Tatyana Trefilova

The term bankruptcy first appeared in 1265 in Britain’s Statute of Westminster. And only three centuries later a full-fledged law on bankruptcy was enacted. In Russia a similar law was approved in 1740 and remained in force for 180 years but after that there was a break for more than half a century. At present, the modern legislative base is being formed, which is to guarantee activities of crediting organizations and investors. The bankruptcy mechanism is assigned a significant role in this process.
In her comments for Eurasian Metals magazine chief of Russia’s Federal service on financial rehabilitation and bankruptcy Tatyana Trefilova stressed the special importance of this mechanism:

    «The real economy cannot function normally without a thought-out, civilized system of bankruptcy. This is the most important tool for raising efficiency of the national economy, one of the foundations of a reliable financial infrastructure, a guarantee of returning at least some of investments in case of financial failures while implementing projects or if market conditions change».
The RF Law «On insolvency (bankruptcy)», which is currently in force, was passed in 1998. It is based on the principle of insolvency, when debts of an enterprise exceed a fixed amount, say, 500 minimum wages (as of today this comes up to about $16.000) and it is unable to offset these debts in 3 months. Since then a number of bankruptcy cases started to grow in geometrical progression. If there were 10.000 cases of court proceedings before the enactment of the law in 1998, then, there were over 27.000 of them by mid-2001 and more than 47.000 cases by the end of 2001.
A lot of world-class lawyers and economists think highly enough of the Russian law but in Russia itself there are already quite a few objections in principle to this document. Basing on the experience of using the bankruptcy mechanism in practice experts consider it necessary to raise the responsibility of enterprises’ leaders and arbitration (temporary) managers for results of activities. Legislators intend to make serious amendments to the bankruptcy procedure itself as well as to ways of ensuring its implementation.
«We believe that bankruptcy proceedings could be started only after there is a court decision to recover a debt or after a court checked the act of indebtedness collation», Tatyana Trefilova says explaining the position of the Federal service on financial rehabilitation and bankruptcy. «The court should also give a debtor 30 days to meet all demands and stop the bankruptcy procedure».
Along with the existing procedure of supervision and outside management there will be a new one called financial rehabilitation. It is similar to English debtor on mortgage. If a debtor provided creditors with a plan of financial rehabilitation and they accepted it, a court might initiate this procedure. Thus, an enterprise gets one more chance to restore its solvency independently. Having guarantees is not ruled out either.
«In our opinion, another important problem is the actual dismissal of those representing an owner and founder from bankruptcy proceedings, the impossibility of their participation», Trefilova says. «In their time these restrictions were introduced so as to prevent a debtor’s agents from hampering the proceedings. At present the RF Constitution Court recognized this as contrasting the basic law. An appropriate draft law on this has already been prepared and is being considered now by the State Duma, the lower house of the Russian parliament».
Courts have started accepting complaints from founders about verdicts and determinations on bankruptcy only after hearing arguments of both sides. Therefore, principles of equality and competitiveness in a court procedure are observed.
In the experts’ opinion, the amended law should strengthen guarantees for all participants of bankruptcy cases and punish those, who abuse rights of others. The very notion «abusing rights of individuals in the course of bankruptcy procedure» should also be clearly defined.
All bankruptcy procedures have to be made transparent so as to uphold public confidence in this process. Today information on bankruptcy procedures in many cases remains totally off the limits. Indeed, the confidentiality of such information is stipulated by clause 26 of the Law «On insolvency (bankruptcy» and this rule is effective till an enterprise is declared bankrupt by a court decision. But after a court declares a debtor bankrupt, all interested parties should get informed of the outcome of the bankruptcy procedure, of its results for creditors of the third, fourth and fifth orders. They have to be informed whether personnel have been paid wages and whether a current debt has been liquidated. The Federal service on financial rehabilitation and bankruptcy is trying to make such information more accessible.
«We intend to make amendments to the Law and revise authorities of the arbitration manager» Tatyana Trefilova says. «Today a private businessman is managing financial flows and property of the third parties, who never entrusted him with these assets and who in fact are deprived of the right to participate in the procedure. The control over an arbitration manager is limited. He practically does not bear any responsibility for wrong decisions. In my opinion, requirements to arbitration managers should be toughened as it was done in the U.K. in the years of Margaret Thatcher. Choosing arbitration managers should be more careful».
There are proposals to change the whole procedure of appointing an arbitration manager. Today he is appointed by court on the suggestion of a creditor, who filed a bankruptcy suit. There is a danger that a manager will act in the interests of this creditor only.
The new draft law significantly increases responsibilities of an arbitration manager. In particular, after being appointed an arbitration manager he should provide «a guarantee of his responsibility in the amount of no less than 5% of a debtor’s balance sheet assets as of the last report date before starting the bankruptcy procedure». It might be an insurance policy or any other liquid guarantee. And its liquidity should be proved in creditors’ committee.
An arbitration manager, who, as a rule, works with a team of 8 or 10 people, has a duty to come to know an enterprise in detail, to conduct consulting and financial analysis. After all this he should try to find the best way to bring an enterprise out of crisis. This is a key task. And if it is successfully accomplished, then, the number of bankruptcies will undoubtedly begin decreasing.
»Money will come only, when the system of relations with creditors is well established and the institution of insolvency becomes one of the important factors in a stable economic development. I agree with those, who think that exactly the legal base of insolvency and bankruptcy secures predictability of risks for creditors investing their moneys in developing the economy», Tatyana Trefilova stresses.