (including those of orchestrated bankruptcies). Among these instruments, the main one became the so called debt pillow an arti ficially formed (as a rule) indebtedness of the enterprise to related companies (that is, affiliated to the shareholders and CEOs), the amount of which was very impressive, as compared to all its other debts. This pillow, in fact, enabled an enterprises owners and CEOs to retain control over it even if it had been declared bankrupt. It should be noted that in some cases the debt pillow was formed after the ini tiation of bankruptcy procedures, with direct participation of the tempo rary administrator. And the attempts to form the pillow without the lat ters knowledge, as a rule, resulted in tragic consequences for the CEOs: the arbitrage courts, at the administrators request, dismissed all the CEOs from managing the enterprise165.

The first creditors meeting was empowered to replace a temporary administrator by an external one, whose candidacy was to be approved by the arbitrage court on the basis of the minutes of the first creditors meeting. And the keeping of the minutes was not supervised by any body the temporary administrator was the sole one responsible for it.

This circumstance enabled the temporary administrator and the arbi trage court to pass the candidates for the post of a temporary admin istrator, in fact disregarding the creditors opinion.

The autumn of 1998. The European Shipping Company is becoming bankrupt. There are two creditors a certain investment company and the State (in respect to taxes). The investment company is the initiator of bankruptcy procedings, and in its petition to the arbitrage court it points out its candidate for the position of a temporary administrator.

This candidate is for some reason rejected, and the arbitrage court ap points another administrator. The latter calls and holds the first credi tors meeting, during which, in accordance with the law, keeps min utes. The creditors agree in their opinions as to the candidate for the post of an external administrator, but the temporary administrator does not enter his name in the minutes. So what does the judge do in this case The judge looks into the minutes and appoints this same tem Butrin D., Neupravliiaemyi upravliiaushchii.

porary administrator the external administrator. It would be logical to conclude that somebodys order had been thus implemented166.

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