This content is from: Local Insights

Russia

The potential bankruptcy of a Russian company has long troubled those investing in the country, as loopholes in the previous bankruptcy laws have led to the use of bankruptcy as a takeover device and other abuses. On December 3 2002, a new Law On Bankruptcy (Insolvency) took effect. In general, the new law is debtor-friendly and was drafted to stop abuses. However, it does not address all the existing problems and its effectiveness remains untested. Some of the noteworthy provisions of the new law are outlined below.

Shareholders' rights

Whereas previously the shareholders of the debtor had no rights in bankruptcy, now a shareholders' representative can petition a court to invalidate decisions of the creditors meetings, contest actions of the trustee and contest the appraisal of the debtor's assets. The shareholders' representative can also contest creditors' claims in court. It is to be hoped that this right, along with a new requirement to have each claim reviewed by a bankruptcy judge, will prevent bankruptcy trustees from manipulating cases through the unfounded inclusion of claims in, or exclusion of claims from, the register of creditors' claims.

Furthermore, shareholders can now revive the debtor company through either a new stage of bankruptcy, financial rehabilitation, or satisfaction of all creditors' claims during the bankruptcy. A court can impose financial rehabilitation if the shareholders' meeting adopts a financial rehabilitation plan and a schedule for satisfaction of creditors' claims, and the creditors meeting approves them. The debtor's obligations to pay the rescheduled claims may be secured by a pledge of collateral by shareholders, a bank guarantee or other security. Moreover, a court can impose a financial rehabilitation plan even if the creditors meeting does not approve it, provided that shareholders have secured a bank guarantee.

In addition, the new law gives the governing bodies of the debtor (board of directors and general shareholders meeting) certain approval rights over the sale of the key assets of the debtor's business, even during the receivership (liquidation) stage of bankruptcy.

Secured claims

The new law substantially changes the treatment of claims secured by a pledge of the debtor's assets. Earlier, such collateral became available to satisfy all claims, although secured claims were satisfied ahead of most unsecured claims. Under the new law, secured claims are to be satisfied directly from the proceeds of the sale of the collateral securing such claims, ahead of all claims except for certain priority claims (personal injury, employee salaries and copyright royalties), that were incurred before the security agreement was executed. The new law also requires the sale of collateral at a public auction after an appraisal; it prohibits private sales, thereby attempting to ensure that a fair price is obtained.

Bankruptcy trustees

One of the most controversial innovations of the new law is the introduction of the bankruptcy trustees' self-regulatory organizations (SROs). The SROs will have broad supervisory authority over bankruptcy trustees, and will select trustees to handle specific bankruptcies. Given that trustees will be dependent on the SROs, and that there is no transparent procedure for selection of the trustees to handle bankruptcies, some observers fear that trustees will manage bankruptcies for the benefit of the principal managers of the SROs.

Irina Antoshevskaya

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