Credit Risk Prevention: Verification is Better than Court Proceedings
The current bankruptcy law has turned out to be untenable. The ability to recover assets through court action is constantly decreasing, the measures for financial rehabilitation do not work. The only effective way to protect assets is to check and monitor business partners.
Less bankruptcies, more outstanding claims:
According to the data from the Information and Analytical system Globas-i® (developed and maintained by Credinform, a Russian company data provider) the court decisions to start bankruptcy proceeding were made against 15 000 legal entities in 2016 (in 2015 – against 18 600). For the 1st quarter of 2017 this figure is 3 500. The trend is positive.
However, the trend in successful collections is not encouraging: According to the information of the Unified Federal Register of Bankruptcy Information, the total share of discharged claims of creditors to debtors (only companies not banks) – legal entities and sole entrepreneurs – was only 3,2% in 2016, over 2% less compared to 2015 (5,4%).
Credit management experts agree: The effectiveness of bankruptcy proceedings has been falling and it becomes more and more difficult to enforce claims against assets.
Reasons of ineffective bankruptcy proceedings:
- Lack of liquid assets: The practice of doing business in Russia today is such that often only the required minimum capital is deployed. Therefore in case of a potential bankruptcy, liquid assets are often quickly replaced with illiquid assets or companies are completely stripped of any assets, therefore there will be nothing left for creditors to recover. Disposal or recovery of assets can take too long and the value of assets can deteriorate as much as 70%.
- Monitoring procedure, being initiated to rehabilitate the debtor’s solvency, turns out to be ineffective: It can drag on for years. It is about time that the legislator steps in to prevent the practice of asset stripping and the deletion of critical documentation by bankrupt companies.
- A low level of professionalism of insolvency officers impedes the bankruptcy procedure effectiveness.
- Non-appealable statutory rights of creditors are ineffective in being able to force the debtor into liquidation. This permits a debtor to strip assets before bankruptcy goes into effect.
Protection of your assets is a timely verification of business partners:
An improvement of legislation will be necessary to correct the situation. New amendments to the bankruptcy law, as proposed by the Ministry of Economy, are being approved. Nevertheless it will be important to pay attention to the quality of the work of insolvency officers.
Generally speaking, the economic situation may change once effective laws have been introduced allowing companies to conduct their business in accordance with transparent and equally applicable rules. This will take time, thus during the interim period credit management experts recommend: To conduct business it is crucial to scrutinize the reliability and solvency of business partners as a preventive measure, and not to rely on debt collection through legal action including bankruptcy procedures. Timely verification of new counterparties and permanent monitoring of business partners will save the business from losses much more effectively than any legal proceeding.
An effective method of preventing credit risks is the use of services like the Information and Analytical System Globas-i® (https://globas.credinform.ru/en-GB/home/auth) containing information on all companies and sole entrepreneurs registered in Russia. The availability of analytical tools permits the monitoring of operational and financial changes for the purpose of loss prevention and mitigating the risk of conducting business in Russia
Source: Credinform Russia
