Threes a Charm Russia Adopts Third Bankruptcy Law in 10 Years

<p>Like the rest of the world's new democracies and emerging market economies, Russia is
trying to develop a body of new law to promote human rights and foster economic
growth. And to a significant degree, it is succeeding.

</p><p>Among the many new—and to them, novel—property, commercial and business laws,
Russia is adopting a third version of its home-grown bankruptcy law. After the
confusing and ineffective first bankruptcy law of 1992 and its much improved
successor of 1998, "Bankruptcy a la Russé 2002" is a much better version
still. The new Russian bankruptcy law—about to be approved by the Duma—tries to remedy
the most glaring problems of the existing bankruptcy system. Some of those remedies
include the following:

</p><p>The new law will eliminate the far-too-easy and automatic procedure for a single
creditor initiating an involuntary bankruptcy against a solvent debtor. Today, a single
creditor owed about $1,600 that is 90 days overdue can force a company into
bankruptcy. In addition, it can do so no matter how large or small the company.

</p><p>The streamlined, "drive-through," simplified creditors' involuntary petition process
extant today, and sometimes pliant bankruptcy judges, are a formula for great
mischief. Since 90 percent of all business bankruptcy cases in Russia today are
creditor- or government-initiated, and not voluntary cases, the problem is huge.

</p><p>After several years of watching serious creditor abuse of the bankruptcy system, which
allows creditors or competitors to hammer debtors into submission, or effectuate the
involuntary takeover of a debtor, Russian lawmakers will make it more difficult for
creditors to file involuntary cases.

</p><p>False or fraudulent, or what the Russians refer to as "fictive bankruptcy," by
business owners or its management is too prevalent and widespread. These contrived
bankruptcy practices—whereby majority owners and/or directors and officers manipulate assets
or income and expenses, or simply cook the books—allow the perpetrators to take over
the company on the cheap.They also deprive legitimate creditors, workers and others of
their rights. Like the above problem, these abuses discredit the courts and the system
immeasurably.

</p><p>Trustees (or "arbitration managers") are to be more stringently screened for
competence, ability and higher ethical standards. Transferring the organization and
oversight of trustees to self-policing, non-governmental associations, and establishing
new insurance or bonding requirements, are the tools by which the Russians intend to
accomplish this task. It is expected to improve the quality, ethics and competence
of crisis managers heretofore often seen as too inept, too inexperienced, too
unprofessional and/or too greedy.

</p><p>Judges will be given more time to consider more complex issues and additional time
to make the more difficult, consequential decisions.

</p><p>The new law will expand and guarantee the right of a debtor to contest an
involuntary petition and to appeal trial court decisions that, heretofore, have sometimes
been disastrous—and too often not appealable. Indeed, the Constitutional Court ruled
last year that the inability to appeal certain consequential decisions made by the
Commercial Court was simply unconstitutional.

</p><p>The pending legislation might also give secured creditors real security. Now,
"secured creditors" take after higher priority creditors such as those with personal
injury claims, wage claims [no limit] and trademark claims. Secured creditors now have
no right to any dedicated or specific collateral (<i>i.e.,</i> they can take only from
the debtor's general assets/proceeds of sale in the estate—in the unlikely event that
there is one after costs of bankruptcy case administration and higher priorities).

</p><p>While some might scoff at the Russians' bankruptcy law—or more specifically, its
implementation—it is basically sound and workable. Yes, it needs revision, and yes,
it needs even more even-handed, businesslike application, but the Russians have only
had a bankruptcy law for 10 years.

</p><p>In the United States, we are on our fourth bankruptcy law in more than 100
years, the last of which has undergone at least three major overhauls, and we're
facing still more changes in the near future. By comparison, the Russians are
actually doing quite well!

</p>