RBK daily interview with Sergey SLAGODA, managing partner of the law firm S&K Vertical.

26 July 2012

The debt crisis which came to Russia in 2008 coupled with the overall economic instability and which still continues revealed the bitter truth that the domestic corporate relations are much prone to conflicts. The parties are ready to bear any losses, and are unwilling to compromise. ELENA KROM, a reporter of RBK, talked with Sergey SLAGODA, managing partner of the law firm S&K Vertical about conflicts between the companies typical of 2012, and the current practice of conflict resolution.

How did corporate debt disputes (which broke out when the crisis of 2008—2009 reached its peak) came to an end?

—Speaking about the big companies’ debts to banks, in my opinion, not all of these stories came to an end, though it's 2012 already. Moreover, currently a new wave of the corporate debts arose, which are not caused by the crisis of 2008. You know just as well as I do that some big Russian companies which passed through the crisis but went bankrupt in this year, because they failed to cope with the new issues. New debts naturally provoke new conflicts.

Turning to your question, I’ll say that there are several ways to resolve debt conflicts. The outcome depends on attitudes adopted by the debtor and the bank, on whether their attitudes are constructive or not. And much depends also on the selected legal concept and on the teams of lawyers representing the parties. Generally, debt disputes are resolved using one of four methods. The first method involves discounted buyout of debt by the so-called third-party investor acting for the benefit of the debtor. The second method involves buyout of the debt or the property complex by an independent investor acting for their own benefit. The third method means the bank going all the way and taking away the debtor’s assets. And the fourth method means an arrangement between the bank and the debtor aimed to debt restructuring. The latter is of course, an intermediate measure. Sometimes it results in debt repayment, because the company uses the delay to solve their problems, and sometimes, and quite frequently, restructuring just allows parties to postpone the acute phase of the conflict.

—Judge by the first two methods, we shall see a wave of mergers and acquisitions, which will follow the debt crisis and put an end to it?

—In our practice, the number of mergers and acquisitions did not grow as compared with the pre-crisis levels. However, the structure of these transactions has significantly changed. Before the crisis, the main reason behind mergers and acquisitions was the economic growth and development of many businesses triggered by this growth, now the main reason is the desire to get rid of distressed, non-core, inefficient assets.

—Does this change affect the legal practice?

—It surely does. Imagine a prospering business buying another prospering business. A company purchasing a distressed asset is quite a different story. Especially when the said asset was the subject matter of a conflict, for instance, a bank is getting rid of some property complex obtained as a result of a debt recovery procedure. Even the due diligence procedure (implemented by lawyers during any mergers and acquisitions) should look quite differently, as applied to distressed assets. The team of lawyers involved should include different experts

— Why?

—Because we have a problem case here. Both the case and the assets should be examined thoroughly. One should look at them from a different angle. The team of lawyers should contain lawyers experienced in dealing with conflict cases.

—In 2009 — 2010 lawyers regretfully talked about the lack of any developed practice of extrajudicial debt restructuring agreements and other civilized tools of conflict resolution. How the practice has developed by now?

—And may I ask you: isn’t the judicial procedure a civilized tool?

— It is.

—Any lawful way of conflict resolution is a civilized one. As to the extrajudicial practice, including the institute of mediators, the Federal Law On alternative procedure of dispute resolution with participation of a mediator was already adopted. Unfortunately, this law did not significantly change the situation. In 2011 I was granted the Russian diploma of mediator, and in 2012 - the international one, but I have very few occasions to present them. There is no domestic market for these services in the area of debt disputes. It is a system problem; people are not prepared for extrajudicial settlement of conflicts. Hopefully, we will come up to it sooner or later.

—They are not prepared legally or psychologically?

—It would be impossible to speak about legal unpreparedness, because lawmakers provided us with basic conditions. It is rather a psychological matter: people in Russia like to solve issues quickly and efficiently. They deem it more efficient to go to law, than to carry out long negotiations with debtors.

—Long negotiations can result in mutually advantageous compromises, while the unwillingness to compromise often leads to financial losses.

—You are right. By my experience, any war means losses on both sides. When a bank attempts to collect money from the debtor, the latter tends to defend himself. Debtors oftentimes prepare to withstand a potential collection, and such preparation is quite a strain on creditor’s resources. The mediation procedure is aimed to help each side party to leave the conflict satisfied, to the extent possible. Therefore, from the point of view of efficiency, mediation is an attractive way of dispute resolution.

—Lawyers told me that at the height of debts crisis clients used to throw gold watches at each other, yelling: “You’ll get nothing more from me”. By your experience, do people incur financial losses due to their aggressive behavior towards opponents?

—Well, emotions have an impact on business. People can lose something during conflicts not only because of decisions they make, but also because of their intemperance. The point is, any negative emotion gives rise to some response. And deadlock situations occur when parties have to carry on negotiations, but they just cannot communicate after a series of unpleasant episodes. Those who have enough brains will turn to mediators or engage lawyers, consultants etc, to communicate with the other party. And those who lack understanding will start hostilities. I believe that much depends on mental training of the team of lawyers. They should be prepared for abnormal situations during negotiations. They should help clients to save the face and to continue the dialog.

Until quite recently, raiding was believed to be the curse of business. Do you often encounter the victims of raiding in your practice now?

—Nowadays, there is the so-called advanced raiding, based on court decisions. As my colleagues are fond of saying, there is a dichotomy. If the decision relating to property transfer was approved by courts, then we are not raiders, we are investors who are in defense of our rights. If the decision was not approved by courts, it can't be helped, our attempt proved unsuccessful.

—Is it possible to protect company ownership rights in advance using legal methods?

—The answer is simple: if there is no initial soft spot, i.e., a corporate conflict, an unsettled debt and if the corporate security of your business is provided by professionals, then the risk of corporate raids is a minimal one. Of course, the “forceful business activity” is still practiced in Russia, but the scope of such activity is greatly reduced under the present conditions.

—The state plays an increasingly important role in the economy; a significant part of the market is occupied by state-run companies. Do these changes affect the legal practice? It is difficult to deal with the respondent if they are a company fully or partially owned by the government?

—Yes, it has affected the legal practice and, yes, it is difficult to manage such disputes. But you shouldn’t give up, if you are sure that you are right. One is entitled to litigate with the state, and one should do so when one’s rights are infringed. There is legislation. People have rights, and they should defend them to the end.

RBK daily

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