This material provides a presentation by Jason Kilborn, law professor of law school John Marshall at the International Bankruptcy Forum, St. Petersburg, 2019. The question is raised about what can serve as a source of financing administrative expenses during the bankruptcy of an individual who is unable to pay these expenses. Meanwhile, we believe that some financing mechanisms could be applied to corporate bankruptcy.
In the United States, all expenses of the debtor are paid for by large enterprises undergoing bankruptcy proceedings, in which a small percentage of all payments are collected quarterly in a special fund created to finance bankruptcies that do not have assets for bankruptcy proceedings. That is, the payment of administrative expenses in this case does not come from the budget, but at the expense of a special tax from the restructuring of large companies.
The administrative costs of bankruptcy in the United States also include the costs of specialists involved (lawyers, accountants, etc.). This is dictated by the fact that it is extremely difficult for the debtor (officials), even with higher education, to understand the legal relations related to taxes and bankruptcy. Therefore, most entrepreneurs are forced to attract bankruptcy specialists to prepare documents for the court and participate in the judicial review of the case, as well as for relations with the manager. In the USA, there is a practice of exemption from such expenses in case the debtor proves that he is not able to pay the amount of administrative expenses. A similar practice was introduced at the end of the 19th century and has existed successfully since then. Moreover, payments to specialists are made at the expense of the fund, which was mentioned above.
Another option to reduce administrative costs is to oblige managers when appointing a large bankrupt company with assets to additionally accept several “shells” as manager.
In Belgium, in the 90s, the state, due to the high level of insolvency among the population, conducted a study whose purpose was to determine the reasons for the increase in insolvency. As a result, one of the main reasons was the excessive availability of lending in combination with low awareness of the population about the amount of remuneration, as well as aggressive advertising of credit organizations aimed at increasing the interest of the population in credit products.
The state, in turn, initiated an additional tax in relation to credit organizations, the amount of which directly depended on the size of the loan portfolio of the credit organization and amounted to about 1%. In this case, the funds received from such a tax are accumulated in a special fund, which is used to cover administrative expenses in some cases of bankruptcy.
In Germany, a bankruptcy law was passed in 1995, which provided for the possibility of obtaining a deferment in the payment of administrative expenses related to the conduct of bankruptcy proceedings. Also, the right to pay for the activities of individual specialists was granted to creditors. It is noteworthy that the state often pays for administrative expenses, thereby easing the debt load of the debtor. This is due to the realization by the state-power apparatus that the problem of paying expenses in the bankruptcy procedure is not an individual problem, but a collective one, and it can affect the whole society.
In 2015-2017 a similar decision by the authorities was made in Poland, Slovakia, Austria:
Earlier in Poland, the debtor had to prove that he had the funds to conduct bankruptcy proceedings, and only in that case was allowed to this procedure. As a result, during the reporting period, only 4% of applications were able to go through the procedure to the end, including because of its high cost. In 2017, the state realized that bankruptcy is a procedure primarily in the interests of the state itself and its economic component. As a result, the total amount of administrative expenses payable was reduced, and the possibility of deferring the payment of this amount was introduced. There was also a legislative possibility of exemption from payment of the entire amount in case of impossibility of repayment.
In Slovakia, in 2017, a state center for providing legal assistance in bankruptcy was established. Applying to this center was declared a prerequisite for applying bankruptcy proceedings. The debtor could get specialist advice, as well as assistance in preparing and submitting documents to the court. In addition, the debtor could count on receiving 200 euros in debt from the state for going through bankruptcy proceedings.