Prospects for commercial debts recovery? Comments of Supreme Economic Court

2 Jun 2011

On the air of “Letter of the Law”, author program of Denis Aleinikov, Senior Partner of Law Group “Argument”, the eternal question “How to provide specific performance of the economic court decision?” is answered by Pavel Vaskovsky (Павел Васьковский), Executor in chief of economic courts of the Republic of Belarus.

Pavel, Dmitry Viarvilsky (Дмитрий Вярьвильский), head of court executor services of Minsk Economic Court was guest of “Letter of the Law” program a year ago. Dmitry told us then that the process of court decision execution has been very slow in our country due to overwork of court executors: one court executor has been processing about 600-700 cases simultaneously. A year has passed, has anything changed in the matter since then?

First of all, let me express gratitude for the opportunity of taking part in the remarkable “Letter of the law” project, the project to be constantly discussed in all the circles.

foto_vaskovskiy.jpgCertainly, there have been particular changes, including in the activities of court executor services of economic courts of the Republic of Belarus. We have now to execute over 37 800 proceedings, it’s about 570 proceedings for each executor. Just insignificant reduction of these numbers has taken place. The reason for reduction of the number of execution proceedings are measures taken in the economic courts system aimed at optimization of the execution proceeding and the economic proceeding in general. For example, conciliation procedures are being actively applied in the economic proceeding now, i.e. alternative dispute settlement ways are being used, consequently, the number of applications for initiation of execution proceeding has slightly decreased.

I have a subjective feeling that 570 proceedings for one executor are still too much. Maybe, parallel private services of court executors shall be introduced? Have you studied experience of foreign countries in this regard?

We have. Colleagues of ours from Lithuania, Latvia and Estonia have just recently introduced the institute of private execution, but we should be very careful with introduction of such a system in our reality.

To speak briefly and frankly, private execution is good as far as the state has no financial burden in the amounts it has now. Financial costs shall be charged exclusively from the debtors, and in case of unsuccessful attempt – from the recoverer. Alongside with that we are ready to recognize it to be an additional stimulating factor for voluntary execution.

On the other hand, private execution has also its shortcomings. Firstly, corrupt practice threat appears, because the information obtained in the course of proceeding often contains data on bank, tax, commercial or some other secret.  Such information may be made use of with different intents, and the first one is illegal takeover of debtor’s assets. Apart from that, one more difficulty existing in private execution is disinterest in recovery of small amounts: profitability is low; and then, private execution is actually the same commercial organization the interest of which lies in nothing but making commercial profit.

Yet, existing two systems shall provide competition and alternative. It depends on your desire – you may apply to the state court executor or to the private court executor system. Having choice is not bad, is it?

We are monitoring the issue. In particular, in Kazakhstan, side by side with the private execution there is a state executor working who carries out some executions upon social aspects. We have been studying the effectiveness.

Within the frames of the Customs Union we shall create an integrated legal action enforcement base for debts of economic entities of all three states. So, it cannot be ruled out that some changes take place in our country as well.

The point is that being state court executors, we place great emphasis on social principles of our state, and each debtor shall be ranked according to all criteria: we watch not only the enterprise’s assets, but also some other criteria – economic performance of the entity in the region, its significance for the region. With this in view we carry out enforced recovery of the entity’s property. I assume you understand that a private executor won’t be interested in all that aspects.

As far as I remember, a draft of a regulatory legal act on debt collection agencies was worked out a year ago… This should be one more step to decrease burden of your system.

It has not fallen into oblivion .As of today, it has been transformed into the implementation program of regulations of directive No.4. I believe, this idea will be realized in the nearest future – if I am not mistaken, definitely, this year.

We are interested in existence of the collection agencies institute. Supreme Economic Court has already expressed its position on existence in the Republic of Belarus of collection agencies, but with a small reservation. A debt collector shall have proper powers pursuant to the law, in order to provide support to the court executor in execution issue while fulfilling its function, instead of being like a troublesome fly fulfilling just a function of the inquirer.

Pavel, if you don’t mind, let’s pass from the issues of future strategies to some vital problems.

Here is the portal user writing: “What is to be done, if there is a certain connection, to my opinion, between the court executor and the debtor, which, in my view, interferes with the recovery? Where shall I apply to? ”

To begin with, I would like to emphasize that economic courts and the court executor services are absolutely open. We have just recently finished the work of court executor services “hotline”.  Advertising of that line was published everywhere, there has also been certain complaints in regard to the actions of court executors. We have just slightly transformed and broadened it, and a sort of telephone emergency service of economic courts is already functioning at present moment.

As far as the user’s question is concerned, connection between the executor and the debtor should exist. Though, if the connection interferes with the enforced collection, this is an obvious violation of the laws, which can entail inter alia criminal responsibility in case it shall be proven.

People usually make such complains: the court executor does nothing. How do you respond to such complaints?

Yes, we do respond, and there are more than enough such complaints in Supreme Economic Court under consideration. On the whole, within the system we have considered about 15 thousand applications on execution course of nonprocedural complaints during last year. Yet, the applicants shall understand that the court executor spends time to respond to this application, and the time is often wasted in vain due to insufficiency of some applications. Many people think that application of nonprocedural nature shall stimulate the work of the court executor, and he shall place more emphasis on work upon a particular execution procedure. I cannot say it is true.

Sorry, is there any other way for an individual entrepreneur, director of an enterprise to stimulate the court executor?

I believe, the basic stimulating factor shall be the point that the recoverer as well as the court executor shall be interested in recovery. Accordingly, the recoverer shall also take part in finding the debtor’s property, as much as possible, and the court executor shall be challenged to realize this or that type of property in case it has been revealed.

I suspect that such interaction between the court executor and the recoverer shall promote a more efficient execution. As regards applications and complaints, certainly, these complaints may be also addressed to my name. A curator of particular court shall request the case materials; we shall inspect the latter and make a corresponding response.

There is a question from the users on prevention of possible debt creation. A user is asking: “How to clear up the contractor’s reliability beforehand, whether he has been a debtor upon any execution proceeding? Or whether he has been a participant of any litigation? There was a list of such entities in the website of Supreme Economic Court earlier, but it fails now.”

Actually yes, we released this information in our website earlier. It was public information and the economic entities checked potential contractors and made corresponding conclusions.  These data was very useful for banks, and in principle, for everybody, including state enterprises. We have ceased this practice due to the fact that functioning of this register in our website has been used by some commercial organizations, putting it mildly, for bad purposes. In simple terms, they made use of such terms as “fraudulent debtors’ list”, “black list”. We have removed that list of debtors in order to avoid creating a sort of branding of such economic entities, and we shall release this information in another way by means of our official edition of “Bulletin of Supreme Economic Court.”

In what way shall it be possible to get access to this information via “Bulletin”?

There are two ways. One of the ways is publishing the titles of economic entities on paper medium, in “Bulletin” itself, but it is going to have rather a big volume. Therefore, we probably provide access to this information on our internet portal by means of login and password. But this information will be provided upon an application and in relation to a certain organization: one should attach UNP or title and we shall make a response, whether the entity is a debtor. I would like to underline that this base shall contain only the debtors that have been under execution proceeding in the services for the period for over three months.

Why exactly over three months?  Shall he not be a debtor if the period is less than three months?

As far as we see it, if the economic entity has paid the debt within three months, it is certainly not worth to stain its good name and indicate it as the debtor. For the moment being the issue of debt repayment has been urgent not only for those economic entities which had been debtors in the past, but also for those which have not suspected themselves of being debtors. There is a good proverb: “Don’t count out a prison cell, a begging bowl may come as well”. That’s why there is always a chance for rehabilitation: well-timed repayment of debts prior to the above three months – and you are not in the “black list”, so the information on unreliability simply disappears. The list shall also contain data on the debtors, in relation to which the work has been finished due to recovery inability determined by the corresponding act of the court executor.

20110525_1206_oleynikov_400.jpg Such information may be also obtained after having filed a proper request to the court, but according to the last amendments to the Economic Procedural Code, on paid basis already.

This procedure is specified by article 407 of Economic Procedural Code at the present time. As of today the state duty amounts to three basic units – not a very substantial sum for obtaining the information on whether the entity is a debtor or not, but also on how much is the debt amount to be recovered, as well as on encumbrances on debtor’s property performed within the execution proceeding, and the number of execution proceedings initiated in relation to the particular debtor. In our opinion, the work of the court executor in connection with providing with such information will take enough working time, therefore it shall be compensated.

By the way, shall the party to the execution proceeding also obtain this information on paid basis, or is it possible to get it for free?

Interesting question, I’ll explain why. On the one hand, we have a regulation in Economic Procedural Code specifying that the party to the process shall be entitled to know what is happening to the case free of charge. That is why it is entitled to obtain certain information free of charge, but for this purpose it has to come to the economic court to the court executor, take case materials and become familiar with them. Certainly, there are exclusions at present, and it can become familiar with them. In particular, we have introduced such a notion as “information for official use only”. There have also been a lot of opinions expressed to this point, for example, we were indicated, that if the information for official use won’t be provided, then the case materials shall essentially contain just the documents issued by the court executor. What is it to become familiar with? But it turns out in practice that we shall keep commercial and bank secret, tax and other confidential data. Due to this point, the information shall be accessible only by the way specified in these acts of legislation. Speaking of this information, the court executor shall provide the party to the process, the debtor and the recoverer with information on paid basis as well, since article 407 does not contain any exclusion. If you have possibility to become familiar with it free of charge, you are welcome to do it.

Of course, there may be some exclusion, when someone is not able to come to the court and become familiar with the data free of charge, let us suppose, the recoverer is situated in Germany or anywhere else, though I still believe, he is quite able to pay three basic units.

Have you ever come across cases of creative debt evasion? What do our people invent in order not to recover debts by relatively honest means?

Our people are inventive enough. For example, we may mention quite improper application by some debtors of regulations of Decree No.1 in the sphere of liquidation. The simplified liquidation procedure today allows the debtor in case of revealing his property by the court executor, to declare his quasi decision on liquidation. In this situation, according to the provisions of Economic Procedural Code and the instruction on execution proceeding, the court executor shall return the writ of execution to the debtor and send it to the liquidator, who as a rule, is appointed official of the legal entity, which may even not answer the telephone calls and can ignore the creditor’s requirements. In such a situation I believe, it is important to strictly prevent such facts.

In what way?

In the first place, to declare that the economic entity has been evading the debt repayment. The internal affairs bodies shall investigate these facts.

Has ever any criminal proceeding been initiated upon the article “Evasion of credit debts repayment”?

I am not prepared to provide you with figures, but there are such precedents, although they are sooner exception of the rules. I think such figures set us on the alert.  

What is the problem? There is an article and there is evasion. Why is the Criminal Code article out of operation?

Imagine that you are a debtor, who is allegedly evading. How can you prove the fact of evasion?

This is the work of militiamen…

The debtor says to the militiaman: “I do agree to pay, but my pockets are empty. I am willing to pay in every fiber of my being, but I cannot. I do not perform any commercial activity now or I do, but unsuccessfully.” Probably, that is the problem worth being raised, and I suppose, our work aimed at improvement of situation upon this issue, shall be completed with the assistance of General Prosecutor Office. It seems to me, we should say that if the debtor has been actually evading, he shall bear criminal responsibility.

Do court executors today have enough powers to perform their work effectively, to your mind?

As far as the powers of the court executor is concerned, I think that they are quite enough for the present moment. However, some regulations of the law are worth being put in order. For example, pursuant to regulation No.147 of the Council of Ministers, the court executor from the dawn of time has been entitled to suspend account transactions. Current Banking Code specifies that it may be done strictly by definite state authorities. We are not in the list of those state authorities. However, article 351 of Economic Procedural Code provides that being vested the powers of authority we are entitled to prohibit certain actions to the state and private authorities. Within the frames of this article we have found the way out in regard to the banks, so we prohibit debit transactions on accounts now following the provisions of article 351 of Economic Procedural Code. Speaking frankly, we had to look for a creative mechanism for implementation of powers. We would prefer to work with the clear powers spectrum instead of seeking such mechanisms and creative ways.

It happens quite frequently that if the debtor has no money or any other source of income, but there is some property, the recoverer is practically not able to do anything with this property. The procedure of its disposal is tough and long-term. What is the problem with that?

We involve specialists for formation of arrested property value, and we are talking of big things. The court executor is not entitled, even more, he should not take responsibility for value formation in respect of a big property complex or real estate property. So, evaluation experts calculate the market value of the property. However, we need to add value added tax to this market value of the property.

It turns out that the item costs 120% of the market value, doesn’t it?

Yes, and on top of all that, plus the first step of 5%, if it is an auction.

In total, value cost of 125% compared to the market value of the property.

Literally speaking, yes. We sell the property for a somewhat greater value than that formed by expert calculation. Taking into account that it is bidding, we shall suppose that this value will be even higher. Therefore, I am ready to state that we have a problem we are working at now. For the present moment effectiveness of the held bids leaves much to be desired.

What about statistics? How many effective biddings per hundred?

According to the latest statistic data, 16 out of 100 biddings have been successful for the moment being.

If the bidding failed, what comes next? Is it possible to reduce the cost?

To start with, the creditors may be offered to take it. In case no creditor has decided to take the property for that value, we make its revaluation. In the result of such revaluation the property value may be reduced up to 20%.

And what if that bidding failed either?

If the repeat bidding failed, we offer the property to the creditors again. If the creditors don’t buy it, we return the property to the debtor in such a situation.

This is a deadlock situation: the debtor has property, but it is impossible to make a recovery because of its evaluation and realization methods which make it impossible to reduce the price and make it purchasing, isn’t it?

In order to resolve the situation I would like to say that we are working through the possibilities of applying in the course of the execution proceeding a different value type. The working name shall be “liquidation value”. We say that taking into account the terms for realization of property win the course of the execution proceeding and some other factors, it is necessary to apply certain decreasing coefficients while forming the property value. We just started talking about that not long ago, and may be, the second option should be going away from value added tax, and realize the property for the price formed by an expert. But some other questions arise there: shan’t we switch from overstatement to understatement of the value? In order to balance that point we need to be accurate with that issue: no sudden movements. I think, the most significant thing is that the approach “taken home” does not lead us to the situation when the assets are sold for nothing in the course of the execution proceeding.

I have heard that Supreme Economic Court has already been working on possibility to arrange electronic bidding for the debtor’s property.

In the course of implementation of the electronic justice program we are actually working through the issue today on the possibility of raising the efficiency of realization of the debtor’s property with the use of modern technologies and in doing so to cut down the debtor’s money.

It has been planned that electronic bidding shall be performed on the e-trading platform which eventually shall be formed then on the internet– portal of economic courts. Using other e-trading platforms may conflict with the effective laws on holding of auctions and biddings. It is progressive that using e-trading platform we do not move any objects exposed to arrest, and thereby reduce the costs and in a certain extent cut bureaucracy taking place in all and any authorities. The person willing to participate in the bidding, shall enter the site via registration, contribute 10% amount, send the electronic bidding participation application and participate in it by placing stakes. This is the way it looks like in the project.

Project archive