Prospects and problems of debt collection through bankruptcy in Russia

13.05.2014 Prospects and problems of debt collection through bankruptcy in Russia

Pre-judicial and judicial procedure of debt collection

In the most general view debt collection represents a complex of measures, directed on debt return, performance of not fulfilled obligations. Various concrete measures are enter into this complex, including

  • 1) pre-judicial regulation of debt or sometimes called claim work with debtors;
  • 2) judicial debt collection;
  • 3) execution of the judgment on collecting.

Pre-judicial regulation of debt usually includes collection of information about the debtor, conducting claim correspondence, negotiations, and also other measures which allow repaying a debt, without resorting to the help of the state.

Usually efficiency of such measures is rather high and reaches 50% and more.

Judicial debt collection means giving to court claim statement about debt collection. Resolution document is the judgment which orders one person to execute something in favor of other person, in particular, to return money.

Judicial debt collection is effective in case if between business entities there is a dispute about existence and debt size.

But often debtors do not pay not because they dont agree with the debt size but because as a result of these or those reasons cant repay a debt, or do not want to return it.

In this regard there is a need of compulsory execution of the judgment.

Compulsory execution of judicial acts according to the Federal law of 02.10.2007 No. 229-FZ Ob ispolnitelnom proizvodstve is assigned to Federal Bailiff Service. Direct implementation of functions on compulsory execution of judicial acts is function of bailiffs-executors.

Practice shows that activity of Federal Bailiff Service and bailiffs-executors isnt rather effective. Therefore important role in this process belongs to the creditor or his representative, who by his actions forces the bailiff-executor to pay attention to the debtor.

Major factors influencing efficiency of pre-judicial and judicial debt collection

One of the major factors influencing efficiency of a pre-judicial and judicial order of debt collection is time. Strangely enough, but as time goes chances to receive money back fall catastrophically.

It is caused by the following reasons:

  • possibility of ignorance of legislatively established periods, for example, term of limitation period, term of presentation of the executive document to service of bailiffs;
  • acceptance by the debtor measures of withdrawal and concealment of assets;
  • appearance of other creditors who also want to recover debt.

Quite often I am asked whether it is worth appealing to court if, as a result of pre-judicial collecting debt, money wasnt returned?

The answer to this question isnt unambiguous, however, in more than 90% cases the appeal to the court with the claim statement about collecting is expedient. It is connected not only with the possibility of compulsory collecting, but also that the judgment opens other prospects of debt collection about which it will be said below.

Moreover, there are examples when judicial debt collection isnt carried out only because of existence of some personal relations between the creditor and the debtor. And motivation usually is: «What will I tell him if I appeal to court?»

Really, the need to resort to judicial debt collection sometimes is a sign that during choosing contractors necessary test events werent held (so-called principle of reasonable discretion), the legal service made insufficiently effective contracts, wasn’t provided performance of obligations – that is those factors which speak about the insufficient organization of working process with debt.

Again, having addressed to practice, we will see that quite often the delay of debt collection process in a significant amount of cases results to bankruptcy of organization.

How it occurs? For various reasons, without having taken measures for timely debt collection, after long time it is impossible to take anything from the debtor. In accounting reports of enterprises – bankruptcy is the biggest article – it is not fixed assets or stocks, but receivables, the percent of possibility to collect which aspires to zero.

What to do in a situation when judicial collecting didnt help?

The scheme described above, in principle, has to provide debt return. But wonder how often it is possible to return money by means of these three stages? Success percent is rather high – around 50-60% on condition of timely acceptance of necessary measures.

But what to do when these measures werent taken or if pre-judicial and judicial collecting were ineffectual?

In this situation one of the few means, being at the disposal of the creditor, is bankruptcy.

Having read these lines many will tell: «Oh, bankruptcy!?», showing there surprise. Those who already faced bankruptcy – of his own organization or bankruptcy of the contractor, already probably made for themselves a conclusion on complexity and incomprehensibility of this procedure.

Really, in the professional environment trials on debt collection are considered to be not difficult (except for a number of cases) with which the beginning lawyer can cope. Meanwhile, bankruptcy is complex concept and for its successful carrying out corresponding experience and knowledge is required.

Why the creditor needs bankruptcy? And how exactly it can help to return money?

The main advantage of bankruptcy is that in procedure of bankruptcy function of the head and also the owner of business is carried out by arbitration manager. He provides safety of the remained property, reveals and returns property of the debtor, being at the third parties, from the sanction of creditors meeting realizes property and repayment of creditor requirements.

Bankruptcy for the debtor represents a serious problem. If the debtor is operating, then for him consequences of bankruptcy proceedings initiation are extremely negative and are reflected in everything – from reputation, image risks and real losses to lack of opportunity to make transactions without consent of the arbitration manager.

In this regard, as the practice shows, many operating enterprises prefer to pay off in the presence of such opportunity as soon as the creditor initiates bankruptcy procedure.

In addition, bankruptcy is the complex legal tool and allows during bankruptcy procedure make such claims, which are impossible to be made in usual economic activity. Due to such legal means the debt is paid in cases which already seemed to be hopeless.

I will tell more, now there is a change of the relation to bankruptcy and the bankruptcy. Arbitration managers will tell that now bankruptcy is not as it was before – came, saw, sold out.

Now on the first place there are legal technologies, which allow «to restore justice» and to provide formation of competitive array.

Specifics of bankruptcy as instrument of debt collection

Now I bring to your attention the list of such tools, legal technologies.

1 . One of the most interesting means is contest of the transactions made by the debtor in anticipation of bankruptcy or already during bankruptcy.

All bases, on which during bankruptcy case claims for contest of the transactions made by the debtor can be given, share on the general and special.

General bases of recognition of transactions invalid are settled by articles 168-173 of the Civil code of the Russian Federation, first of all – the bases of ostensibility and pretense of transactions, contradictions to law bases and so on.

Such claims can be applied also in absence of bankruptcy case, however, in this situation there is a restriction in number of persons who can submit such claim. In most cases, such claim can be applied by the party according to the transaction, instead of the third-party creditor who considers that as a result of the contract conclusion his rights are violated.

Special bases of recognition of transactions invalid are provided by the Bankruptcy Law:

  • a) suspicious transactions made within one year before acceptance by arbitration court of the statement of recognition the debtor insolvent (bankrupt) at unequal counter execution;
  • b) suspicious transactions made within three years before acceptance by arbitration court of the statement of recognition the debtor insolvent (bankrupt) with the purpose of causing harm to property rights of creditors (in the presence of bankruptcy signs performed gratuitous transactions, with interest, large transactions etc.);
  • c) transactions involving giving preference to one of the creditors before other creditors.

As a result of recognition of transactions invalid the property which was removed earlier, comes back to competitive array, is sold, and received money goes on repayment of creditor requirements.

2. The following, not less interesting legal means – involvement of the head and the founder of the debtor to subsidiary responsibility, that is liability for debts of the organization.

By the general rule – it is impossible to assign liability for debts of organization on the founder and the head. However, in bankruptcy procedure such opportunity can be given to arbitration manager and creditors of organization.

The bankruptcy law established some bases of involvement to subsidiary responsibility, namely:

  • a) violation by the head or founder of provisions of the Bankruptcy law;
  • b) duty violation on filing of application about bankruptcy in arbitration court;
  • c) rejection of measures for contest of illegal creditor requirements;
  • d) fulfillment by the head or the founder of actions which caused bankruptcy or increased insolvency of the debtor;
  • e) the head of the debtor incurs subsidiary responsibility in case, if accounting data dont contain necessary information, including data on property and obligations of the debtor and also in case if such information is distorted.

Recently, I mean 2009-2010, this legal means is actively used by arbitration managers, authorized body, and also competitive creditors with the purpose of satisfaction of the requirements in bankruptcy procedures.

Use of recovery procedures potential for debt return

One more interesting direction, providing return of money to creditors, is using of recovery, rehabilitation procedures in the bankruptcy case.

Use of rehabilitation procedures in the bankruptcy case, namely, financial improvement, external management and the settlement agreement – is the subject of separate article, however, I will note the following.

The purpose of carrying out rehabilitation procedures is restoration of debtor solvency that means repayment of debt to creditors.

Appropriateness of rehabilitation procedures introduction is investigated during the financial analysis which is carried out by the arbitration manager. Thus the arbitration manager analyzes market condition, internal and external conditions, possibility of profitable activity of the debtor. From all set of circumstances of the debtor activity conclusion is made about opportunity or impossibility of solvency restoration of the organization during possible term of carrying out rehabilitation procedures in the bankruptcy case. The bankruptcy law provides the maximum term of carrying out financial improvement and external management – 2 years.

Therefore, if by results of the analysis of a financial condition the arbitration manager came to a conclusion that within two years it is possible to restore solvency of the debtor, then he proposes the relevant solution to creditors meeting.

The final decision is made by creditors meeting which then should be approved by arbitration court.

Prospects of debt collection in the bankruptcy case

Position of the creditor in the bankruptcy case varies depending on circumstances.

In particular, the creditor can be majority, means possess absolute majority of voices at creditors meeting. The similar effect is observed at the accession of several less large creditors to alliance or existence of several affiliated creditors in the register of creditor requirements.

Anyway, in this case decisions are made by the majority of creditors and these decisions, obviously, will violate rights and legitimate interests of minority shareholders. Certainly, decisions violating the rights and legitimate interests can be challenged, but it will be necessary to prove the your position.

Quite often there is such situation that in the register of creditor requirements there are two large creditors and also some small. In this regard the purpose of large creditors will be the entry into coalition with one of the less large creditors with the purpose of control establishment under bankruptcy procedure course.

From the examples given above it is visible that depending on a situation the possibility of each creditor to influence the progress of the bankruptcy case differs. Therefore, prospects of debt return in bankruptcy procedure also differ.

How influence on debt repayment possibility of the creditor at creditors meeting can be used.

First, larger creditor defines the arbitration manager who carries out bankruptcy procedure.

Secondly, larger creditor defines an order of property realization of the debtor.

Thirdly, larger creditor can initiate creation of creditors committee and at a certain combination of circumstances to limit access of minority creditors to information about bankruptcy case.

There is a set of other scenarios which are usually used by large creditors for «pulling a blanket on itself». It is natural that the position of the largest creditor sharply increases chances to repay debt in a large part.

On the other hand, the minority creditor has all the volume of procedural rights and also isnt deprived of the rights at creditors meeting. In this regard the strategy called in literature «Green mail» is quite often applied. As a result of taken measures larger creditors quite often make decisions to redeem debt of the small creditor.

Strictly speaking, green mail represents abuse of the right. Nevertheless, such strategy meets often in practice, because the side between protection of the rights against overwhelming majority creditors and frank Green mail is almost imperceptible.

Other quite often applied strategy of minority creditors is the concession of the debt to larger creditor, who needs «absolutely slightly» to receive a majority of votes at creditors meeting. In this situation debt repayment happens usually «at face-value», that is without any discount.

Practice knows cases when the creditors possessing the tenth and 100-th shares of percent, as a result of active procedural actions, forced other creditors to reckon with themselves and influenced bankruptcy procedure.

Order of entry into bankruptcy case

For the entry of the creditor into bankruptcy case there are two main ways.

The first is initiation of bankruptcy procedure by the concerning the debtor. For this purpose bankruptcy statement is sent to arbitration court in the location of the debtor with the appendix of confirming documents.

Important point – the bankruptcy statement can be given only after the debt will «be judged», that is after arbitration court made decision on debt collection. It is one more argument, which is speaking in the favor of expediency to carry out judicial debt collection.

In the statement the creditor, besides those claims which he has to the debtor, specifies family name, first name, patronymic of the arbitration manager (or the name of the self-regulating organization of arbitration managers) who will be approved by court for carrying out bankruptcy procedure.

It is obvious that the creditor, specifying the arbitration manager in the statement, chooses him not casually. And the last, naturally, gives certain preferences to the creditor. Dialogue existence with the arbitration manager, certainly, is the positive factor increasing probability of debt return as a result of bankruptcy.

Other way to enter into bankruptcy case – to make the demands for inclusion in the register of creditor requirements during earlier entered bankruptcy procedure.

If requirements, with which the competitive creditor is included into the register of creditor requirements, make the majority from the size of already included requirements, then, using the majority situation, the large creditor earlier or later will establish complete control of bankruptcy procedure.

If the size of requirements is not enough for control establishment, then there is a version of the entry with someone into a coalition or to use any other strategy.

The entry into already initiated bankruptcy procedure, certainly, affects as well possibility of money repayment, naturally, by reducing it.

Problems of debt collection through bankruptcy

Problems, rather risks, of debt collection through bankruptcy often become an obstacle for use of this legal tool for debt collection.

The first, and the most, perhaps, vital problem is terms of debt collection through bankruptcy.

Lets make the approximate plan of debt collection through bankruptcy:

1. Preparation and filing of application about recognition of the debtor as insolvent bankrupt about 1 week.

2. Consideration by arbitration court of the bankruptcy statement, inclusion of supervision procedure – usually 1-2 months.

3. Carrying out by the interim manager of supervision procedure – from 4 to 7 months.

4. Carrying out inventory and property assessment during competitive production – 3-6 months.

5. If necessary – the appeal to arbitration court with claims about contest of transactions, involvement of the head and the founder of the debtor to subsidiary responsibility – of 4 months.

6. Tendering on property realization during competitive production – of 2 months.

7. Settlements with creditors.

Therefore, considering legislatively certain obligatory stages which should be passed when collecting debt through bankruptcy, term of collecting will be not less than a year. In certain cases in the presence of long trials – even more than that.

Other problem, often, are those experts who carry out collecting. As in any other sphere in bankruptcy people who because of various reasons can not realize goals quite often meet. In this regard it is important to be especially scrupulously during choosing experts to whom you plan to charge debt collection.

The third problem is information. It is shown that before bankruptcy procedure the creditor seldom has full information about the debtor. In this regard quite often preliminary plan of actions should be made on those scraps of information which can be received from open sources. Naturally, obtaining of any special information can help to plan bankruptcy procedure correctly. For example, existence of the balance sheet of the debtor – is considerable advantage, apart from existence of accounting reports for the different dates, allowing understand dynamics of property cost change.

Nevertheless, even in the presence of all above-mentioned problems debt collection through bankruptcy continues to remain actual, reasons of that you will learn from the following paragraph.

Comparative analysis of debt collection methods

Criterion Pre-judicial collection Judicial collection Bankruptcy
Terms of several days some months more than a year
Complexity average average high
Possibility directly control collecting absent partly (through service of bailiffs) available (through creditors meeting)
Existence at the debtor of opportunity to evade collecting available partly available very restrictedly
Possibility of attraction to subsidiary responsibility absent absent available
Opportunity to challenge withdrawal of assets absent very restrictedly available
Possibility of attraction to criminal and legal responsibility restrictedly restrictedly available

From the provided table it is visible that the main advantage of pre-judicial collecting is a speed of collecting. But, actually, all pre-judicial collecting is based on psychology of the debtor and therefore for many debtors doesnt pose special threat.

The main advantage of judicial debt collection is possibility to turn collecting on property of the debtor which is carried out by means of bailiff service. However, it is expedient to supervise activity of bailiff service, because only the creditor is really interested in repayment. Usually for these purposes lawyers and collectors also are attracted.

Debt collection through bankruptcy unlike pre-judicial and judicial collecting allows collecting debts even at the expense of those sources which usually can not be used. Possibility to return removed assets beforehand or to assign a duty on debt payment to the head and the founder of the debtor are the most essential pluses. Thus the debtor cant avoid responsibility easily, because powers as of director as of the founder are very strongly limited, and the professional team led by the arbitration manager deals with collecting issues.

I think that it is necessary to pay your attention that these methods of debt collection are not that much competing, then complementary. From this follows that collecting usually goes on the accruing – from pre-judicial collecting to bankruptcy.

The best method of collecting

The analysis of the bankruptcy reasons and the practice of debt collection show us that the best method of debt collection is, first, prevention of its appearance, and, secondly, immediate taking of measures to its collecting.

One of the factors of successful activity of the enterprise throughout a long time is an existence of a system for receivables control, when measures for collecting are built in the mechanism of business management. Thus each employee who somehow participates in process of formation or collection of debt carries out the certain function, allowing taking timely measures.

In particular, elements of such system are debt monitoring, the test actions realizing the principle of reasonable discretion, monitoring of a contractors condition on a certain set of available and not so available parameters.

Besides, certain automatic and signal measures are put in a control system, allowing to take measures automatically and to provide efficiency of possible following stages of debt collection.

Возврат к списку