Учебный год 22-23 / William_Simons_Private_and_Civil_Law_in_the_R

to the trend in the development of private international law. The law of the place of residence or primary place of business of the party whose performance has a decisive significance upon the content of the contract will be deemed to be the law of the country with which the agreement is most closely connected.

Inaccordancewiththisnewapproach,specificconflictsconnections enumerated with regard to certain types of contracts should be seen as implementing the principle of close connection. These should be applied unless otherwise stipulated by either the law, the terms of the agreement, or the circumstances of a particular case. Considering the varied nature of contemporary commercial practices, this approach will certainly further the flexibility needed when resolving the issue of the law to be applied to the contract and will simultaneously ensure that transparency in the conflicts regulation of disputes remains on a sufficiently high level.

Specific conflicts connections involve a wide scala of agreements in practice, including the majority of agreements regulated by the RF Civil Code. The law which is applied to an agreement on the basis of said conflicts norms will encompass—in particular—such issues as the interpretation of agreements, the rights and obligations of parties, perfor- manceofagreements,theconsequencesofnon-performanceorimproper performance, termination, and the consequences of the invalidity of an agreement.

It should be emphasized that the creation of a new private international law in Russia relies not only upon present-day achievements of legal technique, as found in international acts or the laws of foreign countries, but also takes full account of the traditions of domestic law and legal practice, and the actual level and potential development of socio-economic conditions in Russia.

afraid of bankruptcy—could avoid paying their debts for a long time and use the funds designated for this purpose as their own floating capital as long as the total amount owed to their creditors did not exceed the value of the assets of their enterprise.

It is clear that the earlier legal concept and indicators of bankruptcy protected unscrupulous debtors and, in doing so, subverted the principles of property transactions.

In drafting the 1997 Federal Law, the legislator did not have a great choice: all of the existing approaches used in various legislative systems todefinetheinsolvencyofadebtorcouldbesummarizedbytwooptions, depending on which one of basic principles is used to determine the basis for recognizing a debtor as bankrupt: either the principle of neplatezhesposobnost’ (resulting froma cash-flow analysis) or the principleofneoplatnost’

(resulting from the relationship between assets and liabilities on the debtor’s balance sheet). As noted, the earlier law used the principle of neoplatnost’ as its criterion for insolvency, which hindered the consideration ofcasestothedetrimentofcreditors,and—mostimportantly—deprived arbitrazh courts and creditors of the possibility of applying insolvency procedures (including external management for the purpose of promoting the solvency of the debtor) to insolvent debtors if the value of their assets formally exceeded the total amount of debt owed to creditors.

It should be underlined that several legislative systems use the criterion of neoplatnost’,whichrequiresananalysisofthedebtor’sbalancesheet

(according to German legislation, for example, in addition to neplatezhesposobnost’ as a criterion for insolvency, the principle of overindebtedness (sverkhzadolzhennost’) is also recognized, i.e., when a debtor has an insuffi- cient amount of property to cover all of his obligations).As a rule, however, this criterion is applied in addition to the criterion of neplatezhesposobnost’ and serves mainly as the basis for the choice of procedure to be applied to the insolvent debtor: liquidation or rehabilitation.

The 1997 Russian legislation on insolvency (bankruptcy) followed the same path: a legal entity or an entrepreneur may be declared bankrupt in the case of its neplatezhesposobnost’, but possession of property (assets) exceeding the total amount of debt owed to creditors is evidence of a realistic possibility of restoring its solvency and, consequently, could serve as the basis for applying to the debtor the procedure of external management. With regard to the insolvency of individuals who are not entrepreneurs, the principle of neoplatnost’ will be applied, i.e., when the debt owed to creditors exceeds the value of the individual’s property (assets).

Thus, insolvency (bankruptcy) in the 1997 Federal Law means the inability of a debtor to settle the claims of his creditors with regard to

financial obligations and/or to fulfill his obligation to make mandatory payments.

If the role of debtor is played by an organization (a legal entity), then it is considered incapable of settling the claims of its creditors with regard tofinancialobligations(orofmakingmandatorypayments)iftherelevant obligations are not met within three months from the date of their expected performance. In order to recognize an individual debtor as bankrupt, it is also necessary that the total value of his obligations exceed the value of his property (assets). Thus, the foundation of the concept of bankruptcy is the presumption that a participant in property transactions (a legal entity) that does not pay for the goods, works, or services received from contractors—and that also does not pay taxes and make other obligatory payments in the course of a substantial period of time (more than three months)—is incapable of meeting the obligations owing to his creditors.

In order to avoid bankruptcy, a debtor must either meet his obligations or provide a court with evidence that the claims of his creditors (or tax or other authorized state organs) are unjustified.

Itisclearthat,whendefiningthecriteriaforinsolvency(bankruptcy), only a debtor’s financial obligations are taken into account, as well as his obligations to make payments to the budget and extra-budgetary funds.Ac- tually,whendraftingthe1997FederalLaw“OnInsolvency(Bankruptcy)”— and especially during its passage through parliament—the authors of numerous amendments thought that the draft “insulted” other creditors with respect to non-financial obligations; they suggested providing any creditor with the right to petition an arbitrazh court to begin insolvency (bankruptcy) proceedings for any civil-law obligation. It is a blessing that the legislator had enough wisdom to reject such amendments.

Let us imagine, for a moment, the results of a broad approach to the group of creditors entitled to initiate bankruptcy proceedings, e.g., a buyer who receives an insufficient number of goods from a seller under a purchase and sale agreement; a customer who receives a faulty item from a contractor; or a consignee who suffers a shortage in her delivery, etc. As it was suggested, they would all have a right—in such situations—to petition an arbitrazh court to initiate bankruptcy proceedings against the debtor,withalloftheresultingconsequences.Insuchasituation,itseems to me that very little time would be needed to eliminate the remnants of all initiative from commercial relations.

On the other hand, a creditor may take the initiative to convert any civil-law obligation that is, in essence, not met or improperly met by a debtor into a financial liability. In addition, even if a court were to im- pose bankruptcy measures upon a debtor (including receivership, which

can continue for a significant period of time) based on the petition of a creditor with respect to a financial obligation, this in no way means that creditors—withrespecttoothertypesofobligations—losehopeofreceiv- ing from the debtor the goods, works, or services owed to them.

In accordance with the 1997 Federal Law “On Insolvency (Bankruptcy)”, however, when determining arrears with respect to obligations and mandatory payments to the budget and extra-budgetary funds, obligations to make payments for fines or penalties (or other types of financial sanctions) should not be taken into account. The total amount ofindebtednessthatservesasthebasisforfindingevidenceofbankruptcy includes only debts for goods, works, and services (as well as tax arrears and other mandatory payments).

Theamountofthemonetaryclaimsofcreditors—aswellasoftaxand other authorized state organs—is deemed to be proven incontrovertibly if they are confirmed by a court judgment or by documents evidencing the recognition thereof by the debtor. With respect to other claims, the debtor is afforded a chance to dispute them. In such case, their validity will be verified by an arbitrazh court.

Claims that are not disputed by the debtor are also considered to have been proven. To ascertain the amount of each claim, its value is taken at the moment a petition to declare a debtor bankrupt is filed with an arbitrazh court.

As was the case with the prior law, the right to petition an arbitrazh court for a debtor to be declared bankrupt is granted to the debtor, his creditors, and state prosecutors (the prokuratura), as well as to authorized tax and other state organs. An innovation is the rule establishing cases where the director of an organization (or an individual entrepreneur) is required to petition an arbitrazh court to be declared bankrupt: namely, when settling the claims of one or more creditors leads to a situation whereby it is impossible to meet financial obligations in relation to other credi- tors; when a debtor’s administrative bodies or the owner of its property

(a unitary enterprise) decides to petition an arbitrazh court to be declared bankrupt;aswellasseveralothersituations.Forthenon-fulfillmentofthis obligation, the director of the organization will have secondary liability for the debtor’s obligations to other creditors (Arts.8 and 9).

In the absence of any evidence of bankruptcy, an arbitrazh court should refuse to grant the corresponding bankruptcy petition. However, if such evidence is found, i.e., the debtor’s inability at the present time to meethisfinancialobligationsortopaytaxesandmakeotherpaymentsto extra-budgetary funds, this in no way means that the bankrupt debtor will be subject to mandatory liquidation. In addition to receivership, applied

when a legal entity is liquidated, other procedures may also be applied: supervision; external management; amicable settlement. With respect to an individual debtor, receivership can be applied or an amicable settlement may be reached. An arbitrazh court always has the last word in determining which particular procedure to apply to a debtor.

Entirely new for Russian legislation is the procedure of supervision (nabliudenie), which, as a rule, is introduced from the moment at which an arbitrazh courtacceptsapetitionregardingadebtor’sbankruptcy.The main purpose of this procedure is to ensure the safety of the debtor’s assets until the rendering of the decision of the arbitrazh court on the merits of the case. Fulfilling this task is the responsibility of a temporary director appointed by the arbitrazh court. In this case, the director of the enterprise is not relieved of the duty to fulfill his own obligations; however, an entire range of transactions that could lead to the disposal (waste) of immovable and moveable property (depending on the value of the transaction) may be concluded exclusively with the agreement of the temporary director.

Another task of the temporary director during the period of super- vision is to examine the debtor’s financial situation and to determine whether or not it is possible to reestablish his solvency (upon the existence of signs of bankruptcy, naturally). It is the temporary director who has to call a creditors’ meeting before the arbitrazh court can render a judgment on the merits of the bankruptcy proceedings, which—on the basis of the information provided by the temporary director on the results of an analysis of the debtor’s financial situation—renders one of the following decisions: the introduction of external management and an appeal to an arbitrazh court with the corresponding petition; or an appeal to an arbitrazh court with a petition to declare the debtor bankrupt and to enter into receivership. Thus, upon making a decision on the bankruptcy of a debtor, an arbitrazh courtmayrelyonthewillofthecreditors,which—in the case of introducing external management—predetermines the deci- sion of the arbitrazh court.

The procedure of external management (vneshnee upravlenie) is not new to Russian legislation; however, it is necessary to note that it is now regulated more carefully and in greater detail.

Gapsinthepriorlegislationnotinfrequentlydiscreditedtheveryidea of reestablishing the solvency of a debtor during external management. The principal means of creating conditions for the reestablishment of a debtor’ssolvencyisamoratorium on settling claims of creditors. Previously, this was limited by a rule that stated that: “for the period of conducting external management of the property of a debtor, a moratorium shall be

introduced on settling the claims of creditors against the debtor” (Art.12(3)), but it did not link the introduction of a moratorium with a cessation of the application of penalties or fines to a debtor with respect to monetary obligations or financial sanctions for mandatory payments. As a result, the chances for a debtor to regain solvency were virtually zero since— for the entire period of external management, and consequently during the functioning of the moratorium—the burden of fines and penalties (as well as financial sanctions), grew like a snowball and hung above him like a blade. In such circumstances, a moratorium on old debts lost any practical meaning.

In accordance with the 1997 law, a moratorium on settling the claims of creditors will mean not only halting the enforcement of judicial decisions and other documents ordering the recovery from the debtor of debts arising out liabilities the term for the performance of which had ensued prior to the introduction of external management. During this period, there will also be no additional fines or penalties related to these liabilities (or financial sanctions for mandatory payments or interest for the use of borrowed funds). With the aim of providing compensation for losses incurred by creditors and the state (for mandatory payments) on all“frozen”accounts,interestisaccruedattherefinancingrateoftheRF

Central Bank.

External management is the responsibility of the external manager, whose candidacy is recommended to an arbitrazh court by the creditors’ meeting. The temporary manager who was earlier designated by the arbitrazh court for the period of supervision may also act in this capacity. The directoroftheorganizationrelinquishesresponsibilityforfulfillmentofall of his duties. The authority of all of the administrative bodies of the legal entity is transferred to the external manager, including the authority to dis- poseofthedebtor’sproperty.However,majortransactions—transactions involving real estate and transactions involving other property the value of which exceeds 20% of the balance-sheet value of the debtor’s assets— may only be concluded by the external manager with the agreement of the creditors’ meeting (committee) unless otherwise stipulated by the plan for external management.

The external manager has the right to refuse to honor the debtor’s long-term contracts or contracts that expect to attain positive results only in the long term, as well as contracts that would entail losses for the debtor should they be performed. It is true that creditors who are party to such contracts will have the right to demand compensation for damages from the debtor in the case of real losses, but the moratorium will apply to such claims.

Measures aimed at reestablishing the debtor’s solvency will be con- ducted by the external manager, as before, on the basis of a plan of exter- nal management approved by the creditors’ meeting. The 1997 Federal

Law “On Insolvency (Bankruptcy)” provides detailed regulations for the implementation of measures for reestablishing the solvency of a debtor such as the sale of an enterprise, the sale of property (assets), conceding the debtor’s right of claim, or having a third party perform the debtor’s obligations.

The adoption of a decision by an arbitrazh court to declare a debtor bankrupt entails the start of receivership. As with external management, this is not a new procedure. In accordance with the 1997 law, starting receivership means that the period for performing all of the debtor’s fi- nancial obligations will be deemed to have begun; the imposition of fines or penalties, financial sanctions, and interest for all types of the debtor’s obligationswillcease;anyclaimagainstthedebtor—includingthosemade by the tax authorities—can only be submitted within the framework of receivership. In order to conduct receivership, an arbitrazh court appoints a receiver from among a number of candidates who are recommended by the creditors’ meeting. The receiver has the duty to gather the debtor’s property (assets) in order to form the bankruptcy estate for the purpose of selling the property (assets) and settling debts with the creditors in the order of priority stipulated by Article 64 of the RF Civil Code.

It is once again necessary to turn our attention to the order of priority for settling the claims of creditors and, in particular, to the fact that the

1997Russianbankruptcylaw—followingtheCivilCode—givespriorityto the claims of the debtor’s employees for payment of salaries owed before the claims of secured creditors.

Special attention should be paid to the position of secured creditors. In accordance with the RF Civil Code (Art.64), property (assets) serving as a pledge is (are) not excluded from the total estate of a debtor, and a creditor with a secured claim does not have the possibility of recovering the pledge outside the order of priority. In addition, a secured creditor is in the third, privileged position, ahead of not only the majority of other creditors with respect to civil-law obligations but also the claims of the state with respect to the payment of taxes and other mandatory payments.

Moreover—and contrary to all other legal systems—Russian legislation stipulates that a secured creditor will have his claims settled from all of the debtor’s property, not only from the pledge. Secured creditors also enjoycertainadvantagesinthecreditors’meetingwhenadoptingitsmain decisions. In particular, concluding an amicable settlement with a debtor

requires a unanimous decision by all secured creditors (provided at least one-half of all the other claimants also agree).

When considering the provisions on the order of priority for settling the claims of creditors, one should not ignore the fact that the 1997 federal bankruptcy law—following the Civil Code—gives preference to the claims of the debtor’s employees for payment of salaries before the claims of secured creditors.

The social aspect of such a manner of resolving this issue needs to be underlined. The point here is that the legislation of a variety of countries—giving preference to secured creditors—nonetheless resolves theproblemofprotectingtheinterestsofadebtor’semployeesinadiffer- ent manner. For example, German legislation foresees compensation for the losses incurred by the employees of a bankrupt debtor: the unsettled claims of these employees for the payment of salaries arising during the course of three months prior to the beginning of bankruptcy proceedings are indemnified by a special fund financed by deductions from payments madebyallemployers.USlegislationregulatesindetailquestionsrelated to the payment to the employees of bankrupt debtors of funds stipulated by collective bargaining agreements and, for the portion not covered by such agreements, of a variety of insurance payments.

The absence of similar provisions that protect the rights of the employees of insolvent debtors and liquidated legal persons in Russian legislation is an additional argument in favor of refusing to allow secured creditors to have priority in satisfying their demands.

At any point during an arbitrazh court’shearingofabankruptcycase, the debtor and the creditors have the right to conclude an amicable settlement agreement.Theconclusionofanamicablesettlement—whichcallsfor a delay or extension of the period for meeting liabilities, concession of the debtor’s right of claim, performance of the debtor’s obligations by third parties, a reduction in debts, etc.—is a normal way of concluding a bank- ruptcy case. The prior legislation, however, put virtually insurmountable obstacles in the way of amicable settlements: within two weeks after the confirmation of an amicable agreement by an arbitrazh court, the claims of creditors were to have been settled in the amount of no less than 35% of the total debt.

The 1997 law removed this and other obstacles standing in the way of reaching an amicable settlement, which has become a matter for the free will of the parties to decide. The only condition for confirmation by an arbitrazh court of an amicable settlement is that a debtor clear his debts to creditors of first and second priority: regarding the claims of individu- als with respect to whom the debtor is responsible for inflicting harm to

their life or health; with respect to severance payments and the payment of the salaries of individuals working in accordance with an employment contract and for the payment of remuneration with respect to copy- right agreements.The confirmation by an arbitrazh court of an amicable settlement necessitates the termination of bankruptcy proceedings. If an amicable settlement is concluded during the stage of receivership, then the decision of an arbitrazh court to recognize a debtor as bankrupt and to begin receivership is not subject to enforcement.

As we see, in conducting practically all bankruptcy procedures, one of the most important actors is the temporary or external manager or the receiver, who, in accordance with the law, is given a single title: the bankruptcy commissioner (arbitrazhnyi upravliaiushchii).

In accordance with the 1997 Federal Law, an individual who is reg- istered as an entrepreneur and who has the requisite knowledge may be appointed as a bankruptcy commissioner. Bankruptcy commissioners work on the basis of licenses granted by the State Agency on Bankruptcy and Financial Recovery. Regarding questions of social security, the bank- ruptcy commissioner should be made equal to the manager of the debtor organization.

Remuneration, as a rule, consists of two parts: payment for every month that the commissioner performs his functions in the amount de- termined by the creditors’ meeting and confirmed by an arbitrazh court; and additional remuneration paid in accordance with the results of his work.

Bankruptcy Characteristics of Various Categories of Legal Persons

One of the principal disadvantages of the earlier law on bankruptcy was the one-dimensional approach taken with respect to all categories of debtors when applying bankruptcy procedures. The law did not make any distinction among legal persons and individual entrepreneurs; among large enterprises (often the only one in a particular population center) and intermediary organizations that did not possess any of their own property; among commercial enterprises and agricultural (farming) operations; among industrial enterprises and credit institutions. And the evidence of bankruptcy was also the same for such debtors, as were the procedures applied to them, and the rules for arbitrazh courts to hear cases.

The 1997 Federal Law takes full account of the specifics of different categories of debtors and stipulates the corresponding features of the application of different bankruptcy procedures. This refers to such cat- egories of debtors as legal persons: city-forming, agricultural, insurance organizations; banks and other credit institutions; securities professionals;