The liberalization of state-controlled economies is a fundamentally messy process. State enterprises, who for decades produced what they were told to produce, find themselves suddenly faced with a bewildering state of affairs. Their inputs supply chain is disrupted, their market outlets disappear, and their products are typically viewed with indifference (or outright disdain) by consumers. Financial crisis, if not inherited from the former times, soon arrives with a thud.
The process of transition - while exceedingly complex - can be viewed narrowly (for the purposes of this analysis) as a process by which new participants enter the market, and others exit it. In most cases, a reformist government need only stabilize the macroeconomic environment and eliminate state controls in order to spark a flood of new entrants. The more difficult process to manage, understandably, is how under- and non-performing enterprises exit the market. Properly done, a well designed Bankruptcy system provides an efficient market clearing mechanism that helps assure orderly Market exit and equitable liquidation of insolvent debtors obligations.
Bankruptcy legislation is for this reason one of the more contentious areas of legal reform for transition economies. Reform implies a tradeoff between short-term economic dislocation (e.g., increased unemployment, decreased micro-economic activity, etc.) and long term economic growth - the tangible benefits of which will be felt long after the next election cycle. It is not surprising, therefore, that political pragmatism frequently wins out over visionary leadership in this area of commercial law reform.
In addition to providing a mechanism to mediate conflict between and among debtors and creditors, bankruptcy laws also provide an economically and socially beneficial systems of triage for worrying - but not necessarily terminal - cases of financial dyspepsia. Thus, Bankruptcy is distinguished from Collateral and secured transactions law, both of which address an individual creditor’s interest in property and collection remedies relating to that property. The two sets of law converge in the area of priorities, where multiple, conflicting claims may be made on the same assets.
There are several different approaches to Bankruptcy that have emerged from the CEE/NIS region. These range from “straight” bankruptcy on one extreme, to insolvency proceedings geared toward rehabilitation at the other. These models also vary in the type of debtors covered. The alternative models encompass individuals and registered for profit entities. These models include a disaggregation of the classification of covered enterprises – e.g., agricultural, financial and nonprofit entities - that may be excluded from bankruptcy. Other key differences include:
- Who may initiate a bankruptcy proceeding; and,
- How large an estate needs to be prior to allowing the creditor and/or debtor access to the Bankruptcy code.
There is also considerable variation in terms of the substantive prerequisites for bankruptcy proceedings. Variations here may include the following:
- Cessation of payments;
- Inability to cover current indebtedness with current assets;
- Inability to pay all debts taking into account all prospective liabilities;
- General nonpayment of maturing debts that are not covered by legitimate disputes;
- Inability to pay on a regular basis ones’ liabilities, and,
- Undertaking certain acts that clearly signal insolvency.
Among the many issues examined in these diagnostics of the current state of the region's Bankruptcy law and institutions are exempt versus non-exempt assets; title to property in Bankruptcy proceedings; preferences; and creditor priorities.
