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A logical extension of the policy of government expansion has been made by the introduction of a simplified procedure for the reappointment of an arbitration manager that narrows debtor rights. Effectively, the legislators proposed a mechanism for appointing an administrative (external, receivership) manager bypassing the general procedure for his approval that envisages the debtorТs right to veto one of the candidates. The adoption of such norms simplifies the procedure of approving a candidate for arbitration manager in situations when the majority of creditors vote for the same candidate. The adoption of this mechanism in July 2006, its retroactive application and its use in the Yukos bankruptcy proceedings does not appear to be a coincidence1.

During the court hearing at the Moscow arbitration court regarding the bankruptcy of the Yukos oil company (case № А40-11836/06-88-35Б dated August 4, 2006; the Law was adopted on July 18, 2006), a stipulation was made for the approval of a temporary administrator in the capacity of bankruptcy administrator based on the resolution by the creditorsТ meeting adopted in accordance with Article 45 of the Federal Law on Insolvency (Bankruptcy). By then the indebtedness of Yukos amounting to US$482 million had been assigned by the consortium of foreign banks to the state-controlled Rosneft joint stock company that, jointly with the tax authority Section Institutional Problems Finally, note should be taken of the prorogation in December 2004of the validity of the Federal Law on the Insolvency (Bankruptcy) of Natural Monopolies dated June 24, 1999, until July 1, 2009, which signified the continued application of a different principle of determining insolvency criteria for natural monopolies in the fuel and energy sector, the so-called payment unfeasibility principle1. For such companies, special rules have remained in force for all stages of bankruptcy proceedings that are aimed at ensuring the preservation and integrity of all property of fuel and energy sector natural monopolies and envisage the mandatory participation of fuel and energy sector management agencies in the proceedings (article 7), as well as more stringent requirements for the arbitration manager (article 15).

Other innovations in bankruptcy legislation for the period had more limited reach and were aimed at protecting the interests of specific legal subjects within the bankruptcy process, such as granting preferential treatment to local government agencies facilitating the transfer to such agencies of social sphere assets following bankruptcy and the introduction of legal mechanisms for enhanced protection of the interests of mortgage-backed securities holders.

Thus between 2003 and 2008, legal regulation of bankruptcy evolved to ensure, at the legislative level, the integrity of significant state-controlled assets, while at the same time the development of necessary changes in the interests of other market participants and the development of the institution of bankruptcy as a whole were both stagnating.

The global economic crisis put a stop to government inertia in solving the outstanding issues related to bankruptcy and became an external stimulus for long-overdue changes. The increased legislative activity in this area was particularly spurred by the growth of debt portfolios of the largest Russian banks, as well as by the practice of asset-backed lending to the largest industrial enterprises, many of which experienced a deterioration in their financial condition, and by the expected increase in the number of corporate bankruptcies in 20092010.

The government decision to support the banking sector, which is de facto more than 50% state-controlled, and the emphasis on ensuring its stability, including doing so by creating the conditions for ensuring low levels of bad debt in bank loan portfolios, as well as widespread payment defaults on loan agreements have defined the focus going forward of developing bankruptcy legislation that is centered around the notion of creating real conditions for satisfying creditor interests and increasing the protection of creditor rights.

The implementation of this concept translated into the following changes instituted by state laws No. 296-ФЗ dated December 30, 2008, On Amendments to the Federal Law on Insolvency (Bankruptcy) and No. 73-ФЗ dated April 28, 2009 On Amendments to certain legislative acts of the Russian Federation:

1. The exclusive right of the creditor assembly to elect the arbitration manager has been instituted, along with the previously envisaged possibility of electing a self-governing body of arbitration managers. At the same time, the procedure of appointing the arbitration manager now allows for a single candidate to be proposed by the creditors (three candidates knee were required previously, and earlier still the debtor had the right to veto one of those).

representatives, held the majority vote at the creditorsТ meeting. The company assets were subsequently sold by the Yukos arbitration manager at an estimated substantial discount to market price, and more than 80% of these assets were transferred under direct or indirect government control.

See V. Vitrianski, Insolvency (bankruptcy) specifics for natural monopolies in the fuel and energy sector ( RUSSIAN ECONOMY IN trends and outlooks 2. The liability of the arbitration manager has been increased. Failure to carry out his duties, in full or in part, including the duties envisaged by federal standards, can be the basis for removing the arbitration manager by the arbitration court based on a claim by the bankruptcy case participants. Furthermore, the procedure of disqualifying an arbitration manager has been stipulated in detail.

3. The system of remuneration for the arbitration manager and specialists that he may involve in the bankruptcy proceedings has been changed.

The proposed mechanism of remuneration payments for the arbitration manager is aimed at incentivising the arbitration manager to act in the interests of creditors. It envisages fixed compensation for the arbitration manager of between RUR 15,000 and RUR 45,000 monthlydepending on the stage of the bankruptcy process, and the payment of additional remuneration decided by the creditors. Such additional remuneration amounts to:

- Compensation ranging from 4% (for total assets valued at less than RUR 250,000) to RUR 301.500 plus 0.001% of the total value of debtor assets in excess of RUR 1 billion (for total assets valued at more than RUR 1 billion) at the supervision and financial rehabilitation stages;

- 8% of the amounts designated for satisfying the claims or registered creditors in case the bankruptcy proceedings are terminated, or 3% of the increase in value of the debtorТs net assets during the external administration period in case the debtor is ruled bankrupt and receivership proceedings are initiated at the external administration stage;

- compensation ranging from 3% to 7% of the total amount of the satisfied claims of registered creditors.

The amount that the bankruptcy administrator can designate as payment for specialist services is also stipulated in detail and, depending on the total book value of debtor assets, can range from 10% for total assets valued below RUR 200,000 to RUR 2,995,000 plus 0.01% of the total value of debtor assets in excess of RUR 1 billion for total assets valued at more than RUR 1 billion. Furthermore, the legally stipulated remuneration for such services, as well as the amounts paid for the services of specialists involved by the arbitration manager can be deemed unjustified based on an appeal by bankruptcy case participants if such services are not linked to the specific object of bankruptcy proceedings or to the responsibilities of such agents, or if the amount of remuneration for such services is Уclearly disproportionate relative to the expected resultsФ.

4. The responsibilities of arbitration managers with regard to informing the participants of bankruptcy proceedings have been increased: creditors must be informed about transactions and actions that lead or may lead to third party legal liability, as well as about any evidence uncovered of a deliberate or fictitious bankruptcy, while government bodies must be informed about any administrative or criminal breaches identified.

5. The responsibilities and liability of the self-regulating bodies of arbitration managers have been increased.

Thus starting from 2009, self-regulating organisations have been granted accreditation rights with regards to insurance agencies, valuation specialists, professional securities market participants that carry out registration activities, as well as with regards to other entities involved by the arbitration manager when carrying out his duties in the bankruptcy process.

This amount can be increased based on a court decision following an application by the bankruptcy case participants.

Section Institutional Problems Furthermore, such agencies are put in charge of developing standards and regulations governing the professional activities of arbitration managers and monitor compliance with such standards and regulations. These agencies are also entrusted with monitoring the compliance of arbitration managers with the mandatory liability insurance requirements.

Mandatory disclosure by arbitration manager self-regulating bodies has been instituted concerning their activities, including the use of compensation funds; their managing companies; any instances of disciplinary measures applied to arbitration managers (for more details on the issues of arbitration manager self-regulation, see Section 3.2);

6. The Law has stipulated procedures for the use by arbitration manager self-regulating bodies of compensation funds that are utilised to make payments to debtors, including the procedure of making claims for compensation payments, timing deadlines for compensation payments; investment terms for compensation fund assets; responsibilities of the managing company; the transfer of compensation fund moneys to a national association in case of elimination of the self-regulating organization from the register.

7. State control over the activities of arbitration manager self-regulating bodies has been increased.

Control functions that were previously carried out by the Federal State Registration, Land Register, and Cartography Service (formerly called Rosrtegistratsii), were strengthened by granting it additional powers:

- the right to start legal proceedings for administrative breaches against arbitration managers, arbitration manager self-regulating bodies and/or their representatives, and the right to review such cases or remit them for review by arbitration courts;

- the right to include non-commercial organization records into the general state register of arbitration manager self-regulating bodies and the right to keep such a register;

- the right to establish the status of an association of arbitration manager self-regulating bodies as that of a national association, etc.

In case of non-compliance by arbitration manager self-regulating bodies with the directives of monitoring and controlling agencies aimed at correcting deficiencies related to setting standards and developing regulations or related to reviewing complaints about the actions of their members, the representatives of the government agency must file an application at an arbitration court for the elimination of such an organisation from the general state register.

8. Strict requirements have been established with regards to the mandatory liability insurance contracts signed by arbitration managers. The objects of mandatory insurance, insurance events and insurance risks for such contracts have been stipulated along with the insurance payment procedures.

9. Measures have been taken to counteract the transfer of assets.

The focus on maximizing the satisfaction of creditor claims has led to the implementation of mechanisms for contesting transactions aimed at transferring debtor assets, the so-called Уsuspicious transactionsФ and Уtransactions leading to preferential treatment of one of the creditorsФ. In essence, the state has taken legislative measures to eliminating bankruptcy Уgrey areasФ for the first time in five years.

10. The concept of liability for debtor owners has been established.

For the first time, in addition to the above entities, subsidiary liability has been established for the real owners, Уentities controlling the debtorФ, understood as persons or entities that have or have had, within the two years prior to the acceptance of a bankruptcy claim by an RUSSIAN ECONOMY IN trends and outlooks arbitration court, the right to issue instructions that are subject to mandatory execution by the debtor or can otherwise determine actions by the debtor1.

The practical possibility of establishing liability and pursuing legal action against such persons or entities is doubtful due to the impossibility of establishing the real owners and beneficiary owners of many substantial Russian assets even in the context of criminal proceedings.

The duties of the managers and owners of financial institutions in situations approaching bankruptcy have been significantly broadened, and new types of liability have been established including a ten-year prohibition on the purchase of financial institution shares amounting to 5% or more of total stock and a three-year ban on taking top management positions in financial institutions.

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