Interview with Konstantin Krutilnikov, senior partner of S&K Vertical law firm, in RBC Daily

17 September 2010

Practice of settlement of debt disputes in Russia gives strong grounds for optimism: it shows that domestic business is capable of working at itself. If in 2008-2009 creditors and debtors tried with enviable tenacity to aggressively fight against each other without understanding, against the background of recession, of what the morrow had in store for them and how to behave, the year of 2010 the parties spend in pursuit of efficient solutions. On the one side, the Russian Government tries to make the debt market to be more civilized; on the other side, its informal participation prevents its players from reaching agreement with each other. KONSTANTIN KRUTILNIKOV, Director General and partner of S&K Vertical Moscow law firm, tells ELENA KROM, journalist of RBC Daily , about current trends in the field of debt disputes.

— Is it possible to say that creditors and borrowers learnt to behave in a civilized manner?

— As for the market of corporate debts, in most cases it is true. Slogan of one of Russian banks sounds as follows: “It is advantageous to be honest.” If a business needs a credit for development and growth, but not to buy yachts and planes for shareholders, it is advantageous for it to pass through a hard time and to square accounts with the bank. In the same way, banks strive for retaining the borrower if they see that it is capable of restoring its solvency and works at it. As a result of this understanding formed in the market on two sides we observe much more settlements than before. Banks do not hurry to file petitions in bankruptcy; they restructure and refinance debts and grant deep discounts to borrowers: from 5% to (in some cases) 95%.

— What is more efficient – to compromise at court or to reach agreement in the extrajudicial procedure?

— In the absence of a dialogue, consulting Russian and western banks, we recommend that nevertheless they should initiate legal proceedings – recovery of debts, levy of execution upon subject of pledge. In complicated cases it is worth lodging criminal claims too. Thus, the creditor clearly demonstrates that it has serious intents and makes the borrower to come up with constructive suggestions after which it makes sense not to push the matter through to enforcement or bankruptcy proceedings, but to concentrate on negotiations.

— Some experts noted that Russian judicial system is maladjusted to amicable agreements.

— Why ? The Arbitration Code of Practice expressly specifies that the arbitration court shall take steps for conciliation of the parties and shall assist them in settlement of disputes. And courts willingly confirm amicable agreements which do not infringe rights and legitimate interests of other persons. If a legal recovery is not initiated, the parties can extrajudicially conclude an agreement for debt restructuring and additional collaterals. Judicial compromise and extrajudicial restructuring have one and the same meaning – it is settlement of debt by the parties. If the debtor does not perform the amicable agreement, the creditor obtains a writ of execution through court. If the debt restructuring agreement is not performed, it serves as grounds for initiation of a law suit. In any case enforcement measures shall be established by the court.

— What are the cases in which it is impossible to find an efficient solution?

— When there is no dialogue between the debtor and the creditor. Sometimes the bank acts too aggressively rejecting all proposals: in case of one day in arrears, default is declared, actions are immediately filed and applications are submitted to law enforcement authorities. It provokes a negative attitude; the borrower hunkers down, tries to wind up the company, to strip the company of its assets – in general, to leave the bank with nothing. But in any case it is better to have a bank than individuals or a corporation as the creditor. The bank remains in the legal field, and its position is lawful and predictable. A bona fide bank is always interested in debt servicing and redemption, but not in getting the pledge or gaining control over business. If you deal with an indefinite corporation, there is always a risk of failure to come to an agreement on efficient settlement because from the very beginning it may be headed for a raid seizure.

— How does the law changes in the field of debt disputes?

— Updated law on bankruptcy built legal mechanisms for protection of the creditors’ rights. Additional opportunities appeared for their most numerous group – banks. Special status of pledge creditor in the course of bankruptcy was detailed. I take a favorable view of these changes. I think that banks that supply the market with money and make it possible for business to grow shall have an adequate mechanism for protection of their rights within bankruptcy procedures.

— At the same time the law exposes those managers that are engaged in management of distressed companies in good faith to a risk. At present, it is possible to bring actions against them virtually for any reason.

— Company management bodies shall hold responsibility for their activities including responsibility to the creditors.

— What is your attitude to involvement of independent intermediaries, mediators, into debt disputes?

— The Government adopted the law on mediation to decrease the courts’ work load and to engage additional specialists – skilled experts – in settlement of disputes at courts. It is a great idea . However, its implementation depends on whether the market would wish to apply to mediators. You know, we have a different culture: each time a serious transaction is pending people apply to the Kremlin – it is it that appears to be a source of expert proposals. Business is not used to relying on independent experts. Furthermore, there are serious gaps in the law on mediation: it is very declarative and lacks specifics.

— Arbitration tribunal is another intermediary institution. Does it have prospects?

— Surely . We recommend that our clients should use mechanisms of arbitral proceedings. And we think that the law could enable arbitration tribunals to issue writs of execution for a number of disputes. The market is interested in independent operation of this institute which would engage experts whom the parties trust and in execution of arbitral awards. For the time being arbitral awards are executed through the system of state courts. On the whole, this institute is currently more efficient than the institute of mediators because the law on arbitration tribunals contains more compulsive mechanisms. Furthermore, arbitration tribunals have operated for a long time and some of them managed to give a good account of themselves. However, in the large, civilized intermediary institutions will operate at full power only when uncivilized mediation is excluded. The state shall not intervene into private disputes, and business will learn to efficiently settle them. The market requires that no one would interfere with it.

Risks remain

According to the Central Bank of the Russian Federation, by August 1 of the current year share of overdue debts in the aggregate corporate credit portfolio of Russian banks amounted to 5.63%. It means that level of overdue payments keeps growing (on January 1, 2010, it amounted to 5.54%, and on January 1, 2009, to 1.97%). However, rates of growth notably decreased as compared to the last year. Threats for the banking system are still on the agenda. The situation is commented on by EVGENY NOVIKOV, first deputy chairman of VTB North-West bank.

— In our opinion, official data on overdue debts rather unobjectively reflect the situation with problem assets and extent to which it influences stability of the banking system. Here it is worth mentioning share of problem loans. According to official statements of the Central Bank, as of July 01, 2010, this indicator amounted to 9.6%. Expert estimates show that in fact share of problem loans is notably higher – about 15% of the total portfolio. About 8-10% among them relate to irrecoverable losses, that is debts which will never be redeemed. Reserves sufficient to cover these losses have already been created. Herewith, current profit and capitalization indicators of Russian banks (profit forecast following the results of 2010 – 450 bln rub., indicator of capital adequacy of the banking sector – above 19%) suggest that share of problem (including bad) credits at the level of 15% is not critical for the banking system. However, it is also impossible to say that problem debts do not pose a threat any more, especially if we consider cancellation of the preferential provisioning level for restructured credits and planned tightening of provisioning standards for risky assets. In case of unfavorable macroeconomic conditions the situation can get worse again by the end of the year.

Undoubtedly, formation of a culture of relations between the debtor and the creditor is a positive fact. Most companies experiencing difficulties in redeeming credits currently understand that it is better to act in good faith with regard to the bank and to attempt to settle the situation on mutually advantageous terms. The bank, in its turn, can come to terms if it makes it possible to maintain the business of the bona fide client. Operating business with restructured credit is much more valuable for the bank than separated assets of a bankrupt company.

RBC Daily

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