Reading 2: russian bankruptcy law and privatization Craig a. Hart

Read and translate the article below. Use translation tips where necessary. Pay special attention to the words and word combinations given in bold. Translate properly into Russian and memorize them.

1. Russian bankruptcy law and the privatization process in russia

This Article examines whether Russia’s new bankruptcy law, which became effective retroactively on January 1, 1998 (the “Russian Bankruptcy Law”), is likely to advance or undo the privatization of Russian firms subject to bankruptcy administration. The analysis presented in this Article focuses on who gains control over debtor firms during bankruptcy and how the presence of a bankruptcy regime influences the decision-making of owners and managers.

Bankruptcy, in most jurisdictions, involves the State in the economic decision-making of private firms more intimately than it normally would in a market economy. With respect to Russia, bankruptcy should not become a means through which the State regains control of private firms. The initial research for this Article examined whether the State could be eliminated altogether from the process of reorganizing or liquidating debtor enterprises. Concluding that eliminating the State from the bankruptcy process was not feasible under the economic and political conditions prevailing in Russia, the research turned to considering ways in which the State’s role could be appropriately limited to assisting in the development of corporate governance of debtor firms undergoing bankruptcy administration, so that these firms can compete more effectively in a market economy. The conclusion was that the appropriate role for the State is to support a bankruptcy framework in which interested parties select suitable agents to exercise governance. Whether the State is limited to helping place capable third parties in positions of corporate governance, or is permitted to provide corporate governance itself, is the basis upon which the Russian Bankruptcy Law is judged in this Article.

The Russian Bankruptcy Law is deemed to reverse or prevent the further progress of the privatization of debtor firms if, during the course of bankruptcy, the State regains control of formerly privatized enterprises, prevents the removal of ineffective management insiders, or rescues enterprises that would otherwise fail.

Russian Bankruptcy Law is judged to advance the goals of the Russian privatization program in cases in which judicially-supervised bankruptcy provides a method for transferring ownership and control of insolvent State-owned and privately-held enterprises to private owners who will competitively manage these entities.

In order to determine whether ownership and management is placed with private owners who can operate firms on a competitive basis, the Article evaluates different possible ownership groups based on (1) technical ability to provide corporate governance, (2) incentive to pursue the goals of maximizing firm value and profits, and (3) influence over firm management in order to cause management to operate debtor firms in accordance with the goals of shareholders.

In assessing the Russian Bankruptcy Law, this Article concludes that the law may reverse the privatization of certain firms employing large numbers of people. If these firms become subject to bankruptcy administration, the Russian Bankruptcy Law permits the State to takeover the bankruptcy and to operate the debtor for a period of up to ten years, provided the State guarantees or pays the debts of the enterprise. Additionally, the Russian Bankruptcy Law permits the State to acquire ownership of any debtor by entering into an agreement with the debtor and its creditors. These provisions can reverse the privatization of bankrupt enterprises.

The Russian Bankruptcy Law appears to improve corporate governance in two respects. First, the Russian Bankruptcy Law appears likely to reduce the influence of insiders during bankruptcy. Second, it places creditors in a central role with respect to selecting and monitoring the external administrator, confirming the plan of external administration and approving major decisions affecting the debtor enterprise.

This Article recommends that the bankruptcy law in Russia would be best able to advance the goal of improving corporate governance if it promoted large private shareholders, particularly investment funds, commercial enterprises, and creditors into positions of ownership and control in respect of debtor firms, and eliminated the State from economic decisions which are traditionally made by firm management in a market economy.

Translation Tips

(1) to advance or undo the privatization of Russian firms subject to bankruptcy administration = способствовать дальнейшей приватизации российских фирм, в отношении которых введено внешнее управление, либо аннулировать итоги такой приватизации;

(2) The Russian Bankruptcy Law is deemed to reverse or prevent the further progress of the privatization of debtor firms = Считается, что российский Закон о банкротстве аннулирует итоги приватизации предприятий-должников или препятствует дальнейшей приватизации таких предприятий;

(3) If these firms become subject to bankruptcy administration = с случае введения внешнего управления в отношении данных предприятий;