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As a result, as it is demonstrated by the practices of 2003 and 2004, since the enactment of the provisions of the new law on bankruptcy the role of this institution in the sphere of seizure of assets has significantly declined. However, it means only that the respective burden was transferred to the traditional market of corporate control (hostile takeovers via purchase of shares or other actions related to the companys shares) and the sphere of executive proceed ings. According to the provisions of the new law, the creditor has the right to submit the bank ruptcy claim against the debtor only in the case the law enforcement officers failed to exact the Bankrotstva i skandaly (Bankruptcies and scandals) // Sliyaniya i pogloshcheniya. 2004. No. 12. P. 15.

According to the FSFR data for year 2001, after the sifting out of the cases of absent debtors there remained about 21 000 substantive cases, one third of which (i.e. 7 000) were of contracted nature. (An interview with T. Trefilova Kom mersant, 2004, February 13).

Pervyi god deistviya novogo zakona o bankrotstve: resultaty i perspektivy. (The first year of enforcement of the new law on bankruptcy: results and perspectives). The materials of the conference of the RF Commerce Chamber, the RF SAC, and the RF State Duma, February 24, 2004.

RUSSIAN ECONOMY in trends and outlooks debt. There is formed a situation, where all assets of a company may be purchased via bailiffs without initiation of the bankruptcy proceedings 91.

Below, there are presented certain general evaluations of the impact of the insol vency institution on the demography of organizations (see Table 7) 92. On the whole, about 145 thousand of organizations ceased their operations in the period from July 1, 2002 till July 1, 2004; at the same period there were created almost 600 thousand of organizations.

In 77 per cent of these cases, the cessation of operations of legal entities related to their liquidation and only in 20 per cent of cases to reorganization. In the majority of cases, the liquidation of organizations (72 per cent of the total number of such organizations) was re lated to bankruptcy procedures. On the whole, in 2 years 4.7 per cent of the total number of organizations as on July 1, 2002, was liquidated via bankruptcy procedures.

Table Liquidations involving bankruptcy procedures The share of organizations liqui Number of legal entities liquidated dated via bankruptcy procedures via bankruptcy procedures in the in % of the number of organiza period: tions at the beginning of the pe riod:

July 1, 2002 July 1, 2002 October 1, 2003 October 1, 2003 September 30, September 30, July 1, 2004 July 1, 2003 All legal entities 47 531 32 729 2,8 1,Limited liability companies 14 035 9 575 1,6 0,Joint stock companies (open, 3 760 3 223 2,5 1,closed) Production cooperatives 1 346 1 302 5,5 5,Unitary enterprises 241 228 1,7 1,As concerns the sectoral structure (basing on the data for the first ten months of 2004), the largest number of bankruptcies was registered in the sector of trade, public ca tering, and consumer services (what is not surprising taking into account the fact of the absolute quantitative domination of these enterprises). These enterprises were followed by agricultural and industrial enterprises. The significance of bankruptcy procedures in the course of liquidation of organizations depend on their organizational and legal forms: the bankruptcy processes were more intensive among production cooperatives and joint stock companies. The observed decline in the significance of bankruptcy procedures and liqui dation of enterprises in the period from October 1, 2003 till July 1, 2004, is related to both a lesser duration of the observation period, and the fact that over all this period (in contra distinction to the first period) there was in force the third law on bankruptcy. Accordingly, in this period there was most clearly indicated the sharp reduction of practices of submission of bankruptcy claims against absent debtors. It should be noted that this decline of the role played by bankruptcy procedures and liquidation of enterprises were not proportional across the groups of legal entities depending on their organizational and legal forms. The less intensive use of bankruptcy procedures became the most significant for limited liabil ity companies (in this group there were observed much more abandoned firms and eph See: Vyshegorodtsev I. Chto budet s bankrotstvami (What will happen to bankruptcies) // Sliyaniya I Pogloshcheniya, 2005, No. 1, p. 59.

For evaluations, there were used the data on the state registration of legal entities in the Single State Registry of Legal Enti ties carried out in 2002 through 2004 presented by the Russian Tax Ministry.

Section 4.

Institutional and Macroeconomic Challenges emerid companies) and least significant for production cooperatives and unitary enter prises.

4.3.3. Perspectives of modification of the institution of bankruptcy The problem of protection of the rights of both debtors and creditors in the course of bankruptcy proceedings is of the principal importance as concerns the creation of incen tives for investment activities of Russian enterprises. This problem should be settled in an integrated way in the framework of contractual law, bankruptcy proceedings, tax regula tion, and executive proceedings.

However, it should be noted that there are no ideal laws, which could settle the prob lem in a moment, instantly. Experts in the field of law note that in foreign countries regula tion of insolvency is a most dynamically developing sphere of law, since the economies of states require constant modernization of the respective provisions. Moreover, a similar approach is the objective necessity for the transitional economy of Russia.

In about one year after the enactment of the new law on bankruptcy there was started a work on its improvement and, what is equally important, the harmonization of other legal acts with this law. For instance, in 2003 and 2004, the RF Government approved on the whole the following areas of modification of the bankruptcy law presented by the RF Minis try of Economic Development and Trade and the RF Justice Ministry:

improvement of the criminal and administrative legislation and bankruptcy legislation as concerns the responsibility for offences and crimes related to bankruptcy;

determination of the procedures and terms of participation of the authorized agencies in the procedures of financial rehabilitation and amicable settlement of bankruptcy cases;

modification of the law on bankruptcy as concerns the more clear definition of current payments, requirements pertaining to the bankruptcy commissioner, consequences of the dismissal of the bankruptcy commissioner, the status of compensatory funds and mutual insurance societies, the procedures governing the sale of property in the framework of financial rehabilitation or external administration, development of self regulation;

creation of the legal framework of the procedures of bankruptcy, financial rehabilita tion, and amicable settlements;

introduction of the option of the amicable settlement in bankruptcy cases, where the Russian Federation is the major creditor;

expansion of the circle of legal entities subject to bankruptcy procedures;

harmonization of the issues of priority of satisfaction of creditors claims with the bank ruptcy legislation currently in force;

protection of property from criminal offences, prevention of crimes and offences via the improvement of provisions of the RF Criminal Code and RF Code of Administrative Offences setting forth the responsibility for offences related to bankruptcy procedures and pre bankruptcy operations.

The same guidelines were indicated in the Program of social and economic devel opment of the RF in a medium term outlook (2005 through 2008) worked out by the RF Ministry of Economic Development and Trade and being elaborated in November of through January of 2005. In January of 2005, the RF Government approved a package of draft laws aimed at the improvement of the legislation on bankruptcy and introducing amendments to the law On insolvency (bankruptcy), the RF Criminal Code, the RF Code RUSSIAN ECONOMY in trends and outlooks of Administrative Offences, the RF Tax and Budget Codes. Among the approved innova tions, there should be noted the following:

more precise definition of provisions of the RF Criminal Code concerning premeditated (deliberate creation of insolvency by the manager or owner of an enterprise for per sonal gain) and fictitious bankruptcies, as well as and mala fide actions taken in the course of bankruptcies (for instance, concealment of information about property liabili ties of the debtor);

toughening of criminal responsibility of managers (the term of imprisonment for pre meditated bankruptcy was increased from 3 to 6 years);

introduction of responsibility for obstruction of actions taken by bankruptcy commis sioners;

introduction of provisions permitting FTS to grant debtors deferrals or respites with re spect to tax arrears for periods up to 1 year in the case of amicable settlements in the RF Tax Code (at present the sate has no rights to grant such deferrals, what brings to naught the possibility to start the procedures of financial rehabilitation);

introduction of responsibility of self regulating organizations (SRO) of bankruptcy commissioners, including material responsibility, as concerns the conscientious of commissioners and correctness of bankruptcy proceedings.

In perspective (in 2005 and 2006), it is envisaged to introduce such innovations as subsidiary property liabilities of debtors managers and imposition of the burden of proof of innocence on managers (for instance, in the cases where withdrawal of assets from bankrupt enterprises was ordered by owners). At present, creditors should prove in courts the unlawfulness of transactions provoking bankruptcies. Among other problems, which should be settled, there are the following: dispute of transactions in the framework of bankruptcy cases, detection of interdependent persons in bankruptcy proceedings, bank ruptcies of agricultural organizations, broker companies, insurance firms, private pension funds, etc93.

A separate problem is the bankruptcy of so called strategic enterprises. Although of ficial lists of strategic enterprises intensively change every year, the total number of such enterprises traditionally remains at a high level, and it is hardly adequate to real require ments as concerns such restrictions. According to evaluations presented by the RF Minis try of Economic Development and Trade, some of these enterprises are phantoms ab sent even in the register of legal persons, while the share of the state in such enterprises makes 4 per cent. In this connection, the primary objective is to shorten this list. However, the more precise definition of the lists of strategic enterprises and more detailed determi nation of respective bankruptcy proceedings are traditionally delayed, although the lack of clear procedures apparently will not permit to apply measures envisaged in the legislation on bankruptcy to this group.

A special problem is so called subjects of natural monopolies in the fuel and energy complex. According to the law On bankruptcy being in force since January 1, 2005, the law On the specifics of insolvency (bankruptcy) of subjects of natural monopolies in the fuel and energy complex should be abolished and the provisions of item 6, article IX, of the law On bankruptcy, which stipulate respective procedures applicable to the subjects of natural monopolies, enacted. In December of 2004, the State Duma Property Commit tee recommended that the law On the specifics of insolvency (bankruptcy) of subjects of natural monopolies in the fuel and energy complex should be in force until July 1, 2009.

There were used the materials presented at the official web site of the RF Ministry of Foreign Development and Trade (www.economy.gov.ru), PD Kommersant of January 20, 2005 (www.kommersant.ru), and the LIN.RU project (www.lin.ru).

Section 4.

Institutional and Macroeconomic Challenges According to the Committee, this time horizon is needed because of the estimated terms of reorganization in electrical power engineering and natural gas industry.

The planned changes seem to embrace a rather wide range of flaws and gaps of the law on bankruptcy and in the case these amendments are approved, they may significantly improve the quality of the new law. However, there remain significant possibilities for fur ther modification of the law.

First, in the framework of the third law on bankruptcy there remains the risk of rise in corruption due to the trade with the state votes as concerns the decisions taken at the meetings of creditors, as well as the risk of higher activity of local governments as con cerns hidden nationalization and redistribution of enterprises property in favor of third parties. From the authors point of view, in the cases of state participation in bankruptcy proceedings concerning large economically and socially important enterprises it would be feasible to envisage the creation of Boards of authorized representatives of the state in or der to ensure the balanced representation of different state interests.

Second, direct participation of the state in amicable settlements may significantly in crease the risk of bias in favor of certain enterprises. In this connection, it is necessary to create a transparent and exhaustive legal framework (the Tax and Budget Codes) of the terms, on which the state may participate in amicable settlements.

Third, as concerns the initiation of bankruptcy proceedings, at present the state (the executive authorities) is guided by the principles, which are non transparent not only for market operators, but for the executive authorities as well, what sharply increases invest ment risks due to the unpredictable results of application of bankruptcy proceedings with respect to concrete enterprises. It is necessary that the state works out its own criteria of initiation of bankruptcy proceedings with respect to debtor enterprises, which would con cern only a limited number of industrial enterprises and could be consistently implemented in practice.

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