Initiated bankruptcy 70000 cases Including monitored bankruptcy cases 4893 1998 1999 2000 2001 2002 Fig. 3. The dynamics of initiated bankruptcy cases At the background of such a massive reduction of claims against absent debtors, the decline in the number of claims against “substantive” debtors does not look very signifi cant; however, in reality the number of such claims decreased about two times. The num ber of initiated bankruptcy cases involving monitoring made 5351 in 2003 as compared Yakovlev V. F. Itogi raboty arbitrazhnykh sudov v 2003 g. Osnovnye zadachi na 2004 g. (Arbitration courts: the results of work in 2003. Major objectives in 2004.) Verbatim record of the conference of heads of arbitration courts of the Russian Federation (February 11, 2004).
RUSSIAN ECONOMY in trends and outlooks with 10739 cases registered in 2002. It seems that these developments resulted from more strict conditions of the registration of claims concerning insolvency. However, it is ex pected that this would be a rather short term effect as it is probable that many creditors have not yet subjected their debtors to executive proceedings.
On the face of it, a more sharp reduction of the number of initiated bankruptcy cases in comparison with the decline in the number of bankruptcy claims against debtors may be interpreted as a more strict approach of courts to the submitted claims (see Fig. 4). How ever, the growth in the number of initiated bankruptcy proceedings observed in through 2002 was related to the increase in the specific weight of the number of claims against absent debtors; therefore, in 2003 the activity related to the initiation of cases gov erned by simplified procedures sharply declined, while the share of dismissed claims in creased.
120000 Number of bankruptcy 85 claims against debtors (left scale) 70 Number of initiated 60 bankruptcy cases (left scale) 60000 The rate of initiation of claims in % of the total number of submitted claims The specific weight of claims against absent debtors in % of the total number of claims (right 0 scale) 1998 1999 2000 2001 2002 Fig. 4. The rate of initiation of bankruptcy proceedings against debtors On the whole, the “exclusiveness” of the application of bankruptcy procedures has significantly increased. On the face of it (judging by the number of submitted claims and the share of claims against absent debtors in this number), the scale of application of bankruptcy procedures in 2003 reminds of the situation existing in 1998 and 1999.
% Section 4.
Institutional and Macroeconomic Challenges The law on insolvency continues to rather successfully “compete” with the Law on privatization as concerns the liquidation of unitary enterprises86. Although in 2003 the number of bankruptcy claims initiated against “substantive” debtors declined two times in comparison with the figures registered in 2002, the number of SUEs, with respect to which there were taken decisions to initiate bankruptcy proceedings, did not decreased so sig nificantly – from 643 in 2002 to 511 in 2003 (see Fig. 5). According to the top officials of the Federal Agency for Management of Federal Property87, as soon as there appear plans to privatize a SUE, its assets are diluted, and its managers themselves initiate its bankruptcy.
SUE, within 1 year 2045 MUE, within 1 year SUE, cumulative total since 500 MUE, cumulative total 0 since 1998 1999 2000 2001 2002 year year year year year year Fig. 5. The dynamics of bankruptcy proceedings with respect to unitary enterprises The practices of enforcement of the third law on insolvency in 2003 do not permit to indicate any positive shifts in the solution of reorganization and rehabilitation problems in the course of implementation of bankruptcy procedures (see Fig. 6 – 7). In about 70 per cent of cases, the monitoring procedures resulted in the initiation of bankruptcy proceed ings. The trend towards a decline in the both the number, and the share of rulings initiating external administration persisted (547 cases in 2003 as compared with 931 cases in 2002).
There was observed a significant decline in the number of approved amicable settlements:
from 145 in 2002 to 54 in 2003.
At the same time, there was observed a significant increase in the share of rulings dismissing bankruptcy claims against debtors and the share of rulings terminating pro ceedings related to bankruptcy cases, what is an evidence of a growing role played by ar bitration courts as concerns the protection of interests of potentially solvent enterprises.
In 2000 through 2003, there were privatized about 500 FSUEs.
Interview of V. Nazarov, the Head of the Federal Agency for Management of Federal Property // Vedomosti. 2004. May 18.
RUSSIAN ECONOMY in trends and outlooks Only due to these factors the bankruptcy bias of monitoring procedures has somewhat di minished.
The procedures of external administration proved to be even less suitable both for the achievement of amicable settlements, and for recovery of enterprises’ paying capaci ties. In 2003, more than 90 per cent of external administration procedures resulted in rul ings initiating bankruptcy proceedings. The trend towards a decline in the number of ami cable settlements persisted (53 cases in 2003 as compared with 121 cases in 2002), while financial rehabilitation of enterprises was achieved only in few cases (only 28 cases).
100% On termination of proceedings concerning 90% bankruptcy cases 80% 70% On dismissal of bankruptcy claims 60% against debtors 50% 40% On introduction of external management 30% 20% 10% On bankruptcy of the debtor and start of 0% bankruptcy proceedings 1998 year 1999 year 2000 year 2001 year 2002 year 2003 year Fig. 6. Monitoring: the structure of decisions taken On the whole, taking into account all “stages” of bankruptcy proceedings, in there were registered about 230 cases where businesses were “rehabilitated”: 170 pro ceedings were terminated after the conclusion of amicable settlements and 56 bankruptcy proceedings resulted in the rehabilitation of debtors and satisfaction of debtors’ claims.
Therefore, in spite of enhancement of the mechanisms aimed at the preservation of the debtors’ businesses (the third law on bankruptcy in particular envisages the option to revert bankruptcy proceedings to external management in the case there is a real oppor tunity of restoration of solvency and additional issue of stocks during external manage ment on condition of approval of such an issue by the debtor’s owner) there are hardly ob served positive shifts. The practice of enforcement of insolvency procedures in indicates that the bankruptcy bias persists and even increases.
It is apparent that in the course of elaboration of the provisions of the third law on bankruptcy the wish of owners to rehabilitate and develop debtors’ businesses was over estimated. It has been assumed that the major part of bankruptcies does not result in ami cable settlements only due to the fact that owners have no possibility to repay the indebt edness of enterprises and carry out their rehabilitation. Provisions of the third law on insolvency introduced owners of debtor enterprises as participants of the process. Be sides, the law stipulates the right of the debtors, owners of debtor enterprises, and any third parties on the condition of approval on the part of bankruptcy commissioners, to stop bankruptcy proceedings at any stage by repaying the debts of debtor enterprises. The law % of the total number of decisions taken in the course of monitoring Section 4.
Institutional and Macroeconomic Challenges introduced a new procedure financial rehabilitation, which in certain situations should permit the founders (partners) of the debtor to keep control over the fate of the enterprises even in the case there are initiated bankruptcy proceedings. However, it seems that all these innovations are in low demand. The procedures of financial rehabilitation have been introduced only in 10 cases. The procedures of external management have resulted in sat isfaction of the claims filed by creditors only in 28 cases. Only in 19 cases the bankruptcy proceedings have been reverted to external management.
Proceedings terminated 100% because of restoration of solvency 90% 80% 70% Proceedings terminated 60% after the conclusion of 50% amicable settlements 40% 30% 20% There were taken decisions on bankruptcy of the debtor 10% and start of bankruptcy 0% proceedings 1998 year 1999 year 2000 year 2001 year 2002 year 2003 year Fig. 7. External management: the structure of decisions taken From the authors’ point of view, the practical implementation of the third law on insol vency in 2003 indicates the fallibility of the actively discussed in 2001 and 2002 assumption that in the framework of bankruptcy proceedings there occur mass infringements on the rights of debtors and their owners, who are “prevented” to rehabilitate enterprises and re pay the debts.
management % of the total number of decisions taken in the course of external RUSSIAN ECONOMY in trends and outlooks 100,0 Specific weight of disputes in % of the total number of reviewed cases (left axis) 90,80,70,Specific weight of disputes 60,in % of the total number of reviewed cases with the 50,0 exception of proceedings carried out in accordance 40,with simplified procedures (left axis) 30,Number of applications, 20,complaints, and claims submitted during the year 10,(right axis) 0,0 1998 1999 2000 2001 2002 Fig. 8. Evaluation of the disputableness of bankruptcy proceedings In 2003, there was registered a sharp increase in the number applications and com plaints in the framework of bankruptcy cases, there was also observed an increase in the level of “disputableness” of insolvency cases; however, it was the result of not only the “in novation nature” of the law on insolvency (see Fig. 8). The provisions of the third law on bankruptcy have significantly enhanced the possibility to appeal in the course of conduct of bankruptcy cases, for instance, there has been introduced the right of representative of owners of debtor enterprises to appeal against the claims of creditors and stipulated the possibility to appeal against the determinations issued in the course of bankruptcy pro ceedings basing on the results of disputes between the parties participating in the case.
At the same time, it should be noted that out of the total number of appellations and complaints submitted in the course of the conduct of bankruptcy cases 60 per cent of such appellations and complaints concerned the determination of the amounts of creditors’ claims. Therefore, in spite of the declared purposes, the third law on insolvency retained a rather wide field for different interpretations of principles set forth with respect to the de termination of creditors’ claims.
The trends noted above were also characteristic in 2004. According to the data pre sented by the RF Ministry of Economic Development and Trade, as on September 1, 2004, the number of bankruptcy cases examined by Russian arbitration courts declined two times (to 48833) as compared with the respective figure registered in 2002. As it has been Section 4.
Institutional and Macroeconomic Challenges noted above, a sharp decline (including the data for year 2004) of the number of bank ruptcy claims against debtors was to a significant extent related to the “freezing” of the state activity as concerns the initiation of bankruptcy procedures since March of 2004 be cause of the administrative reform and the necessity to provide budgetary funds for the payment of bankruptcy procedures related costs. At the same time, about 50 per cent to 60 per cent of the consolidated debts of enterprises undergoing the bankruptcy proce dures are due to the state. The changes in this situation (including the solution of adminis trative, legal, and financial issues) will result in a sharp increase in the number of bank ruptcies.
In particular, this also means that in the near future the state will become the major “contractor” of bankruptcies and the issues relating to the criteria of initiation of such cases become extremely urgent at present. For instance, in the autumn of 2004 there started a heightened discussion concerning the plans of FTS to initiate bankruptcy of “strategic” enterprises related to the defense and military complex and double purpose technologies. At the same time, in the process of transfer of powers in the sphere of bank ruptcy from FSFR to FTS the latter refused to accept the elaboration of expert reports about the presence or absence of indications of deliberate bankruptcy. The extreme statements in this discussion implied that FTS wished to initiate artificial bankruptcies for the purposes of redistribution of property88.
The problem of fraudulent and deliberate bankruptcies remained urgent in 2003 and 2004. According to the data presented by FSFR, in 2002 there were revealed 457 cases of deliberate and fraudulent bankruptcies and 417 such cases in 2003. It should be noted that in 2002 through 2004 there were initiated about 300 respective criminal cases, how ever, only 20 were examined in courts, and only 12 of them resulted in convictions. Due to the introduction of more complicated procedures governing the initiation of bankruptcy proceedings and restriction of the discretion of bankruptcy commissioners, since 2003 the number of “contracted” bankruptcies (according to the FSFR estimates) has significantly declined in 2003 and 200489; however, there were implemented corporate procedures (withdrawal of assets is carried out prior to bankruptcy). This problem is rather urgent as concerns state unitary enterprises, especially those included in yearly privatization plans.
According to certain estimates, up to 10 per cent of such state unitary enterprises (in cluded in privatization plans) go bankrupt within a year, while 70 per cent to 80 per cent of assets of such enterprises are withdrawn prior to bankruptcies90.
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