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11. The possibility of a closed sale of debtor assets has been narrowed. The enterprise selloff procedure has been given detailed legal treatment, with its rules applying also to the full or partial sale of debtor property (articles 110, 11 and 139 of the Federal Law on Insolvency (Bankruptcy). While the possibility of a closed sale of debtor assets has remained and is now called an auction featuring closed price offers, numerous necessary technical innovations have been introduced such as the application procedure and application requirements when applying for participation in the auction, as well as requirements concerning the company sale contract, while the information transparency of the sale process has been enhanced. The practice of formally open auctions has been announced; however, the practice of selling assets to earmarked buyers will remain (albeit to a limited extent), especially considering the growing influence of the state upon the arbitration manager who acts either as auction organiser or as the person contracting a specialised agency for this purpose.

Furthermore, enterprise sale can now be carried out both by auction and by competitive sale so long as the buyer complies with specific conditions set by a creditor assembly or creditors committee with respect to the company being sold. The introduction of an electronic format for enterprise sale is a progressive measure, however, its implementation has been postponed indefinitely2.

Further changes were made to the key provisions of the bankruptcy legislation.

A. Whereas previously the right to make a bankruptcy claim at the arbitration court came into effect 30 days after the date of remittance of the executive order to the court bailiff service, at present such a right comes into effect from the date of the legally binding court decision concerning a monetary claim upon the debtor.

Debtor actions can be determined by a controlling entity, including determination by coercion of the representatives of the debtor manager or of the members of debtor management bodies, or by otherwise exerting influence on the debtor manager or of the members of debtor management bodies (thus, debtor controlling entities can include members of the receivership committee, persons or entities that had the power by way of power of attorney or regulatory act, or by way of special power to enter into transactions on behalf of the debtor, persons or entities that had disposal rights with respect to more than 50% of the voting shares of a joint stock company or more than half of the statutory capital of a limited (subsidiary) liability company). Federal Law No. 73- dated APril 28, 2009, On Amendments to certain legislative acts of the Russian Federation.

Electronic auctions for the sale of enterprises shall be held 120 days following the day of approval by the regulatory body of the requirements regarding electronic trading sites, requirements regarding the operators of electronic trading sites when holding open auctions in electronic format, the procedure of verifying compliance of the electronic trading site and its operator with the established requirements, the procedure of holding open auctions and electronic format (Federal Law No. 296- dated December 30, 2008, edited July 19, 2009). By November 2009, the relevant provisions have been developed by the Ministry for Economic Development, but they are yet to be adopted.

Section Institutional Problems Thus it becomes possible to start insolvency procedures prior to ascertaining the impossibility of carrying out the court decision and prior to actual insolvency. This allows for the application of bankruptcy procedures to companies that are neither bankrupt nor even in a state approaching bankruptcy.

Such a situation is once again advantageous for creditors who at present compete among themselves. From a legal point of view such stipulation of a creditors right to file a bankruptcy claim prior to the expiration of the deadline for voluntary execution of a court order by the debtor and prior to the start and end of executive proceedings is illegal as it infringes upon the debtors rights and the subjects the debtor to bankruptcy proceedings that are the last resort measure of protecting creditor rights, without sufficient legal grounds and unjustifiably bypassing the customary process is of protecting creditor rights. Doubts also arise regarding the stipulation of the right of the competent authorities, primarily tax authorities, to file a bankruptcy claim. The legal grounds for the stipulation of such rights must undergo a fundamental test of substance, and the procedure must be changed if sufficient grounds exist.

B. The list of bankruptcy procedure participants has been expanded with the inclusion of authorised representatives of the Russian Federation and local government bodies. Furthermore, the right to participate in bankruptcy procedures has been granted to the self-regulating body where the arbitration manager is a member, to bankruptcy supervision and monitoring agencies (the Ministry for Economic Development and the Federal State Registration Service), as well as to creditors for current payments.

Overall systemic measures for the development of bankruptcy legislation are accompanied by strengthening direct and indirect government influence upon the execution of bankruptcy proceedings and by the further narrowing of debtor rights that underlines the pro-creditor focus of the insolvency legislation1. Apart from direct participation by representatives of the Federal State registration service and other government representatives in bankruptcy procedures, there is growing informal influence of government officials upon arbitration managers (also by way of influencing the self-regulating bodies), and growing influence of the tax authorities by way of arbitration manager selection and establishing his remuneration. The same purpose is served by changing the status of mandatory payments that become due after the instigation of the bankruptcy procedure, resulting in ensuring the growing influence of government representatives at the creditors assembly.

The area of enterprise rehabilitation that is in great need of development has undergone changes linked to its potential application at any stage of bankruptcy proceedings and to stipulating the right of founders (partners) and owners of unitary enterprises and third parties to settle company indebtedness for mandatory payments at any stage of the bankruptcy process. Considering the increasing state control over bankruptcy proceedings and the increase in The pro-creditor focus of the bankruptcy legislation uses the presumption of the debtor being an ineffective owner. Unlike countries with more advanced economies, Russia has low levels of competition and corporate governance, an underdeveloped financial system, and a high level of criminal involvement in corporate activities. Furthermore, breaches of contract roll obligations, including monetary obligations, were pervasive in Russia even at the time of economic growth due to insufficient asset levels, difficulties in attracting debt financing and in using financial instruments that would ensure the fulfillment of such obligations. On top of that, the methods of financing chosen by the government at the time of crisis have led to the deterioration of the competitive environment. In this situation the practically unchecked right of large creditors with regards to determining debtor activities while depriving the latter of any possibility of preserving their business and restoring company solvency goes against market interests as in such cases efficient owners are likewise in danger of losing their assets.

RUSSIAN ECONOMY IN trends and outlooks the methods of directly and indirectly influencing the arbitration manager, this innovation provides a loophole for those willing to preserve their business. The measures adopted are insufficient and incapable of radically changing the unsatisfactory situation with regards to preventing bankruptcies.

The increase of bankruptcy participant rights as regards demanding an expertise at any stage of the bankruptcy proceedings to determine instances of deliberate or fictitious bankruptcy is a positive development albeit a clearly belated one.

A number of procedural innovations have also been made:

a) A general federal register of bankruptcy information is being created that will contain a broad range of information regarding the procedures used in bankruptcy cases such as asset sale auctions and their results, their removal of arbitration managers, etc.;

b) Debtor employees have been included among the interested persons who cannot be appointed as temporary, administrative, external, or receivership managers, while the statute of limitations within which debtor managers, members of its board of directors and executive body, as well as its chief accountant are considered interested persons has been extended from one year to three years;

c) The arbitration court has been granted the right of independently ordering an expertise to investigate issues that require specialized knowledge in the preparation of the bankruptcy case.

Important social innovations include changing the ranking of payroll indebtedness within the order of creditors for current indebtedness arising after a court bankruptcy ruling. It will now be settled immediately following the payment of legal expenses and remuneration to the arbitration manager and persons contracted by him for the purpose of conducting the bankruptcy proceedings. Previously payroll indebtedness ranked below current utilities and maintenance payments and below creditor claims arising after the bankruptcy filing.

In general, the development of bankruptcy legislation in 2003-2009 can be conditionally divided into two periods. The first was the pre-crisis period focusing on the preservation of the overall corporate bankruptcy framework whose functioning had limited impact upon the interests of key players who had significant lobbying potential. The protection of their interests necessitated the strengthening of government control and broadening the scope of application of special bankruptcy procedures for strategic enterprises that were subjectively designated as such, while the most influential economic subjects (Vnesheconombank and government corporations) were exempted from the application of the bankruptcy law.

With the onset of the crisis, the priority changed from ensuring the integrity of state controlled assets to ensuring low levels of bad debts in the loan portfolios of the largest banks, which was meant to contribute to the preservation and support of the banking system. In this situation the banking sector is significantly aided by the state twice, once by way of direct finanscial aid and once again by substantial protection of bank interests in the area of bankruptcy, thus promoting the idea of banks as efficient owners while inefficient owners have been penalised not only by the financial crisis but also by the impossibility of protecting their legal interests given the strengthening pro-creditor focus of the bankruptcy system that practically rules out the preservation of business and at present has little to do with the efficiency for market participants or lack of such.

At the same time, the significant number of expected bankruptcies and the dispersal of state interests in this regard has resulted in the adoption in December 2008 and later in April Section Institutional Problems 2009, for the first time since 2004, of general legislative provisions concerned with the interests of all market participants.

A number of proposed measures, such as more detailed stipulation of procedures, more stringent controls over the activities of arbitration managers and their self regulating bodies, stipulation of auction procedures for debtor assets, the introduction of greater information transparency in bankruptcy proceedings are long overdue and can improve the protection of both creditor and debtor rights. The efficiency or inefficiency of the new measures will be largely determined by the extent to which the state will continue to use its growing influence to further strengthen its position and protect quasi-government interests in the corporate market by controlling the redistribution of corporate assets, or by whether the economic downturn will cause the state to be guided by the interests of society in general, however contradictory.

The practice of developing both corporate legislation and bankruptcy legislation in the 2000s shows a growing trend toward a merger or government interests with those of the largest state-owned (pro-government) companies and banks, along with amending economic legislation predominantly in the interests of such agents and to the detriment of the interests of society in general. The only exception is provided by the reaction to acute social phenomena.

At present there is no planned systematic development of either corporate law or bankruptcy law in the interests of all market participants. In this respect the pre-crisis and postcrisis developments in bankruptcy law are similar, with legislation serving as an instrument of upholding the interests of a specific group of subjects that the state identifies itself with at various points in time. Until such time as this identity crisis is resolved by the state, the development of economic institutions well be chaotic and destructive to the development of the economy as a whole.

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