Учебный год 22-23 / William_Simons_Private_and_Civil_Law_in_the_R
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the Pension Fund should be consulted. However, the 1998 Law provides that in such a case, the petition must be rejected.
Inabankruptcycase,thequestionaroseastowhatanarbitrazh court may do if the debtor does not submit documents on its debt position. According to the Higher Arbitrazh Court, the court is then entitled to submit an appropriate request to the relevant tax authorities, the Fed- eral Administration for Bankruptcy Matters at Goskomimushchestvo, the debtor’s bank or other credit institutions that service the debtor, the RF PensionFund,andtootheragenciesthat—intheviewofthecourt—may have such documents.
These aforementioned persons are more or less the same as those listed among the persons that are invited for the hearing of the arbitrazh court at which a decision will be made on the petition for bankruptcy proceedings (Art.10(1), 1992 Law).
The Higher Arbitrazh Court did not rely on any provision of the 1992
BankruptcyLaw.Article5(3),providesthatthedebtor—whenpetitioning for the commencement of bankruptcy proceedings—must submit a list of its creditors and debtors with a calculation of its outstanding debt and the debt owed to it.Apparently, the above case was initiated by the debtor and not the creditor(s). Furthermore, the debtor must submit a balance sheet and other accounting documents. Failing to submit the accounting documents, the arbitrazh court may order another auditor to draw up a balance sheet at the expense of the debtor. However, under the 1992 Law, no sanction had been provided for failing to submit documents on the debtor’s debt position. The 1998 Law stipulates, however, that peti- tions that do not meet the requirements of the Bankruptcy Law must be returned by the arbitrazh court (Art.43).
IncreasingEfficiency
There are two types of liquidation:voluntary and mandatory (involuntary). Liquidation takes places in accordance with the procedure set out inAr- ticles61-64oftheCivilCode.Inthecaseofmandatoryliquidation,where a court declares an enterprise bankrupt, the priority order of Article 64 of the Civil Code is followed for the satisfaction of claims of creditors.
Whatmutualrelationshipexistsbetweenbothliquidationprocedures? Cantheybefulfilledsimultaneously,ordoesthecommencementofavolun- taryliquidationblockthepossibilityofinitiatingbankruptcyproceedings aimed at a forced liquidation?According to the Higher Arbitrazh Court, the fact that an organization is in a state of liquidation under Article 61 of the Civil Code (voluntary liquidation), and that a liquidation commis- sion has already started its work, does not prevent a creditor from filing
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a petition to initiate bankruptcy proceedings.19 As a result, an arbitrazh court may not refuse to hear such a case if the requirements for filing an application have been met.
Furthermore, the Higher Arbitrazh Court has held that it may be ap- propriate to forbid the liquidation commission from performing certain acts with regard to the assets of the debtor.Although this is not clear from the short description of the case, it must be assumed that if the application has been awarded to commence bankruptcy proceedings, the normal procedure of the Bankruptcy Law should be followed, terminating at the same time as the procedure for voluntary liquidation.This would entail, inter alia,thatabankruptcyadministratorisappointedandthattheliqui- dation commission should be dissolved. On the other hand, one wonders whether it is efficient to terminate the voluntary liquidation and start a mandatory liquidation procedure, since—under a voluntary liquidation procedure—a creditor’s rights are more or less sufficiently guaranteed. Of course, an advantage of mandatory liquidation is that the procedure takes place under the supervision of an arbitrazh court.
Whatismissingintheabovecase—ofanorganizationinliquidation forwhichapetitiontoinitiatebankruptcyproceedingshasbeenfiled—is a clear criterion as to when such a petition will be granted and when it will not. The 1998 Bankruptcy Law stipulates such a criterion: if the value of theassetsofadebtorinliquidationisnotsufficientforthesatisfactionof all outstanding claims, the mandatory liquidation procedure that is out- lined in the Bankruptcy Law (Art.174(1)) must be followed. The new law providesforasimplifiedliquidationprocedureforadebtorinliquidation (Arts.174-176). If the liquidation commission or liquidator finds that the value of the assets is less than that which is required for the satisfaction of the claims of the creditors of the debtor in liquidation, the commis- sion (or liquidator) is obliged to file a petition with the arbitrazh court. As a result, the voluntary liquidation would be replaced by mandatory liquidation proceedings—a far better procedure than that proposed by the Higher Arbitrazh Court in its 1995 survey.
SharpeningofDefinitions
In several decisions, the Higher Arbitrazh Court has ruled that penalties, fines,etc.,maynotbeincludedinthetotalamountof500minimumwages.
This rule has been included in the 1998 Bankruptcy Law (Art.4(3)). Both the 1992 and 1998 Laws stipulate that bankruptcy cases may be
heard by an arbitrazh court “if the total amount of the claims against the debtor is not less than 500 minimum wages, as established by the law”
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Ibidem, 85. |
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(Art.3(3), 1992 Law; Art.5(2), 1998 Law) or 100 minimum wages for an individual entrepreneur (Art.5(2), 1998 Law). In its 1995 survey,20 the Higher Arbitrazh Court pointed out that the amount of 500 minimum wages does not include penalties, fines, sanctions, etc., that are due for late payment of mandatory contributions to the budget or non-budgetary funds. In that conclusion, the Higher Arbitrazh Court relied on the definition given in
Article 1 of the 1992 Law: “the incapacity to satisfy the claims of creditors for the payment of goods (works, services), including the incapacity to provide mandatory payments to the budget and non-budgetary funds.”
It found that—unlike lower arbitrazh courts—this definition does not include fines, penalties, or other financial sanctions for late payments of these mandatory payments to the budget and non-budgetary funds. This conclusionshouldhaveresultedinthesepenalties’beingtakenoutofthe amount of 500 minimum wages, which, in casu, should have led to the rejection of the petition since, as a result, the total amount of the debts remained under the critical limit of 500 minimum wages.
This principle—which could be defined as that only principal finan- cial obligations will be taken into account and not subsidiary obligations arising from a principal obligation—which was not contained explicitly in the 1992 Law, has been included in the 1998 Law. Moreover, the defini- tion of what should be included in the amount of financial obligations and mandatory payments has been specified in more detail. Under Article 4(2), of the new law, the definition is no longer claims of creditors for “payment for goods (works, services)” and “mandatory payments to the budget and non-budgetary funds” but, rather, “indebtedness for goods that were transferred [to the debtor], works that were performed, and services that were rendered”, as well as “amounts of loans with the calculation of interest due by the debtor”. Debts do not include payments for compensation to citizens for damage to their health and life, payment of royalties for copyright, or obligations toward the founders or participants of the indentured legal entity. Penalties and fines for non-performance or improper performance of a financial obligation are also excluded from the amount of 500 minimum wages. Article 4(3) contains the rule that fines, penalties, and other financial sanctions for nonpayment of manda- tory contributions to the budget and non-budgetary funds are excluded from the total amount of the indebtedness for declaring a legal entity or a private entrepreneur bankrupt. Moreover, the 1998 Law provides for the moment at which this total amount of debt needs to be established: when a court judgment has entered into legal force, when there are documents evincing that the debtor has recognized the claims of the creditors, or in
20 Ibidem, 84.
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other cases provided for by the present law. Also, the 1998 Law provides for a procedure to establish the amount of the debt if the debtor chal- lenges the creditors’ claims (Art.4(5);Art.63).
In another case described in its 1995 survey,21 the Higher Arbitrazh
Court held that more than one creditor may file petitions for initiating bankruptcy proceedings as long as the total amount of the claims is not less than 500 minimum wages. Furthermore, the court ruled that all creditors-applicants should have the same procedural rights. From this ruling, it looks as if the Higher Arbitrazh Court wants to determine the following:
(a)Apetition to initiate bankruptcy proceedings must be filed by one creditor with a claim of not less than 500 minimum wages;
(b)Several creditors may file such an petition; their joint claims must also be not less than 500 minimum wages.
It seems that these requirements are not fully in line with what the 1992
Law stipulated in Article 3(3):
“Cases on insolvency (bankruptcy) of enterprises shall be heard by an arbitrazh court if the claims to the debtor amount in total to a sum of not less than 500 minimum wages as established by the law.”
From this, it does not follow that if a creditor wishes to initiate bankruptcy proceedings against a debtor, its claim alone must already be no less than 500 minimum wages. If it is able to demonstrate that there are more creditors and the total amount of the outstanding debt is not less than the amount equal to 500 minimum wages, then the arbitrazh court must hear the case.
Also,the1998Lawdoesnotrequireacreditorwhofilesapetitionto initiate bankruptcy proceedings to prove that its claim alone exceeds 500 minimum wages (cf. Art.35, which deals with the petition of the creditor: in its petition, it must indicate the amount of its claim; it is not required, however, that the claim exceeds 500 minimum wages).
Furthermore,the1998Lawprovidesforthepossibilityofacreditor’s petition being based on joint claims for different obligations (Art.36(1)). Also, several creditors may join their claims and file one petition to an arbitrazh court (Art.36(2)). It is likely that in the latter two cases, the amount of the outstanding debt owed to the creditor(s) who have filed a petition must not be less than the required amount.
21 Ibidem, 85.
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Adjusting to International Standards
The 1992 Law did not provide for participation of foreign parties. However, court practice has allowed foreign parties to participate. The 1998 Law explicitly allows participation of foreign parties.
In the practice of some arbitrazh courts, foreign parties were blocked from filing a petition to initiate bankruptcy proceedings, relying on the argument that the 1992 Law failed to make such provisions.22 In its 1995 survey, the Higher Arbitrazh Court ruled that under Article 3(2) of the 1992 Law, the Code of Arbitrazh Procedure applied in matters that had been provided for by the 1992 Bankruptcy Law. Said Arbitrazh Procedure Code allowed the participation of foreign parties in cases heard by Russian arbitrazh courts.Also, in its ruling, the Higher Arbitrazh Court determined that foreign parties should submit their petitions to arbitrazh courts and not to a court of general jurisdiction.23
The 1998 Bankruptcy Law includes special provisions on hearing bankruptcy cases with a foreign element. Under Article 1(5), it has been provided that international agreements to which Russia is a party have priority over the present law where the international agreement contains provisions that differ from the 1998 Law. Subsection 6 ofArticle 1 stipu- lates that the present law also applies where foreign parties participate as creditors unless international agreements provide otherwise. Furthermore, Article 1(7) stipulates that foreign court judgments in bankruptcy matters must be recognized in the Russian Federation in accordance with international treaties to which Russia is a party or on the basis of reciprocity. Also, Article 11(1), deals with the position of creditors and allows the participation of foreign creditors.
Including Edicts and Decrees in the Law
Several court judgments have dealt with the bankruptcy of so-called “cityforming enterprises” (gradoobrazuiushchie predpriiatiia). A 1994 decree provided for the sale of such debtor enterprises. In principle, a city-forming enterprise was not to be declared bankrupt. The 1998 Law contains a separate chapter on city-forming enterprises but allows their bankruptcy under certain conditions. A special procedure has been introduced for the sale of such enterprises when they are in debt. On the basis of a 1994 presidential edict,24 the Russian Government issued a Decree “On the Procedure of Designating Enterprises as City-Forming and Details of the
22Cf., Barenboim, op.cit. note 15, 29-30.
23Op.cit. note 17, 86.
24Edict of the President of the Russian Federation No.1114.
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Sale of Enterprises in Debt That Are City-Forming”.25 Under this decree, which approves a statute with the same title, city-forming enterprises are defined as enterprises in debt if:
(1)They employ not less than 30% of the total number of employees in enterprises of a city (or village); or
(2)Their balance sheet includes objects of the social-communal sphere and engineering infrastructure that services not less than 30% of the population of the city (or village).
The statute provides for a procedure to determine whether an enterprise in debt should be considered “city-forming”, as well as for the sale thereof. The sale may be carried out in two ways:
(1)the enterprise is sold as a whole with the preservation of its legal status; the sale takes place through a tender under the following conditions:
(a)if the enterprise employs not less than 30% of the total number of employees in the given city or village, the number of personnel must be preserved;
(b)a minimum starting price may not be fixed;
(c)objects of engineering infrastructure that service the population of the city or village and that have been included on the balance sheet must be excluded from the enterprise’s assets;
(2)the enterprise is liquidated and its assets are sold at an auction or through a tender; the sale must be carried out under the following conditions:
(a)the decision on the liquidation of the enterprise and the subsequent sale of its assets must be made in agreement with the respective executive body of the Subject of the Federation;
(b)objects of engineering infrastructure that service the population of the city or village and that have been included on the balance sheet must be excluded from the enterprise’s assets.
25Decree of the Government of the Russian Federation of 29 August 1994 No.1001 “On the Procedure of Designating Enterprises as City-Forming and Details of the Sale of Enterprises in DebtThatAre City-Forming”, Sobranie zakonodatel’stva Rossiiskoi Federatsii 1994 No.19 item 2217.
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So far, there have been a number of court decisions pointing out that cityforming enterprises may not be declared bankrupt and cannot be subject to liquidation, given their special status.
Such a case is the bankruptcy proceeding of Skopinskii stekol’nyi zavod (Skopin Glass Factory),26 where the glass factory was declared bankrupt and a bankruptcy administrator was appointed despite the fact that the creditor, Riazan’energo, requested the appointment of external manage- ment. The Higher Arbitrazh Court held that the Riazan’ Oblast’ Court unjustifiably failed to take into account a number of facts, including the city-forming nature of the glass factory:
“The Court did not take into consideration the fact that the factory is a city-forming enterprise that provides one of the villages with heat, as well as hot [water] and drinking water as well as electricity to consumers not only of the Skopnenskii Raion of Riazan’ Oblast’.The liquidation of that enterprise would cause harm to the social sphere of the city and the region, as well as result in the need for employment of
1,100employees,whichwouldcausenumerousdifficultiesduetotheweakindustrial development of the region.”
As a result, the oblast’ court’s decision to commence liquidation of the glass factory was overturned and the case returned to the same court for reconsideration taking into account the arguments put forward by the factory.
Another bankruptcy case involving a city-forming enterprise was that of the Bokov Linen Factory in the Semenov Raion. In a decision of the Nizhegorod Oblast’ Arbitrazh Court,27 the court decided to impose external management for a period of twelve months despite the request of the claimant, Nizhegorodpromstroibank, to liquidate the enterprise as it had failed to fulfill its financial obligations vis-à-vis the bank. Apparently, one of the arguments for the arbitrazh court was the city-forming character of the linen factory. It provided heating for a large apartment building and operated cleaning installations (probably sewerage) and equipment for the supply of hot water. The costs for operating these installations weighed heavily on the factory’s budget, as it had to take huge loans in
1993-1994 to purchase fuel that had not been compensated by the local government.
The 1998 Law provides for special procedures for a number of spe- cific categories of legal persons as well as natural persons.Aspecial bank- ruptcy procedure has also been provided for “city-forming organizations” (Arts.132-138). This procedure applies to enterprises that employ not less than half the population (including the employees’ families) of a commu-
26.Decision of the Higher Arbitrazh Court of 28 November 1995 No.6419/95, Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii 1996 No.3, 58-59; Zakon 1996 No.3, 99-100.
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Decision of 28 September 1994 No.21-118, Zakon 1995 No.6, 110-111. |
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nity and to enterprises with more than 5,000 employees. Evidently, the requirementoftheenterprise’smaintainingthecommunity’ssocialassets has been left out.The procedure provides for external management of the city-formingenterprise,wherebyastatebodymaywarranttheenterprise’s obligations. In principle, a city-forming enterprise may be sold during the period of external management but only on the condition that at least
70% of the employees remain employed; in the case that the enterprise’s profile is changed, its employees will be retrained or other employment will be found for them.
Conclusions
From the above survey, it becomes clear that the 1998 Bankruptcy Law is—to no small extent—the product of court practice based on the 1992 Law. Many court decisions have rectified, clarified, supplemented, and interpretedalawthatwasdifficulttoapplyforvariousreasons.TheHigher
Arbitrazh Court assumed its responsibility and rendered, in most cases, a judgments that were just and fair within the framework of the law in force. At the same time, it signalled through its judgments that the 1992 Law was ready for replacement. As a result, in the case of bankruptcy law, one may conclude that the decisions of the Russian Higher Arbitrazh Court have proved to be a rich source for the new Russian bankruptcy law.
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Postscriptum: A New Russian Law on Bankruptcy
On 26 October 2002, the President of the Russian Federation signed the Law “On Insolvency (Bankruptcy)” into a law. The Law entered into force thirty days after the date of its publication, i.e., as per 2 December 2002. The new Law is now the third bankruptcy law in a period of ten years. The 1992 Law, which entered into force in March 1993, was distinctly debtor-friendly and was subject to strong criticism.
In 1998 as we have highlighted above, a second version of the bankruptcy law entered into force.This 1998 legislation was generally regarded as being more creditor-friendly and, eventually, turned into an instrument for hostile take-overs due to various reasons, including the alleged ignorance of bankruptcy judges and administrators but, also, due to the undue influence to which the latter were allegedly subject by interested parties.
Further flaws of the 1998 Law included:
—violation of the rights of the debtor, as bankruptcy proceedings were often initiated under fictitious documents or involved minor amounts of money without giving the debtor the possibility to satisfy its outstanding debt;
—violation of the rights of minority creditors;
—poor protection of secured creditors;
—violation of the rights of the state as a creditor in indebtedness involving tax payments;
—lackoftransparencyofthebankruptcyproceedings,theinadequate regulation thereof which allowed “arbitrazh managers”—as the administratorsarecalledintheRussianbankruptcyproceedings— and other participants in the proceedings to allegedly abuse their powers;
—directing assets of the debtor in favor of a restricted number of creditors in the course of the external management or the bankruptcy procedure;
—the absence of effective mechanisms for imposing liability upon malafide arbitrazh managers.
The new Law seeks to address the many of the above shortcomings. The 2002 Law “On Insolvency (Bankruptcy)” contains 233 articles and 12 chapters, including
I.General Provisions (Arts.1-29)
II.Prevention of Bankruptcy (Arts.30-31)
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III. |
Bankruptcy Proceedings with the Arbitrazh Courts (Arts.32-61) |
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Supervision (Arts.6275) |
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Financial Restructuring (Arts.76-92) |
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VI. |
External Management (Arts.93-123) |
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VII. Bankruptcy Proceedings (Arts.124-149) |
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VIII. Amicable Settlement (Arts.150-167) |
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IX. |
Details of Bankruptcy of Separate Categories of Debtors, Legal Per- |
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sons (Arts.168-201) (general provisions; bankruptcy of city-forming |
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[i.e., large enterprises on which a great part of a city is dependent] |
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organizations; bankruptcy of agricultural organizations; bankruptcy |
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of financial organizations; bankruptcy of strategic enterprises and |
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organizations; bankruptcy of subjects of natural monopolies) |
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X.Bankruptcy of Citizens (Arts.202-223) (general provisions; individual entrepreneurs; individual farmer households)
XI. Simplified Procedures of Bankruptcy (Arts.224-230) (bankruptcy of a debtor-in-liquidation; bankruptcy of an absent debtor)
XII. Final and Transitional Provisions (Arts.231233).
The 2002 Law distinguishes between the insolvency of natural persons and legal entities. Both categories will be considered insolvent when they do not fulfill their financial obligations during a period of not less than three months after these obligations have become due. As regards natural persons, an additional condition applies, i.e., the requirement that the amount of their indebtedness exceeds the value of their entire property.
The 1992 Law included this criterion for legal entities, too, but it was dropped as most enterprises had assets with a value exceeding the amount of their obligations and, rather, were simply short of cash to satisfy their obligations. In addition, the 2002 Law requires that the total amount of debts shall not be less than 100,000 rubles (appr. 3,000 US dollars) for legal entities and 10,000 rubles (appr. 300 US dollars) for natural persons.
Petitions to initiate bankruptcy proceedings may be filed by the debtor, creditors, and the so-called “authorized bodies”, which are federal executive bodies authorized by the Government to submit claims on behalf of the state regarding unpaid tax liabilities and other mandatory payments, as well as mandatory payments to the budgets of the “Subjects of the Federation”, i.e., the 86 “states” that jointly make up the Russian
Federation.In a number of cases,the debtor is even obliged to file a peti- tion to initiate bankruptcy proceedings, for instance, if the satisfaction of the claims of one single creditor (or several creditors) would make it impossible for the debtor to fulfillitsobligations towards othercreditors
(including the tax authorities).