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Insolvency as Rehabilitation: Implementation of Rescue Culture

Who can be declared bankrupt and how does it happen? What are possible proceedings and their pitfalls? What is the role played by financial restructuring in this system? Those were some of the issues discussed by experts at the 3rd Insolvency Forum held as part of the SPILF.

The debate was moderated by Evert Verwey, Co-opted Director, Co-chair of the Eastern European Countries’ Committee at INSOL Europe and Council at Clifford Chance LLP, and Emmanuelle Inacio, Co-chair of the High-Level Course on Insolvency at INSOL Europe.

The expert panel featured Carrie James, Vice-President of the Insolvency Practitioners Association and Director of Benedict Mackenzie; Artur Trapitsyn, Board Member of the Russian Union of Self-Regulated Organizations of Arbitration Managers and Chairman of the Self-Regulated Organization of Arbitration Managers Merkuriy; Eduard Olevinskiy, Head and Advisory Council of the Russian Union of Self-Regulated Organizations of Arbitration Managers, and Cristina Fussi, Co-Chair of the Insolvent Financial Institutions Subcommittee at IBA Insolvency Section and Partner at De Berti Jacchia.

The discussion was led by INSOL Europe. “Insolvency is more than just an empty bank account, a case which actually only falls under one jurisdiction. It is something more complicated, especially if placed in an international context. Therefore, we should examine different systems beyond the national one, to understand how they work. That is exactly what we do at INSOL, through setting up a unified platform”, the moderator Evert Verwey emphasized, adding that his organisation counted 1250 members from 50 countries in Europe and other continents.

The current practice of France was presented by Emmanuelle Inacio, Co-chair of the High-Level Course on Insolvency at INSOL Europe. “France offers two formal collective proceedings, reorganisation and liquidation. A debtor must apply for either reorganisation or liquidation when he is insolvent for less than 45 days. The proceedings may also be requested by creditors or public prosecutors. Indeed, if the continuity of the business is impossible, it is for the liquidators to put an end to its activity and liquidate it as a company through selling out the remaining assets either as a whole or asset by asset, or else by branch. This case implies that a liquidator is appointed by the Court, and the debtor remains in possession of no asset”, she noted.

The UK experience was presented by Carrie James, Vice-President of the Insolvency Practitioners Association and Director of Benedict Mackenzie. “We have different proceedings falling under two bases. There are corporate liquidation proceedings, i.e. final proceedings that are bringing a company to an end. And there are those that are driven by the companies, when they take action to place themselves into liquidation. Also, we have processes involving creditors who take action, or involving the courts. These are proceedings that have no rescue ability. However, aside from that we also have rescue proceedings that are outside the insolvency proceedings”, the expert said.

“In terms of the rescue proceedings, we have administration, which is a core process, aiming at recovering the business and deal with a creditor pressure. A moratorium is compulsory throughout the core process. We also have companies’ voluntary arrangements including those on management procedures, or arrangements with creditors. It is a voluntary agreement containing some proposals to be advanced and agreed by the debtor. Here, the company continues to trade, and the practitioner just reviews that the company is continuing to meet its obligations. There are also special regulatory proceedings within the insolvency law, providing for the rescue of companies”, Carrie James added.

The panel also discussed Russian experience. Artur Trapitsyn, Board Member of the Russian Union of Self-Regulated Organizations of Arbitration Managers and Chairman of the Self-Regulated Organization of Arbitration Managers Merkuriy, shared some statistics with the panelists. “13,117 Russian companies went bankrupt in 2018. 19 rescue proceedings were launched in Russia in 2019. Even if we add other recovery proceedings, they will only total to 2%. For instance, bankruptcy administration went down to 297 cases against 395 in 2017. As for voluntary settlements, we have only had 7 since early 2018. In fact, those proceedings are rarely successful. Therefore, just a few are launched and nearly zero succeed, which is inferior to the margin of error”, the expert underlined. He went on to say that nobody was interested in those cases, neither insolvency practitioners, nor creditors nor even debtors.

Eduard Olevinskiy, Head and Advisory Council of the Russian Union of Self-Regulated Organizations of Arbitration Managers, also shared his views. “I believe that pseudo-rescue procedures aiming at saving the debtor’s business, do face some issues here. For instance, within receivership the debtor’s estate may be dealt with through the replacement of assets. However, the Supreme Court has warned us on several occasions that this proceeding may not be applied to socially important assets. They say an essential criterion to be met is that the debtor should continue its business activity. Therefore, only the assets that are necessary and sufficient for the debtor to continue their business activity, may be subject to replacement. Put aside the issue of safeguarding the rights of both the debtor and its supervising entities, the effective rescue of a company is often impeded by other circumstances. One of them is the requirement to re-apply the added value tax once the assets have been disposed of, which increases the budget’s receivables from the debtor by 20%. Actually, the only way to cut down the owner’s rights is through the receivership proceeding. Within the external management, the owner must approve the issue of additional shares, and consent to any substantial asset disposal, the only exception being the receivership proceeding”, the speaker concluded.

Wrapping up the debate, the moderator expressed his hope that other countries’ experience would be useful for the participants, so that they could improve their own practice by learning from others.

The 3rd International Insolvency Forum is being held as part of the 9th St. Petersburg International Legal Forum, serving as an unrivalled platform which brings together insolvency professionals from around the world. It festures executive government officials, lawmakers, judges, court-appointed receivers, attorneys, academics, entrepreneurs, and envoys from numerous international institutions involved in matters of insolvency.