Improvements in the bankruptcy legislation.

10.03.2009

LEGAL UPDATE No. 8.

Goltsblat BLP advises that substantial amendments to Federal Law of 26 October 2002 No. 127-FZ “On Insolvency (Bankruptcy)” (the Federal Law)   have been adopted and have come into effect.

The provisions of the Federal Law concerning the status, rights and obligations, activities and responsibilities of court-appointed administrators (insolvency officers) have been fundamentally modified to increase regulation of the activities of insolvency officers by their self-regulating organisations (SROs), over 50 per cent of which can now set up a national association of SROs.

SROs are now entitled to determine the requirements on candidate insolvency officers proceeding from a mandatory list of such requirements that may be supplemented or made more stringent by organisations. At the same time, from 1 January 2010, it will no longer be essential to register insolvency officers as individual entrepreneurs, since their activities will not be classed as entrepreneurial any more, but as professional activities carried out in the form of private practice. This clearly emphasises that the task of the insolvency officers within the scope of bankruptcy is not to make a profit, but to satisfy, as far as possible, the claims of the creditors in whose interests the bankruptcy proceedings are initiated.

In this connection, the meeting of creditors is granted the right to give the insolvency officer a material incentive in the form of an increase in his fixed remuneration (which now consists of a set sum of money and interest on the increase in the balance sheet value of the debtor’s assets) and even to allocate to him an additional remuneration to be paid by the creditors adopting the relevant decision.

On the procedure by which the insolvency officer is appointed and dismissed, there has been an about-turn, going back to the applicant in the bankruptcy case and, subsequently, the meeting of creditors having the right to propose a specific candidate (as was the case in the previous 1992 and 1998 laws on bankruptcy). Dismissal of the insolvency officer is now final. Even if a higher state arbitration court revokes a ruling to dismiss the insolvency officer, he is not to be reinstated within the scope of the same proceedings on the same specific bankruptcy case.

The requirements on maximum expenditures on holding bankruptcy proceedings and the procedure for incurring said expenditures have been made more stringent. Lack or exhaustion of  funds to finance the proceedings might, in our opinion, constitute grounds for terminating the proceedings on a bankruptcy case.

The corrections made regarding emergence of an authorised body’s right to lodge a suit for initiation of a bankruptcy case are quite significant. As confirmation of the requirements for initiating a case, it suffices for the tax or customs authorities to pass a decision on recovering a debt out of the cash, not the property, of the debtor, as was previously the case. The priority position of authorised bodies is thus consolidated, as, in contrast to creditors in bankruptcy, they have no need to wait for a court ruling confirming that their claims on the debtor are justified when applying to a state arbitration court to initiate a bankruptcy case. There has also been a certain easing in relation to creditors under monetary liabilities, since they have been granted the right to apply for a bankruptcy case to be initiated as soon as a court ruling comes into effect on recovering funds from the debtor. Let us recall that, previously, 30 days had to elapse from the date on which the writ of execution was forwarded to the bailiffs’ service before an application could be filed.

The rule on a reduced (30%) quorum for holding a second meeting of creditors has been deleted from the Federal Law. A preclusive term has been set for appealing a decision of a meeting of creditors (6 months from the decision being taken).

Significant changes have taken place in the composition of creditors’ claims and the order of priority in satisfying them.

First, a special order of priority has been established for satisfying creditors’ claims on current payments, pride of place being allotted to expenditures on procedures involved in the bankruptcy case.

Second, creditors’ claims under obligations arising before the bankruptcy proceedings were initiated and maturing after this date have been excluded from current payments. Such claims have become “regular” ones. In our opinion, this will effectively preclude debtors concluding agreements with partners that are back-dated, stipulate an obligation fulfilment date during the bankruptcy proceedings and thus give these persons a “priority right” to satisfaction of their claims.

Third, the procedure has been changed for satisfying the claims of creditors out of pledged property.

As for receivership proceedings, the following aspects should be noted. The rules governing sale of the debtor’s property have been significantly revised and supplemented. The most marked innovation is introduction of electronic tenders, the purpose being to establish remote access to the tenders and make them as transparent as possible. Second, the question of the possibility of the debtor continuing its business operations during the receivership proceedings, which has always been a matter of dispute in practice, has in general been settled positively. Finally, on conclusion of the receivership proceedings, the opportunities have been extended for participants in the bankruptcy case to appeal the final ruling of the state arbitration court.
All the information about bankruptcies subject to mandatory publication will shortly be reduced to a Unified Federal Register of Information on Bankruptcy. Acts regulating formation of such a Register are to be adopted in 2009.

For additional information, please contact:

Anton Sitnikov, Partner,
Corporate/M&A,
Goltsblat BLP;
Tel: +7 (495) 287 44 44,
Email: info@gblplaw.com

Anton Panchenkov, Senior Associate,
Corporate/M&A,
Goltsblat BLP;
Tel: +7 (495) 287 44 44,
Email: info@gblplaw.com

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