BizCLIR

The Law on Bankruptcy  of 1997 is significantly changed and new enough that judges are still investigating the internal nuances, and how its provisions relate to older laws.  Information about practice under the new law is not effectively disseminated.  For example, one judge, who does mostly bankruptcy, indicated that there had been several attempts at restructuring of bankrupts under the new law but that none had been successful.  The High Commercial Court on the other hand reported that only one major restructuring had been attempted, and that it was successful. 

Among the commercial entities there seems to be the feeling that bankruptcy was equivalent to the old liquidation procedures, and the consensus was that it was generally better to have an on-going company as a debtor than to have a company in bankruptcy as a debtor.  Commercial entities and others also referred to the Great Circle of Debt as a reason to avoid pressing for a bankruptcy.  On the judges’ side, however, there was general agreement that nearly all bankruptcies were brought too late in the debt process to effectively manage them. This lack of understanding creates a number of problems.  First, by waiting until the debtor is essentially defunct, the bankruptcy action becomes an exercise in futility, in which litigants wrestle over an ever shrinking body of assets.  Thus the courts become clogged with complicated and costly litigation that is often not justified by the overall benefits received.  Second, only a few judges understand the legal and commercial issues involved well enough to make timely and legally appropriate decisions; less experienced judges tend to put-off the decisions and delay the court proceedings for fear of making a wrong decision that might be overturned upon appeal.  The length of time required to recover assets from a bankrupt debtor -- often in excess of two years --  has led many creditors to write off loans, and has put others into bankruptcy because they could not collect the assets they needed to pay off their own creditors. 

A third problem arises from a somewhat different angle.  Bankruptcy is an expedited procedure -- at least at the outset -- and bankruptcy claims tend to receive their first hearing within approximately one month of filing.  Some commercial lawyers report that they bring simple debt collection actions -- which often take up to six months or more for an initial hearing -- as bankruptcy claims so that they gain leverage to obtain payment or otherwise renegotiate debt, and then drop the case or simply cease to pursue it.  This strategy is certainly understandable as a creative solution to the crisis in the courts, but it brings about a serious misallocation of judicial resources.

Finally, lack of understanding of corporate law in the bankruptcy context is permitting use of bankruptcy as a fraud on creditors.  The Company Law deliberately and carefully adopted the concept of "piercing the corporate veil" from German law.  However, few judges understand the concept, and several respondents reported that they refused to apply the concept to bankruptcy proceedings because they did not know how to do so.  As a result, the bankruptcy courts have become an unwilling agent in fraudulent transfers of corporate assets.