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. Last Updated: 07/27/2016

Arbitration Court Chairman Tackles Caseload

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The Supreme Arbitration Court's workload has been steadily increasing. At the end of the 1990s, the number of claims filed increased by 15 percent to 17 percent annually, and in the first half of last year, the number of applications rose by 2.5 percent. While the number of privatization cases is falling, the courts have been overwhelmed by a wave of bankruptcy suits.

Veniamin Yakovlev, chairman of the Supreme Arbitration Court, said the bankruptcy law is being used primarily as a means to divvy up property and must be changed. Though the pressure on the arbitration court is building, Yakovlev is not prepared to farm out its responsibilities. He said the administrative bodies that consider cases between businessmen and the state must remain in the jurisdiction of the arbitration courts, even though some lawyers expect these cases to be transferred to general jurisdiction courts.

Q:
The bankruptcy law has turned into an institution for grabbing and redistributing property. What must be done in your opinion in order for the law to work properly?
A:
The bankruptcy procedure is aimed at repairing failing enterprises or helping businessmen who have become entangled in their debts. But we can see that our existing legislation was, and remains, incomplete in the sense that it allows a bankruptcy case to be brought with surprising ease, without, to my mind, sufficient justification. After all, all that is required to launch a bankruptcy case, even for the biggest organizations, is an insignificant debt of about 40,000 rubles [$1,400]. In some cases this debt is created artificially.

Under existing legislation, the court must launch the case in a very short amount of time, as soon as the application is received and there is confirmation that the debt exists. The court informs banks and suppliers that such-and-such a firm is undergoing bankruptcy proceedings. Everyone immediately breaks all economic ties. Yesterday, the company was working fine, and today, it's on the way out. For example, we broke off a bankruptcy case in connection with the Klinsky Beer Factory. Is the Klinsky Beer Factory an unsuccessful company? It makes good beer, people buy it, the company operates fine and there is demand for its goods. Why on earth declare it bankrupt? But it started bankruptcy proceedings. It's a good thing we stopped them on time.

Q:
Perhaps separate bankruptcy courts are required?
A:
So far, there is no objective justification for establishing separate bankruptcy courts, since there are something like 30,000 such cases per year. Under this court system, no one will set up separate courts. But it doesn't follow that these cases should be heard by any court working within the arbitration system.

It is my opinion that specialized judges should form the basis of a highly professional legal system. And we have judges that specialize in bankruptcy. After all, these cases are extremely complex; they require a good understanding of the law and its implementation. In our larger courts, we have teams of judges that specialize in hearing bankruptcy cases. If these teams are lacking in the smaller courts, there are nonetheless one, two or three judges that are specialists in this area. We will expand these teams in line with the number of bankruptcy cases. I believe that the number of such cases will increase — it is a necessary element in market economics. The extent to which this will happen and whether the bankruptcy law will be used as it is intended is a different matter.

Q:
And regarding the companies that are the sole, major enterprise of a town — at one stage, you said the law on bankruptcy wasn't having a positive effect on their operations.
A:
The problem, you see, is that the law hasn't changed. There have been plenty of amendments made by us and the government, but not once has the State Duma adopted amendments to the law on bankruptcy. A bankruptcy law concerning enterprises in the defense sector was adopted, but, unfortunately, it wasn't carried through and never saw the light of day. And so the law that we had previously remains in effect. No amendments have been made to it. And my position with respect to this law hasn't changed: Changes must be made that are dictated by life experience itself. Otherwise, this law and this bankruptcy procedure will continue to be used for purposes other than that which it was intended.

Q:
Are many privatization cases being heard in the arbitration courts?
A:
Statistics show that the number of privatization cases is falling. In 1996, the arbitration courts heard about 2,000 such cases compared with 341 in the first half of last year.

The number of cases was highest in the early '90s when the number of privatizations was at its peak. These were very complicated cases because privatization was continuing apace and not always in accordance with the law. The privatization process is now essentially over and continues only in isolated instances. Though the period is coming to an end when the parties to an illegal privatization agreement can be returned to their former state, there is no new burst of privatizations. The privatization results aren't even being reconsidered in court.

But there are separate cases, of course, and we are examining them. Statistics show that in the first half of this year, 48.9 percent of these claims were satisfied, because of violations of the law.

Sometimes, the agreement on privatization is itself concluded legally, but subsequently unravels. If so-and-so didn't provide money in exchange for state property — then the question arises not over whether the agreement is invalid, but whether it should be annulled. There is a big difference between the two: The agreement or the privatization deal is recognized as being invalid if the transaction itself was made in violation of the law. The violation may be connected with the object of privatization (something is privatized that legally cannot be), the subject of privatization (someone received the property who didn't have the legal right to participate in the privatization), the conditions of privatization (it was to have been privatized under one set of conditions, but was privatized at an entirely different price) and, finally, when the rights of third parties were violated during the privatization process.

We have come across several cases of a privatization transaction being recognized as invalid over the object and the subject [of privatization] simultaneously. In one case, the object was a military enterprise, which legally cannot be privatized, and the subject was a foreign company, which legally cannot participate in the privatization of a military enterprise. … [The foreign company] wouldn't have been able to do this directly, but thanks to its cunning maneuvers, the privatization took place. Then the claims were filed, and the court recognized the case as illegal. If I'm not mistaken, the enterprise in question was an aviation company.

When an agreement is annulled, the law hasn't been violated, but one of the parties has failed to perform a legal agreement. Let's say investor tenders were held and an investor bought the property on condition that it invests a certain amount in production. Then the investor doesn't contribute the money. Naturally, the question of dissolving this agreement could be raised on the grounds that it wasn't satisfied. The result will be one and the same: The privatized property will be returned, but the grounds, as you can see, are quite different.

Q:
Is the relationship between civil and administrative cases in our courts changing?
A:
The number of administrative cases is growing faster than the number of civil cases. Civil-legal disputes are generally between businessmen, while administrative disputes are between businessmen and state bodies. If, several years ago, administrative disputes accounted for about 15 percent to 20 percent of the total cases heard, then based on the results of the first six months of last year, administrative disputes accounted for about 46 percent. Tax disputes lead in this category. There are also plenty of customs cases. Among the civil cases, as before, those connected with the performance of agreements lead. In this sense, the tendency isn't changing. It's another matter when, within these major divisions, the number of disputes that previously didn't exist start to appear and increase. Previously, we had virtually no disputes connected with securities or promissory notes, for example.

Q:
Who wins most frequently in the tax disputes?
A:
Tax cases must be distinguished on the basis of who is the plaintiff and who is the defendant. In tax disputes, the plaintiff might be the taxpayer with the tax service as defendant. But it can be the other way around — the tax inspectorate may apply to the court seeking to levy a fine from the taxpayer. Thus, in disputes where the plaintiff is the taxpayer, in more than 50 percent of cases, the taxpayer wins. This was the case in the past, and it remains so to this day. In those cases where the plaintiff is a tax body, the inspectorate wins 60 percent to 70 percent of the time. This is to be expected since they make claims to levy tariffs only on occasions when the tax violations are clear-cut. Otherwise, they don't go to court.

Q:
Will the new Tax Code increase the number of tax disputes?
A:
I don't know about the number, but it seems to me that certain difficulties arise in resolving these disputes. Firstly, the new tax legislation differs significantly from the old legislation. After all, the practice of applying and interpreting the laws is constantly being developed. Secondly, the complexity of the disputes changes every time, as new questions arise that previously didn't exist. The new laws introduce certain new categories, measures and regulations that the court must overcome. But this will only last for a certain amount of time. There will be fewer disputes once it has all been assimilated, as the taxpayers will know their rights and obligations better as will the tax bodies. After all, no one wants to loose in court.