In the autumn of 2021, Russia expects a change in bankruptcy for legal entities. While the draft law No. 1172553-7, prepared by the Government, has passed only the first reading, the second and third will be held in the autumn, the public discussion procedure will probably be applied, since the law will be significant for business. Changing the bankruptcy of legal entities will shorten the terms and simplify the bankruptcy procedure. But the main purpose of its adoption is to protect the interests of both businesses that are in debt restructuring or bankruptcy proceedings, and creditors. The law, after its adoption, will be called “On Restructuring and Bankruptcy”.
Changing bankruptcy for legal entities — Review of Draft Law No. 1172553-7
Bankruptcy legislation in the Russian Federation was adopted in 1998 and, according to many experts, it is hopelessly outdated. Since 2018, it is planned to change it comprehensively, but so far the bill submitted to the Duma in the spring of 2021 has been able to overcome only the first reading.
Also, the profile committee of the State Duma of the Russian Federation on natural resources, property and land relations has already expressed its opinion.
It is worth noting that in the financial and economic justification, significant attention is paid to the digitalization of this economic institution as part of the overall strategy to increase the transparency of the economy.
It is planned to create a Unified federal Register of bankruptcy information, a state information system for disclosure of information on the formation and implementation of bankruptcy estate in the field of bankruptcy, as well as a system for registration, accounting and analysis of information about arbitration managers.
But this task is not the main one, it is necessary to speed up and simplify bankruptcy and increase the percentage of satisfaction of creditors’ claims.
Today, there are several stages in the bankruptcy procedure, these are:
- observation;
- financial recovery;
- external management;
- bankruptcy proceedings.
It also provides for the possibility of concluding a settlement agreement between the debtor and creditors. When the court approves the debt repayment schedule, the procedure itself is terminated.
In practice, most of the enterprises recognized as insolvent are in such a depressing financial condition that in 98% of cases bankruptcy proceedings are immediately appointed — the sale of property in order to satisfy creditors’ claims.
At the same time, the Ministry of Economy, in its message on the introduction of the draft law to the State Duma of the Russian Federation, reports that in practice no more than 5% of creditors’ claims are satisfied.
The sale of assets is not transparent. It is not always clear how contests or auctions take place. The actual market value of assets is underestimated by dozens of times. At the same time, structures affiliated with the owners of the company often become buyers.
Changing bankruptcy for legal entities solves the following tasks:
Reduce the number of bankruptcy stages to two – one recovery and one liquidation procedure.
- Reducing the number of procedures will reduce the duration of the bankruptcy process. If it is possible to restore the solvency of the debtor company, it will be possible to file an application for debt restructuring with the arbitration court.
If it is satisfied, a restructuring plan is approved for four years with the possibility of extension. This makes it possible to increase the probability of saving the business. At the same time, the possibility of concluding a settlement agreement with creditors at the stage of restructuring is fully preserved.
- Streamline the process of selling property;
By using the unified register of realizable property, changing the order of its sale, reducing the stages of implementation, excluding the use of the bidding mechanism in the form of a public offer.
- Create an additional mechanism for monitoring intentional bankruptcies;
By giving additional powers to one of the state bodies, at the same time they will control the bankruptcy of companies with more than 25% of shares or shares owned by the state or those whose shares exceeded 100 million rubles.
- Reduce the time for consideration of bankruptcy cases;
Now the average term for the Russian Federation is 2.5 years. In the USA, according to the Ministry of Economic Development, it is about a year and hardly more.
- Create a mechanism to ensure commercial secrecy by considering the case in a closed court session.
- Exclude the inclusion of persons affiliated with the company in the list of creditors;
This should help reduce the number of controlled bankruptcies. At the same time, if the company’s shareholder is the state, regional or municipal authorities, this requirement does not apply to them, they will be included in the list of creditors.
- To restore order in the work of arbitration managers;
Now the candidacy is offered by the creditor who first filed an application for recognition of the debtor as bankrupt, after the adoption of the law, all creditors can offer candidates, the one who has a higher rating will be chosen.
- To try out a new procedure under which the assets of the company and its shares are implemented in the process of bankruptcy proceedings with the preliminary cancellation of debts in accordance with the procedure established by law.
- Transfer tax debts to the second stage of creditors;
According to the Constitutional Court of the Russian Federation, a taxpayer does not have the right to dispose of that part of his property that is subject to a contribution to the budget, it can be considered as secured by a pledge.
- To introduce a mechanism of subsidiary liability of businessmen and arbitration managers for the debts of companies.
The law will be put into effect no earlier than a year after its actual adoption. This is due to the need to create new information resources to ensure its implementation.
The debt restructuring process should make it possible to negotiate with creditors during the judicial review of the dispute, to obtain a deferral or installment repayment of obligations. The Ministry of Economy of the Russian Federation prepared the project under the leadership of Deputy Prime Minister A. Belousov.
To date, the project has not been proposed for public discussion. Usually at this stage, regulations that significantly affect the interests of business change, and regions often make their own amendments.
At the first stage of discussion, the bill did not cause approval of the community of arbitration managers and business in general, it was rejected at the first stage by the State Legal Department under the President of the Russian Federation. Interestingly, the discussion of the bill at the level of the president and the government was held in a closed mode for the public.
How is the simplification of the bankruptcy procedure planned?
While the law exists only at the level of the first reading and the opinion of the expert community has not been received, it is difficult to predict in what form it can be adopted.
It is permissible to assume the following consequences of changing the bankruptcy procedure:
- approval of the proposed plan to reduce the number of recovery procedures;
- creation of information bases that allow the sale of property at a fairer price during the bankruptcy proceedings (liquidation procedure), which will help to increase the percentage of satisfaction of creditors’ claims.
But the fact that the debt restructuring period is, in accordance with the draft law, 4 years cannot guarantee an overall reduction in terms. An extremely important innovation is the complication of the procedure for the selection of arbitration and bankruptcy managers by the court.
Based on their experience, they will be assigned certain evaluation points that will influence the choice of the arbitration manager.
Changing bankruptcy for legal entities — what does the legislator want to achieve?
The course on the general digitalization of all public processes also touched upon the bankruptcy procedure. In parallel, procedural issues related to the acceleration of bankruptcy and faster satisfaction of creditors’ requests are being resolved. Special attention is paid to the interests of the state and employees.
Thus, one of the participants in the bankruptcy process necessarily becomes a representative of the labor collective.
The main goals of making changes from the point of view of the Ministry of Economic Development of the Russian Federation and the expert community:
- simplify the bankruptcy procedure for legal entities by reducing the total number of procedures, accelerate the timing of financial recovery and repayment of creditors’ claims;
- to ensure the possibility of debt restructuring, saving the company from the need for liquidation, while maintaining production;
- to make the process of property sale transparent and more profitable for debtors and creditors;
- reduce the number of abuses by arbitration managers, increase the average cost and speed of asset sales, the level of debt repayment;
- to ensure the sale of property at the stage of bankruptcy, and not at the stage of enforcement proceedings, which will more fairly satisfy the interests of creditors in compliance with the payment queues.
Today, the stages of the wellness type are practically not used. As a result, the company comes to bankruptcy proceedings practically without a property estate. The affected party is most often employees, in terms of non-payment of wages, and the state, in terms of tax debts.
The law also assumes the transfer of tax debts from the third stage to the second, which will increase the likelihood of their payment.
The government assumes that the proposed measures will partially solve the problem of mutual debts that reduce the overall economic performance of the country, increase budget occupancy, and reduce the number of salary arrears.
At this stage, until all the comments have been received and the third reading in the Duma has not been passed, the following conclusions can be drawn from the study of the law:
- the number of controlled bankruptcies will be significantly reduced when this mechanism is used exclusively for the withdrawal of assets from the company;
- arbitration managers and their self-regulating organizations will work better, and control over their activities will increase;
But at the same time, if there are about 4 thousand specialists in this field in the country now, increasing the requirements for their qualifications will reduce the number of arbitration managers by 70-80%. This causes an extremely negative reaction from the professional community.
- the total number of bankruptcy procedures in the country and criminal cases initiated in connection with them will decrease, which will reduce the overall level of economic crime;
- we should expect resistance to the adoption of the law on the part of interested participants – business, regional authorities, self-regulatory organizations of arbitration managers;
- a large number of jobs will remain due to the rescue of the business, and not the sale of assets.
It can be summed up that there will be more opportunities for bona fide companies to keep business. At the same time, bona fide debtors will be able to influence the choice of arbitration managers.
Разрабатываем Стратегии для собственников бизнеса в целях оптимизации группы компаний, решения нестандартных задач и продажи активов. Оказываем услуги по сопровождению сделок M&A, управлению непрофильными активами и проектами в целом.
