Academic journal article Texas International Law Journal

Rescue versus Liquidation in Central and Eastern Europe

Academic journal article Texas International Law Journal

Rescue versus Liquidation in Central and Eastern Europe

Article excerpt

HARRY RAJAK^

I. INTRODUCTION

Nearly two years ago, the Institute of Central and Eastern European Business Law at the Wirtschaftsuniversitat in Vienna, Austria, began a project to prepare and publish the newly created and, in some cases, resuscitated bankruptcy codes of eight countries in Central and Eastern Europe, namely, Russia, Poland, Hungary, Bulgaria, Slovakia, the Czech Republic, Slovenia, and Croatia. Working papers have been drafted and are in the course of preparation; some of the statutes have been rendered into German. There is a simultaneous, continuing process of translating all this material into English. Thus far, material in English is available for Poland,. Bulgaria, Hungary, Slovenia, and Slovakia. I was invited to act as one of three consultants to this project and to analyze the extent to which these eight countries have addressed the issue of rescue as part of their newly established bankruptcy codes.' Given the fact that at this point only part of the material is available in English, this is an interim report.

II. THE RANGE OF BANKRUPTCY REGIMES

Let me begin by attempting some crude definitions and distinctions. We assume an entity (at this stage, this entity may be an individual, an unincorporated organization, or an incorporated organization) that is unable to pay its debts in full as they fall due is in a condition which we shall define as insolvency; more concretely, it has become an insolvent entity. At one end of the bankruptcy spectrum, the insolvent entity will be pushed through a commercial expunging process-it will disappear temporarily or permanently from the commercial stage. In England, we describe this process as winding up where the entity is an incorporated or unincorporated association and bankruptcy where the entity is a human being. In some jurisdictions, this process may necessitate court procedures and may be capable of execution only by court order. In other jurisdictions, an alternative, largely private, process is available, although even here some public recognition of commercial death is almost certainly built in. I shall refer to this process as "winding up."

At the other end of the bankruptcy spectrum, we have the informal process of negotiation and private agreement. This process, if successful, results in a sufficient alteration of the prior contractual arrangements between a debtor and its creditors so as to enable the debtor to continue its commercial activities, either exactly as before or according to some mutually agreed changes. I shall describe this process as "informal restructuring." While it is almost certainly dependent on legally binding arrangements between debtors and creditors, an essential characteristic of the informal restructuring is that it will avoid any court involvement except, possibly, of the most perfunctory nature.

Between these two extremes, we have at least two recognizably distinct processes. First, there is the informal control of the debtor by one powerful creditor, the latter's superiority over other creditors deriving from the proprietary consequences of the contract between the debtor and this superior creditor. Here, I am obviously referring to the phenomenon of the secured creditor, especially where the security consists of all or most of the debtor's assets and where the relationship between debtor and secured creditor gives the latter powerful rights to deal with the secured assets. The best example of this institution is the creditor who has security not only over the immovable or fixed assets of the debtor (a "fixed charge"), but also over the movable assets of the debtor (a "floating charge"). The latter is uncommon and found mainly in common law jurisdictions such as England and Wales, where it came into existence in the last quarter of the nineteenth century through the development of the common law principles of contract and property. I shall call this regime "receivership."2

Second, statutorily enacted regimes that establish a moratorium protecting the debtor for a limited period from any execution process initiated by its creditors are now widely available. …

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