Awkward wording of the bankruptcy law

Gaps of the Russian bankruptcy legislation leave the creditors without protection from the ill-faith debtors, who withdraw their assets prior to the bankruptcy. Even when the procedure is already initiated, money flows to the affiliated creditors, and the courts take the simplest position, which is formally legal, but is against the very essence of the law. Advocate Artem Kukin, Doctor at Law, Partner of the Law Firm "YUST", told Prime Agency of Economic Information of these and other offences frequently committed in Russia in the course of bankruptcy as well as of the ways to fight them in an interview. Elena Malysheva spoke with the expert.

Question: Many large companies have gone bankrupt in Russia lately, what could be the cause of that? Are such causes purely economic or are there others?

Answer: Economic causes are the basic ones, of course. The companies can’t cope with the burden of debt, competition forces them to offer their goods, works and services at a lower price, and they do not always manage to repay a credit on time. Management mistakes and near-sighted policy also have their effect. In general, the bankruptcy causes nowadays are quite common and multiplied by a certain all-round instability of the post-crisis period.

Question: Tourism operators in particular have gone bankrupt lately, are there any special causes for that?

Answer: The bankruptcies of tourism operators have become more frequent lately, and the causes for that are primarily related with the specificity of their activity. You see, the tourism operators have to purchase flight seats and hotel rooms for an entire season with anticipation. The situation on the market as well as the preferences of some clients and their financial resources change during the time period between that purchase and the sale to the end user.

Many operators went bankrupt after the crisis of 2008, when a part of the populace became less well-off and was forced to cut back on foreign voyages (and our tourism is largely foreign-oriented) or to settle for cheaper variants instead of customarily fashionable – more or less so – resorts.

Add high competition to this. The tourism operators are forced to sell the tickets and the rooms purchased earlier in order to raise at least some money. If the prices for this are high, the tourists will simply go to the competition, and the seller may receive zero cash for an already paid-for product. Price dumping on the market contributes significantly to the risks of bankruptcy of a company.

Question: What are the most common offences committed by debtors within the framework of bankruptcy? What are the legislation gaps, which enable this?

Answer: One of the most common offences is the withdrawal of assets by the debtor, who “senses” his imminent bankruptcy, in order to avoid the sale of that property at auctions and the subsequent settlement of the creditors’ claims.

Another problem is that the current legislation contains no peculiarities of legal regulation for the persons of the same group of persons as the debtor regarding the inclusion of their claims into the register of claims to that debtor and the receipt of the majority of votes in said register.

Such claims may also be artificial: for example, they may be created by the debtor, who senses his imminent bankruptcy and executes contracts of debt with its affiliated entities, which enable such affiliated entities to be put on register in the case of deliberate non-payment thereunder.

If affiliated creditors are the majority, they may, for example, enter into an amicable agreement as lenient to the debtor as at all possible. Or, to the contrary, request the court to initiate bankruptcy proceedings despite the opinion of the trustee in bankruptcy that it is possible to restore the debtor’s solvency.

The courts nowadays adopt the position, which for them is both conservative and the most simple. When other creditors, whose rights are violated by the inclusion of an affiliated creditor in the register, object to this, the court says that the law does not forbid the inclusion of such creditor, so that Justice cannot refuse that.

Is this nonsense? It surely is, but the judges make the helpless gesture: they don’t have anything to back themselves with, and there are few, who are able to look beyond the form of the law into its essence. And this reproach goes to the bankruptcy legislation rather than to the court.

In this connection, it comes to mind that it is time to amend the legislation in such a way as to make the claims laid by the creditors, who are affiliated with the debtor, pass additional veracity checks.

Next offence: when the debtor “stonewalls” (illegally, of course) by completely ignoring the bankruptcy proceedings. The debtor does not appear in court sessions, pays no regard to the trustee, does not fulfil the latter’s demands to provide document copies (needed for the study of the debtor’s financial situation), does not fulfil the court’s rulings to claim those documents.

It is very difficult to bring the debtor’s management to administrative responsibility for this. There is a case that we are in the second year of fighting for justice on, the cassation court, thanks to our efforts, has revoked the lower instance courts’ decisions, the case is in its second round, and the settlement still seems very remote.

Question: And if the creditor had no time to take any action, and only an “empty” firm is left for him, what to do? Is there any way to recover the debt? How?

Answer: The creditor should look for the opportunity to recover his money from the warrantors, the backers, if any. Up to their bankruptcy, since the law and the law-application practice allow us to do this. Also, one should use the arsenal of claims to acknowledge the transactions aimed at ruling invalid the transactions, which we are discussing.

Chapter III.1 of the Bankruptcy Law fixes the procedure of contesting the debtor’s transactions. Even though that procedure does not always allow protection of the creditors’ rights violated by the assets’ withdrawal transactions, in some cases the position based on those provisions is successful, and the money go back where they belong: in the bankrupt estate.

Question: Is it possible for the bettor and the trustee to enter into collusion? Is the candidate indicated by the creditors always elected? What is the course of the procedure? What should be done if the trustee, in the creditor’s/debtor’s opinion, does not cope with his duty?

Answer: Such collusion is certainly possible, but such possibility exists only due to the initiative of said subjects and in no way to the current procedure of approval of trustee, where the debtor only has deliberative and not deciding vote (with the exception of the case, when the debtor himself files for bankruptcy).

If the trustee is not capable, first of all, the causes for that should be ascertained. If the trustee is a “puppet” of ill-faith creditors, an attempt should be made to remove him. However, it should be kept in mind that the request to dismiss the trustee must have extensive argumentation, contain references to legal provisions and concrete facts of wrongdoings.

If the trustee does not cope with his responsibilities for some other reason, it may be attempted to help him: provide him with the existing case materials, communicate to him the position on certain procedural issues beforehand. Maybe good specialists in law or economy should be recommended to him, whom he may contract. If the trustee is not committed to a party to the project, one should and needs to work with him.

Question: What is the efficiency of the self-governed trustee organizations? Does anything in their operation, in the governing legislation require any changes?

Answer: The current Bankruptcy Law was adopted ten years ago, and the STOs were one of its novelties. Such organizations were to replace the not too efficient system of state licensing of the trustees’ activity.

Let us point out that or law governs some issues of the activity of trustees in a different way that most foreign states. Is it good or is it bad – that is another matter. For example, in Russia, exercising the trustee profession obligatorily requires an STO membership – unlike the West. And there are some, who claim to revoke that condition. But it should be kept in mind that such measure, even if temporary, for now remains efficient: it helps to civilize this segment of the market of professional services.

A number problems related to the uncertainty of the legal status of said organizations were resolved, when a special law on STOs was adopted. That law defined the respective term, the object of self-governing, the conflict of interests rules and other key issues.

Source of the publication - here.