The American society of the first part of the XIX century: an interpretation by Alexis de Tocqueville

Table of contents: The Kazakh-American Free University Academic Journal №3 - 2011

Author: Veremchuk Lyudmila, Kazakh-American Free University, Kazakhstan

A market economy operates according to certain rules and provides opportunities for companies to become prosperous. A market economy does not have a place for companies that lag behind. Formal adherence to market criterion of resolving crisis situations in an organization which is usually the elimination of all insolvent institutions will inevitably lead to mass unemployment, lowering living standards and increasing income differentiation. All this leads to an increase of social tension and presents insurmountable obstacles to economic growth.

An alternate solution to crises is the institute of bankruptcy. It restores the viability of the organization by helping the company overcoming financial difficulties. Furthermore, the institute of bankruptcy eliminates non-viable elements of the market.

A comparative analysis of national models of organizations insolvency in the world economy indicates that the bankruptcy institute in France and in the United States focuses on protecting the interests of the debtor. The priority is given to an organization that operates and functions as a company; therefore, its cessation through elimination is the last measure to undertake. However, a strict rule used by the French is to support the organization's activities in any case. While reducing the share of assets that creditors expect from the liquidation process of the insolvent debtor weaken the entire economic system as a whole. In addition, using the model allows the debtors to abuse their rights. Corporate governance issues of "Enron" in the U.S. can serve as an example.

In the legal systems of Great Britain and Germany, bankruptcy is a way of debts repayment at the expense of the liquidation and sale of bankruptcy estate. For instance, in Germany the process is aimed at maximizing the debtor's assets for their distribution among its creditors. Along with unfavorable market conditions, lack of opportunities for funding due to banking crisis, the bankruptcy law of 1999 caused significant number insolvent companies in Germany. According to the law, explicit encouragement was given to terminate the organization because creditors were interested primarily in the sale of assets of the company that was experiencing a difficult situation rather than in its recovery. Thus, as international experience shows the national models of organizations insolvency regulation and rights distribution in favor of debtors or creditors is largely a political choice by the states and governments.

Kazakhstan's independent economy, which is only 20 years old, is characterized by the use of neutral models of insolvency regulation, which combines both debtor’s and creditor’s interests protection. For example, bankruptcy system in Kazakhstan cannot accept only the interests of the creditors, as it can be done in some economically developed foreign countries. The bankruptcy should facilitate the implementation of the macroeconomic strategy of the state, helping to preserve the productive capacity of the country and not to be destructive but a creative force.

It should be noted that effective functioning of the institution of bankruptcy in the national economy is possible only if there is a qualitative legislation on insolvency and mechanisms for its implementation are established. The law of the Republic of Kazakhstan "On Bankruptcy" of 1997 is the third part of legislative documentation (the first law was passed in 1992, the second - in 1995) that regulates bankruptcy procedures. Until now, the law underwent multiple amendments (more than 30 times) in order to improve the country’s insolvency regulation mechanisms. Despite that, the legal basis of the insolvency of organizations requires further improvement.

Initially, since the introduction of the institution of insolvency, the most dysfunctional organizations went through the bankruptcy process in Kazakhstan. These organizations did not have to restore the solvency of the debtor and the continuation of their operations: a large percentage of bankruptcies accounted for the organizations with no assets through the sale of which the creditors claims could have been met, as well as absent debtors. Absent debtor – is a debtor, whose physical location, as well as the location of the founders, members, managers and officials, without whom the entity cannot operate, is not identified during six months. The national budget for the program 003 "Implementation of procedures for liquidation and bankruptcy" each year provides funds to carry out liquidation procedures of the insolvent debtors. As a result, objectives of the procedures to eliminate insolvent institutions are not achieved. As a result, entrepreneurs had the stereotypical attitude to the Law of the Republic of Kazakhstan "On bankruptcy", which can be used as a way to close the organization through the sale and concealment of property.

The practice of the institution of bankruptcy demonstrates that business entities do not consider bankruptcy as a mechanism for recovery. For instance, in Kazakhstan in 2008, the rehabilitation processes were introduced at only 15 organizations (0.7% of the liquidated), in 2009 - 14 organizations (0.6% of the liquidated), in 2010 - for 43 organizations (2.0% of the liquidated).

The institute of bankruptcy must reduce the number of negative effects in the event of insolvency, and ensure financial recovery, restructuring and liquidation of insolvent organizations. It must protect the rights of creditors as well as the interests of owners. In addition, it requires further development in the policy of the state in regulating the processes of bankruptcy. The urgency of improving the mechanisms of bankruptcy also depends on ongoing changes in Kazakhstan's economy in a globalized world.

Now due to the crisis in the global economy, a number of competitive enterprises have difficulties with loan repayment and loan servicing. This creates a risk of bankruptcy, default by lenders, investors and counterparties, default of tax obligations and a negative impact on banks' loan portfolio. In turn, deterioration of banks’ financial position reduces the possibility of crediting the real sector and may ultimately hinder economic growth.

This suggests that it is the time that entrepreneurs caught in difficult circumstances, are provided with effective tools of financial restructuring and rehabilitation stipulated in the bankruptcy law. Thus, over the last one and a half years more than 70 debtors have gone through the procedure of rehabilitation and 30 out of which restored their paying capacities. 84 organizations are now in a rehabilitation procedure and more than 13 000 workers are fully employed and in addition to that 8 organizations that successfully completed the rehabilitation in 2011 saved more than 1,000 jobs. It should be mentioned that majority of organizations that went through the rehabilitation procedures were municipal and public, but recently this procedure has become popular among the other forms of business organizations.

The use of rehabilitation procedures by the institute of bankruptcy provides the debtor with the following advantages:

1) growth of debt stops once the rehabilitation procedure is introduced. Forfeits (fines and penalties) for all types of debt of the debtor, including bank loans, are not charged.

2) repayment of deferred payables is carried out according to the repayment schedule according to the 3-year rehabilitation plan. In addition, the repayment of deferred payables is carried out on the first day after the administration of the rehabilitation process, and after 4 months, i.e. after the approval of the register of creditors. This gives the company time to create a working capital.

3) during the rehabilitation procedure the company continues carrying out its economic and financial activities, including participation in tenders.

4) rehabilitation procedure applies to business: legal entities and individual entrepreneurs.

5) claims of creditors are satisfied within the period of rehabilitation procedure.

It should be noted that the introduction of rehabilitation procedure has several advantages to the banks: a guaranteed return of borrowed funds within 3 years, participation in the committee of creditors and monitoring the conduct of the rehabilitation process. It follows that the introduction of the rehabilitation process will help stabilize the economic development and reduce social tension in the country.

Practical experience shows that the model of insolvency in Kazakhstan plays an important role in the national economy. It involves many of the structures of different levels of government: the Ministry of Finance of the Republic of Kazakhstan, the Committee on the Insolvent Debtors within the Finance Ministry and its territorial agencies - the departments, the Ministry of Justice of the Republic of Kazakhstan, organizations of professional managers in bankruptcy procedures, specialized economic courts, and other state and commercial organizations.

In connection with the existing problems of the real and financial sectors due to the global financial crisis, the Government of the Republic of Kazakhstan in March 2011 approved a program of post-crisis recovery, which aims to improve competitive enterprises, the debt of which exceeds 4.5 billion tenge. Competitive enterprises, whose debt is less than that amount, will benefit from state support in the framework of the "Road map business 2020", approved by the Government of the Republic of Kazakhstan on 13 April 2010. It should be noted that government support of enterprise rehabilitation is a temporary measure and is directed to help businesses move to the growth strategy. Therefore, the possibility to enter the post-crisis recovery program is limited.

Kazakhstan’s economy requires a common concept of public policy in the field of bankruptcy. This concept should include a set of laws and regulations that is refined on an ongoing basis in accordance with the radical changes in the national economy. In addition to the existing law of the Republic of Kazakhstan "On bankruptcy" as amended and supplemented, the "Rules of interaction of state bodies for the prevention, detection and suppression of facts and deliberate false bankruptcy," etc., a legislation on financial restructuring of institutions of self-regulatory organizations should be developed. Changes in the law "On Joint Stock Companies", which make provision for protection of property rights with introduction of bankruptcy procedures in organizations, should be well-thought-out.

The concept of public policy to prevent bankruptcies should include provisions that establish new and strengthen existing structures of bankruptcy institution. In order to develop an appropriate mechanism for implementing the state policy in the area of bankruptcy it is necessary to establish a permanent Coordinating Council to improve organizations’ well-being. The composition of this council should include representatives of industry ministries, the judiciary, tax authorities, enforcement authorities and others.

The main tasks of the Coordinating Council should include:

- coordination of state and public organizations during crisis management and financial improvement of enterprises;

- preparation and implementation of the National program of financial rehabilitation of enterprises;

- analysis of financial condition of the economically and socially important enterprises of the republic, and development of appropriate measures for their improvement;

- overseeing the implementation of bankruptcy procedures in large and socially important insolvent enterprises;

- formation of positive attitudes towards bankruptcy procedures as a natural economic process, which facilitates the recovery of the economy;

- establishing a system of training, retraining of crisis managers.

The main priority in the state regulation of insolvent organizations is creating a regulatory framework for governing bodies of insolvent institutions in bankruptcy proceedings.

Studies show that bankruptcy laws in foreign countries usually put forward requirements for professional quality control of the organization’s governing body. For example, in U.S., UK, Germany, Belgium, Italy a governing body (the manager) is a person who either has a license or authorization from the competent authority, or a member of a certain professional organization or person entered in the special list. In almost all countries the responsibility of governing bodies (the managers) are regulated in the civil and criminal codes. Many countries seek to ensure their obligations. The governing bodies have the insurance coverage both for their activities in the framework of their profession and for procedures while filing for bankruptcy. In Canada, associations of "Insolvency practitioners" develop standards of their managerial activity.

For ensuring the effectiveness of the mechanisms associated with the failure of organizations in the management of the bankruptcy proceedings it is necessary to create a common regulatory control system in the Republic of Kazakhstan which may consist of the following:

- Professional and other requirements to the person who is the bankruptcy governing body (the manager);

- Liability insurance for those performing duties of the bankruptcy governing bodies (managers);

- Professional activity standards for those who are the bankruptcy governing bodies (managers).

In Kazakhstan, obtaining a license allowing managing property and affairs of insolvent debtors during bankruptcy proceedings is realized by an applicant – a physical entity that must meet the following eligibility requirements:

1) have a higher law or economic education and be trained in educational institutions for continuing work as the administrator of external observation, bankruptcy trustee in accordance with the laws of bankruptcy;

2) have at least three years of experience in one of the following areas: economics, finance, accounting and analysis, control and audit, legal, or being the head of the legal entity at least for three years.

In addition, these requirements should include the provision of training in acting as an assistant manager, as well as membership in a self-regulatory organization. The last requirement entails conforming changes in the regulatory system of control in the Kazakhstan economy.

It should be noted that the purpose of state regulation in the bankruptcy process should be to maximize market self-regulation. The state should reduce the regulatory role in crisis management, transferring its functions to the operational management of an insolvent organization of leading professional crisis management organizations, leaving behind only the control and enabling functions.

World experience indicates that a system of self-regulation at the micro level in countries with the developed market economies was established a long time ago and covers practically all spheres of economic life. All kinds of professional associations of lawyers, notaries, auditors, insolvency administrators develop ethical standards and special activities that create mechanisms for monitoring compliance with these rules. Thereby their activities contribute to improving the quality of their professional activities and reduce the number of violations in the field of entrepreneurship. As a result, self-regulatory organizations are considered as mechanisms of stability and balance on the microeconomic level.

To increase the effectiveness of regulatory and economic failure of organizations in Kazakhstan's economy it is imperative to create self-regulatory organizations of governing bodies (managers) (SROM). It is the responsibility of SROM to appoint managers to carry out the bankruptcy procedures. The lender/creditor submitting the application to the court to declare the debtor bankrupt, mentions only the self-regulatory organization, which, in turn, nominates managers who file for and deal with bankruptcy procedures.

Noteworthy in this regard, the experience of Russia, where the trustee is a member of a self-regulatory organization and approved by the arbitration tribunal. Self-regulatory organization offers the court three candidates of arbitration managers. Therefore, according to Russian practitioners to initiate bankruptcy proceedings for any lender is a complicated issue since "it is useless to buy only one arbitrary manager, one needs to buy the entire self-regulatory organization or its staff."

A key element of the regulatory system of control procedures for bankruptcy is a mandatory liability insurance of managers for accidental damage to third parties involved in the bankruptcy case. Third parties who are entitled to compensation for damage shall be deemed a debtor and creditors of the debtor. This insurance is complemented by the creation of compulsory SROM compensation funds, which are formed exclusively in the form of money from contributions of members to recover damages caused by the activity of SROM managers. The Government of the Republic of Kazakhstan establishes conditions and procedures for allocation and disbursement of compensation fund. The means of compensation funds will be applied only in case of impossibility of full compensation for losses at the expense of insurance liabilities as well as in the case, if such losses were not included in the insurance, that is, if there is an intentional infliction of damage control in course of business by managers. We emphasize that this self-regulatory organization must pay for the guilty trustee, using funds from the compensation fund.

Thus, the proposed changes in the regulatory control of the bankruptcy proceedings will allow securing independence of the managers of various participants in bankruptcy cases and will make them responsible for property liability and for retaining control of the parties filing their bankruptcy procedures.

The rules for self-regulation do not conflict with the formal rules established by the state and are legitimate. Therefore, it is assumed that SROM will monitor compliance with laws and regulations governing the activities set by the Government of the Republic of Kazakhstan; SROM will protect the rights and legitimate interests of its members. It will provide information openness of bankruptcy procedures among the members and will encourage professional growth and level of training of its members. The authorized body of the state will monitor the implementation of legislation by the self-regulatory organizations.

Thus, under the new regulatory system of control based on the study of foreign experience, the concept of Republican SROM as a vertically integrated organization that brings together all regions of the country and operates on principles that encourage its members to execute the bankruptcy procedures in strict accordance to the law is proposed for implementation. The result will be an increase in the degree of managers’ responsibility for the results of the bankruptcy proceedings. In the event of damage to the debtor or debtor’s creditors by the rehabilitation or administration managers, the losses should be compensated at the expense of their insurance liability. In case of the fund shortages the losses are covered by the SROM compensation fund.

It should be noted that the creation of SROMs will enhance the effectiveness of the economic insolvency regulation system of organizations by bringing a competitive professional management in carrying out bankruptcy procedures. SROMs will also increase the proportion of rehabilitation procedures, enable the percentage growth of the repayment of debts and will prevent negative tendencies in Kazakhstan economy in the sphere of bankruptcy.


1. The Republic of Kazakhstan. The law on bankruptcy. - Almaty: Lawyer, 2011.

2. The Russian Federation. Federal law. On insolvency (bankruptcy). - M.: Os-89, 2008. (Current law).

3. Proceedings of the Committee on the Insolvent Debtors Ministry of Finance of the Republic of Kazakhstan. -

4. Stepanov, VV Insolvency (Bankruptcy) of Russia, France, England and Germany. - M.: "The Statute", 2003.

Table of contents: The Kazakh-American Free University Academic Journal №3 - 2011

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