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The threat of an enterprises bankruptcy and the transfer of control to its creditors have traditionally represented the most important in strument for protecting the rights of the latter. Nevertheless, the appli cation of the institution of bankruptcy for asset seizure, the special role of the State as a creditor, the traditions of soft budget constraints, the socio political barriers in the way of implementing genuine bankruptcy procedures in respect to loss making enterprises (especially to large or forming company towns), the numerous technical difficulties associ ated with an objective estimation of the financial status of potential bankrupts, and corruption have all been the reasons why legislation, as it emerged in the 1990s and the early 2000s, had low efficiency.

It is, nevertheless, necessary to admit that there exist no perfect laws capable of immediately eliminating one or other problem. Special ists in the sphere of law note that the regulation of insolvency repre sents a most dynamically developing area of law in developed coun tries, where the national economies necessitate continual updating of certain norms. Thus, in objective terms, a similar approach be comes even more inevitable for Russias economy in transition.

Economic and institutional aspects By now, all the basic elements of the institution of bankruptcy have already come into being in Russia.

Nevertheless, the existing institution of bankruptcy, despite a rather rapid growth in the number of bankruptcy cases, is still very pin pointed as regards the scale of its application. Therefore, it cannot solve on the macro level the problem of withdrawing inefficient enter prises from the market and that of repaying the debts due to creditors (though the character of this institution is explicitly pro creditor). This situation has resulted from heavy indebtedness of enterprises to the State and from the low predictability of bankruptcy procedures. In gen eral, the institution of bankruptcy does not ensure any predictable dis tribution of risks for the creditors.

While referring to the pin pointed application of bankruptcy proce dures, it is necessary to take into consideration the significant hidden role played by the institution of bankruptcy in safeguarding payment discipline. The very possibility of petitioning to a court of justice that a debtor be deemed to be bankrupt has become an efficient instrument for securing the fulfillment of contractual liabilities.

The scale of application of bankruptcy procedures is dynamically broadening, but the institution of bankruptcy has failed to become a real instrument for achieving the withdrawal of inefficient enterprises from the market and for guaranteeing the repayment of debts to credi tors (despite its pro creditor character). The proportion of unprofitable enterprises is too high for the State to initiate mass bankruptcies of debtor enterprises. At the same time, despite all the shortcomings of the application of the institution of bankruptcy, we cannot share the widespread catastrophic view of bankruptcy as the sole source of all evils. Within the framework of corporate law alone, there occur many more violations and abuses in absolute terms than those associated with the said institution.

In general, in the years 20002002 the institution of bankruptcy was rather actively made use of by the State. At that time, the State, in the person of its tax authorities, was seeking a solution to the problem of eradicating the abandoned enterprises, while in the person of the Fed eral Service for Financial Recovery and Bankruptcy of Russia to that of intimidating the debtors to the budgets and those persons who had outstanding debts in other mandatory repayments. In 2002, more than 90% of bankruptcy petitions regarding debtors was filed by various state bodies. The tax authorities apparently decided not to lose the op portunity still existing in the year 2002 and to apply bankruptcy proce dures in order to liquidate empty enterprises.

The role played by the Federal Service for Financial Recovery and Bankruptcy (FSFRB) in initiating bankruptcy procedures remained rela tively active. Excepting the bankruptcy petitions filed by the tax authori ties, the proportion of petitions filed by the FSFRB with respect to the general amount of petitions concerning substantive debtors, accord ing to our estimates, amounted to approximately 30% in the year 2002.

As regards non governmental structures, the institution of bank ruptcy found its major use as an instrument for redistributing property, reorganizing enterprises and overtaking control thereof. The first two usages were determined by the dynamic processes of integration, by the necessity to carry out organizational restructuring of the enterprises and by the smaller costs (as compared to other methods) of the appli cation of bankruptcy procedures in order to solve these problems. The third usage had more to do with the existing opportunities for fraud and abuse within the framework of managerial procedures.

The significant shifts towards a greater protection of minority share holders rights have provided additional stimuli to the demand for bank ruptcies as an efficient instrument for solving various corporate prob lems ranging from protecting the manager from the owner to carrying out a hostile takeover.

There have been noticed recently a number of new tendencies with respect to the application of the institution of bankruptcy.

Firstly, bankruptcy of debtors is becoming an increasingly important instrument for safeguarding payment discipline and for guaranteeing the compliance of enterprises with their liabilities in respect to pay ments to the budgets and other mandatory payments. From early onwards, the State has become more active in the application of bank ruptcy procedures to enterprises with arrears of taxes and other man datory payments. According to our estimates, by early 2003 the proce dures in bankruptcy had already tied up more than 15% of enter prises arrears of taxes, as compared to only 5% in mid 2001. Thus, there appeared first signs that the State, which had already exhausted the opportunities for restructuring debts, had begun to use the institu tion of bankruptcy on a major scale as an instrument for safeguarding payment discipline and for leveling off budgetary restrictions in respect to debtors with arrears of mandatory payments.

Secondly, an increasing proportion of Russian businesses is becom ing interested in guaranteeing stable, transparent and predictable con ditions for their economic activities. In this connection, the losses caused by the shortcomings of the imperfect and unpredictable institu tion of bankruptcy procedures are being considered as increasingly significant, as compared to the advantages brought about by a seizure of a business.

The results of our analysis of the application of bankruptcy proce dures in the year 2003 have made it possible to offer some preliminary remarks concerning the problems associated with putting into effect the new (third) Law on bankruptcy.

1) In the year 2003, there was a sharp reduction in the scale of appli cation of bankruptcy procedures. The number of petitions in bank ruptcy dropped by 7.5 times from 106,647 in 2002 to 14,277 in 2003, while the reduction in the number of petitions accepted for hearing was even greater by 9.8 times, from 94,531 in 2002 to 9,695 in 2003.

2) Approximately 85% of such a dramatic decline in the number of submitted petitions resulted from the fact that the tax authorities had almost entirely stopped to petition against absent debtors. In 2003, only 2,129 petitions were filed against absent debtors, as compared to 81251 in 2002. Such was an effective consequence of putting in force the norms of the 3rd Law on Bankruptcy, stipulating that bankruptcy procedures be used in respect to absent debtors only if appropriate funds are available in the budget, but the budget for the year 2003, not unexpectedly, did not envisage any expenditures in respect to these purposes.

3) Against the background of a major fall in the number of petitions filed against absent debtors, the decline in the number of petitions con cerning substantive debtors seemed rather moderate, but in fact was approximately two fold. The number of cases accepted for considera tion after the introduction of observation in the year 2003 amounted to 5351, as compared to 10739 in the year 2002. In all likelihood, this de cline resulted from the tightening of the terms for filing the petitions in bankruptcy. Thus, the pin pointed application of bankruptcy proce dures clearly became more visible.

4) In general, the degree of extraordinariness of the application of bankruptcy procedures became significantly higher. Outwardly (by the number of the petitions filed and by the proportion of claims to absent debtors), the application of bankruptcy procedures in the year was resembling, by its scale, the situation witnessed in 19981999.

5) The Law on Bankruptcy has continued to rather successfully compete with the Law on Privatization, as far as the liquidation of uni tary enterprises is concerned. Though the number of petitions ac cepted for consideration against substantive debtors reduced two fold in the year 2002, as compared to the year 2002, the number of state unitary enterprises regarding which it was decided to initiate pro ceedings in bankruptcy, did not decline quite so dramatically (from in 2002 to 511 in 2003). According to the Federal Agency for Federal Property Management, as soon as the plans emerge to transform a state unitary enterprise into a joint stock company, its assets begin to disperse, and the bankruptcy, as a rule, is effected by its own manage ment.

6) The situation in 2003 was not indicative of any substantial shifts in finding solutions to reorganization and rehabilitation problems arising in the course of bankruptcy procedures. Approximately in 70% of cases, the supervision procedures were culminating in the initiation of the pro ceedings in bankruptcy. There was a continuation of the tendency to wards a reduction in the number and the percentage of decisions con cerning the imposition of external administration (547 in the year 2003, against 931 in the year 2002). There was a considerable fall in the num ber of approved amicable settlements: from 145 in the year 2002 to in the year 2003. At the same time, there was a significant increase in the percentage of refusals to declare debtors bankrupt and in the per centage of decisions to terminate proceedings, which was demonstra tive of the increased role played by arbitrage courts in protecting the rights of potentially solvent enterprises. Only due to these factors, the bankruptcy oriented character of supervision procedures was miti gated to a certain extent.

7) The procedures of external administration proved to be even less relevant to the conclusion of amicable settlements and the restoration of enterprises solvency. Thus, despite the emergence of additional mechanisms for the preservation of a debtor's business (the 3rd Law on bankruptcy envisages, in particular, the possibility for return from pro ceedings in bankruptcy to external administration, if there exists a real istic opportunity for restoring solvency, and the possibility of an addi tional issue of shares in the course of external administration, provided that the debtor's owner has agreed to this measure), it is still doubtful whether any positive shifts have actually occurred. The practice of ap plication of bankruptcy procedures in the year 2003 is indicative of the preservation and even strengthening of the tendency of bankruptcy procedures to culminate in bankruptcy proceedings.

8) The authors of the norms envisaged by the 3rd Law on bankruptcy have clearly overestimated the owners determination to reorganize and develop debtor enterprises. It was assumed that a significant percent age of bankruptcies did not end up amicably only because of the owners' inability to repay the debts of an enterprise and to carry out its reorganization. Therefore, the provisions of the 3rd Law on Bankruptcy make the owners of a debtor enterprise one of the participants in the process. Apart from this, the Law specifies the right of the debtor en terprise, its owners and any third parties to discontinue the bankruptcy procedure at any stage on the approval expressed by the bankruptcy commissioner, after repaying the enterprises debts. The law envisages the introduction of a new reorganization procedure (financial recovery), which is designed, under certain conditions, to preserve the founders (participants) right to determine the fate of the enterprise in question, even after the proceedings in bankruptcy have been initiated. Neverthe less, all these innovations have not, apparently, been widely applied.

The procedure of financial recovery was effectuated only in ten cases.

In our opinion, the practice of applying the 3rd Law on bankruptcy in the year 2003 is a testimony to the inconsistency of the thesis actively debated in 2001 and 2002, according to which bankruptcy procedures create a framework for mass violation of debtors rights, as well as those of their owners, who are hampered in their efforts to reorganize the enterprise and to repay its debts in the course of bankruptcy proce dures.

9) In the year 2003, there occurred a sharp rise in the number of ap plications and complaints within the framework of bankruptcy proceed ings, while the level of disputability of such cases also went up, which had other reasons beside the novelty of the Law on bankruptcy. The provisions of the 3rd Law on bankruptcy have significantly widened the opportunities for filing protests in the course of consideration of bank ruptcy cases for example, there was introduced the right, on the part of representatives of a debtors owners, of protesting in courts against the demands filed by the creditors. Thus, despite all the intentions stated, the 3rd Law on bankruptcy is still rather ambiguous, and permits various interpretations of the principles for determining the demands of creditors.

It should also be acknowledged that the institution of bankruptcy cannot be considered as a stable and efficient mechanism of corporate governance aimed at reorganizing corporate finances and manage ment. Nevertheless, there exist certain objective indications that the 2002 Law on bankruptcy has already been effectively implemented:

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