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At the same time, the practice of enforcement of the second law on bankruptcy had demonstrated that bankruptcy proceedings could be easily initiated with respect to large enterprises, where the levels of indebtedness were insignificant in comparison with the scales of their businesses. In accordance with the second law on bankruptcy, the creditor could submit to the arbitration court the claim to declare the debtor bankrupt in the case the latter failed to meet its obligations within 3 months and the amount of indebtedness was above 500 minimal wages. As it had turned out, the principle of insolvency was signifi cantly more efficient as concerned the instilment of payment discipline; it ensured equal opportunities as concerns the initiation of bankruptcy on the part of creditors; in principle, it did not required that judges had special highly professional training in order to take deci sions concerning the substance of claims. However, this principle failed to take into ac count the scale of businesses and possible cash gaps, which were not indicative of the in efficiency of enterprises.

20000 1108 10000 1993 1994 1995 1996 1997 1998 1999 2000 2001 Fig. 1. The dynamics of claims resulted in initiation of bankruptcy proceedings (the first and second laws on bankruptcy) The second stage of development of the institution of bankruptcy, especially after the financial crisis of 1998, was characterized by significant changes in the complex of key factors affecting the implementation of bankruptcy proceedings:

the threshold permitting to start bankruptcy proceedings was sharply lowered;

the processes of industrial integration intensified alongside with the law making activi ties aimed at protection of minority shareholders;

RUSSIAN ECONOMY in trends and outlooks the stock market crisis of the late 1990s resulted in a search for alternative low cost tools of interception of corporate control;

at a significant number of enterprises there was observed a growth in production; how ever, the high level of indebtedness of enterprises associated with tax payments per sisted73;

the state was deprived of voting rights with respect to the most important decisions at the meetings of creditors;

the problems related to the training of bankruptcy commissioners and their affiliation to certain creditors became more urgent.

While in the period in which the first law on insolvency was in force (1992 through 1998), the institution of bankruptcy was rather of the imitation nature, the second law (1998 through 2002) had even more distorted the situation turning the institution of bank ruptcy from a method to instill financial discipline into a tool of redistribution of property and withdrawal of assets 74. There was observed a paradoxical situation: the enterprises of rather safe financial standing were involved in bankruptcy procedures (since there existed the favorable chance to seize control over such enterprises on the part of competitors), while hopelessly loss making enterprises avoided these proceedings (since there was no one wishing to seize these enterprises and there were low chances to collect debts in the course of bankruptcy proceedings).

In fact, in 1998 through 2002 initiation of bankruptcy proceedings was a low cost (in the case of a potential collusion of the bankruptcy commissioner and creditors, arbiters, and FSFR officials) alternative to hostile takeovers carried out via the buy up of shares on the secondary market. In this relation it is interesting to suggest that there was a direct connection between the enactment of the law On insolvency (bankruptcy) in 1998 and the low level of the resistance demonstrated by the Russian stock market in 1998 through 200075. It is significant that the law On joint stock companies provides numerous legal opportunities to efficiently repulse corporate aggressors in the framework of corporate law, while the bankruptcy proceedings existing in 1998 through 2002 practically ensured the success of the aggressors.

The analysis of 100 bankruptcy cases carried out by FSFR revealed that with respect to about one third of enterprises creditors were interested to change owners rather than collect the debts. In 2000, FSFR and its territorial agencies carried out 388 expert apprais als aimed at the detection of fraudulent and fictitious bankruptcies, and in 156 cases there were revealed the respective indications76. Such offences were also directly related to the tax payment situation. According to FSFR77 evaluations, each fifth bankruptcy case had the indications of premeditated criminal actions (in particular bankruptcies aimed at write down of debts). At the same time, in accordance with the data collected in 2002, only 5 out of 2000 initiated bankruptcy cases resulted in convictions78.

A systemic toughening of budget constraints started only in the second half of 2001 in relation to the launch of a campaign for restructuring of the debts of enterprises related to mandatory payments.

See: Radygin A., Simachev Yu. Bankrotstva (Bankruptcies). In: Ekonomika perekhodnogo perioda. Ocherki eko nomicheskoi politiki postkommunisticheskoi Rossii 1998 2002. M., Delo, 2003, pp. 498 512.

See: Volkov A., Privalov A. A nu ka otnimu! (Why Dont I Try To Take It Away!) In: Ekspert, 2001, No. 1 2, pp. 28 29.

See: FSFR final report for year 2000.

Since September of 1993, in Russia there had been operating the Federal Administration for Insolvency (Bankruptcy) (FAIB) under the RF State Committee for Management of State Property, in March of 1997 there was set up the Russian Federal Service for Insolvencies and Financial Rehabilitation (FSIFR), which in June of 1999 was reorganized as the Russian Federal Service for Financial Rehabilitation and Bankruptcies (FSFR). Since March of 2004 the FSFR functions were distrib uted across several state bodies.

See: Sliyaniya i pogloshcheniya (Mergers and takeovers) // Zhurnal dlya aktsionerov. 2002. No. 6. P. 15.

Section 4.

Institutional and Macroeconomic Challenges It should be noted that sometimes the state also used the threat of bankruptcy as a tool to exert pressure on enterprises in order to make them repay the tax related debts or for other non economic purposes. On the whole, the state actively used the institution of bankruptcy in the 2000s. The state, as represented by the tax authorities, attempted to clear the field of abandoned enterprises, and, as represented by FSFR, to intimidate the debtors defaulting on payments to budgets and other mandatory payments. In 2002, the state authorities submitted 90 per cent of bankruptcy claims against debtors. It seems that the tax authorities made haste to take advantage of the opportunities, yet available in 2002, to use bankruptcy proceedings for the liquidation of empty enterprises.

FSFR still played a considerable role as concerns the initiation of bankruptcy pro ceedings. According to our estimates, in 2002 in the case the bankruptcy claims submitted by the tax authorities were excluded, the share of FSFR in the total number of claims against substantive debtors made about 30 per cent.

However, private structures rather used the institution of insolvency as a tool of re distribution of property, reorganization of enterprises, and interception of control. The first two ways of the use of the institution of insolvency were determined by dynamically pro gressing integration processes, the necessity to carry out organizational restructuring of enterprises, and lower (as compared to other methods) costs associated with the applica tion of bankruptcy procedures. The third method could be used due to a large number of opportunities for falsifications and machinations in the framework of management proce dures. The significant shifts occurring in the sphere of protection of the rights of minority shareholders generated additional demand for bankruptcies as an efficient tool suitable for the settlement of various corporate problems: from ensuring the protection of manag ers from owners to carrying out hostile takeovers.

However, in spite of the fact that on the whole the Russian law On insolvency (bank ruptcy), which was in force in 1998 through 2002, was a rather progressive document from the viewpoint of international practices and maintained a certain balance of interests of debtors and creditors, the practical implementation of its provisions became one of the most odious manifestations of discrimination of the rights of certain participants of the process (depending on the concrete situation it could be owners of enterprises or various creditors, including the state). Over the last few years, the major substantive criticism of the Russian institution of insolvency was aimed at the practices of bankruptcy of large economically and socially important enterprises, the large scale use of bankruptcy proce dures for mala fide purposes, and infringements on the interests of the state as a creditor and owner.

Evidently, it was necessary, on one hand, to ensure protection of creditors rights in the process of bankruptcy of enterprises, but also, on the other hand, to prevent the use of simplified schemes of mala fide interception of control over debtor enterprises (or parts of their assets) via bankruptcy procedures. During the whole period, when the second law on insolvency was in force, there were being taken attempts to improve its provisions79. A con siderable part of proposals concerning the reform of the legislation resulted from the in sufficiently developed enforcement infrastructure (dependence of arbitration courts of lo cal governments, the professional level of judges, etc) rather than the imperfection of the regulations being in force at that time.

See, for instance: Radygin A. Soprotivleniye korporativnomu agressoru (Resisting a corporate aggressor) // Dlya aktsion erov. 2002. No. 4. P. 26 28.

RUSSIAN ECONOMY in trends and outlooks In the second half of 2001, there were formed the prerequisites for a radical reform of the institution (legislation on) insolvency. At the governmental level, there were regis tered the following most urgent problems in the sphere of bankruptcy (insolvency):

infringement on the rights of debtors and founders of debtor enterprise (initiation of bankruptcy proceeding on the basis of false documents or an insignificant amount of debt without giving debtors a chance to repay these indebtednesses, the fact that founders of debtor enterprises were deprived of the opportunity to carry out creditor controlled rehabilitation after the initiation of bankruptcy proceedings;

infringement on the rights of the state as the creditor with respect to tax payments;

withdrawal of debtors assets in the interests of certain groups of creditors in the framework of external management and bankruptcy proceedings;

insufficient protection of the rights of creditors;

widespread practices involving the use of premeditated bankruptcies as a tool of un civilized seizure of property;

non transparency and insufficient regulation of bankruptcy proceeding permitting bankruptcy commissioners and other participants of bankruptcy proceedings to abuse the respective flaws;

absence of efficient mechanisms bringing to responsibility mala fide and inefficient bankruptcy commissioners;

insufficiently clearly defined status of self regulating organizations of bankruptcy commissioners, terms of membership, guarantee funds;

possibility of emergence of conflicts of interests as concerns authorized state agen cies, the lawfulness and consequences of proposed broader powers;

settlement of such an issue as the complete elimination of the powers of arbitration courts (which should bear no responsibility) powers to take any decisions concerning the selection and professional level of bankruptcy commissioners and decisions (ap proval of decisions) with respect to the assets of enterprises;

settlement of the issue of the principal exclusion of such procedures as external man agement and financial rehabilitation;

existence of unfair specifics of bankruptcy as concerns all enterprises of the fuel and energy complex in the absence of legislatively fixed specifics of bankruptcy;

absence of reasonable mechanisms of bankruptcy as concerns the enterprises of the defense industrial complex and natural monopolies;

At the same time, in many cases the ideas about possible ways to settle the problems indicated above turned out to be antipodal. The state authorities had no common concept with respect to the transformation of insolvency regulations.

The heated discussion concerning the new already third law on bankruptcy was primarily related to the flaws of this law (as of any other law) in the general institutional con text of problems of corruption, redistribution of property, arbitrary administration, and in competence of various state structures. As a result, the new third federal law No. FZ approved on October 26, 2002, On insolvency (bankruptcy) contains the following principal innovations.

1. Reduction of risks of misuse of the rights on the part of creditors. Initiation of bankruptcy proceedings on the basis of creditors claims is possible only in the case the creditor presents the writ of execution indicating that the creditor has taken an attempt to collect the debt in the framework of executive proceedings and that all attempts taken by the bailiffs within 30 days after the court ruling about the recovery of the debt have failed, so the bankruptcy proceedings with respect to the debtor is the means of last resort for the creditor to collect the debt.

Section 4.

Institutional and Macroeconomic Challenges 2. Granting of equal rights to the state and other creditors in the course of bank ruptcy proceedings, consolidation of state claims. The law equalized the rights of the state and the rights of other creditors in the course of bankruptcy proceedings. The state had obtained the rights to vote at all meetings of shareholders via its authorized agency and participate in the meetings of the creditors committees, at the same time, the priority of the claims of the state was made equal to that of other creditors in the course of bank ruptcy proceedings.

3. Enhancement of the mechanisms aimed at the protection of bona fide owners.

Owners of debtor enterprises were accepted as participants of bankruptcy proceedings.

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