Failing companies line up to face new bankruptcy laws

Some of the biggest names in Russian business have found themselves mired in debt, with the list of those in the red spread across the economy. That’s adding to the focus on new bankruptcy laws.

In 2008, they were just over 35,000 insolvency procedures completed in Russia, up from over 18,800 in 2005.

Bankruptcy cases are heard at the High Arbitration Court in Moscow. New amendments to Russia's bankruptcy law could go into effect as early as January 2010. And that might be just in time for a new wave of filings that could be twice the number of last year.

The law has gone through several changes since being adopted in 2002. Currently, it is seen as being in the interests of creditors, with a filing for bankruptcy essentially means the end of a company in Russia, according to Dmitry Stepanov, Partner at Egorov Puginsky Afanasiev & Partners

“When a company goes to the court, it's too late to go for any reorganization or protection measures against creditors. So debtors have no incentive to initiate bankruptcy because if shareholders or managers will initiate proceedings, they perfectly understand they will lose control over the firm, cashflows, and will end with a liquidation.”

Creditors are also often wary of starting proceedings under the existing system.

But now the emphasis is being put on "financial reorganisation". Companies will now have 5 years – up from the current 2 – to restructure their debts.

But Vladimir Osakovky, Chief Economist, Unicredit says the new changes could cause Non-Performing Loans to become a bigger problem.

“Given that the bill is very protective for debtors, the backdrop of it is the very possible adverse implications for the creditors and the Russian banking system in particular. And really Russian banks might really face problems in recovery of bad debts from debtors.”

Almost everyone agrees better bankruptcy laws are desirable. But only time will tell if it helps alleviate the problem, or turns out to be just a dose of medicine for those companies gripped by the crisis.