• Problems of compromising on bankruptcy matters (discussion paper)
  • September 20, 2008 | Author: Eduard U. Olevinsky
  • Law Firm: Olevinsky, Buyukyan and Partners, The Law Office - Moscow Office
  • The legislator has paid special attention to the individual issues of participants in a bankruptcy case when an amicable settlement procedure is applied.

    In particular, further expansion of legal regulations should be expected due to one of the most significant changes related to amicable agreement – enfranchisement for creditors on compulsory payments to the budget. This innovation is followed by equaling them with scheduled creditors in priority order of satisfying their demands.

    According to clause 8 of Plenum Resolution No. 4 of the Supreme Arbitration Court of the Russian Federation as of 04.08.2003, upon the bankruptcy of a debtor, a priority order and a legal position of lien creditors shall be applied, regulated by the Bankruptcy Act rather than the Civil Code of the Russian Federation. The opportunity to change the terms and order of compulsory payments is specifically provisioned by Article 156 of the Bankruptcy Act 2002. However, until the appropriate tax and budget legislation is amended, the terms of amicable agreement with regard to compulsory payments to budgets of different levels are restricted to six months of deferment or payment by installment (Article 64 Tax Code of RF).

    If one adheres to the viewpoint of the equality of amicable agreement terms for all creditors to be satisfied in monetary form, such limits in practice bring the possibility of a rehabilitation procedure to naught. Such a viewpoint exists due to provisions of the new Law on priority and order of satisfaction of peer creditors (Articles 63, 81, 84, 121, 122, 134 and clause 3 of Article 142) and voidability of a debtor’s deal, involving the satisfaction of individual creditors (Article 103).

    However, the author adheres to another point of view - terms of amicable agreement for scheduled creditors to be satisfied in monetary form and for authorized bodies may vary provided that there are no objections on the part of the creditors, who whether voted against or did not participate in voting on adopting a decision by the meeting of the creditors on the execution of an amicable agreement.

    An amicable agreement is a procedure used to terminate the bankruptcy proceedings through attainment of agreement between a debtor and creditors that substantially differs from the purpose, for example, of bankruptcy proceedings used for the ratable satisfaction of creditors’ requirements. This is supported by the exception of the regulation on inadmissibility of such difference in terms of an amicable agreement as provided for by Article 127 of the Bankruptcy Act 1998.

    Another innovation, the non-monetary satisfaction of creditors’ requirements, is now accepted only under the individual agreement of the creditors. Since parties to an amicable agreement can be creditors with different concerns, even a uniform non-monetary satisfaction for all may have a completely different value for each of them, which cannot be said about the monetary form. Therefore, this provision should be acknowledged as progressive.

    This provision cannot be regarded as the legislator’s aspiration to change the order by which a decision is adopted on executing an amicable agreement from ‘demand-driven’ voting to ‘head’ voting, when each creditor enjoys an equal vote despite of the claim size. In order to prevent small creditors being forced by large ones into an amicable agreement, other history-proven and practicable methods should be used, such as increasing the number of creditors’ votes required to adopt a decision on executing an amicable agreement. In pre-revolutionary Russia, for example, such a limit constituted three-quarters of total debts.

    The new Bankruptcy Act is based on the assumption that an amicable agreement is a transaction. Therefore, in cases when an amicable agreement includes provisions on large transactions with a vested interest, it requires preliminary agreement with the administrative authorities of the debtor. However the Act does not require the presentation of documents to a court during approval of an amicable agreement, which attests the appropriate deal agreement on the part of the debtor’s administrative authorities, such as a debtor’s balance as of the last reporting date preceding the execution of the amicable agreement.

    Disclosure of the inappropriate adoption of a decision on the part of the debtor as regards the execution of an amicable agreement, which under regular conditions makes a deal voidable, after the approval of the amicable agreement in court, leaves the concerned parties only an opportunity to appeal the corresponding decision.

    Such an opportunity is an innovation in bankruptcy legislation: a decision on amicable agreement approval may be appealed by parties, which are not parties participating in the bankruptcy matter, but whose rights and legal interests are infringed or may be infringed by the amicable agreement (Article 162 of the Bankruptcy Act, Article 42, Arbitration Procedure Code of RF 2002). The new law makes no provision for invalidation of the amicable agreement.

    Scheduled creditors and authorized bodies now have the right to hold meetings of creditors on their own, if a bankruptcy commissioner avoids fulfillment of its duty to organize and hold the meeting. In addition, the consent of the temporary and bankruptcy commissioner regarding execution of an amicable agreement by the debtor is not required.

    Worthy of approval is the innovation, under which an arbitration court is entitled to approve an amicable agreement, even if the creditor’s representative went beyond its authority when signing the amicable agreement, provided that the voting of such representative in no way affected the decision-making concerning execution of the amicable agreement (clause 5 Article 158 of the Act).

    Certain difficulties are caused by application of regulations on the amicable agreement in matters of bankruptcy, executed under the 1998 Act. However, since an amicable agreement is a form of bankruptcy proceedings that start after adoption of a decision by the creditors’ meeting on execution of an amicable agreement and finish after its confirmation in court, the new Act should be applied to all stages of the said procedure accordingly.

    Therefore, participation of authorized bodies in voting on execution of the amicable agreement is required to present the meeting with information on the nature of the vested interest, if any, in that transaction, to present an appropriate decision of the debtor administrative authorities and to meet other conditions of the amicable agreement approval as provided by the new Act (Article 158).

    In general, the amendments to legal regulation of amicable agreement procedure can be characterized as improved, albeit partially.