Учебный год 22-23 / William_Simons_Private_and_Civil_Law_in_the_R

as well as individual debtors, including individual entrepreneurs and agricultural (farming) operations. Let us look more closely at the bankruptcy characteristics of several categories of debtors.

By city-forming organizations, the law means such legal persons the workers of which—including the members of their families—comprise no less than one-half of the total population of the corresponding population center (Art.132).

In defining the bankruptcy characteristics of a city-forming organi- zation, the law takes into account the possible social consequences of its liquidation.This,inparticular,isthereasonfortheinclusioninthelistof participants in the bankruptcy proceedings of a city-forming organization of the relevant body of local self-government. An arbitrazh court may also invite to participate in the same capacity federal executive bodies and executive bodies of the relevant Subject of the Russian Federation.

Upon the request of the above-mentioned bodies, an arbitrazh court may introduce external management in relation to a city-forming orga- nization even when the creditors’ meeting votes to declare the debtor bankrupt and to begin receivership. In such a case, however, the relevant bodies provide a guarantee with respect to the debtor’s obligations and also assume an obligation to take on secondary liability in relation to its creditors.

In addition—upon the request of the above-mentioned bodies— external management may be extended by an arbitrazh court for a period of no more than one year. Thus, the total duration of external manage- ment—and, consequently, the period of operation of the moratorium on settlingtheclaimsofcreditors—cantotaltwoandone-halfyears.During this period, the relevant bodies can institute measures directed towards the financial recovery of the city-forming organization by investing in its activities, employing its workers, and creating new jobs. Under exceptional circumstances, the period of external management may be extended for a period of up to ten years upon condition that the debtor and its guarantor settle accounts with creditors no later than two and one-half years after the introduction of external management (Art.135).

The Russian Federation, a Subject of the Russian Federation, or a municipality—throughtheirauthorizedbodies—mayatanytimepriorto the completion of external management settle accounts with all of their creditors or in another manner settle the claims of creditors with respect to financial obligations or mandatory payments.

During the process of external management, a city-forming organization may sell the enterprise as a “going concern” which would allow it to receive the funds necessary to settle accounts with creditors—without

resortingtotheliquidationofthedebtor—whilealsoretainingjobs.More- over,upontherequestofastatebodyorbodyoflocalself-government,the enterprise may be sold at an auction under certain mandatory conditions, including the retention of jobs for no less than 70% of the enterprise’s employees;incasetheenterprise’sprofilemaybechanged,thebuyerwill be required to provide retraining or reemployment for the enterprise’s workers. In case a city-forming organization is declared bankrupt, the bank- ruptcy commissioner must offer to sell the enterprise as a going concern.

And only if such an auction does not yield a buyer will the bankruptcy commissioner be able to sell the enterprise’s assets separately.

The provisions regarding the bankruptcy of a city-forming organization also apply to other organizations that have more than 5,000 employees.

The bankruptcy of agricultural enterprises has certain distinguishing features that are determined, first of all, by the particular nature of their activities; as a rule, these are connected with the use of plots of land (principally for agricultural purposes), and, second, by the seasonal nature of their work.

In accordance with the 1997 Federal Bankruptcy Law, agricultural enterprises are legal persons the primary activity of which is the cultivation (production only or production and processing) of agricultural products, the income earned from the sale of which comprises no less than 50% of the enterprise’s total income (Art.139).

The essence of the first special rule regulating the bankruptcy of an agricultural enterprise is that agricultural enterprises or small agricultural (farming) operations are given priority right to purchase the real estate of a bankrupt agricultural enterprise. Plots of land may be disposed of in the amount permitted by land legislation.

The second special rule involves an extension of the period of external management of an agricultural enterprise because of the seasonal nature of its work and the need to wait for the completion of the corresponding period of agricultural work. Also taking into account the possible time necessary for selling the cultivated (processed) products, the legislator considered it possible to increase the period of external management to one year and nine months. In addition, if—during the period of external management—there were natural disasters, epidemics, and the like, then the period of external management of an agricultural enterprise may be increased by an arbitrazh court for one additional year.Thus, the maximum period of external management is two years and nine months (in general, the maximum period is one and one-half years).

In all other matters, bankruptcy proceedings of an agricultural enterprise are instituted in accordance with the general rules.

The bankruptcy of banks or other credit institutions is carried out in accordance with the special Federal Law “On the Insolvency (Bankruptcy) of Credit Institutions”. The regulations of the Federal Law “On Insolvency (Bankruptcy)” should be applied in the absence of special rules.

It is impossible not to notice the difference in the consequences of an arbitrazh court’s initiation of bankruptcy proceedings in relation to an ordinary debtor and to a bank. The decision of an arbitrazh court to acceptapetitiontolaunchbankruptcyproceedingsinrelationtoabank— more often than not—causes panic among creditors, provoking them to withdraw the money they have in accounts and investments in the bank in question. By losing its clients’ money, the bank loses its solvency in addition to its clients.

At the same time, the prior law did not contain any regulations limiting the group of creditors that could initiate bankruptcy proceedings in relationtobanksortomakeitmoredifficulttopresentsuchclaimsincom- parison with a bankruptcy petition in relation to an ordinary debtor.

One of the ways of resolving this problem is to exclude individual investors from among those creditors that can present a bankruptcy petition in relation to a bank by guaranteeing (or through mandatory insurance) their banking deposits.

A second way—which is included in the draft Federal Law “On the Insolvency (Bankruptcy) of Credit Institutions—is the introduction of special preliminary procedures preceding the initiation of bankruptcy proceedings in an arbitrazh court.

This allows bankruptcy proceedings of a bank to be initiated in an arbitrazh court only after a creditor has complied with a mandatory, thoroughly regulated procedure by which the Central Bank considers a creditor’s petition to revoke the license of a particular commercial bank. Thus,thefinancialstandingofthebankwillbedeterminedbytheCentral

Bank, taking into account an entire range of indicators characterizing its solvency.

If there are no indicia of insolvency, the Central Bank will refuse to revoke the bank’s license, and—in doing so—will exclude the possibility of initiating bankruptcy proceedings, while the creditor is limited to an ordinary lawsuit based on civil-law obligations. If any signs of insolvency are found,theCentralBankcantakemeasuresaimedatrecoveringthebank’s solvency by introducing a temporary administration or suggesting that its founders (participants) reorganize the bank by merging with another bank that is sustainable and stable in its commercial undertakings. And only the absence of such possibilities will lead to the initiation by an arbitrazh court of bankruptcy proceedings in relation to an insolvent bank.

Individual Bankruptcy

The bankruptcy of an individual who is not an entrepreneur is a new institution for Russian legislation. As has been noted, the majority of legal systems have rules that regulate the insolvency of individuals. The earlier Russian law stipulated the possibility of bankruptcy only of individuals who were entrepreneurs, although it did not in any way regulate the specifics of such bankruptcy. Meanwhile, the institute of individual bankruptcy is considered in developed legal systems to be one of the most effective meansofprotectingindividualswho—becauseofcircumstances—fallinto difficult financial straits; this allows them, in a single act, to wipe out the burden of debt and make a fresh start. Not only individual entrepreneurs mayfindthemselvesinthepositionofadebtorwithaback-breakingburden of liabilities; so can any individual who has taken out a loan from a bank, purchased real estate or other expensive goods or services on credit, etc. And this is why the 1997 Federal Law “On Insolvency (Bankruptcy)” has a special chapter regulating the specifics of individual bankruptcy.

The basis for declaring an individual bankrupt is deemed to be the inability to meet financial obligations or to pay taxes and make other mandatory payments in connection with an excess of debt in relation to the value of the individual’s property (assets). Bankruptcy proceedings in relation to an individual may be initiated by an arbitrazh court upon a petition from the individual himself or from his creditors. Once bankruptcy proceedings have been instituted, others may also file claims against the individual, including in connection with causing harm to one’s life or health, the recovery of alimony, and other obligations of a private nature.

If such claims are not filed, however, they are not discharged following the completion of the bankruptcy procedure—unlike the individual’s other obligations.

Afteranindividualsettlesaccountswithhiscreditors—usingtherev- enues earned from the sale of his property, with the exception of property that, in accordance with procedural legislation, cannot be used to satisfy a judgment—the individual, who has been declared bankrupt, is released from all of his debts, including those that have not been discharged.

If an individual entrepreneur is declared bankrupt, this also means that he loses his state registration as an individual entrepreneur, and any licenses granted to him for conducting various types of entrepreneurial activities are annulled.

The provisions on the bankruptcy of individuals who are not entrepreneurs generated the largest number of objections during the adoption of the draft new law.The main argument of the opponents of the introduction of the institution of individual bankruptcy was that this institution does

not comply with the RF Civil Code. With respect to this point, it should be noted that the absence in the provisions of the Civil Code of an article dedicated specifically to individual bankruptcy—when there are articles regulating the bankruptcy of individual entrepreneurs (Art.25) and legal persons (Art.65)—does not in any way suggest a prohibition on including such rules in the Federal Bankruptcy Law.

Moreover, the realization of a range of provisions contained in the

CivilCode—inourview—isinprincipleimpossiblewithoutregulatingthe procedure for recognizing an individual as insolvent. First and foremost, this relates to the rules stipulating the secondary liability of the founders (participants) of a legal person for leading it into bankruptcy (Arts.56 and 105), as well as the provisions on the liability of persons who, on the basis of the law or founding documents of a legal entity, act in its name (Art.53, para.3). In such situations, the amount of liability of individuals who are not entrepreneurs may exceed the value of their property sev- eralfold, which would have severe negative consequences both for those individuals and for their other creditors (for example, for their children who receive child-support payments).The very same problems could arise upon the realization of other provisions of the Civil Code that establish the secondary or joint liability of individuals with respect to the debts of legal persons. The only solution to this problem is the introduction of the institution of bankruptcy for individuals who are not entrepreneurs.

In addition—from the point of view of protecting the rights and legal interests of creditors—it is impossible to explain why they have the right to petition an arbitrazh court for the bankruptcy of an individual entrepreneur who has not paid for a small portion of goods transferred to him but, at the same time, cannot initiate bankruptcy proceedings against the former manager of a bank who has not repaid millions in loans.

There is also a second part to this problem. Global practice stems from the fact that the institution of individual bankruptcy (so-called consumer bankruptcy) is good for conscientious individuals,insofarasitallowsthem— in the course of one proceeding—to free themselves from debt by using their property (assets) to settle accounts with their creditors.

Nonetheless, in accordance with Article 185 of the 1997 Federal Bankruptcy Law, the provisions on the bankruptcy of individuals who are not entrepreneurs will enter into force only from the moment of the introduction into force of rules on the bankruptcy of individuals, which will be introduced as amendments to the RF Civil Code. The problem is that, at present, we are just seeing the formation of the service of bailiffs, on whose shoulders will lie responsibility for enforcing judgments of arbitrazh courts on individual bankruptcy.

This circumstance does not mean, however, that the provisions on individual bankruptcy contained in Chapter IX of the Federal Law will

not be applied until the introduction of the relevant amendments to the Civil Code. According to the rules in this chapter, bankruptcy procedures will be carried out in relation to individual entrepreneurs and small agricultural (farming) operations, which will allow for the development of practical experience with respect to enforcing judicial decisions regarding individual bankruptcies.

did not fulfill its obligations within three months after they became due [to be fulfilled].” As a result, the fine-tuning of the 1992 Law (“incapac- ity to pay the creditors’ claims [...] in connection with the excess of the debtor’s obligations over its assets or unsatisfactory structure of its bal- ance sheet”) was dropped.The new definition is more or less in line with that of Articles 25 and 65 of the Civil Code: “incapable of satisfying the claims of creditors”. However, it would have been preferable if the 1998

Law would have used the same definition as the Civil Code in order to avoid confusion.

Further novelties include:

(a)The introduction of supervision (nabliudenie) as of the moment bankruptcy proceedings commence, with the objective of safe- guardingtheassetsofthedebtorandassessingthelatter’sfinancial position;

(b)A more prominent role for creditors reflected in the introduction of the meeting of creditors and the committee of creditors vested with specific powers;

(c)The procedure of sanation (sanatsiia) has been left out;

(d)External management aimed at restructuring and amicable settlement;

(e)Special procedures have been introduced for different categories of bankrupt persons, including:

—“city-forming organizations”;

—agricultural organizations;

—credit organizations;

—insurance organizations;

—stock brokers; and

—citizens, individual entrepreneurs, and farmers.

When examining court cases under the 1992 Bankruptcy Law, it becomes evident that the 1992 Law had many gaps and inconsistencies that needed to be addressed. Most of them led to adjustments in the 1998 Law. With regard to such court decisions leading to practice-driven changes in the law, the following categories of judgments in bankruptcy cases can be distinguished:

(a)Broadening the grounds for bankruptcy;

(b)Filling in gaps;

(c)Clarifying obscure provisions;

(d)Improving protection for creditors;

(e)Improving administrative procedures;

(f)Increasing efficiency;

(g)Sharpening definitions;

(h)Adjusting to international standards; and

(i)Including edicts and decrees in the law.

Broadening the Grounds for Bankruptcy

In a number of cases, courts have refused to hear a case even if the enterprise was, in fact, bankrupt, relying on the fact that the debtor’s assets still exceeded its debts, although the debtor could not satisfy its creditors’ claims.

For instance, in the 1993 case of bankruptcy proceedings against Bratsk Lesopromyshlennyi Kompleks (LPK, Forest-Industrial Complex) initiated by the closed joint-stock company Irkutskenergo for failing to pay its electricity bill to the latter for the period from August to November 1992 (i.e., prior to the entry into force of the 1992 Bankruptcy Law, although this was not an issue, despite the fact that the decree on the entry into force of the 1992 Bankruptcy Law made no provision for debts that arose prior to the date of entry into force, i.e., 1 March 1993), the Irkutsk Oblast’ Arbitrazh Court rejected the petition submitted by Irkutskenergo, holding that Bratsk LPK was a solvent enterprise as it had substantial financial resources consisting of:

—Asignificant number of debtors with large debts;

—Finished products with a high degree of liquidity; and

—The debts for the given period had been paid as of the date of the court session.

This decision was in line with the requirements of Article 1 of the 1992

Law, which connects the nonpayment of debts by the debtor to:

(1)Its debts exceeding its assets; or

(2)The unsatisfactory structure of its balance sheet.

The court did not, however, examine the nature of the outstanding debts owed to Bratsk LPK, in particular, whether these were “bad debts” or the like.

Under the 1998 Bankruptcy Law, debts owed to a debtor against which bankruptcy proceedings have been instituted may not be taken into consideration when establishing whether the debtor failed to pay its debts during a period of not less than three months from the moment payment was due (Art.3).