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In contrast to a temporary administrator, an external administrator is, in fact, not limited in his powers. It is during external administration that takeovers of enterprises occurred and/or certain actions were committed in order to withdraw assets and thus to avoid the fulfillment of due obligations. For this end, a wide variety of schemes were applied from the simplest, involving property removal, to rather intricate ones, envisaging the changing of the structure of a debtors shareholders and the creation of affiliations. It should be noted that some of the schemes were universal, i.e., could be applied, almost without changes, for taking over a debtors business or for protecting it from creditors. For example, property removal was a protective measure, if it was re ceived by structures related to the debtors owners, and was a form of a business takeover, if the property was being transferred to creditors or their affiliated companies. Other schemes were unidirectional: for ex ample, the structure of a debtors shareholders was usually changed for the benefit of some of the creditors, while the formation of affilia tions, as a rule, was orientated at maintaining the control of the debtors founders and CEOs over its most valuable assets. And the key role in implementing each of the schemes was to be played by the external administrator.

Example 1. The Moscow Electro mechanical Plant No. 1 a large scale supplier of electro mechanical systems for specialized products.

November 1, 1997. An external administrator comes to the enter prise Vladimir Aliabiev, recommended by the Guild of Anti Crisis Managers, whose Head is Grigorii Yun. On the same day (!) he replaces the security staff at the enterprise.

November 3. The new security officers confiscate the passes and forbade the employees to enter the enterprise.

November 4. The Director of the Limited Partnership Luka is ap pointed to the post of director of operations, and orders that all supply contacts be rewritten, to make the Limited Partnership Luka the sole supplier.

December 11. The Guilds Head, Grigorii Yun, has a meeting with representatives of the enterprises employees. They are informed that Volkov A. et al, Sanitary i marodiory.

no wages will be paid. Money is promised only to those who will be come employed by the Limited Partnership Luka.

December 1213. The tools from the central tools warehouse and the materials from the operation material warehouse are being re moved.

March 25, 1998. The enterprise, in effect, has terminated its exis tence. An order concerning the termination of operations is issued. The whole operation has been carried out within five months167.

Example 2. Achinsk Aluminous Combine (AAC). In the era of the So viet Union, the Combine was considered to be the largest alumina pro ducer and supplied aluminum plants with raw material, primarily the Krasnoyarsk plant (KAP). However, the Combine was unable to adjust to the market economy, and at the end of 1996 was, in effect, bank rupt. External administration was imposed, and the administrators post was given to Gleb Fetisov, who previously had been employed by the Alpha Group. At that moment, the interests of the Alpha Group and the Krasnoyarsk plant coincided, and so the latter voiced no objections as to this candidate. However, in a year and a half, the CEOs in charge of the KAP were replaced, and by mid 1998 the KAP and Alpha were allies no more. In the summer of 1998, five Russian aluminum plants (including the Krasnoyarsk plant) came forth with the initiative to ap point a new person in Achinsk. The Arbitrage Court of Krasnoyarsk Krai gave support to this initiative, and on 30 July the nominee of the alumi num plants, Nail Nasyrov, was appointed external administrator. But when the new external administrator began to execute his responsibili ties, he found that during the period when Gleb Fetisov had been in charge, all the AACs main assets had become property of the compa nies affiliated to the Alpha Group.

The scheme according to which the Combines property was alien ated is somewhat more sophisticated than the one described in Exam ple 1. In early 1997, the Achinsk Aluminous Combine took two loans from the Alpha Bank, in the total amount of 25 billion non denominated roubles. Simultaneously, the Combine formalized two suretyship con tracts with the Open Joint Stock Company Alpha Eko, the main con tent of which was as follows. Alpha Eko was guaranteeing that it It should be noted that this example occurred in the period during which the 1st Law on bankruptcy was in force.

would be able to repay the loans instead of the AAC, but in that case the fines imposed on the Combine were to amount to 1 per cent per day.

The fines became effective since the spring of 1997, after the Open Joint Stock Company Alpha Eko had repaid to the Alpha Bank the loans granted to the Combine. By February 1998 the Combines total debt to Alpha Eko had exceeded 100 million denominated roubles, due to which Gleb Fetisov, the bankruptcy commissioner, made the decision to repay the Combines debt. Between March and May, the Achinsk Aluminous Combine repaid the debt, by transferring to Alpha Eko, in effect, all its main assets in the amount of 75 million roubles, finished products in the amount of 25 million roubles, as well as the right to a five year lease of the property complex of the Kiia Shaltyr mine, where the AACs main raw material, nephelin, was extracted168.

Example 3. Leningrad Metallurgical Plant (LMP). The plants exter nal administrator, Yevgenii Guliaev, by commission of the creditors council, submitted to the Federal Securities Commission the necessary documents for effectuating an additional issue of shares, without any decision to this effect on the part of shareholders. At the moment of this issue, the LMP was an object of interest for two large business struc tures: Energomashinostroitelnaia korporatsia (Power Machine building Corporation) and Interros. The former was the plants main shareholder (32%), the latter had in control a stake of 16% and the main bulk of its creditor indebtedness. And this additional issue of shares was to result in the growth of the stake owned by Interros to the size of a controlling stake (51%)169.

Yet another one of the schemes mentioned above is as follows. In the course of external administration, it was found necessary to separate several (the most efficient) operation units into independent enter prises. The parent company (the bankrupt enterprise) established one or several subsidiaries, which it fully owned. Then the decision was made to more than double the subsidiaries charter capitals. The shares additionally issued in this connection were not transferred to the parent company, but instead, for example, were cross exchanged be tween the subsidiaries. As a result, the bankrupt enterprise lost control over its most valuable assets. Later, in the course of bankruptcy pro Volkov A. et al, Sanitary i marodiory.

Butrin D., Neupravliiaemyi upravliiaushchii.

ceedings, only the non controlling blocks of the subsidiaries shares, which remained the enterprises property, were offered for bidding170.

After the period of external administration is over, the external ad ministrator may be replaced by a receiver, whose main task would be to sell the bankrupt enterprises property. Among the most common abuses committed by receivers we may point out the sale of property at an underestimated price.

Within the framework of bankruptcy proceedings at the Petro zavodsk Aviation Plant, receiver Mikhail Mordashev effectuated the sale of the property, which constituted the mass of the bankrupts estate, in a very original manner. For example, the price of the Ka 26 helicop ters was set at 70,000 roubles (their market price being $20,000 50,000)171.

As for the main clients who order bankruptcy procedures in order to take over a business (who are, in effect, the beneficiaries), in many instances there were large business group related to the bankrupts area of activity. Bankruptcy, in this instance, represented just one of the lower cost variants of integrating new enterprises and operation units into the target associations structure. During the period when the 2nd Law on bankruptcy was in force, real empires were created, consisting of insolvent plants.

For example, the owners of the Evroazmetall Group, in two years, were able to create, by way of imposing external administration on those enterprises that were of interest to them, a very powerful metal lurgical alliance, with an annual turnover of about $ 2 billion172.

Beside private structures, active participants in strange bankrupt cies were also regional administrations, striving to redistribute, for their own benefit, the control over their regions enterprises. The established procedures were thus applied by local authorities as a means for taking over the administration of enterprises owned by the federal center or by private investors, as well as an instrument for protecting the enter prises, which were (formally and actually) under their control, from un related creditors.

Volkov A. et al, Sanitary i marodiory.

Butrin D.,Neupravliiaemyi upravliiaushchii.

Butrin D., Neupravliiaemyi upravliiaushchii.

It should be noted that while business structures during the effec tuation of orchestrated bankruptcies were relying primarily upon bank ruptcy commissioners, local authorities, in addition, could secure the support of arbitrage courts, because the latter, as a rule, depended on regional bodies of authority. Of course, under Russian legislation, all arbitrage courts are in federal jurisdiction, and thus cannot be influ enced by local administrations. However, in actual practice, due to the insufficiency of federal financing for arbitrage courts and the distance (both political and physical) from the federal center, arbitrage courts are highly dependent upon regional authorities.

The enterprises CEOs were active allies of regional administrations in the struggle with the federal center and external investors. Regional leaders had an interest in keeping revenues inside their regions and maintaining a high level of employment, CEOs in maintaining their control over enterprises. The former quite often guaranteed to the latter their protection in exchange for certain services, like timely payment of all regional taxes, ensuring redundant employment, etc. And in the event of an enterprises bankruptcy being initiated, the governor, through pressure exerted on the arbitrage court, secured the appoint ment of the necessary commissioner (for example, one of the CEOs), who then acted for the governors benefit173.

Concluding our discussion of the period during which the 2nd Law on bankruptcy was in force, we should like to note that despite the mass scale character of the abuses and violations of law committed by bank ruptcy commissioners, they almost never were brought to serious re sponsibility for their actions. As a rule, the worst outcome for a bank ruptcy commissioner (not counting the possibility of a criminal method of settling the scores with him) was the recalling of a professional li cense.

This was what the FSFRB did in respect to V. Zubkov, who, in the function of the temporary administrator of the Joint Stock Company Sonin K., Zhuravskaia Ye. Bankrotstvo v Rossii: ni zashchity kreditorov, ni restrukturiro vaniia (Bankruptcy in Russia: neither the protection for creditors, nor restructuring). Spet sialnyi doklad. Obzor ekonomiki Rossii. Osnovnye tendentsii razvitiia (A special report. An overview of Russias economy. Main trends of development). 2000. I. Transl. from Eng lish. ., RECEP, 2000.

Kuzbassenergo, committed large scale manipulations with debt amounts when forming the register of creditors174.

5.2. Late 2002 the present time The inefficiency of the 2nd Law on bankruptcy in the part concerning the prevention of strange bankruptcies (both of the takeover and protection types) became one of the main reasons for the elaboration and adoption of the new (third) Federal Law of 26.10.2002 No. 127 FZ On insolvency (bankruptcy). More than one and a half years has passed since its coming in force, but disputes thereof are still going on.

It should be noted that at first during the period of its elaboration and in the first few months after its enactment this Law was regarded very sceptically (if not negatively) by the experts community. However, even the most militant critics of the new Law remarked that it had a number of advantages, as compared to the federal law previously in force that of On insolvency (bankruptcy) 08.01.1998 No. 6 FZ (hereinafter the previous law), a more complicated procedure for the initiation of bank ruptcy, tougher requirements to bankruptcy commissioners, their with drawal from the sphere directly influenced by the State, and some oth ers175. However, at the same time, the majority of experts were sharing the viewpoint that despite having certain advantages, however impor tant, the new Law, by the level of its quality, did not differ so much from the previous law, which had been very unsuccessful and imperfect. It was commonly believed that the new Law inherited the main limitation of the previous law the inability to prevent corruption and violations by the interested parties in the course of the bankruptcy process176. In this context, some experts rather negatively estimated one of the principal innovations of the new Law the requirement that the responsibility of bankruptcy commissioners be insured on a mandatory basis, because they believed that the necessity to seek considerable funds for the Butrin D., Neupravliiaemyi upravliiaushchii.

See, e.g., Rubchenko M. Zachekhlit ne poluchilos (No success in covering). Expert, 17 December 2001;

Fedotkin I., Khomiakov V. Rossiiu triasiot bankrotnaia likhoradka (Russia is being shaken by bankruptcy fever). Moskovskiie novosti, 2329 April 2002.

See, e.g, Volkov A., Privalov A. Khudshii zakon Rossii (Russias worst law) 2. Ex pert, 4 March 2002.

payment of the insurance premium would inevitably made bankruptcy commissioners dependent on the persons who had provided these funds, and would thus enable the latter to exert pressure on the com missioner and, consequently, to influence the process of bankruptcy.

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