Cabinet Steps to Rid Bankruptcies of 'Criminal Hue'

The Cabinet on Tuesday approved amendments to the bankruptcy law that will give the government more control over bankruptcy proceedings and are designed to curb abuses.

The amendments are needed to perfect a law that has become "a mechanism for redistribution of property" and developed "a criminal hue," Economic Development and Trade Minister German Gref told reporters.

The government is trying to make the law a tool for reviving businesses when possible rather than destroying them, government officials have said.

One of the main changes approved Tuesday will allow government representatives to vote at creditors meetings, a right that, up to now, they officially did not have.

For a say in the process, state creditors will have to give up their place in line to claim debt from bankrupt companies. At the moment, they fall into the fourth of the five creditor groups. In line with the change, state creditors are moving to the fifth group, making them equal to corporate creditors.

While this may in some cases cost the government money, it could also help the overall bankruptcy process. With loose controls in recent years, neither the fourth nor the fifth group often had any chance of getting the money -- a bankrupt company's most valuable assets usually were illegally divided up long before their distribution was supposed to begin.

As a result, corporate creditors in the fifth group were in effect often fighting for state money as the government stood by with little motivation or ability to help.

In some cases, such as the bankruptcy of MOST-Bank, the federal bankruptcy agency FSFO has been trying to play an active role. In the case of Inkombank, however, the state was completely excluded from the process. In the Menatep bankruptcy, the state did not bother to intervene at all in some phases of the process.

"Why do you come to our meetings so seldom?" a Menatep lawyer asked a FSFO official at one of the creditors meetings.

Analysts said they hoped that the new legislation will make state creditors more responsible.

Under other amendments approved Tuesday, creditors will have to vote unanimously on any issue. This was often the case in the past, but the system left room for straggling.

In addition, a more stringent procedure for appointing and supervising liquidators will be introduced.

So far, many bankruptcy cases have been plagued with accusations of interested parties bribing external managers or the courts that appointed them.

Under the amendments, external managers will have to meet stricter requirements, such as longer experience, and be subject to criminal prosecution.

The new legislation also is designed to prevent artificial bankruptcies and hostile takeovers of viable companies. As such, a company that is sued over a small debt will be given a grace period of 20 days. Grounds for a bankruptcy claim will have to be considered by a court, and the debtor will have to be notified of a claim 20 days ahead of the hearing.

The bankruptcy law will be further amended during the next few weeks as various government institutions hammer out remaining minor differences.