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Effective Bankruptcy’s Prospects in the Russian Legal Framework: Preserve or Eliminate

Prospects for effective bankruptcy procedures in the Russian legal framework were on the agenda of a panel discussion at the VI St. Petersburg International Legal Forum.

The discussion was moderated by Sergey Gavrilov, Chairman of Property Committee at the State Duma of the Federal Assembly of the Russian Federation, and the panelists were Sidney Brooks, Former Federal Bankruptcy Judge at the United States Bankruptcy Court for the District of Colorado, Alexey Guznov, Head of Legal Department at The Bank of Russia, Sofia Lebedeva, Head of Legislative Drafting Division at the Agency for Housing Mortgage Lending, Stephan Madaus, Professor of the Chair for Civil Procedure and Insolvency Law at the Martin Luther University of Halle-Wittenberg, Rustem Miftakhutdinov, Associate Professor of the Department of Entrepreneurial and Corporate Law at the Kutafin Moscow State Law University and former Judge of the Supreme Commercial Court of the Russian Federation, Mikhail Sukhov, Deputy Governor at The Bank of Russia, Konstantin Chekmyshev, Head of Bankruptcy Directorate at the Federal Tax Service of the Russian Federation, and Aleksey Yukhnin, Director of the Development Projects at the Interfax Information Services Group and Director at the Center of Bankruptcy Problems.

The panelists discussed why bankruptcy procedures proved inefficient in reestablishing the debtor’s solvency, spoke of delayed entry to bankruptcy, and debtors’ prejudices toward bankruptcy caused by the lack of effective protection from creditors.

According to Rustem Miftakhutdinov, Associate Professor of the Department of Entrepreneurial and Corporate Law at the Kutafin Moscow State Law University and former Judge of the Supreme Commercial Court of the Russian Federation, “our challenge now is to motivate the debtors to apply for bankruptcy at an early stage, when they still have something to restore and to restructure. The purpose is to make them declare. Why don’t they declare? Because there is a breach in the current system of public order, which makes any debtor applying for bankruptcy fall under the creditors’ control. They exercise an exclusive right to determine the debtors’ future. Therefore, any attempt to establish administrative or criminal liability for failure to seize the justice proves vain, as the debtors know all too well that they would be left behind, deprived of decision-making power, and lose everything. Predictably enough, the debtors try their best to avoid such kind of procedure.”

The panelists also discussed the efficiency of the Russian bankruptcy law, reviewed different suggestions for extending the toolkit of bankruptcy prevention, and considered different approaches to rehabilitation. Stephan Madaus, Professor of the Chair for Civil Procedure and Insolvency Law at the Martin Luther University of Halle-Wittenberg, shared his country’s practice.

 “Germany is constantly reviewing and amending its bankruptcy law. Any business may be saved from bankruptcy if the business model is still effective and the business ideas able to bring profit. According to the German law, the debtor’s assets remain with the initial legal entity, while the exemption from repayment may only be granted to the new owner. Another restructuring option is as follows: the owner keeps possession of the assets while the exemption from repayment is achieved through an agreement with the creditors,” Mr. Madaus said.

According to Sidney Brooks, Former Federal Bankruptcy Judge at the United States Bankruptcy Court for the District of Colorado, bankruptcy law should be country-specific and adapt to every country’s business practices. “Every country needs its own system that should respect its business culture and legal traditions,” Mr. Brooks explained.

The panelists also spoke of bank bankruptcy, making suggestions about possible legislation changes in this area. According to Mikhail Sukhov, Deputy Governor at The Bank of Russia, the existing responsibility for unfair banking practices should be complemented with property liability.

 “The unfair bankers database contains over 5 000 names. While losing their positions in banking institutions, they would still get the full amount of their deposits. This is how our legislation works. Therefore, in order to adjust our bankruptcy law, we should eliminate this injustice and increase property liability for those who drive banks into bankruptcy,” Mikhail Sukhov added.

According to the panelists, the current Russian bankruptcy law states that the debtors lose their decision-making powers, and the control of assets is transferred to the creditors. “It is reasonable though to keep honest debtors into possession, as they neither negotiate against the creditors, nor move out assets. Why shouldn’t the creditors trust them? However, in this country they must sink or swim on their own. I doubt that a third-party executive would take the same interest in the business as the owner,” Rustem Miftakhutdinov noted