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In the USA, and even more so, in France, the commonly applied models are based on a combination of two sets of goals: those of achieving stability and consistent economic growth (macroeconomic problems), and those aimed at creating efficient mechanisms for dis tributing debtors assets. In France, in particular, the institution of insol vency is to a substantial degree pro debtor, being focused on restruc turing. US legislation allows a debtor to retain control over an insolvent juridical person, and grants the former an exclusive right to submit its own reorganization plan within a specified period of time. The distribu tion of rights in favor of the debtor has largely been determined by a political choice, since the preservation, as a going concern, of a com pany against which a petition in bankruptcy has been filed, instead of its See also Radygin A.D., Gontmakher A.Ye., Mezheraups I.V., Turuntseva M.Yu. Eko nomiko pravovye factory i ogranicheniia v stanovlenii modelei korporativnogo upravleniia (The economic and legal factors and limitations during the consolidation of corporate governance models). M., IET, 2004.

annulment by way of liquidation, is being recognized as a priority. An important limitation of this model is the existence of an opportunity for the debtor to misuse the granted rights.

All intermediate models differ primarily from the point of view of the degree of equilibrium being achieved between violating creditors rights and maintaining an enterprise as a going concern.

According to the EBRDs estimates, legislation on bankruptcy pro cedures in the countries with economies in transition is less developed than legislation addressing other areas of commercial law. In particular, this is true of the efficiency with which this legislation is being applied.

Proceedings in bankruptcy often are very protracted and yield no actual results. The qualifications of the appointed external administrators, as well as the scope of their powers, are also quite often questionable. De spite the serious steps that have been taken in the countries of Central and Eastern Europe, the Baltic states and the CIS in order to improve both existing legislations and the practices in the sphere of corporate bankruptcies, no significant improvements have been observed54.

At the same time, those specific objective limitations that character ize the situations in Russia and some other countries with economies in transition and are impeding an effificnt and mass scale application of this mechanism are also well known:

an unfavorable financial status of a considerable number of newly created corporations;

the traditions of soft budget constraints;

the preservation of a large number of corporations where the State has a stake;

the need for an adequate and highly qualified executive and judicial infrastructure;

socio political obstacles that prevent the application of genuine bankruptcy procedures to loss making corporations, especially if they are very large or city forming enterprises;

multiple technical difficulties associated with objective estimations of the financial status of potential bankrupts;

corruption and other criminal aspects of this problem, especially those associated with property redistribution.

See EBRD Transition Reports, 19992003. EBRD.

Pro debtor bankruptcy legislations exist in Uzbekistan, Moldova, Lithuania, Ukraine (although in the latter case the overall pro debtor orientation is combined with some important pro creditor provisions).

The systems of bankruptcy law existing in Azerbaijan, Kazakhstan and Georgia can be characterized as pro creditor. Strong pro creditor elements also exist in Latvias and Estonias legislations.

Initially, the countries of Central and Eastern Europe and the CIS faced the necessity of a choice to be made between these two models.

However, since in the majority of developed countries a mixed model is being applied, which incorporates elements characteristic of both the USA and the UK in order to achieve a proper balance between credi tors and debtors rights (thus, the management of an enterprise un dergoing the procedure of bankruptcy is usually delegated to a com missioner who is neutral in respect to both the creditors and the debtor), many countries with economies in transition have also at tempted to follow this example.

The system of bankruptcy law existing in Russia may be called neu tral, with a considerable pro debtor bias (since 2002).

In this connection, so far three main phases in the development of the institution of insolvency in Russia can be distinguished:

from the end of 1992 till early 1998 the period when the Law of the Russian Federation of 11.19.1992, No. 3929 1, On insolvency (bankruptcy) of enterprises (hereinafter the 1st Law on bank ruptcy) was in effect;

from early 1998 till the end of 2002 the period when the Federal Law of 01.08. 1998, No. 6 FZ, On insolvency (bankruptcy) (here inafter the 2nd Law on bankruptcy) was in effect;

from the end of 2002 till the present time the period of the Federal Law No. 127 FZ On insolvency (bankruptcy) (hereinafter the 3rd, or New, Law on bankruptcy) being in effect.

The first phase (19931997) For fairness sake, it should be noted that the legal history of bank ruptcy in Russia had begun prior to the onset of the first phase, as specified above. The first set of key provisions on bankruptcy in par ticular, those concerning the application of rehabilitative procedures to state enterprises, appeared in the RF Presidents Edict of 14 June 1992, No. 623, On the measures designed to support and rehabilitate insolvent state enterprises (bankrupts) and the application of special procedures to them. The Edict envisaged the administrative procedure for state enterprises (as well as those where the States stake amounted to 50% or more) being deemed insolvent. After such enter prises had been recognized as bankrupt, the application to them of special liquidation procedures, including reorganization and other measures aimed at rehabilitating the economic and financial status of enterprises, was envisaged. It is noteworthy that this Edict is still for mally being in force.

One more act preceding the 1st Law on bankruptcy was the ordi nance of the RF State Committee for Managing State Property of 5 No vember 1992, No. 717 r, On approving the Model Provision on con ducting a tender to sell a bankrupt enterprise and its property. This ordinance was adopted in order to develop the provisions established by the Presidential Edict of 14 June 1992 No. 623. The Model Provision envisaged two types of an enterprises sale: the sale in full, when it re mained a single property complex with the same specialization as be fore, or the sale of an enterprises property part by part. The selling out of an enterprise was envisaged in the event when the attempt to sell it in the course of a commercial tender had been unsuccessful55.

The 1st Law on bankruptcy was enacted in Russia approximately at the same time as in other countries with economies in transition.

Though during 19951997 the number of petitions in bankruptcy sub mitted to the arbitrage courts demonstrated a noticeable growth, the procedure of bankruptcy as such did not become as common in Russia as in other countries with transition economies. This law was based on the principle of unpayability, stipulating that, when the ratio between the values of assets and liabilities is being estimated, and if the amount of credit indebtedness is higher than the value of an enterprises estate, that enterprise is recognized as insolvent on the balance sheet basis.

The 1st Law on bankruptcy is usually commented upon as very imper fect. An overwhelming majority of authors share the opinion that this law is too lax in respect to debtors. According to V. Vitrianskii, the notion Yu. Svit. Vosstanovitelnye protsedury sposob predotvrashcheniia bankrotstva. (Re habilitative procedures a way of preventing bankruptcy). Rossiiskaia Iustiysiia, No. 3, 1998.

and indicia of bankruptcy as stated in the 1st Law have become outdated and incompatible with the modern ideas of property turnover and the requirements to the participants in this turnover. In this Law, insolvency (bankruptcy) was understood as a debtors inability to satisfy a credi tors claims concerning payments for goods (or works, services), in cluding an inability to make mandatory payments to the budget and off budget funds, due to the debtors liabilities being higher than its es tates value, or due to an unsatisfactory structure of the debtors bal ance sheet.

It was not enough that a debtor had for a long time (more than three months) failed to pay debts, and was unable to pay in principle; in order to recognize a debtor as bankrupt, a court was obliged to review the composition and value of its estate, as well as to estimate the structure of its balance sheet from the point of view of asset liquidity. And only when credit indebtedness was higher than the balance sheet value of total assets could a debtor be declared bankrupt. This approach made possible a situation when persons (organizations and entrepreneurs) incapable of paying for the goods, works and services supplied to them could become participants in property turnover, as a result of which their contractors were becoming insolvent, too.

On the other hand, the conditions were thus created, under which those directors of commercial organizations who knew the law to a certain practical degree could, without paying their debts, use the funds, earmarked exactly for that purpose, as their own circulating as sets, just taking care that their total credit indebtedness not become higher than their organizations total assets value. The then existing le gal notions and indicia of bankruptcy were protecting dishonest debtors and thus undermined the principles of property turnover56.

The practice of applying this law has demonstrated that creditors rights were being significantly restricted due to the difficulties associ ated with the estimation of true estate value by the arbitrage court, and, therefore, to the delayed decisions to deem debtors to be bankrupt. In the Russian situation, when the balance sheet value of property does not reflect its real value, when it is very difficult to estimate the liquid part of a debtors assets, and when accounting documentation is unre V.Vitrianskii. Novoe zakonodatelstvo o nesostoiatelnosti (bankrotstve). (New legisla tion on insolvency (bankruptcy). Khoziaistvo i pravo. No. 3, 1998.

liable, such an approach in some instances resulted in arbitrary or un predictable decisions having been made by arbitrage courts57. The then existing legal notions and indicia of bankruptcy were protecting dishon est debtors and thus undermined the principles of property turnover58.

During this phase, the most important external factors determining the interests of conflicting parties in the sphere of insolvency were as follows:

as the grounds for declaring an enterprise bankrupt, an excess of its total debts over the value of its property was established, which created considerable problems in respect to initiating bankruptcy procedures;

a considerable number of large attractive enterprises remained in the States or mixed ownership;

the economy was characterized by a high level of barter transac tions, as well as by an acute problem of non payments, including debts to the State in respect to taxes and mandatory payments.

Among the reasons for insufficiently active application of the Law on bankruptcy59, the lack of a systematic practice of applying bank ruptcy procedures on the part of the State as a tax creditor was pointed out, as well as its orientation towards the use of certain instruments like imposing fines for delays in payment. It was senseless for ordinary creditors to initiate bankruptcy procedures, because all liquid assets in this case were used to repay the stale debts to the State as a preferred creditor.

In 19951997, certain trends appeared that manifested an expan sion of the scope of applying bankruptcy procedures to potentially highly profitable enterprises, as well as to those likely to receive a big See, e.g., Zakliucheniie po zakonoproektu O vnesenii izmenenii i dopolnenii v Fed eralnyi zakon O nesostoiatelnosti (bankrotstve). (An estimation of the draft law On insolvency (bankruptcy)). Rossiiskoe obshchestvo nezavisimykh ekspertov i antikrizis nykh upravliaiushchikh (Russian Society of Independent Experts and Anti Crisis Manag ers). February 1999.

V. Vitrianskii. Novoe zakonodatelstvo o nesostoiatelnosti (bankrotstve). (New legisla tion on insolvency (bankruptcy). Khoziaistvo i pravo. No. 3, 1998.

O. Pake, R. Seligman. Ugroza bankrotstva i restrukturizatsii (na primere moskovskikh predpriiatii). (The threat of bankruptcy and restructuring (as exemplified by Moscow en terprises) Predprinimatelstvo v Rossii, 1997, No. 2.

order. Some experts60 associated this with the desire of the Federal Administration on Insolvency to accelerate the process of privatization.

Due to the substantial limitations of the 1st Law on bankruptcy, it pro duced no noticeable impact on the Russian economy. According to the authors of the report published by the Russian European Center for Economic Policy61, bankruptcy became neither a serious threat for inef ficient directors of the majority of Russian enterprises, nor a means for ensuring the protection of rights of external creditors.

The second phase (19982002) As the main reason for the adoption of the 2nd Law on bankruptcy, experts have most often pointed out the low efficiency of the previous law, resulting from its excessively lax attitude toward debtors, and as the main innovation a fundamental change in the approach to deter mining the criteria for insolvency (bankruptcy) of debtors juridical persons, which considerably strengthened the position of creditors.

The 2nd Law on bankruptcy was founded on the principle of insolvency:

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