2010 was a successful year for Russian banks. Their profit in 2010 made up 573.4 billion roubles, which was three times as much as in 2009. Nevertheless, to guard against uncontrolled failure of banking institutions that could have happened during the crisis, the Russian government put in place new bank bankruptcy procedures.

The Economic Development Ministry at the end of February drafted and posted on its website amendments to the law “On the insolvency (bankruptcy) of lending institutions” and other legislative acts related to bankruptcy procedures of lending and other financial institutions, tightening liability for unjustified actions preceding bankruptcy.

A memo to the bill says it should facilitate the comprehensive improvement of bankruptcy procedures for lending institutions.

Thanks to the innovations, it will be easier to obtain reliable information about the financial status of debtor lending institutions; effective bankruptcy-prevention mechanisms will be introduced on a regular basis; the operations of the temporary administration, the Deposit Insurance Agency (DIA), and the Central Bank will be modified, and the effectiveness of their interaction enhanced.

The amendments will expand the opportunities of managing the property of the debtor in the process of receivership, the time of receivership will be reduced, the size of bankruptcy estate will increase, the procedure of liquidating lending institutions will become simpler, and the percentage of creditors’ claims satisfied will increase.

With the purpose of expanding the opportunities of investors to participate in the financial recovery procedures and the compilation of financial recovery plans, the bill adds provisions to the law on the insolvency of lending institutions.

Presently, insolvency legislation does not define the procedure of returning property (securities, cash) to customers received or acquired by lending institutions under contracts on transactions with securities if the banking license is pulled from a lending institution that is a participant on the securities’ market.

Lawmakers suggest supplementing the law on the insolvency of lending institutions with a provision defining the specifics of the operations of a temporary administration appointed after the recall of a banking license from a lending institution having a license for professional operations on the securities market.

For instance, the bill introduces guarantees to customers of the return of their property at the stage of introducing a provisional administration to manage the lending institution.

Similar mechanisms of returning property (securities, money) to customers from the accounts of financial organizations – professional traders on the securities’ market can be found in the law “On insolvency (bankruptcy)”. This property is not included in the bankruptcy estate.

Simultaneously, lawmakers suggested introducing the procedure of returning funds in the trust management of a lending institution.

The bill suggests amendming the law on the insolvency of lending institutions that would give DIA as the receiver (liquidator) the right to take part in court hearings concerning such vital issues as the existence/absence of insolvency (bankruptcy), to produce evidence, file pleadings, and exercise other rights of parties involved in a bankruptcy case as of the starting day of bankruptcy procedures in an arbitration court.

The memo to the bill says that current legislation does not define clearly enough the procedure of applying the recovery of property (imposing seizures and other restrictions on the disposition of monetary assets of the customers of a lending institution) in the process of liquidation (bankruptcy) of a lending instituton.

The bill also contains amendments and addenda to regulatory acts aimed at introducing a special regime of enforcing court rulings, the acts of other authorities and officials in the process of liquidation (bankruptcy) of a lending institution.

For instance, as of the date of the recall of the banking license from a lending institution, the fulfillment of all executive documents shall be suspended, including court rulings, the acts of other authorities and officials executed in line with criminal law, the legislation on taxes and collections in its part pertaining to the recovery of property of a lending institution (the property of customers of a lending institution) with the exception of the recovery of debts under current liabilities of a lending institution.

This should help increase the size of the bankruptcy estate of the debtor lending institution through the inclusion of property due to be recovered by way of executive proceedings, and establish a consolidated procedure of settlements with all creditors in line with the succession stipulated by the law on the insolvency of lending institutions.

Taking into account the successful use of the mechanism of the transfer of property and liabilities of banks during the operating period of the temporary administration (the role which is played by DIA) pursuant to the anticrisis law No. 175-FZ, legislators suggested using a similar mechanism in the process of receivership as well.

The Economic Development Ministry says that the mechanism of the transfer of property and liabilities is the least costly from the viewpoint of the need of requiring state expenditures. Besides, it is less time-consuming. It has an apparent social effect, as it is most favorable for both the depositors and bank employees, since it permits maintaining the main functions of the bank and part of the jobs.

The only way of distributing the bankruptcy estate would amount to the mandatory sale of the property of the bank by installments with the subsequent distribution of receipts from such sales among the creditors.

The use of the transfer of property and liabilities as an alternative to such settlements with clients should help complete receivership in a shorter time and satisfy the claims of creditors.

The current law on the insolvency of lending institutions directly bans accord and satisfaction agreements as a form of discharging the claims of creditors in bankruptcy cases.

However, cases have been identified in legal practice when a lending institution had property that could be recovered, but such recovery required a long time. The problem can be resolved by amending the provisions of the law on the insolvency of lending institutions regulating the mechanism of the transfer of such property by way of payoff to a creditor/creditors.

The advantage of such a proposal is that a bankruptcy case is completed in a shorter time, the bankruptcy estate is saved through the reduction of current expenses, and more creditor claims are satisfied. The claims of creditors satisfied through the transfer of property will be regarded discharged and can be removed from the register of creditors’ claims on the basis of a judicial act.

The current wording of the law on insolvency rules out the possibility of disputing the deals of the debtors executed in conditions of the inadequate reciprocal fulfillment of obligations by either side of the deal or resulting in preference to one of the creditors compared to others, if the price of property transferred under one or several connected deals or the size of obligations or liabilities under such deals exceeds 1 percent of the value of assets of the debtor as defined during the last reported period.

A DIA analysis of deals executed by 64 lending institutions ahead of the recall of their banking license and damaging their property interests indicated that the overwhelming majority of such deals were conducted within the framework of the regular course of business of lending institutions (the concession of claiming rights under loans, trading in securities, debt payments to banks).

Moreover, in more than 80 percent of the cases, the value of such deals amounted to less than 1 percent of the balance-sheet cost of the assets of the lending institution on the last reporting date before the corresponding deal. However, in absolute figures the price of each such deals could exceed tens of millions of roubles.

The same applies to other financial institutions (insurance companies, professional traders on the securities’ market, nongovernmental pension funds). The possibility of declaring such deals executed by a financial institution, including a lending institution, invalid is vital, the authors of the bill stress.

As a result of disputing such deals, the bankruptcy estate of a financial institution, including a lending institution, can be significantly replenished and, consequently, the claims of a greater number of creditors can be satisfied.

The creditors of a financial institution, as a rule, are much more numerous than the creditors of other legal entities, and in the event of the bankruptcy of a lending institution, there are many private depositors among them. The impossibility of disputing numerous deals clearly infringing on the interests of normal creditors and containing signs of the abuse of rights by parties to such deals undermines confidence in financial institutions as a key element of the financial system of the state, the Economic Development Ministry has emphasized.

Thus, the bill proposes introducing corresponding amendments to the law on insolvency that would offer the possibility of disputing deals executed by the debtor financial institution for a sum exceeding 0.1 percent of the value of its assets.