Legal Convergence in Developing the Anti-crisis Potential of

Bankruptcy Institute as Responding to the Negative Economic Impact

of Covid-19 Pandemic

Y. N. Folgerova

, K. A. Minnullina

and E. P. Tatarinova

Federal State Budgetary Educational Institution of Higher Education «Vyatka State University», Kirov, Russia

Keywords: Pandemic, Covid 19, Legal Regulation, Bankruptcy, Insolvency.

Abstract: The insolvency (bankruptcy) institute has a special role in the crisis management measures system, given its

rehabilitative potential and selection mechanisms inherent in it. The crisis phenomena caused by the Covid-

19 spreading serve as the legal regulation problems catalyst in this sphere, which actualizes its improvement

necessity to minimize the pandemic negative economic effect. Insolvency law adaptation to the Covid-19 new

challenges, given its spread scale, is a challenge faced by all legal systems without exception. This article

attempts to systematize and structure the Government's response at the national level to the institution of

insolvency, aimed at minimizing the negative consequences of the pandemic. The analysis allows us to

demonstrate that disparate, uncoordinated measures have common trends and patterns. Based on the

conducted research, in conclusion, proposals are formulated that would allow taking into account foreign

practice to determine the strategy for the development of the institution of insolvency in the Russian legal

system in order to increase its effectiveness as a mechanism of anti-crisis regulation.

1 INTRODUCTION

The covid-19 pandemic had a negative impact and

revealed vulnerable point a social and public health

spheres, it is also paralyzed business activity and led

to the «worst economic crisis since the Great

Depression of the 1930s» (Sapir, 2020). As a

response to the negative trends caused by the

economic shock, many countries are responding with

a package of legal and economic measures for

stabilization. At the first stages, negative effect of

сovid-19 pandemic has largely been handled as an

essentially national matter. Nevertheless, the

continuous phenomenon of global economic

interdependence determine the tendency towards

similar responses to the spread of the virus eventually.

The phenomenon referred to as the «copycat

coronavirus policies» that was the result of regulatory

emulation (Alemanno, 2020). This study aims to

answer the question whether there is a similar pattern

in the legislation in the field of bankruptcy

https://orcid.org/0000-0001-6980-278X

https://orcid.org/0000-0002-0585-2072

https://orcid.org/0000-0002-2066-0618

(insolvency). In conditions economic downturn, the

legal regulation of bankruptcy (insolvency) deserves

special attention from the point of view of its anti-

crisis potential. The most dynamic development of

legislation in this area is during the crisis. The

Russian legal system is no exception. The Ministry of

Economic Development has prepared a draft of large-

scale reforms to the federal law on insolvency

(bankruptcy), aimed at optimizing procedures and

improving the effectiveness of the rehabilitation

component. The findings of this study reveal that

fragmented and uncoordinated national responses

have common trends what is caused by the unity goal

of minimization economically and financially

destructive effects of the pandemic.

2 RESEARCH METHODOLOGY

The study key objective is to assess the crisis

phenomena impact caused by the Covid-19 spread on

232

Folgerova, Y., Minnullina, K. and Tatarinova, E.

Legal Convergence in Developing the Anti-crisis Potential of Bankruptcy Institute as Responding to the Negative Economic Impact of Covid-19 Pandemic.

DOI: 10.5220/0011118400003439

In Proceedings of the 2nd International Scientiﬁc and Practical Conference "COVID-19: Implementation of the Sustainable Development Goals" (RTCOV 2021), pages 232-236

ISBN: 978-989-758-617-0

the insolvency institute state and legal regulation in

the Russian legislation, which was based on the

formal-legal method. The work starts with the

insolvency institute role in the anti-crisis regulation

system. It helps to identify this institute low-

efficiency problem in the Russian legal system, which

is caused by pro-creditor concept prevalence. The

study was accompanied by the statistical method

used, in particular, the data analysis from the

information about bankruptcy Unified Federal

bankruptcy legal regulation fundamental problems in

the Russian Federation

The article further attempts to systematize the

responses implemented by states to minimize the

pandemic negative economic effect, directly reflected

in the insolvency institute legal regulation, to identify

patterns and trends. This study objective was to

identify the most effective strategy for the bankruptcy

institute modernization, which solution is based on

the comparative analysis and convergence methods.

In the course of the study, the measures taken

during the pandemic in the different states insolvency

legislation sphere were divided into two stages: first,

emergency measures to prevent bankruptcies a

massive wave; second, subsequent reforms to

«smooth the insolvency curve». On the general

scientific methods basis, the bankruptcy institute

development basic tendencies have been revealed,

and their analysis has allowed designating the

legislation perfection most effective and perspective

strategies in this sphere. The conclusion suggests

ways to reform the bankruptcy institution in the

Russian Federation, directly aimed at its anti-crisis

potential development.

3 RESEARCH RESULTS

3.1 The Institution of Insolvency

Significance in the Anti-crisis

Regulation Measures System

The institution of insolvency (bankruptcy) occupies a

special place in the state institutions system to support

business entities in the recovery process from the

crisis, given the selection mechanisms and

rehabilitation opportunities inherent in it. Bankruptcy

on the global economy scale serves as one of the anti-

crisis regulation tools, aimed at improving financial

and economic stability (O.N. Lvova, 2016). This

institution special importance is determined by its

main functions:

1. bankruptcy prevention and avoidance under

temporary economic downturn conditions;

2. corporate solvency restoration with economic

feasibility and viability to viable entities, through the

crisis exit tools provision;

3. the insolvent entity liquidation takes into

account all parties (stakeholders) interests, which

implies the debtor's assets effective and fair

distribution.

On this basis, the bankruptcy institution provided

the mechanisms inherent in it are effective, can act as

a powerful tool to protect business entities affected by

the COVID-19 pandemic negative economic

consequences. It is worth agreeing with the opinion

that «bankruptcy is not a problem, but a solution

especially for large companies» (D. A. Ellias, D.

Triantis, 2020). In addition, pandemic crises pose the

massive corporate bankruptcies threat and catalyze

inefficient insolvency mechanisms problems. Based

on the above, the Covid-19 pandemic has actualized

the ensuring the bankruptcy law institutional capacity

problem by maximizing its anti-crisis potential.

3.2 The Bankruptcy Institution

Transformation to Minimize the

Pandemic Negative Economic

Impact

Taking into account the pandemic spreading scale, all

legal systems without exception faced the

minimization the negative economic impact task.

Insolvency laws have changed in Germany, Great

Britain, Italy, the USA, Poland, Colombia and other

states, including Russia. At the same time, the initial

disparate measures caused by the emergency are

quickly replaced by the legal regulation convergence,

the so-called «copycat coronavirus policies» (J.

Krastev, 2020), which is due to identifying and

modelling the most effective strategies of response

under the external factors influence.

There is no denying the differences in the ongoing

reforms some elements, for example, most countries

took the existing regulations optimization and

modification path (on a temporary or permanent

basis), in other states support measures were taken by

introducing special regulations. However, in general,

it seems possible to identify response certain

regularities and stages.

3.2.1 The Emergency Response Phase

The pandemic response first phase was characterized

by fragmented, uncoordinated measures designed to

prevent a massive wave of bankruptcies and to allow

Legal Convergence in Developing the Anti-crisis Potential of Bankruptcy Institute as Responding to the Negative Economic Impact of

Covid-19 Pandemic

233

time for businesses to recover (N Shchukina, V.

Varfalovskaya, A. Bekaeva, 2021). Measures at this

stage were time-limited and subject to cancellation

(or review) depending on the pandemic scale and

impact in a particular country.

One of the first measures taken in jurisdictions a

number is the provisions' suspension imposing an

obligation on controlling persons to initiate

bankruptcy proceedings if there are objective

insolvency indications. In some jurisdictions, such as

Germany, a rule was adopted for a time reasonable

period, in some others, such as Spain, such an

obligation suspension was introduced for an

emergency period.

Most states suspended bankruptcy procedures

initiation by creditors, including Russia, the so-called

moratorium on bankruptcy. However, concerning

creditors' rights to apply for bankruptcy states a

number followed the not prohibition path but

correction towards insolvency threshold increase

concerning the claims' amount and periods during

which they are not fulfilled. In Singapore, for

example, the amount of insolvency was increased

tenfold and the period within which the debtor failed

to meet the claim was doubled. Indian law initially

restricted the creditors' rights to initiate bankruptcy

proceedings, but a moratorium was subsequently

imposed (A. Jinda, 2020). Despite the different

approaches in essence they are defined by a common

objective, which is characterized as taking into

account the pandemic negative impact in assessing

the introducing bankruptcy procedures

reasonableness concerning a person.

3.2.2 Subsequent Reform Stage (The

Institute Improvement and Adaptation

to New Challenges)

The measures taken at the initial stages had a

stabilizing effect, however, the crisis phenomena

determine the reforming the legislation on bankruptcy

necessity in increasing its anti-crisis potential

direction. Experts predict an increase in the

corporate' bankruptcies number, which determines

the legislation ensuring effective legal regulation task

in this area, which provides for procedures

optimization, as well as its individual mechanisms

adaptation to new challenges.

States a number, such as Denmark, have

perceived the crisis as a reason for legislation a major

reform, which have been postponed for a long time.

In other jurisdictions, where there is no need for

radical reforms, transformations take place through

the optimization of existing norms and their

adaptation to new challenges.

Given that the bankruptcy anti-crisis potential is

largely determined by the rehabilitation procedures

effectiveness, their improvement is one of the law

reform main trends, through procedures

simplification and conditions for their introduction.

Thus, in countries, a number (the USA, Singapore)

the rules on thresholds of creditors' consent for the

procedures introduction and financial reorganization

plan approval were revised or abolished.

In the mass bankruptcies forecasts view, one of

the reform key areas is characterised by the new

preventive restructuring mechanisms introduction.

These tools should help to reduce the burden on the

courts, as well as reduce the costs associated with

bankruptcy proceedings. Recommendations to

introduce preventive restructuring mechanisms in the

insolvency institution were developed by the

European Union back in 2019, but the crisis

phenomena prompted lawmakers to enshrine them

legally (E. Ghio, J. Gant, G. Boon, D. Ehmke, L.

Langkjaer, E. Vaccari, 2021). European states a

number are adopting special rules on restructuring,

providing for the possibility for entities in financial

distress to restructure debts through an agreement

with creditors outside the bankruptcy framework.

Thus, the Dutch bankruptcy law (Faillissementswet,

DBA) introduced the procedure «Wet homologatie

onderhands akkoord» based on the preventive

restructuring American model, also a new German

restructuring law (StaRUG, SanInsFoG) may be

noted.

The second direction in adjusting the institute of

insolvency is the debtor's good faith principle

expansion. Thus, in some states, the rules of directors'

liability have been revised and softened, in particular,

for payments and transactions made in the insolvency

indications presence (the USA, Germany, Great

Britain). In jurisdictions where subordination

mechanisms for corporate loans are applied, this

institution has been suspended (Italy, Germany,

Spain) due to the attracting external capital objective

problem in the crisis environment (K.V. Zwieten,

2020).

Taking into account the fact that in crisis

conditions the bankruptcy highest risks have small

business entities, the third direction is characterized

by the bankruptcy procedures special (simplified)

regimes establishment concerning them. This regime

specific is to establish a faster and simplified

procedure to minimize costs. For example, new rules

for microenterprises have been introduced in

Colombia. In jurisdictions where such rules are

RTCOV 2021 - II International Scientiﬁc and Practical Conference " COVID-19: Implementation of the Sustainable Development Goals

(RTCOV )

234

already in place (USA), attempts are being made to

expand the subjects range falling under special

treatment, in particular, such rules extension to

include medium-sized enterprises. The

recommendations developed for simplified

insolvency procedures rules for small and medium-

sized enterprises are the international organizations'

responsibility (UNCITRAL, the World Bank).

4 RESULTS AND DISCUSSION

The first phase emergency response measures,

although fragmented and uncoordinated, were aimed

at preventing bankruptcies from a massive wave by

giving business entities a certain period to recover.

Although individual elements differed from

jurisdiction to jurisdiction, in essence, they all had the

same objectives, by restricting or prohibiting the

bankruptcy procedures initiation. The measures in

this phase were characterized by a time limit.

The legislation on insolvency in Russia was not

an exception. In the Bankruptcy Law enshrined a

provision allowing for a moratorium introduction in

emergencies. It was in force until 7 January 2021 in

the most affected industries certain debtors respect.

At the same time, the Russian bankruptcy institution

specifics, determined by the pro-credit concept,

stipulated the establishment, simultaneously with the

additional measures moratorium, to prevent the

debtor's assets withdrawal.

The moratorium is «postponement a kind»

concerning entities with insolvency signs due to the

circumstances exceptionality and essentially a

rehabilitation mechanism. However, its introduction

has aggravated the debtor and creditors balancing the

interests' problem. In particular, it has brought to the

fore the such a measure admissibility issues in

dishonest debtors respect, as well as its rationality in

person respect, whose crisis financial condition arose

before the pandemic. As a response, the Supreme

Court explained that the creditor's application

checking stage does not provide an opportunity to

identify abuse by the debtor, countering such

behaviour is possible only on the mechanisms «ex-

post» basis, directly in the bankruptcy case, after the

moratorium lifting.

To date, foreign experience shows that the

emergency response measures were subject to a

targeted, case-by-case approach. That is, the effect of

these exceptional measures was extended only to the

entities (depending on the industries or types of

activities), which financial condition was most at risk

due to the Covid-19 spread. Because their application

to entities whose insolvency was not caused by the

pandemic negative effects would inevitably conflict

with their creditors' interests (A. Gurrea-Martínez,

2020). At the same time, experts acknowledge that

such a measure’s introduction in Russia had the

expected positive effect.

The response second stage is already

characterized by greater focus and consistency, which

main task is to smooth the bankruptcy curve. This

stage implies reforming the legislation on bankruptcy

to increase its anti-crisis potential, optimization,

adaptation to the crisis phenomena caused by the

pandemic.

As the Covid-19 spreading a result, the economy

real sector and, in particular, small business entities

turned out to be in the most vulnerable position. This

specificity determined the general tendency to

strengthen the continuation (pro-debitor) component

and the focus on increasing the efficiency and

effectiveness of rehabilitation mechanisms. The

continuation trend most striking example of the is the

change in the «crisis» definition in Italian legislation,

which is now defined as a significant economic and

financial imbalance» (Decree 147/200), which

indirectly creates opening bankruptcy proceedings

validity proof a higher standard in the debtor consent

absence.

The need issue to reform the Russian legislation

on bankruptcy was raised even before the pandemic.

This institution fundamental problems are evidenced

by the Unified Federal Register statistical data of the

information on bankruptcy (The Statistical Bulletin,

2021). The key shortcoming is recognized is the

rehabilitation procedures inefficiency, which

indicates this institution has low anti-crisis potential.

Reforming the legislation on insolvency in

strengthening its rehabilitative orientation direction

was and remains a topical issue, widely discussed in

the doctrine. It is necessary to admit that the crisis

phenomena caused by the pandemic accelerated its

resolution. At the moment the large-scale reforms

draft to the legislation on bankruptcy is under

consideration, providing radical changes of

rehabilitation procedures, which, cannot be

recognized as exhaustive and optimal to minimize the

pandemic economic consequences.

The bankruptcy institute improvement as crisis

management a mechanism should be accompanied by

continuing orientation additional measures. The

doctrine proposes various approaches to solve this

problem, in particular, by enshrining debtors’

rehabilitation special mechanisms, whose insolvency

is associated with the economic nature' an emergency.

However, granting preferences to debtors a certain

Legal Convergence in Developing the Anti-crisis Potential of Bankruptcy Institute as Responding to the Negative Economic Impact of

Covid-19 Pandemic

235

category on this criterion basis seems unreasonable.

Based on the foreign experience analysis, insolvency

legislation improving the efficiency and adaptation is

seen in the special bankruptcy regimes preventive

measures and consolidation improvement concerning

small businesses. Of course, their borrowing should

be accompanied by taking into account the insolvency

regulation national specifics.

5 CONCLUSIONS

The Covid-19 pandemic spread predetermined

essentially new challenges for the legislator in the

insolvency legal regulation sphere. Responses to the

pandemic negative economic consequences in the

bankruptcy institution serve as the legal convergence

processes a reflection due to the goals and objectives

uniformity, as well as the need to identify the most

effective model (strategy) to strengthen this

institution anti-crisis potential. The most preferable

approach is pragmatic and consistent, reflecting the

interests of all, without exception, business entities.

Thus, despite all the negative consequences, the

insolvency institute context can be considered in a

positive aspect, as evidenced by the following

arguments.

First, the economic crisis phenomena catalyzed

bankruptcy legislation deficiencies and problems and

contributed to its more dynamic reform;

Second, the pandemic facilitated of

harmonization and legal convergence process with

undeniably positive effects;

Thirdly, the economic instability conditions

predetermined the insolvency institution concept

global revision towards the pro-debitor orientation.

The bankruptcy destigmatization advantages are

manifested in the institution liberalization and

increasing its rehabilitation component effectiveness.

The foreign countries experience in adapting national

bankruptcy laws to the pandemic crisis makes it

possible to identify the reform most promising areas:

to improve the efficiency and to optimization of

existing rehabilitation procedures, consolidate the

preventive restructuring mechanisms, focus on the

debtor good faith expansion and controlling persons,

and introduce special insolvency regimes for small

business entities.

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