Учебный год 22-23 / William_Simons_Private_and_Civil_Law_in_the_R

In August 1993, Vachskii Commercial Bank and the closed joint-stock company Zvezda filed a request with Nizhegorod Oblast’ Arbitrazh Court to declare Zvezda bankrupt. The court rejected this request—insofar as it was made by Zvezda—determining that it was not supported by any documents evincing a resolution of the supreme body of the joint-stock company, as was required by the 1992 Bankruptcy Law (Art.5(1)). The court found, however, that the joint-stock company’s debts to the bank exceeded the amount of 500 minimum wages and that there were further indications allowing for the assumption that the company was insolvent.

Furthermore, a financial-research institute found that Zvezda’s financial and economic position had worsened since early 1992 and that its balance sheet had an unsatisfactory structure. As a result, the court concluded that the company was insolvent. However, the bank submitted a request to impose external management upon the company. Apparently, the bank did so with the simultaneous withdrawal of its petition to initiate bank- ruptcy proceedings—under Article 6(4) of the 1992 Law, a creditor may withdraw its petition before the court commences its proceedings—but based on the circumstances, it became evident that the court had already initiated its proceedings on the basis of Article 8. The court granted this request despite clear signs of Zvezda’s insolvency. In its request, the bank relied on the following:

—Profitability of the enterprise in the past;

—The enterprise’s reputation for its products (knives);

—The demand for the products made by the enterprise;

—The availability of raw material;

—The state of the company’s production equipment; and

—The availability of potential buyers of the products.

Apart from citing these arguments put forward by the bank with apparent approval, the court pointed out that the bank also proposed a number of measures to restore the enterprise’s solvency. As a result, the court hon- ored the bank’s request to appoint an external manager proposed by the bank for a period of eighteen months, with a simultaneous freeze upon performance of the enterprise’s financial obligations.

In fact, this decision was in line with the principles of the 1992 Bankruptcy Law, i.e.,thatforcedliquidationshouldbeanultimatemeans after measures for restructuring have failed. In Western practice—even in countries with rescue-oriented bankruptcy law—enterprises in such a precariousfinancialpositionastheabove-mentionedjoint-stockcompany would not have been easily awarded relief from their debtors. Creditors

(including banks) would have been more aggressive in seeking payment for their outstanding claims, or other solutions would have been tried, including debt-for-equity swaps followed by a thorough restructuring of the insolvent enterprise.

Filling in Gaps

In a number of cases, the RF Higher Arbitrazh Court has adopted decisions with regard to the imposition of a moratorium on payments by the debtor,wherethelawfailedtoprovideadequateandclearguidance.These omissions were rectified by the 1998 Law.

In its survey of April 1995, the Higher Arbitrazh Court discussed the issue of whether—during the period of moratorium of all payments due by the debtor in the case of external management under Article 12 of the

1992 Law—the moratorium also applied to interest and penalties agreed upon prior to the introduction of the external management.3 The court ruled that such interest and penalties were due but were to be paid only upon the termination of the external management. The same rule is now contained in the 1998 Bankruptcy Law.4 The Higher Arbitrazh Court has also taken the same position with regard to obligations of the debtor toward the budget.

Strangely enough, the Higher Arbitrazh Court failed to rule on the question of whether interest would be due if nothing had been agreed upon in the relevant contract. The 1992 Law did not answer the ques- tion of whether the provision of the Civil Code on the payment of legal interest should apply. The new law, however, stipulates that interest shall be due over the amount of claims of creditors as of the moment of the introduction of external management in accordance with Article 395 of the Civil Code.

With regard to a moratorium, the Higher Arbitrazh Court has also held that the moratorium may not be partial and can only apply to credi- tors of the first and second rank.

In the bankruptcy proceedings of the open joint-stock company Miasomoltorg, a regime of external management was introduced with a simultaneous moratorium on all payments.5 In spite of such a moratorium, theKomibranchofRussia’sSberbank remitted a sum of 59,600 rubles from the company account of Miasomoltorg to the state budget and the Pension Fund. A claim made by Miasomoltorg with the Komi Arbitrazh Court was rejected, as were appeals against this decision. The RF Higher Arbitrazh

3Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii 1995 No.7, 90.

4See Art.70(2), para.4, 1998 RF Bankruptcy Law.

5Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii 1997 No.12, 64-65.

Court heard the case in a protest procedure and held that—according to Article 12(3) of the 1992 Bankruptcy Law—the introduction of external management with regard to an insolvent debtor entails a moratorium on all payments due by the debtor. The relevant provision does not provide for a partial moratorium nor does it stipulate that the moratorium applies to creditors of the first and second rank only.According toArticle 64 of the Civil Code, the state budget and funds like the Pension Fund hold the fourth rank in the priority order for the satisfaction of claims of creditors. As a result, Sberbank was not entitled to make the payment and was, therefore, bound to return the amount, as well as pay a penalty.

Unlike the 1992 Law, which provided rather summarily for a moratorium, the 1998 Law contains a separate article on the moratorium (Art.70). This same Article also provides for a general moratorium on all payments due by the debtor but admits a number of exceptions to the moratorium. It distinguishes, inter alia, between mandatory payments that were due before the introduction of the moratorium and those mandatory payments that only became due after the introduction of the moratorium. The aforementioned case of the external management of Miasomoltorg did not specify whether the mandatory payments to the budget and the Pension Fund had already fallen due before the introduction of the external management.Underthe1992Law,suchadifferencewasnotrelevant,but it would have been relevant under the 1998 Law. However, the rationale of thedistinctionisnotobviousotherthanforreasonsoftaxefficiency.But in that case, all mandatory payments should be paid irrespective of their being due before or after the introduction of the external management.

In the case of the bankruptcy of Penza Watch Factory, the Higher Arbitrazh Court ruled that a moratorium did not extend to wages.6 As the 1992 Law did not explicitly provide for such an exemption, the Higher Arbitrazh Court had to take recourse to a rather complicated reasoning. As a result, the court, in fact, overruled its earlier decision in the above case of the bankruptcy of Miasomoltorg, where it held that with regard to a moratorium,nodistinctionwastobemadeamongthedifferentcategories of creditors, whereas in the bankruptcy of Penza Watch Factory, it did in fact make such a distinction. It held that in accordance withArticle 1 of the 1992 Law, a moratorium would apply to claims of creditors named inArticle 1 of the law with regard to payment of goods, works, and services, as well as with regard to mandatory payments to the budget and non-budgetary funds. As a consequence, a moratorium would not apply to creditors of

6Decision No.3343/97 of 30 September 1997 on the bankruptcy of the joint-stock company PenzaWatch Factory, VestnikVysshegoArbitrazhnogo Suda Rossiiskoi Federatsii

1998 No.1, 70-71.

the first and second rank.7 Under Article 64 of the Civil Code, claims of employees for their wages are considered to be of the second rank. Therefore, a moratorium would not extend to wages. The new Bankruptcy Law also rectified this omission in that underArticle 70(5):

“A moratorium on the satisfaction of claims of creditors shall not extend to claims regarding debts for wages, payment of remuneration of copyright, alimonies, as well as compensation for damage caused to life and health.”

In another case of external management, the Higher Arbitrazh Court held that an arbitrazh manager—a person appointed by an arbitrazh court who has the task of external management of the debtor’s assets—may not be restrictedinfulfillingitspowersbyrestrictionsestablishedbythedirector of the organization-debtor.8 In this case, a creditor had filed a complaint with the arbitrazh court, arguing that under the charter of the company in debt (a joint-stock company), the general manager had no authority to enter into transactions with a value exceeding an amount of 10 million rubles without the consent of the board of directors. However, the arbitrazh manager had sold assets in the amount of 50 million rubles. The Higher Arbitrazh Court determined that the lower arbitrazh court rightly allowed the arbitrazh manager’s transaction without the consent of the company’s board. The court relied on Article 12 of the 1992 Law (6) (3), which reads: “disposes of [rasporiazhaetsia] the assets of the debtor”. In the court’s interpretation, this power was to be fulfilled “without any restric- tions”. And the court continued: “Restrictions of powers determined for the manager of the organization in debt shall not extend to the arbitrazh manager.” This seems to be a rather far-reaching limitation of the text of Article 12 of the 1992 Law. Under the 1998 Law, this lacuna was also filled. Article 76(1), of the new law stipulates that:

“the owner of the assets of the debtor or the management body of the of the debtor shall not be entitled to make decisions or otherwise to restrict the powers of the external manager [under the 1997 Law, the arbitrazh manager is now called the external manager] regarding the disposal of the assets.”

Inaddition,Article76providesthat—forlargetransactions(involvingreal estate or other assets with a value over 20% of the balance-sheet value of thetotalassetsatthemomentoftheconclusionofthetransaction)—the

7The Higher Arbitrazh Court made the same decision in a similar case (or perhaps it was the same case—no details have been provided). See Obzor praktiki primeneniia arbitrazhnymi sudami zakonodatel’stva o nesostoiatel’nosti (bankrotstve), Case No.12, Informatsionnoe pis’mo No.20 of 7 August 1997, Rossiiskaia gazeta 18 October 1997 (Vedomstvennoe prilozhenie).

8Obzor praktiki primeneniia arbitrazhnymi sudami zakonodatel’stva o nesostoiatel’nosti (bankrotstve), Case No.5, Informatsionnoe pis’mo No.20 of 7 August 1997, Rossiiskaia gazeta 18 October 1997 (Vedomstvennoe prilozhenie).

consent of the meeting of the creditors or the committee of the creditors is required unless the law or the external management plan provides oth- erwise. Apparently, the rule on the non-application of restrictions upon the arbitrazh manager has been mitigated, i.e., the external manager has to seek consent from the creditors instead.

Clarifying Obscure Provisions

In various cases, provisions of the 1992 Law appeared to be unclear. The Higher Arbitrazh Court sought to clarify the position in a number of questions, including:

(i)Which persons may be declared bankrupt?

(ii)Which persons are entitled to initiate bankruptcy proceedings?

(iii)Which state bodies are authorized to initiate bankruptcy proceedings?

(iv)Which body of a company is authorized to file a bankruptcy peti- tion?

Which Persons May Be Declared Bankrupt?

The 1992 Law provided for the bankruptcy of enterprises without providing adefinitionofenterprises.Moreover,underthe1992Law,naturalpersons, even private entrepreneurs, could not be declared bankrupt. However, Part I of the new Civil Code, which entered into force on 1 January 1995, has introduced a number of new items with regard to bankruptcy, thereby amending the 1992 Bankruptcy Law. The new provisions include the possibility of declaring a private entrepreneur bankrupt (Art.25); they have also amended the priority order for the payment of the creditors’ claims in the bankruptcy proceedings (Art.64), exempted so-called treasury enterprises from being declared bankrupt (Art.65), and finally—under a simultaneous reference to the grounds contained in the Law on Insolvency

(Bankruptcy)—reduced the grounds for a bankruptcy declaration to just simply, “if a [legal entity] is unable to satisfy the claims of creditors”.

The above clarification was contained in a “Survey of the Practice of

Application by Arbitrazh Courts of the Legislation on Insolvency (Bankruptcy)” issued by the Higher Arbitrazh Court.9 Apparently, the Higher Arbitrazh Court wished to bring to the attention of the lower arbitrazh courts the fact that the new Civil Code had amended the 1992 Bankruptcy

Law.ItisnotquiteclearwhethertheHigherArbitrazh Court also wanted to

9Attachment to Informational Letter of the Higher RF Arbitrazh Court of 25 April 1995 S1-7/OP-237, Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii 1995 No.7, 83.

emphasize that the grounds for bankruptcy should be applied in a stricter manner (“if [a debtor] is unable to satisfy the claims of creditors”).

Which Persons Are Entitled To Initiate Bankruptcy Proceedings?

Article 4 of the 1992 Law provides that the debtor, creditor or creditors, as well as the procurator (prokuror) may commence bankruptcy proceed- ings—if the latter has discovered indications of fraudulent bankruptcy.

According to data in a 1996 article by Higher Arbitrazh Court Justice

N.A. Veseneva, 11% of all requests were submitted by debtors, whereas approximately 70% of all requests were submitted by creditors.10 This leads to a conclusion that approximately 19% of all bankruptcy cases were initiated by the procurator.As regards the question of which persons can be regarded as creditors, Justice Veseneva referred to a case dealing with the question of whether a beneficiary to a sales contract of a depositary certificate can be regarded as a creditor entitled to initiate bankruptcy proceedings. In this case, the joint-stock company Kairos filedaclaimwith the Moscow City Arbitrazh Court to commence bankruptcy proceedings against the Promyshlennyi Bank but was refused on the grounds that the holder of a depositary certificate was not among the persons entitled to initiate bankruptcy proceedings within the meaning of the 1992 Law. The supervisory collegium of the RF Higher Arbitrazh Courtsatisfiedaprotest filed against this decision, arguing that:

“adepositarycertificateshouldbeconsideredtobeanegotiableinstrumentevidenc- ing the deposit by a client of cash and certifying its right to receive in a specified period of time the principal amount and interest.”

The supervisory collegium concluded that the holder of a depositary cer- tificatemustbeconsideredacreditorand,therefore,wasentitledtofilea claim to commence bankruptcy proceedings against its debtor.11 A special law, the 1998 Law “On Insolvency (Bankruptcy) of Credit Organizations”, now governs the bankruptcy of credit institutions.

Which State Bodies Are Authorized To Initiate Bankruptcy Proceedings?

Under Article 1 of the 1992 Law, insolvency also includes the inability to ensure mandatory payments to the budget and extra-budgetary funds.

In this respect, the question arises as to which state bodies are entitled to initiate bankruptcy proceedings, as the law remains silent with regard to this issue. With a view to solving this problem, the Higher Arbitrazh

10N.A. Veseneva, “O nekotorykh voprosakh praktiki primeneniia arbitrazhnymi su- damiZakonaRossiiskoiFederatsii“Onesostoiatel’nosti(bankrotstve)predpriiatii’”,

Kommentarii k sudebno-arbitrazhnoi praktike, 3rd ed., Moscow 1996, 62-63.

11Ibidem, 63-64.

charterstipulatedthatadecisionontheliquidationofthecompanycould be made only by the general shareholders’ meeting.14

As an objection to this decision, it can be argued that initiating bankruptcy proceedings is not the same as a decision on the liquidation of the company, as bankruptcy proceedings need not necessarily lead to a company’s liquidation. As a result, the board of directors could have been empowered to initiate the proceedings if such authority was not al- located to the exclusive power of the general shareholders’ meeting.The 1998 Law is clearer on this point, asArticle 7 specifies that a debtor may initiate bankruptcy proceedings on the basis of a decision of the body empowered to decide on its liquidation.

Improving Protection for Creditors

In a case cited in a 1995 survey, the Higher Arbitrazh Court found that creditors were allowed to join their claims in a joint petition. A similar decision was rendered in a 1996 case. This improvement has also been included in the 1998 Law (Art.36).

Afirst issue is whether a creditor has the option to choose:

(a)Tolevyexecutiononitsdebtor’sassetsfornonpaymentofitsclaims, i.e., a procedure under the Code of Civil Procedure; or

(b)To initiate bankruptcy proceedings.

Some arbitrazh courts have ruled that creditors must first follow the en- forcement procedure under the Code of Civil Procedure, and if that fails, they may initiate bankruptcy proceedings. Due to the fact that the 1992

BankruptcyLawdoesnotexplicitlyrequirepluralityofcreditors,thereis confusion as to this issue. If the requirement of plurality of creditors ap- plies, a single creditor has no option other than seeking to levy execution on the debtor’s assets in case of nonperformance of the debtor’s obliga- tions. Barenboim argues that a creditor should have the choice between both procedures.15 However, in a bankruptcy case heard by the Amursk

Oblast’ Arbitrazh Court, the court held that, as in a bankruptcy request against a sovkhoz—there was one creditor only—the request should be rejected.16 The new 1998 Bankruptcy Law is not very clear either on the idea of plurality of creditors, which may lead to the conclusion that under

14Decision of the Higher Arbitrazh of the Komi Republic of 2 March 1995 in JSC

Bakalei, quoted inVeseneva, op.cit. note 10, 62.

15Barenboim, Rossiiskaia Iustitsiia 1995 No.3, 28.

16Ibidem, 28-29.

the new Bankruptcy Law, a bankruptcy proceeding may be commenced if there is a single creditor only.

In a letter of the Ministry of Justice and the Higher Arbitrazh Court of 6 July 1994,17 both bodies stated that a creditor has both options avail- able: it may either file a petition to initiate bankruptcy proceedings or may request the court to levy execution on the assets of its debtor. The Higher Arbitrazh Court also pointed out that—unlike many arbitrazh courts had ruled in practice—a prior court judgment for enforcement of a claim upon the debtor’s assets does not prevent the commencement of bankruptcy proceedings against the same debtor.

In my view, the Higher Arbitrazh Court has made it insufficiently clear that—where it is evident a debtor is unable to satisfy the claims of its creditors—one of the basic principles of bankruptcy, i.e., to create a possibility for all creditors to submit their claims and to satisfy as many of them as possible in a fair and transparent manner without prejudice of any of the creditors, should entail that creditors are estopped from filing claims against the debtor and, rather, are entitled to commence bankruptcy proceedings.

InacasequotedinthesurveyofpracticeinbankruptcycasesofApril

1995,18 a petition was submitted to commence bankruptcy proceedings against a joint-stock company that was in debt with respect to a supply contract. Other creditors that were known to the arbitrazh court were invited to appear at the court hearing. However, none of them, including theTax Inspectorate and the Pension Fund, submitted claims for outstanding debts. The Higher Arbitrazh Court held that the fact that none of the creditors had appeared at the hearing and that no other claims had been submitted, thus leaving one creditor only, did not impair the arbitrazh court from hearing the case.

Although the 1998 Bankruptcy Law seems to begin from the premise of plurality of creditors—for instance, Articles 11-17 deal with the meet- ing of creditors and the committee of creditors—the new law does not explicitly rule out the concept of a single creditor only.

Improving Administrative Procedures

If a debtor petitions for bankruptcy, certain documents on its debt position have to be submitted. It was unclear what would happen if these documents were not submitted. The Higher Arbitrazh Court found that in such a case, the Tax Inspectorate, the State Property Committee, and

17No.06-73/54-94, No.S1-7/OZ-476; reference made in: Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii 1995 No.7, 84.

18Ibidem, 88.