Article 93. Procedure for introducing external management. 1. External management is introduced by an arbitration court on the basis of a decision of a meeting of creditors, with the exception of cases provided for by this Federal Law.

Stages

External management as a bankruptcy procedure is formed from the following stages:

• approval of the arbitration manager;
• creation of a project for the financial recovery of the company;
• bringing this project into operation after approval by creditors at the general meeting;
• fulfillment of all obligations to counterparties.

The plan for suspending bankruptcy proceedings contains:

• actions to restore the viability of the enterprise;
• circumstances and period of their activation;
• estimate for implementation;
• the period during which the insolvency of the company will be liquidated;
• arguments confirming the reality of restoring the viability of the company;
• division of functions of collectors of the general meeting and the committee for approving agreements of a bankrupt enterprise.

The interim manager is obliged not only to agree on the company’s recovery plan with financial counterparties, but also to report on the progress of its implementation upon request.

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The external management process will be considered successfully completed if the enterprise has no signs of insolvency and it fulfills its obligations under financial agreements.

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Algorithm of actions for external control

External management as a bankruptcy procedure involves the following algorithm of actions:

• notification to the director and owners of the company on the day of introduction of the VA;
• submission of an application for the publication of data on the launch of a financial institution as a stage of insolvency - 10 days in advance;
• receipt by the manager of an order to transfer documentation to him;
• handing over a package of documents to the new interim manager;
• initial meeting of creditors - before the expiration of the 31st day from the date of launch of the VA;
• sending information about ongoing measures for the purpose of recovery to tax authorities, banking enterprises, the FSSP and other organizations to which the company has debts;
• general meeting of the organization’s staff;
• attracting an accountant and auditor to the VU;
• organization of inventory;
• analysis of the company's financial position;
• return to third parties of their property;
• preparation and consideration of creditors' claims;
• repeated meeting of creditors;
• generation of reports and their transfer to creditors and judicial authorities;
• implementation of measures according to the health improvement plan;
• drawing up final reports and submitting them to creditors and judicial authorities.

When external management is introduced as a bankruptcy procedure

External management, as part of the bankruptcy procedure, can be introduced at the insistence of the Arbitration Court, at the request of the debtor himself, or at the request of a meeting of creditors immediately after the completion of the monitoring procedure. One of the conditions is that the debtor has a real chance to maintain production and, if he does not pay off all debts, then to restore his own solvency.

Important! The main condition for the introduction is the consent of creditors and Arbitration, the goal is to preserve the operating enterprise on the market.

If the debtor does not have the resources to continue its activities, and bankruptcy is not only a way of distributing debts, but also one of the ways to close the enterprise, then the bankruptcy stage under consideration is skipped. They move directly to bankruptcy proceedings.

Deadlines

The law establishes a general period for financial recovery and external management of a bankrupt enterprise - 2 years. Of this, no more than 1.5 years can be allocated for external management. An extension is possible, but only at the request of the creditors and expediency - making important adjustments to the plan or achieving tangible success in suspending the bankruptcy procedure. The maximum possible extension period is an additional 6 months.

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In accordance with Part 3 of Art. 92 No. 127-FZ, the time frame for management can be reduced at the request of both creditors and the bankruptcy trustee.

Important! Separate deadlines have been set for city-forming and farm-type enterprises affected by natural disasters. In such situations, it is possible to increase the duration of the procedure to 2.5 years.

The procedure for introducing external control

If the activity of the enterprise, in the opinion of the meeting of creditors, can still be restored, a decision is made on the need to attract an independent specialist in the field of management. The arbitration court considers the possibility of introducing external management and makes an appropriate determination.

The Law “On Insolvency (Bankruptcy)” also provides for cases when a judge can, without a decision of a meeting of creditors, initiate the involvement of an independent manager. In particular, in Part 4, Clause 2, Art. 75 of this regulatory legal act states that the arbitration court has the right to skip the stage of financial recovery and immediately proceed to external management if there are grounds to believe that such a measure will help restore the solvency of the enterprise. Also, according to Part 4, Clause 1, Art. 92, the court issues a ruling on the involvement of a specialist if the meeting of creditors filed a petition to declare the organization bankrupt, but before the date of consideration of the case, circumstances appeared indicating the possibility of overcoming the crisis.

External management can restore the activity of an enterprise

When a determination is made on the transition to external management, a new head of the company is appointed. In addition, the beginning of a new stage in the bankruptcy procedure implies the following consequences for a legal entity:

• internal management is entrusted to another person, the previous management is dismissed or transferred to another position;
• previously introduced measures to restore financial independence are cancelled;
• A moratorium on monetary transactions to repay debts is declared.

The stage is introduced for a maximum of 18 months and can be extended for another six months (sometimes for a longer period, for example, if we are talking about the bankruptcy of a city-forming enterprise - for a year).

Participants, their rights and obligations

The bankruptcy procedure of a legal entity involves:

• firm;
• temporary manager;
• collectors;
• government bodies.

Company rights:

• putting forward a proposal to sell the enterprise to creditors;
• appointment of your representative;
• signing agreements with third parties on the transfer of funds to fulfill financial obligations and suspend bankruptcy proceedings;
• replacement of own assets.

External manager in case of bankruptcy of a company:

• exercises full management of it;
• performs inventory;
• prepares a project of measures to restore life activity;
• generates reports on completed cases and achieved results for collectors and judicial authorities.

Rights of creditors as persons to whom there are financial obligations:

• participation in declaring an enterprise insolvent;
• organizing meetings to discuss company policies;
• sending a petition to the judicial authorities to open external administration;
• compiling a list of parameters that the arbitration manager must meet;
• approval/rejection of the project drawn up by the manager, making adjustments and additions.

Government agencies have the right to priority satisfaction of financial obligations. This includes tax authorities, labor inspectorate, pension fund, customs, etc.

Possible categories of debtors

The bankruptcy procedure is introduced for different categories of defaulters, and not all of them can be subject to a management procedure.

Legal entities

In case of bankruptcy of a legal entity, external management is one of the ways to return to its former viability. Introduced by the court if there is a potential possibility of saving the company from liquidation.

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Activities within the framework of the procedure are aimed at:

• improvement of general financial condition;
• repayment of existing debts;
• continuation of the enterprise's activities.

Individuals

For this category of debtors, the introduction of external management is impossible. A debt restructuring procedure has been established for them, as a result of which:

• the property of the defaulter is sold;
• the remaining debts are closed.

Bank

When a banking organization is declared bankrupt, the introduction of management is also not provided for. A number of other actions aimed at improving the financial situation are possible, but they are carried out pre-trial.

If a petition is sent to the court, the result can only be the initiation of bankruptcy proceedings with the subsequent recognition of the bank as bankrupt.

Developer

For this type of company it is possible to introduce a procedure. In this case, the manager performs a series of actions, as a result of which the developer should have the opportunity to:

• completion of construction and commissioning of the facility;
• settlement of all debts.

If the plan cannot be fulfilled, bankruptcy proceedings are introduced. As a result, the bankruptcy trustee is obliged to sell the property of the debtor of the unitary enterprise, including unfinished facilities, and use the funds received to pay off debts.

The difference between an external manager and a bankruptcy manager

Unlike a bankruptcy manager, an interim manager seeks to revive the enterprise. All his efforts are aimed at restoring the debtor’s solvency in order to avoid its liquidation.

If throughout the entire bankruptcy procedure it was not possible to bring the enterprise out of the crisis, a bankruptcy trustee is involved in the process. The specialist begins his activities at the last stage of bankruptcy to organize auctions of the debtor’s property, pay off his debts and liquidate the bankrupt company. Thus, the bankruptcy trustee completes the bankruptcy procedure.

Control over an external manager

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The rehabilitation of the company is carried out according to a plan, which the manager must prepare and submit to creditors for approval within 1 month. It must comply with regulatory requirements and contain the basic conditions for the company to return to its previous activities.

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A regular report is drawn up on the procedures carried out and their results, on the basis of which monitoring is made of how the manager performs the functions assigned to him.

How does external management differ from financial recovery?

These are two different stages of bankruptcy that have common features:

• a single goal – restoring the company’s solvency;
• provision of preferential conditions for the further functioning of the company;
• introduction by decision of the judicial authorities or the first meeting of creditors.

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At the same time, there are 2 significant differences between these methods of restoring vitality:

1. During financial recovery, the functions of the director are limited, but he continues to manage the company (under control), and with external management, the current management of the enterprise is completely removed, and the duties of the interim manager include the adoption of resolutions that determine the future policy of the company;
2. Financial recovery means closing debts in installments under specific guarantees, and with an external manager, there is an absolute change in the company’s strategy.

External management and finance. wellness as rehabilitation procedures

EXTERNAL MANAGEMENT AND FINANCIAL RECOVERY AS REHABILITATION PROCEDURES IN CORPORATE BANKRUPTCY CASES

Kochergin Pavel Vladimirovich Master's student of the Department of Civil Law Rostov State Economic University (RINH), Rostov-on-Don

Abstract: The article discusses aspects of the legal regulation of the application of rehabilitation procedures in case of insolvency (bankruptcy) of a corporation. The author explains that the stages of external management and financial recovery in the insolvency procedure are important and make it possible to protect the legitimate interests of persons participating in a corporate bankruptcy case. These stages are aimed at satisfying the claims of creditors and restoring the solvency of the debtor corporation. A problem has been identified regarding the timing of the external management procedure, as well as the lack of demand for the financial recovery procedure in bankruptcy cases, and a solution to eliminate this problem is proposed.

Key words: Corporate bankruptcy; corporation; external management; financial recovery; temporary manager; insolvency.

External administration is the next step in a corporate bankruptcy case. Representing a measure of a rehabilitation nature and as another mechanism for restoring the debtor’s solvency. External management is introduced by the court based on the decision of the first meeting of creditors[1].

In the process of external management, measures to restore the solvency of the debtor corporation are carried out by an external manager. The arbitration court gives it the authority to dispose of the debtor's property in accordance with the external management plan, and also allows it to declare refusals to fulfill contracts. The external management plan must meet the conditions and procedure for implementing solvency measures; a list of costs for the implementation of these measures has been compiled (Clause 1, Article 106 of the Bankruptcy Law) [2].

So, after drawing up an external management plan, it is submitted to a meeting of creditors, who can either accept or reject it. To restore the debtor's solvency, any measures that do not contradict the legislation of the Russian Federation can be used. Particular attention should be paid to judicial practice on invalidating an external management plan. The courts base their position on the fact that the plan presented by the external manager does not meet the requirements of Article 106 of the bankruptcy law and does not contain either real measures to restore the debtor’s solvency within a specific time frame, or economically justified mechanisms for implementing these measures, and also violates the rights of persons participating in a bankruptcy case[3].

The external management procedure is the most active stage in the bankruptcy of a corporation compared to supervision and financial recovery, due to the fact that management of the enterprise passes directly to an external manager. At this stage, operations to satisfy claims on monetary obligations to creditors are suspended, with the exception of current payments. It is important to note that during this period no fines or penalties are assessed for failure to fulfill monetary obligations and mandatory payments. In this regard, in practice, the question arises about the correct differentiation of payments that arose before the stage of external management. The resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated December 15, 2004 clarifies that monetary obligations that arose after the court accepted an application to declare the debtor bankrupt, regardless of the deadline for their execution, remain current in the external administration procedure[4].

The external manager, in addition to disposing of the debtor’s property and filing claims in the arbitration court to invalidate transactions, has a specific right for this procedure in bankruptcy cases, namely, within three months from the date of introduction of external management, he can refuse the debtor’s transactions that have not been executed parties in whole or in part, and also impede the restoration of solvency or incur losses compared to transactions concluded under similar conditions. As can be seen from the above provisions, not all provisions of the bankruptcy law devoted to external management meet the criteria of clarity and unambiguity of the rules they contain. In some cases there are obvious gaps. Moreover, as in the case of other rehabilitation procedures, the question arises about the advisability of introducing a long period for external management. This procedure is introduced for a period not exceeding 18 months, which can be extended for another 6 months. Such a period is clearly not justified if it does not lead to the restoration of the debtor’s solvency. Considering the time, effort and money required to carry out external management procedures, we consider it advisable to shorten the established period, as well as introduce a number of provisions aimed at increasing the efficiency of this procedure. Financial recovery is a procedure introduced to restore the solvency of a debtor corporation and repay its accounts payable. This is the main purpose of the financial recovery procedure. The introduction of this procedure is innovative, since it did not exist before the adoption of the Bankruptcy Law of 2002, and this indicates the desire of the legislator to find more optimal forms of implementing the process of insolvency (bankruptcy) of a corporation. Particular importance is attached to interested third parties, as participants in a bankruptcy case, in order to provide the necessary financial resources to repay the claims of bankruptcy creditors and restore the economic position of the debtor. The concept of financial recovery should be considered as a stage of insolvency (bankruptcy) of a corporation, which is introduced with the aim of restoring the solvency of the corporation and satisfying the claims of bankruptcy creditors. Financial recovery could be considered as a decisive stage in the bankruptcy process, applicable to debtor corporations; if, during financial recovery, the debtor's solvency is restored and the creditors' claims are satisfied, then the arbitration court decides to terminate the bankruptcy proceedings. But if, during financial recovery, the debtor’s solvency cannot be restored, and, consequently, the creditors’ claims remain unsatisfied, then the corporation is declared bankrupt and bankruptcy proceedings are opened immediately after the termination of the financial recovery procedure. Judicial practice in bankruptcy cases indicates insufficient demand for the financial recovery procedure; in 2020 there were 32 of them, and in 2020 there were only 19 cases[5].

There are several reasons to explain this problem. Firstly, the procedure itself is not sufficiently elaborated in the law. It would be advisable to describe in detail the mechanism for regulating collateral by interested third parties, as well as the mechanism for using this collateral to satisfy the claims of bankruptcy creditors. Secondly, third parties should be considered as investors investing in the economic stability of the debtor corporation, and therefore some adjustments should be made to the financial rehabilitation provisions of the law in order to guarantee the rights of investors and increase the efficiency of this procedure. An administrative manager is appointed to the position of manager during the financial recovery procedure. His responsibilities include monitoring the debtor’s compliance with the debt repayment schedule and financial recovery plan [6].

Thus, if the debtor makes payments in violation of the debt repayment schedule, the administrative manager has the right to appeal to the persons who provided the security with a demand that they fulfill their obligations, and if they do not fulfill the obligations they have assumed properly, the administrative manager has the right, or rather – is obliged to take all necessary actions to use the security provided by third parties to satisfy the claims of creditors (Article 83 of the Bankruptcy Law).

Bibliography

1. Karelina S. A. Legal regulation of insolvency (bankruptcy). M. – 2006. – P. 156.

2. Federal Law “On Insolvency (Bankruptcy)” dated October 26, 2002 No. 127-FZ (as amended on November 12, 2019) // Russian newspaper. 2.11.2002. No. 209-210.

3. Resolution of May 20, 2020 in case No. A 63-17736/2017 from the archives of the Sixteenth Court of Appeal.

4. Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated December 15, 2004 No. 29 “On some issues of the practice of applying the Federal Law on Insolvency (Bankruptcy)” // Economy and Law. – 2005. – No. 2. pp. 3-4.

5. Statistical bulletin of the EFRS as of December 31, 2018 [Electronic resource]. — Access mode: https://download.fedresurs.ru/news/ (11/28/2019)

6. Lebedev K.K. New in the legislation on insolvency (bankruptcy) // Current problems of legal science and practice. Gatchina: Publishing house: State Institute of Economics and Technology, 2020. – pp. 108–124.

Options for completing external control

As a result of the procedure, 2 scenarios are possible:

1. Achieving the goal of restoring the solvency of the company, full repayment of debts and continuation of activities. In this case, the legal process ends with the conclusion of a settlement agreement, and the manager is obliged to continue to provide management until new responsible persons are appointed.
2. Recognition of the insolvency of the organization and the impossibility of fulfilling its financial obligations. In this case, after closing the register, the bankruptcy trustee begins the procedure for selling the property, and subsequently the company is liquidated.

Result of consideration of the external manager's report

By virtue of paragraph 3 of Article 118 of the Bankruptcy Law, based on the results of consideration of the external manager’s report, the meeting of creditors has the right to make one of the decisions:

- on applying to the arbitration court with a petition to terminate external management in connection with the restoration of the debtor’s solvency and the transition to settlements with creditors;

- to apply to the arbitration court with a petition to terminate the proceedings in connection with the satisfaction of all creditors’ claims in accordance with the register of creditors’ claims;

- about applying to the arbitration court with a petition to declare the debtor bankrupt and to open bankruptcy proceedings; on concluding a settlement agreement.

Possible consequences

Based on the results of the actions of the temporary manager, the arbitration court makes one of the following decisions:

• closure of the company's insolvency case - if the manager has fully fulfilled his responsibilities and stopped the bankruptcy procedure;
• signing a settlement agreement - if it was possible to pay off all debts;
• increasing the management period - if the court considers that significant improvements have occurred and the chances of restoring the viability of the company have increased;
• rejection of the prepared plan and the appointment of a new manager - if the court comes to the conclusion that the lack of results is the fault of the manager and if new management is appointed, the company can still be saved;
• opening bankruptcy proceedings - if this stage does not produce results.

The decision depends on the results that have been achieved up to a certain point.

What is external management?

In paragraph 1. Article 93 of the Federal Law of the Russian Federation No. 127-FZ it is noted that external management is introduced by the Arbitration Judge. This is one of the optional, but often used bankruptcy procedures, in many ways identical to the concepts of “recovery” and “rehabilitation”.

As part of external management:

• management personnel are reshuffled within the organization that filed the bankruptcy claim, the director or person responsible for management activities is removed, and his place is taken by an external manager selected by the court and approved by the creditors;
• The company is provided with benefits for repaying loans and purchasing necessary equipment and goods.

This is a lengthy process. By wisely using the time and opportunities given to it, the company emerges from the financial crisis and no longer needs to declare bankruptcy. There is a chance that by the time the procedure is completed, the organization will pay off all debts and continue operating.

Complaint against the manager

The manager is the person on whom the company’s chances for further functioning depend. But his actions are not always effective, the reasons for which may be:

• political situation;
• natural disasters;
• inflation and other factors.

This may also be due to pressure from creditors who want to quickly move to the stage of bankruptcy proceedings, which is why they put pressure on the manager and create obstacles for his effective work.

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But most often the lack of results is explained by the low level of professionalism of the interim manager.

If creditors are not satisfied with the manager's policies, they can file a complaint against him in court. Other persons to whom the company has unfulfilled financial obligations can also submit claims.

The complaint is drawn up in writing, taking into account the general rules of legal proceedings and contains:

• details of the judicial authority;
• information about the plaintiff and defendant;
• details of the bankruptcy case;
• the essence of the appeal - the grounds for the claim;
• requirements for the court - replacement of the manager or opening of bankruptcy proceedings;
• list of applications;
• date and signature of the plaintiff.

The court has a month to consider the appeal.

Appointments of an external manager

Only a judge can appoint a specialist to provide external management at an enterprise. The decision is made in accordance with the proposals of the lenders, the authorized body or other interested parties who initiated bankruptcy. In his application, the applicant indicates the name of the organization and details of the candidate for the position of manager. The court decision indicates not only the details of the appointed specialist, but also the amount and source of his remuneration.

If the court for any reason does not approve the manager, the consideration of the case is suspended until a decision is made on the appointment of a specialist. The period within which the judge must make a decision is no more than 15 days. During this time, the initiators of the process must propose a suitable candidate to the judge.

Who can be appointed

The court may appoint an individual who has the necessary knowledge, experience and is a member of the SRO as a temporary manager.

The following requirements are put forward for a candidate for the position of manager:

• presence of Russian citizenship;
• active IP status;
• higher education;
• 2 years of experience as a manager;
• having an internship as an assistant manager;
• successful passing of theory in the specialty;
• availability of a valid liability insurance contract.

In addition, the specialist should not be personally interested in the outcome of the trial. And also he should not have a criminal record, cases of disqualification, overdue debts or bankrupt status.

Typically, the judge appoints a specialist for a period of up to 18 months. However, at the initiative of the lenders, this period can be extended for another six months or shortened. The manager may be removed from his position early due to his inefficiency, lack of professionalism or violations.