Among other changes made, a new provision regarding anticipated bankruptcy has been added.
The second part of Article 3 of the law has been supplemented with the following content in part 2.2: "2.2. The debtor has the right to apply to the court in the case of anticipated bankruptcy when it is evident that the grounds for recognizing the debtor's own bankruptcy, as provided in points 2 and 2.1 of the second part of this article, will arise."
Essentially, this is a new concept in the law, which, unlike existing grounds, defines the debtor's right to apply to the court not as an obligation but as a possibility. In cases where the grounds for voluntary bankruptcy defined by the bankruptcy law arise, the debtor's inaction may lead to undesirable legal consequences for them; however, in this case, the non-exercise of the right cannot cause any consequences and is intended to protect the debtor's rights more effectively. As is known, the threshold amount defined by the bankruptcy law, which the law associates with the possibility of the emergence of bankruptcy relations, is a thousand times the minimum wage, amounting to 1,000,000 drams. When it becomes evident to the debtor that there is a risk of any grounds for bankruptcy arising as defined by the law, that is, there is a payment obligation that, although it does not exceed the amount defined by law in relation to their own assets, there is an obvious risk of exceeding it. For example, if the company has a payment obligation of 800,000 drams, while the value of its assets is 900,000 drams, then it has the right to apply to the court at its discretion, as long as no factual circumstances that would constitute grounds for voluntary bankruptcy have emerged. On the other hand, it is noteworthy that this right has been reserved only for the debtor, not for the creditor. If the same conviction arises in the creditor, they will not be entitled to file a lawsuit against the debtor on this basis until the factual grounds defined by the bankruptcy law have emerged. In this regard, it would be more effective to also provide this opportunity for the creditor, who is the more interested party in these relations, as the debtor's potential bankruptcy usually ends up being detrimental to the creditor due to the debtor's failure to fulfill their obligations towards them.
The authors of the law have justified the amendment by stating that these changes will "allow debtors to return to normal operations without reaching bankruptcy, receiving anti-crisis management assistance from the manager. Broader opportunities and longer terms will be provided for the debtor's financial recovery, which can significantly increase both the level of the debtor's financial recovery and return to the market, as well as the protection of creditors' interests. As a result, the efficiency of the bankruptcy process will also improve. It has been noted that the activities of bankruptcy managers will become more effective and controllable from the perspective of protecting the interests of both debtors and creditors."
In other words, it is assumed that the bankruptcy manager should be a professional manager endowed with economic and other professional knowledge, depending on the specific characteristics of the business, who, based on their knowledge and experience, will be able to prevent the emergence of bankruptcy characteristics. Although this claim is theoretically not excluded, in practice, it cannot ensure the results that are possible in developed countries, where both the training of managers and the amounts of their remuneration differ significantly.
Alternative solutions to avoid damages from bankruptcy.
Anticipate the risk of potential bankruptcy
Take appropriate measures in advance knowing the possibility of bankruptcy
In the USA, there is a solvency assessment system called "FICO SCORE." The system also generates a separate score called the bankruptcy or insolvency score, so the creditor can take certain preventive actions based on information about this score before entering into a transaction with any person or company or even during the transaction, thereby reducing the risk of potential losses arising from possible bankruptcy. It is an effective means of assessing an individual's likelihood of bankruptcy. In reality, when a company is operating at a loss and there is a real possibility of its bankruptcy, the likelihood that it will go down the path of voluntary bankruptcy as defined by law and declare its bankruptcy is quite low, while another company that appears to have good financial indicators or even presents itself as such may declare its bankruptcy "one fine day." For example, many developers and citizens who did not receive apartments, or the bankruptcy of a well-known supermarket chain, which has harmed hundreds of companies. The counterparty or ordinary consumer has very limited means to assess the likelihood of this or that person's potential bankruptcy or the degree of that risk. For example, whether a company will end its activities with profit or loss over a certain period. This possibility becomes real in the USA through the implementation of that system. The application of this system in Armenia and providing the creditor with the right to file a lawsuit against a company with a corresponding bankruptcy risk score would allow many creditors to timely recover their funds or at least avoid corresponding transactions. Under the current bankruptcy procedure, it becomes almost impossible to receive any payment from a debtor recognized as bankrupt. The system is indeed quite effective, and the criteria used for assessing solvency, and therefore the risk of bankruptcy, are real indicators of the possibility of the company's continued operation.
35% Payment history - collections by court decisions, public legal claims, settlement agreements. Prohibition of late payments -
30% Volume of obligations;
15% Duration of credit history
10% Type of credit used
10% New credit applications
Other changes
Termination of administrative and arbitration cases against the debtor
Previously, the law did not regulate whether administrative or arbitration cases against the debtor should also be terminated. The question of eliminating the security measures applied in those cases also remains open.
Examination of all court disputes related to the debtor in one proceeding
In practice, it is often encountered that disputes related to the debtor are examined in different courts, for example, when the debtor disputes the validity of transactions, makes property claims, etc. In such cases, the bankruptcy case remains pending.
Examining all civil cases related to the debtor in one proceeding could make it more efficient.
The maximum term for the financial recovery program has been changed; previously it was 24 months, and now it cannot exceed 36 months unless the term of its operation has been extended in accordance with this law.
Additional rules of conduct for the bankruptcy manager have been provided.
In this regard, valuable changes have been made by stipulating that the manager must perform their powers in the shortest possible time, as many unscrupulous managers unjustifiably delay their bankruptcy cases for years; thus, this regulation will make it possible to raise their accountability in case of such unlawful behavior. The following obligations have been established:
1) ensure respectful and impartial treatment of the debtor and creditors.
2) clarify the nature of the bankruptcy process to the parties.
3) maintain the confidentiality of information protected by law that becomes known to them during the bankruptcy case.
4) exercise their powers assigned to them in the bankruptcy process in the shortest possible time.
5) contribute to the formation of trust towards managers.
Provision has been made for the remuneration of the manager in the case of financial recovery
In the case of the debtor's financial recovery, the amount of the manager's remuneration is determined at least five percent of the amount of creditors' claims satisfied during the implementation of the financial recovery program. If the financial recovery program is successfully completed and the debtor is rehabilitated, the manager is paid a bonus according to the procedure provided for in the financial recovery program.
However, the manager's remuneration continues to remain quite low in cases where the debtor has no property, or the value of their property is less than five times the minimum wage. In this case, after the completion of the bankruptcy case, within a month, the manager is paid compensation from the state budget of the Republic of Armenia in the amount of five times the minimum wage. Naturally, 30,000 drams is a negligible amount compared to the work performed by the manager. In reality, this amount does not even cover part of the expenses incurred by the manager. Therefore, the opinion stated in the justifications of the draft law that this will "solve the problems related to the remuneration of bankruptcy managers..." is highly exaggerated, and this minimum amount needs to be reviewed.