Date of publication: 23 November 2017
Dmitry Konstantinov, Lawyer
Economic pragmatism: transborder bankruptcy will improve the creditors’ chances for reimbursement of monetary assets
The absence of a unified legal environment leads to the situation when the creditors’ interests are not protected at all: the bankruptcy procedure is always imposed by the courts, but the courts almost never have a transnational nature.
In June 2017 the second (in succession) all-European Act, which governs the procedure of transborder bankruptcy, will become effective in the EU – the Regulation 2015/848. In the course of two decades the transborder bankruptcy has been considered to be a trendy and popular subject, which is discussed at various levels. But in practice the subject of bankruptcy is used only as a concept in our country.
The risks for the creditors
Under the global market conditions the absence of transborder bankruptcy procedure negatively influences the competitiveness of the Russian economy. If a sizeable part of companies owns the property and does the business outside the country of their incorporation, the interests of the creditors must be equally protected all over the World. Now the situation is absolutely different. For example, for our country typical is the situation when the companies, which were incorporated in other jurisdictions, carry out their activities only in the Russian Federation. In the circumstances of the exclusively national regulation of bankruptcy the creditors of such companies may only rely on the enforcement proceedings applied in the Russian Federation, or try to initiate and prosecute the bankruptcy proceedings in other countries. In addition, the creditors do not have access to the specific instruments of reimbursement of assets, which is provided by the institution of bankruptcy. For example, they cannot challenge the agreements and bring the debtor’s executive persons to responsibility.
The institution of transborder bankruptcy would allow starting the bankruptcy procedure in the country where the debtor carries out its economic activities and the chances for reimbursement of monetary assets would considerably improve in such case. Ultimately, it means lesser risks for the creditors and, as a result – less expensive credit resources for the economy.
Common European environment
However, creation of a unified institution in the whole world is facing an array of problems. The bankruptcy procedure is always imposed by the court and the courts, except in rare circumstances in the field of public law, are not of a transnational nature. This is why the bankruptcy procedure, which was commenced in one country, has no compulsory effect in another country. It is understood that in all the countries a decision upheld by a foreign court may be acknowledged and enforced, but a corresponding procedure may take years and requires engagement of substantial financial resources. In addition, it is far from always when the court of one country acknowledges the court acts upheld in another country, especially if such court is convinced that such particular matter was under its jurisdiction. This situation is shaping up as regards to the transborder bankruptcy – even if the laws of one country allow opening a bankruptcy procedure under the place of location of a debtor’s property, the court located under the place of incorporation of a certain company will be reluctant to enforce the bankruptcy court order.
These difficulties lead to the situation when, de facto, realization of the regime of transborder bankruptcy is possible either on the basis of two-party international agreements, or within the frames of the existing legal environment represented, for example, by the all-European law. As early as in 2001 the EU Regulation No. 1346/2000 was passed, which introduced a notion of “centre of main interests” due to which it has become possible to lodge a bankruptcy petition in any EU country where the debtor has its business interests. The bankruptcy case initiated in a EU country will be valid and effective in any other country of the EU. It must be said, however, that even within the unified Europe application of this mechanism has not started immediately and has not always been successful. Yet, gradually the transborder bankruptcy has become gaining popularity. 15 years later the new Regulations were passed which, in particular, allow application of the transborder bankruptcy rules towards rehabilitation and hybrid procedures and regulated cooperation between the courts located in different countries.
But all these options are not available for our country. The Russian Federation is not a member of the EU and does not aspire to acquire this status. Does it mean that the only thing left for us is to witness formation of the single bankruptcy environment? If we limit our options by the approaches in our country towards the international law, transborder bankruptcy in Russia will remain to be an exceptionally theoretical concept. Even with the closest partners – Belarus and Kazakhstan – Russia is negotiating no international agreements, which are similar to the European regulations. And there is no use even to speak about the agreements with the European countries (where the major part of foreign legal entities doing their business in Russia was incorporated).
But if the regime of transnational bankruptcy may have a positive economic influence, it is better to overcome the aforementioned obstacles. Nowadays there are no difficulties in the development of the international agreements with CIS countries, which would make it possible to establish a regime of the transnational bankruptcy, at least with the nearest neighbours.
Also there are no pivotal obstacles for similar agreements with other EU countries or with the EU in general. If we disengage ourselves from the political component of this matter, the dissemination of the EU Regulation in a country, which is not a member of the EU, is totally possible. It must be said that there is abundance of such examples. For example, Norway and Switzerland are not the members of the EU, but have a number of agreements concluded with the EU, which make it possible to apply the norms of the European law to these countries. This is why Russia, acting in accordance with the considerations of healthy economic pragmatism, may consider a possibility of application in its territory of the all-European rules of transborder bankruptcy.
But it is also necessary to understand that transborder bankruptcy will not allow the creditors to get more than in the case of internal Russian bankruptcy. Transborder bankruptcy is only able to level up the effectiveness of the procedures in cases when the debtor is represented by a Russian company and a foreign entity. Unfortunately, the national institute of bankruptcy can hardly be considered effective. Percentage amount of the creditors’ claims satisfied is very low and this problem will have to be solved concurrently with the introduction of the procedure of transborder bankruptcy.