Date of publication: 2 January 2019
Dmitry Konstantinov, Lawyer, Head of Insolvency and Financial Restructuring
The bankruptcy procedure is currently quite ineffective in Russia: the percentage of satisfied creditors’ claims is extremely small. At the same time, in practice almost all bankruptcies are controlled, because the insolvency receivers are actually operating as persons hired by the parties to the insolvency procedure. And these two facts are, of course, closely linked.
The bankruptcy law declares that a receiver is independent in his status and acts in the interests of the “debtor, creditors and the society”. His candidacy in all bankruptcy proceedings, with the exception of supervision, is subject to approval by the majority of creditors’ votes. At first glance it looks fair, but in reality, it does not quite work like this. In most cases, the debtors have professional lenders (first and foremost banks), whose amounts of claims often require the appointment of “one’s own” receiver who, respectively, can primarily focus on the interests of the lender – the “client” and not particularly be willing to seek to satisfy the interests of all others.
Banks are usually strict in exercising control over the bankruptcy proceedings, and often they (of course, solely by coincidence) appear to be the only lenders that have their claims satisfied. Often the lenders wage wars for getting control over the creditors’ meetings during which the interested parties seek to include their claims into the creditor’s register and exclude the claims of other parties. The winner gets the opportunity to appoint his “own” receiver and to freely have any any decision adopted at the creditors’ meetings. This situation looks bizarre. After all, the parties do not select a judge – then why would they select a receiver?
Space for Abuse
According to the bankruptcy law, the settlements with creditors are carried out in proportion to a unified priority order – and the receivers cannot change this order, but the space for abuse is still left. To a great extent from the receiver it depends how the debtor’s property is to be sold: for example, he can assist the secured lender to retain the subject of a pledge and, at the same time, minimize the amount of mandatory transfers on his part to the liquidation estate. In even more shady instances, the receiver seeks to ensure the sale of the debtor’s property at an understated price in favor of the client-controlled company.
The dishonest receiver may also, subject to the instructions of the client, challenge or abstain from challenging certain debtor’s agreements, lodge or abstain from lodging a motion for bringing the controlling persons of the company to subsidiary liability, etc. Such tactics, of course, are on (and often behind) the verge of violation of the criminal law, but law enforcement bodies in such cases are very reluctant in their reaction. Therefore, even for a bona fide creditor, the main instrument in the struggle for the debtor’s property is the appointment of his “own” receiver.
Leaving Things to Chance
An insolvency receiver, even within the limits of the law, is not always appointment by a majority of creditors. In case of supervision – which is a simplified procedure – a different procedure is stipulated. In the event of a bankruptcy at the creditor’s initiative, the court shall approve the candidature proposed by the first claimant. Previously, even the debtor himself could do this. But starting from 2015, in the case of a simplified procedure initiated by the debtor, the receiver is randomly selected by an electronic system. The introduction of this rule has shown that the state understands the existence of the problem of the controlled appointment of insolvency receivers. However, the authorities were reluctant to go further – this rule does not apply to other bankruptcy procedures, although there were no objective obstacles to this.
The system of random selection has been used by the arbitration courts for many years – this is how the distribution of cases between judges takes place, and in general, it has proved itself to be effective. In my opinion, such procedure can be also used when choosing the insolvency receivers.
One can also speak about the appointment of a random manager selected from a self-regulating organization proposed by the creditor, and about the ranking of the receivers with subsequent random selection among the candidates having the same rating, as well as about the random selection of the receivers accredited to the court. The main thing to avoid the influence which may be exerted by one of the case participants onto the selection of a particular receiver within one’s own proceedings.
Selection Does Not Solve Everything
Banks are voting against the change of the currently-existing system. Officially, they refer to the total incompetence and negligence of insolvency receivers, and such assessment has been made not without the reason. But how can a civilized market of the receivers’ services be formed if most of their revenues consist of unofficial remuneration for loyalty? And should one problem lead to another?
Objections of the banks can be taken into consideration when new system of appointment of the receivers will be approved on a legislative level. There are many ways to verify the required level of the specialists’ expertise. For example, a judge who considers a bankruptcy case may verify compliance of the receiver’s experience to the complexity of the particular proceeding to which such receiver is assigned. Obviously, it will be necessary to legislatively formalize the corresponding criteria, and possibly the rating system as a whole. But this will not change the essence of the issue – the candidacies of the receivers must be submitted to the court on a random basis.
It must be admitted that the procedure of the appointment of the receivers is not the only reason for the existence of the problems related to bankruptcy proceedings. The representatives of the professional community, for example, often refer to the low level of the fixed remuneration. Now such remuneration is compensated by the receiver’s right to the interests from the funds directed at making settlements with the creditors. But hardly anybody wants to wait for the completion of the bankruptcy proceedings to receive their share of interests, so many receivers are looking for a client who could finance their activities from the very beginning. It is obvious that without the change of the interest rate of the remuneration the randomly selected experts are unlikely to become more independent from the financial standpoint.
It is understood that lenders will never receive more than the cost of the debtor’s assets. Therefore, one should not expect a full settlement with all the creditors in each bankruptcy procedure – if that were possible, there would be no bankrupts in principle. But an independent and competent insolvency receiver may act as a guarantor of the effectiveness of the competitive mass formation and its fair and equitable distribution.
In my opinion, the reform of the procedure of appointment of insolvency receivers in our country has become high on the agenda. There is no sense tightening the responsibility for formal violations and at the same time making the receivers work for one of the participants to the bankruptcy proceedings. When the appointment of a receiver and his material well-being depends on the lender or debtor, he will consider such a sponsor as a client, and sometimes even will violate the law in his interests. The only way to avoid this situation is to ensure the appointment of objectively independent receivers who will be unrelated to the participants to the bankruptcy proceedings.