Mutual financing by Yu. Vasilieva Russian Business Daily, No. 726, November 3, Section Institutional Problems In summary, a review of government legislative initiatives in the area of bankruptcy or shows both a desire for significant legal innovations in the area of bankruptcy regulation and the focus of such innovations on social aspects. However, recent years in Russia have traditionally seen legal regulation lagging behind the demands of the economy. Given the recent unfavorable economic conditions, this can become a decisive factor in adversely impacting the effectiveness of the measures proposed.
5.3.5. Concluding remarks In conclusion, it must be noted that the 2005-2009 period was characterised by broadening the scope of application of bankruptcy procedures to “substantive” debtors. However, the institution of bankruptcy continues to carry out, albeit to a lesser extent, the function of government regulation of the number of inactive legal entities that should be outside its scope.
Tax authorities play a leading role in initiating bankruptcy proceedings, including those against “substantive” debtors, while government regulation of their activities can largely determine both the scope of application of bankruptcy procedures nationwide and have a significant impact on the general practices of insolvency proceedings.
The increase in bankruptcy rulings taken in the first half of 2009 amounted to 16.7% compared to the respective period in the previous year. A 24.1% increase in the number of bankruptcy filings, as well as Supreme Arbitration Court data that show evidence of significant (88%) growth in the number of claims related to breach of obligations, predominantly of contractual obligations, point to the high probability of further growth in the number of bankruptcies in 2010.
Restoring debtor solvency within the framework of bankruptcy procedures and settling creditor claims by signing restructuring agreements, as well as financial rehabilitation, are still confined to isolated instances and leave debtors who have become the subjects of bankruptcy proceedings no practical chances of retaining control over the enterprise. Given the low threshold for an insolvency ruling (RUR 100,000), as well as the large-scale payment defaults, shrinking industrial production volumes, lending volumes, and market demand starting from late 2008, this results in decreasing numbers of economic agents, above all of private entrepreneurs, regardless of their competitive strengths.
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.
During 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 financial 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 RUSSIAN ECONOMY IN trends and outlooks 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 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 will be chaotic and destructive to the development of the economy as a whole.
In terms of the peculiarities of the institutional environment that impacts bankruptcy proceedings, it must be noted that the Russian judicial system, having inherited many of the traditions of the Soviet judicial system, continues to be significantly influenced by the executive power. Ensuring the independence of presiding judges is therefore a key issue.
Recent assessments of the judiciary system range from “a mockery of justice” and “a tool serving the executive branch” to “a comprehensive judiciary system albeit riddled with numerous shortcomings”. These shortcomings arise from inadequacies in the legal mentality, including that of professional practitioners, in professional personnel training, in organizing the functioning of courts, including workload issues, in the selection criteria, selection mechanisms, and appointment mechanisms for judges, in receiving and improving professional qualifications, and in the degree of transparency in the system. One of the factors contributing to the low quality and long duration of case reviews is inadequate staffing that results in unprecedented high workloads for judges.
Another widely known shortcoming of the Russian judiciary is the lack of enforcement of Russian court rulings that contributes to the increasing number of bankruptcy cases. Statistically, half of the rulings by both general courts and arbitration courts in Russia are not enforced. The most urgent issues related to the enforcement of court decisions are to do with the inefficient and illegal sale of arrested assets, as well as with staffing issues.
Section Institutional Problems The development of a system of selling arrested property based on mixed auctions using global auction practices (Dutch and English auctions) is advisable in order to deal with the above shortcomings. Such a system must combine various features aimed at attaining the full of sale of arrest and property at a maximum price. This will allow to minimize the issues related to the current system of valuing arrested property.
As regards staffing, the inefficiency and abuses of power by court bailiffs are widespread and have long been an urgent issue. The high level of abuse instances is coupled with the very low proportion of court decisions to satisfy claims contesting the action or inaction of and rulings by the officials of the Federal Court Bailiff service.
Problems likewise exist with respect to the self-regulating bodies of arbitration managers and valuation practitioners that have so far failed to establish themselves as efficient professional regulators of their members’ activities. A number of self-regulating organizations of arbitration managers failed to take timely measures even in cases of breaches of law by their members that were evidenced by courts. Such cases are due to the absence in most self regulating bodies of the systemic approach to monitoring the professional activities of their members that should be based on an analysis of the activities of member arbitration managers and of their efficiency and should investigate the causes of any legal breaches committed The limited effectiveness of state control over the activities of arbitration manager selfregulating bodies is due to the lack of self-regulating traditions in Russia given that it is a recent institution and thus relations in this area are not yet established and the legislative basis for dealing with the issues of state supervision and monitoring is still insufficient. The Russian market is still plagued by instances of issuing unjustified valuation reports and process abuses committed during valuation.
Promoting the effective functioning of the institution of bankruptcy in the economy necessitates the following measures:
1. Continued implementation of legal reform to ensure the independence of judges, including arbitration court presidents, from the executive power, minimising corruption in the judiciary system, etc., along with decreasing the workload of arbitration court judges in the interests of more thorough review of court cases.
2. Substantial changes to the objectives and scope of activities of the tax authorities with respect to insolvency and elimination of inactive legal entities from the register a. the existing conflict of interest driven by the need to ensure the fulfillment of targets for remittances to the state budget by the tax authorities and the resulting inflexibility of such authorities in initiating and reviewing bankruptcy cases. Ideally, government interests in such proceedings, including those related to taxation issues, should be represented by different government body (such as the Ministry for Economic Development).
b. Legal measures must be taken to create effective mechanisms for rescheduling and restructuring mandatory payments that are to be used within the framework of insolvency cases and whose lack at present hinders the practical implementation of creditor agreements and financial rehabilitation procedures. Given the average level of satisfying registered creditor claims of 10%, such measures are unlikely to have a significant impact upon tax remittances to the state budget.
c. In the medium term, the issue of setting an adequate corporate tax burden, especially in the first three years of the company’s existence, shall continue to be of paramount importance.
RUSSIAN ECONOMY IN trends and outlooks d. The activities of tax authorities in the liquidation of inactive legal entities must be adequately financed and must be separated from their role in bankruptcy procedures. Ideally, such functions should also be transferred to a different government body. (It has not been possible to analyse the expediency of entrusting tax authorities with the functions of registering legal entities within the context of this paper) 3. Further improvements must be made to the functioning of the court bailiff service with respect to staffing policies, increasing liability for inaction and illegal or inappropriate action, including the obligation to compensate the plaintiffs whose rights have been infringed upon for related losses. This shall be made possible by the improvement of the mechanisms of contesting the actions and rulings of Federal Court bailiff service officials with a view to creating real and effective as opposed to formal mechanisms of legal protection.
4. A crucial task that will result in greater efficiency of the institution of bankruptcy is the creation of preconditions for further development of self-regulatory organizations of arbitration managers and valuation practitioners.
Necessary prerequisites for developing government monitoring (supervision) in this area include:
– Establishing an official list of documents and information that government agencies are entitled to receive from self regulating organisations and the self regulating organisations are required to furnish – Making amendments to the Administrative Code of the Russian Federation with regards to the substance of specific breaches that can result in administrative liability of self regulating organisations and giving government monitoring agency is the right to initiate administrative proceedings for such breaches.
It is also necessary to create a framework of measures aimed at incentivising the self regulatory organizations toward improving the professional qualifications of their members both by developing and implementing operating standards and by evaluating their effectiveness, as well as by increasing the accountability of their members and active efforts to remove the causes of legal breaches.
Further development of valuation activities requires:
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