Oda Russian Commercial Law 2007-1

supervision of creditors. The administrator is under an obligation to keep the creditors’committee informed. When required by the creditors’meeting or committee, the administrator must report to creditors of the progress of the realisation of the plan (Art.106, para.4). The administrator must report to the creditors when external administration has been completed, when there is a ground for early termination of the procedure or upon the request of a person who is entitled to convene creditors’ meeting (Art.107).

The creditors’ meeting, after hearing the report of the external administrator, is to adopt a decision either to apply to court for the termination of external administration due to the restoration of the solvency of the debtor, due to the ful lment of all the claims of creditors in accordance with the register of the claim, or to apply for the recognition of the debtor as bankrupt and to commence the bankruptcy procedure (Art.118, para.3).

Compared to the overall number of insolvency cases, the number of cases where external administration is effected is rather small. In 2000, external administration was introduced in 1,069 companies. In 907 cases, the company was recognised as bankrupt and the bankruptcy procedure started. 296 cases ended in amicable settlement (composition) between the creditors and debtors. Only in 50 cases, the debtor became solvent.30 In 2005, there were 1,013 cases of external administration. In only 21 cases was the solvency of the debtor restored. Thus, the effectiveness of the present system of external administration is questionable.31

The primary problem with external administration under the 1998 Law was the quality of external administrators. According to the report of the commercial court, no corpus of quali ed administrators has been formed. “In fact, the incompetent and unprofessional external administrators and the absence of an effective means of controlling them often results in the liquidation of companies”. Some administrators who are quali ed totally lack experience. On the other hand, many administrators handle the procedure of 8-10 large companies simultaneously.32 External administrators are in practice, free from control and the result is the “theft of basic assets of the enterprises, violation of the rules of auction for the sale of assets etc”.33

What is more, the neutrality of the administrators was questionable:

30Supreme Commercial Court, “Rabota arbitrazhnykh sudov Rossiiskoi Federatsii v 2000 godu’, www.arbitr.ru

31VVAS 2001 No.5, pp.11-12. Spravka o rassmotrenii arbitrazhnyni sudami RF del o besostoiatel’nosti v 2002-2005 gg., www.arbitr.ru.

32“Rabota...’, supra.

33Ibid.

When the court recognises the debtor as bankrupt, the bankruptcy procedure begins. With the commencement of the bankruptcy procedure, all monetary claims become due.As a rule, transactions related to the disposal of the property of the debtor are not allowed. The arrest of the debtor’s assets and other restrictions on them in place are terminated and further measures are forbidden. Most importantly, the power of the executive as well as the management bodies of the debtor company is terminated (Art.126, paras.1 and 2). The recognition of the debtor as bankrupt is published.

The bankruptcy administrator is con rmed by the court in the same manner as administrators in other procedures. The administrator performs the function of the executive or management bodies of the debtor company during the bankruptcy procedure. The bankruptcy administrator is under an obligation to:

i) manage the assets of the debtor and conduct inventory checks;

ii) involve an independent valuer for the valuation of the assets of the debtor; iii) notify employees of their dismissal within a month of the commencement of

the bankruptcy procedure;

iv) adopt measures to preserve the assets of the debtor; v) analyse the nancial state of the debtor;

vi) collect debts owed to the debtor; vii) prepare a register of claims;

viii) adopt measures for the search, discovery and retrieval of the assets of the debtor.

The bankruptcy administrator is empowered to dispose of the assets of the debtor, to refuse the performance of contracts and other transactions, and to initiate an action in court to invalidate certain transactions having been effected by the debtor (Art.129).

Limited liability company Kamgesstroibeton and an open joint stock company Kamgesenergostroi owed debts against each other. On April 30, 2003, both parties signed a protocol to the set-off mutual claims. On this very day, an application for the recognition of Kamgesstroibeton as bankrupt was submitted to the commercial court. On May 22, 2003, the observation procedure started. Subsequently, Kamgesstroibeton was recognised as bankrupt and the bankruptcy procedure was commenced.

The bankruptcy administrator applied to the court for the above set-off agreement with Kamgesenergostroi to be invalidated. The rst instance court dismissed the claim on the ground that the transaction was effected in the normal course of economic activities and other creditors were not affected and that preferential repayment has not been proved. This was supported by the court of cassation. The case eventually reached the Supreme Commercial Court.

The Supreme Commercial Court ruled that the Law on Insolvency did not acknowledge such a transaction to be valid merely because it was effected in the normal course of economic activities. Furthermore, according to the Court, the Law does not acknowledge such a transaction to be valid simply because the creditor, at the time of the transaction, was not aware, or could not have been aware that the debtor was on at the verge of bankruptcy. The rst instance court should have veri-ed whether the transaction had been effected within six months of the application for the recognition of the debtor as bankrupt, and whether or not it had resulted in the preferential repayment of the claim ahead of other creditors. On the rst point, the set-off was effected on the day of the application in this case. On the second point, there are creditors of the rst and second rank.

The judgment of the lower court was quashed.35

The bankruptcy estate comprises all properties of the debtor existing at the time of the commencement of the bankruptcy procedure and properties found in the course of the procedure. Properties which are excluded from circulation, e.g. items of cultural or historical signi cance, proprietary rights which are related to the personality of the debtor, including licences for carrying out speci c types of activities etc. are excluded from the estate (Art.131, paras.1 and 2).

Within a month after the preparation of the inventory and valuation of the assets, the bankruptcy administrator must submit a proposal to the creditors’ meeting the manner, the timing and the terms of the sale of the debtors’ assets. The bankruptcy administrator is to sell the assets by public auction, unless otherwise provided by the Law (Art.139, paras.1 & 4).

The order of ful lment of claims from the proceeds is as follows (Art.134):

i) Claims outside the rank

(a) Court costs;

(b) Fees of the administrator, holder of the register;

(c) Current communal and other payments;

(d) Claims which emerged after the application for the recognition of the debtor as bankrupt was accepted by court until the recognition of the debtor as bankrupt;

(e) Arrears in wages which emerged after the application for the recognition of the debtor as bankrupt was accepted by court, and wages during the bankruptcy procedure;

(f) Claims which emerged during the bankruptcy procedure.

35Decision of the Presidium of the Supreme Commercial Court, January 18, 2005, Case 11119/04.

ii) Claims of the rst rank:

Claims of individuals based upon the liability of the debtor for causing damage to life and health

iii) Claims of the second rank:

Payment of retirement money and wages, and royalty for author’s rights (copyright)

iv) Claims of the third rank:

Other claims.

The order of distribution of the proceeds of sale has been different in the past. The difference primarily involves the tax claims and secured claims. Under the 1998 Law, tax claims were ranked after the secured claims as the fourth in rank, but ahead of the general claims which were fth in rank. Now the tax claims are in the same rank as the general claims, which is in the third rank.

The problem with the 2002 Law is that the order of distribution is different from the provision in the Civil Code which sets out the order of ful lment of the claims. By virtue ofArticle 3, para.2 of the Civil Code, the Code has priority over the Bankruptcy Law. According to the Civil Code, tax and other mandatory payment claims come third, and general claims follow as the fourth rank (Art.64). In fact, this is one of the most controversial issues in Insolvency Law.36 The view of the Supreme Commercial Court is that the Civil Code is applicable to liquidation without bankruptcy and is not applicable to insolvency per se.37 However, this approach is not without criticisms.38

The treatment of secured claims has changed over the years too. In the 1992 Law, secured properties were excluded from the bankruptcy estate. The 1998 Law included them in the estate, but secured claims were in the third rank, ahead of tax and mandatory payment claims as well as general claims. This is said to be because the Civil Code, which was enacted after the 1992 Law, has a provision to this effect (Art.64, para.1), and the Law on Insolvency could not provide otherwise. Another reason was that the security rights are regarded as rights in personam, and not real rights in Russia.

36Karelina, supra, p.202.

37Vitrianskii, supra, p.52; Decision of the Plenum of the Supreme Commercial Court No.4,April 8, 2003, item 8.

38M.V.Teliukina, Kommentarii k federal’nomu zakonu o “nesostoiatel’nosti (bankrotstve)”, second edition, Moscow 2004, pp.349-350.

This was criticised since secured creditors now had to wait for a long time for the whole insolvency procedure to be competed and also because their claim may not be fully satis ed.39

The 2002 Law does not distinguish between secured and unsecured claims insofar as the rank is concerned – both are in the third rank. However, secured claims are satis ed from the proceeds of sale of the collateral ahead of other claims, except for the claims of the rst and second rank which emerged before the conclusion of the contract of pledge (Art.138, paras.1 and 2).

In 2005, in 13,963 cases, the debtor was recognised as bankrupt by the court and the bankruptcy procedure was initiated. This was an increase of 48.7% from 2004.

Whether or not the creditors can have their claim satis ed by this procedure is questionable, though.

The Commercial Court of Moscow completed the bankruptcy procedure in relation to an open joint stock company, Legprombank. The Central Bank withdrew the banking license on February 9, 2004 for the failure to comply with law and regulations and to pay creditors. Since then, a provisional administrator was operational. On April 1, a bankruptcy administrator was appointed. On April 7, 2005, the court extended the bankruptcy procedure by six months in April 2005.

Claims of creditors of the rst and second rank were fully repaid. Creditors of the third rank only had around 1% of the claim repaid. The value of the bankruptcy estate was 79.8 million roubles. The cost of the procedure amounted to 39.5 million roubles.40

The Government Accounting Of ce, after inspecting the Federal Tax Agency, pointed out that the basic reasons for the insuf cient effectiveness of the bankruptcy system are the sale of the assets of the debtor by the administrator at a low price and the unjusti able increase in the cost of the procedure which leads to the decrease of the bankruptcy estate. For instance, the value of the assets of the open joint stock company, Nosta, decreased by 75% of the balance sheet value between October 2003 and January 2004.41

7)Amicable Settlement

An amicable settlement can be made between the debtor and the creditors including the empowered bodies (for tax and mandatory payments) at any stage of the

39Teliukina, Konkursnoe pravo, Moscow 2002, p.338.

40Obzor deiatel’nosti arbitrazhnykh sudov v SMI, October 6, 2005 www.arbitr.ru.

41Ibid., November 12, 2005.

6

GENERAL RULES OF THE LAW OF OBLIGATIONS

1GENERAL

Book Three of the Civil Code is divided into two sections: general rules of the law of obligations and general rules of contract law. The rst section is divided into six chapters: concepts of and parties to an obligation, performance of obl igation, securing of performance of obligation, change of parties, liability for the breach of an obligation, and the termination of an obligation.

Individual types of obligation are provided in Book Four, which is in Part Two of the Code enacted one year after Part One in 1996. Book Four not only contains obligations arising from various types of contracts, but also obligations arising out of tort and unjust enrichment.

This structure is in line with the tradition of Russian civil law under the in u- ence of the Pandekten system. The draft Civil Code of the Russian Empire of 1905 was arranged in this way.

2PERFORMANCE OF OBLIGATION

1)Manner of Performance

The general rule is that an obligation should be performed in an adequate manner in accordance with the terms of the obligation and the requirements of the law and other legal acts, and in their absence, in accordance with the business custom (obychai delovogo oborota) or other normally applicable requirements (Art.309). Inadequate performance is not acknowledged as performance:

TheAllied Colleges ofAdvocates of St.Petersburg brought an action in court against an open joint stock company Stroimashin for the payment of 42,500,000 roubles for legal services provided to the latter. The rst instance court acknowledged the claim of the plaintiff. The Supreme Commercial Court, upon protest, quashed the judgment and remanded the case for a new hearing.

According toArticle 309 of the Civil Code, an obligation must be performed in an adequate manner. The defendant argued that the plaintiff had performed its contractual obligations in an inadequate manner. The advocates were acting on behalf of Stroimashin against a limited liability company Medlamo. Documents prepared and submitted to the court on behalf of Stroimashin were rejected several times by the court, due to their poor formulation. Even the iskovoe zaiavlenie was returned four times. The proceedings were delayed because of this, and in the end, although the court acknowledged the claim of the Stroimashin, because Medlamo had become bankrupt in the meantime, Stroimashin was unable to receive payment.1

Commercial custom means “accumulated and widely applied rules of conduct in a particular area of entrepreneurial activity” (Art.5). Some other laws, such as the Law on International Commercial Arbitration, use the term commercial custom (torgovyi obychai). There are three requirements for business custom to be applied; it has to be accumulated, i.e. continuous and suf ciently de ned in its content, it has to be widely applied and not against the law.2

2)Time of Performance

If the obligation presupposes a xed date or period of performance, it has to be performed on that day or within the period. If no date or period is determined, the obligation must be performed within a reasonable period after the obligation emerged. With an obligation which was not performed within a reasonable period, or an obligation by presentation, the debtor must perform the obligation within seven days of the creditor requiring the performance, unless otherwise provided by law, legal acts, business custom or emanates from the content of the obligation (Art.314). Performance of obligation ahead of the agreed time is allowed in principle. However, in obligations involving entrepreneurial activities, performance ahead of time is allowed only when it is provided by law, legal acts, business practice or emanates from the content of the obligation (Art.315).

1Decision of the Presidum of the Supreme Commercial Court, February 23, 1999, Case

2732/98.

2O.N.Sadikov ed., Komentarii k grazhdanskomu kodeksu Rossiiskoi Federatsi, Chasti Pervoi, third edition, Moscow 2005, pp.19-20.