Bankruptcy in C.I.S. and the Baltics
Evolution of Bankruptcy Laws
There are few common features in the bankruptcy laws of the former U.S.S.R. countries. One of them is that all bankruptcy laws currently in force were passed after the U.S.S.R. collapse in the early 1990s. Some of them have changed dramatically over the last decade. In Moldova, for example, the first bankruptcy law was passed in 1992, then amended three times and replaced by a new text dated as of 1996.
The oldest laws still in force are in Belarus2 and Tajikistan.3 They are followed chronologically by bankruptcy laws of Estonia,4 Ukraine,5 Turkmenistan,6 Moldova,7 Georgia,8 Armenia,9 Kazakhstan,10 Azerbaijan,11 Lithuania,12 Kirgizstan13 and Russian Federation.14 These laws may be divided into two groups: "first wave" laws passed in 1990-93 (Belarus, Tajikistan, Estonia, Ukraine and Turkmenistan) and "second wave" laws passed after 1996, most with the purpose of replacing the "first wave" bankruptcy bills (Moldova, Georgia, Armenia, Kazakhstan, Azerbaijan, Lithuania, Kirgizstan and Russia). Some of them were repeatedly amended (i.e., it took five major revisions to Ukrainian law to come to its present state), while most of them were not amended at all.
From a geographical point of view, we can split these laws in four categories: Asian countries (Kazakhstan, Kirgizstan, Tajikistan, Turkmenistan and Uzbekistan), Baltic states (Estonia, Latvia and Lithuania), Caucasus republics (Armenia, Azerbaijan and Georgia), and Central-Eastern European countries (Belarus, Moldova, Ukraine and Russian Federation). The English or Russian texts for most of these laws are available on Internet.15
All of these laws were groundbreaking drafts, as there was no prior concept of bankruptcy in socialist ideology. Soviet economic and legal doctrine did not allow a question about the viability of socialist enterprises. However, the new laws inherited the elements of a socialist-planned economy. When analyzing the state involvement in bankruptcy issues, the protection the law grants to different kinds of creditors is evident. This article identifies and compares at least some of these issues.
The evolution toward a contemporary, market-oriented bankruptcy regulatory model may be easily traced by contrasting the first of the bankruptcy statutes (e.g., Belarus) with latest bankruptcy bills (e.g., Russia). The former are very brief, general and extremely severe in the treatment of insolvent debtors (e.g., the only bankruptcy procedure provided by Belarus law is liquidation); the latter are large bills providing a detailed (sometimes too detailed) regulatory framework to deal not only with business bankruptcy, but also with consumer cases.
Role of the State in Bankruptcy
The state is the regulator in the C.I.S. and Baltics, as it provides the legal framework of bankruptcy in these countries. Moreover, the issues that are not directly regulated by law are, in most cases, left to the discretion of courts, which is another regulatory approach the state took to deal with bankruptcy cases. In some cases it allowed voluntary (i.e., extrajudicial) bankruptcy proceedings (see "Role of Courts in Bankruptcy," infra).
The second function of the state is to supervise the law's implementation. In some countries, this responsibility was delegated to a special authority (e.g., Russia, Kirgizstan). Yet, in several of them the state's attempt to do so goes beyond limits imposed by market economy. For example, according to Russian law, the State Bankruptcy and Financial Recovery Authority is charged with keeping track of the solvency of companies that are of special concern to the national economy. Under these circumstances, state intervention may be justified to prevent the possible disastrous effects of a bankruptcy of these companies. Such intervention imposes the heavy burden of disclosure on these enterprises, and, as a consequence, their performance is restricted.
Third, the state may well be a creditor in bankruptcy proceedings. Here, few legislators escaped the temptation of granting the state a privileged position, in contrast to other creditors. This trend may be traced in most laws of the region, starting by the distinction between monetary obligations (i.e., claims of regular creditors), on one hand, and compulsory payments (i.e., budget or extra budgetary funds' payments), on the other (Russia, Ukraine, Kirgizstan); and ending with no time limits for declaration of claims resulting from these compulsory payments (Kazakhstan).
Role of the Courts in Bankruptcy
The bankruptcy regulatory models being examined are grouped in these categories:
- Laws that place the monopoly on bankruptcy proceedings with courts (either of common or special jurisdiction), such as in Belarus, Tajikistan and Estonia.
- Laws that allow the debtor to initiate bankruptcy proceedings by calling a collective assembly of creditors and seeking their input on the procedure under which a bankruptcy petition should be filed. Once the petition is acknowledged by the court, further proceedings are entirely in the court's jurisdiction, such as in Azerbaijan.
- Finally, laws that permit the debtor to choose between judicial or extra-judicial bankruptcy proceedings, including reorganization, compromise or liquidation with respect to the debtor, decided and supervised by the creditors without court involvement, such as in Lithuania and Kirgizstan.
Bankruptcy: Option or Luxury?
The laws of former U.S.S.R. countries show a surprisingly wide spectrum of definitions—some of them more successful than others—on the concept of and eligibility for bankruptcy. The vulnerable points of some of the laws are the extremely severe eligibility criteria, i.e., rigid definitions of bankruptcy. For example, the law of Georgia restricts the ability to file for bankruptcy and therefore limits the application and effectiveness of the law itself by stating that one may file only when two features of bankruptcy are present: the failure to pay business debts when due, and the balance-sheet insolvency; the law in Tajikistan requires the excess of the debtor's liabilities over his assets to be the cause of the failure to repay.
Most of the bankruptcy laws of former U.S.S.R. countries are still influenced by principles inherited from the Soviet era, with its centralized and planned economy operated by bureaucracy rather than markets. This is evidenced by increased interference of the state in bankruptcy, immunization of state claims in bankruptcy proceedings and the restriction of the effects of bankruptcy regulations by imposing heavy filing requirements.
Yet some of the examined laws go considerably further in designing a regulatory model that adequately meets the market requirements, as in the case of the Baltic States. Other countries of former U.S.S.R. will likely raise their bankruptcy statutes to similar standards over time.
1 Victor I. Burac, LL M (Bruges), is a lecturer at the International Law Department of the Moldova State University Law School and partner at Buruiana & Burac LLP (Moldova). Research for this article was supported in part by a grant from the International Research and Exchanges Board (IREX) with funds provided by the United States Information Agency. None of these organizations is responsible for the views expressed herein. C.I.S. is Commonwealth of Independent States, formed after the collapse of the U.S.S.R., and including all former socialst republics from the Soviet Union, except the Baltic states: Estonia, Lithuania and Latvia. Return to article
2 Passed on May 30, 1991 [entered into force on July 1, 1991]. Return to article
3 Passed on March 10, 1992. Return to article
4 Passed on June 10, 1992. Return to article
5 Nr. 2343-XII of June 14, 1992.Return to article
6 Nr. 861-XII of Oct. 1, 1993. Return to article
7 Nr. 786-XIII of March 26, 1996. Return to article
8 Passed on June 25, 1996. Return to article
9 Passed on Dec. 4, 1996. Return to article
10 Nr. 67-1 of Jan. 21, 1997. Return to article
11 Nr. 326-1Ã of June 13, 1997. Return to article
12 Nr. VIII-270 of June 17, 1997. Return to article
13 Nr. 74 of Oct. 15, 1997. Return to article
14 Nr. 6-Ô3 of Jan. 08, 1998. Return to article
15 See Lexinfosys database maintained by the GTZ project jointly with Bremen University (http://www.gtz.de/lexinfosys); or database of bankruptcy laws maintained by the American Bankruptcy Institute, http://www.abiworld.org/international/foreign.html. Return to article