INSOLVENCY COURT IN THE REGIME OF REHABILITATION PROCEEDINGS

Abstract

As it is known, the court is the body that administers justice. Georgia has a system of general courts, including District, Appeal, and Cassation courts. The district court is a court of first instance covering the entire territory of Georgia. Considering the specificity of insolvency, its cases are considered only by the city courts of Tbilisi and Kutaisi. The powers assigned to the insolvency court include reviewing the application, opening the rehabilitation regime, appointing a manager/supervisor, etc. The activity of a judge often goes beyond the scope of civil law and Civil Procedure Code. Accordingly, the rights and obligations established by other branches of law apply to him/her. One is the law of insolvency, which mainly has independent general and procedural norms. The current law envisages the court’s involvement in such a regime as rehabilitation. In the work, the role of the court is considered within the framework of the regulation of the law of insolvency, the rehabilitation regime, which is regulated by the law of insolvency. And the research revealed that certain issues need to be regulated at the legislative level. Due to the fact that the role and rights, and duties of the court in the rehabilitation regime have not been elaborated in accordance with the new law by the researchers, the research topic is relevant and interesting. To properly discuss the topic provided by the article, the law “On Rehabilitation and Collective Satisfaction of Creditors’ Claims”, insolvency proceedings, and bankruptcy proceedings are compared. The normative acts in force in Georgia are used in the work, which regulates the rights and duties of the judge. In addition, various international acts are cited in the article for comparison and strengthening of the position.

Keywords: insolvency; rehabilitation regime; statement of insolvency; insolvency court.

Introduction

In the law of insolvency, the rehabilitation regime is of special importance. The court decides to open it. In particular, it examines the application submitted on the request of the rehabilitation regime and makes an appropriate decision on recognizing the application on insolvency as admissible.

This article is interesting and noteworthy because it discusses the court/judge in the context of insolvency and the necessity of its independence at the level of specialization in this field.

Research methods such as historical, comparative, descriptive, and others were used during the work.

The purpose of the research topic is to study the role, independence and rights, and duties of the judge in insolvency.

The research topic is the study of Georgian and foreign legislation on insolvency within the framework of the judge/court.

The object of the research is the study of the rights and duties of the court/judge.                                                              

Admissibility of Insolvency Petition by Court

Every action is committed to achieving the appropriate result. While applying, the applicant is focused on the court’s acceptance of the application. The appropriate result will be obtained when the applicant considers the reservations defined by the law and properly submits the application to the court. In particular, the declaration of admissibility of the application for insolvency will be made by the court. Otherwise, the court will refuse to declare the application admissible.

To initiate the rehabilitation regime, the court shall conduct a kind of “investigative” procedure to determine whether the debtor is, in fact, insolvent. This investigation requires an insolvency test. The court discusses the admissibility of the application for insolvency within the time limits established by law, which are different depending on the applicant’s status.             

Since the application has been submitted in accordance with the law and the court considers that it meets the formal requirements, and the debtor is insolvent or facing imminent insolvency, it will issue a ruling on the admissibility of the application and the opening of the rehabilitation regime.[1] The mentioned issue is similarly regulated by German legislation. The application filed by the creditor or the debtor must be based on insolvency or imminent insolvency, verified by a judge, to start the proceedings.[2] According to the new law, the court has a 7-day deadline for the application filed by the debtor and a 10-day deadline for the submission by the creditor, after the creditor presents the document confirming the delivery of the court order to the debtor.[3] The Law “On Insolvency” of 2007 provided for the submission of the latter before the filing of the application, for which a 5-day period was determined, and it could be extended by a court order for 10 days.[4] The court had a 5-day deadline for accepting the application filed by other applicants.[5] Setting a 5-day deadline for the judge was called unreasonable by Professor Roin Migriauli, who spoke in his article about the mentioned issue in 2013. He believes that the given time is not enough to make a decision.[6]

If we consider that our judicial system suffers from a lack of judges, is characterized by many cases, and not insolvency judges. Still, judges from other branches of law consider insolvency law cases, 7 and 10 days will not be enough to study the factual circumstances stated in the application, especially the basis of insolvency given in the application, and to make appropriate decisions. As the practice of the previous law showed, five days were not enough. It is regrettable that the new law did not consider this problem, failed to assess the dangers that an unreasonable deadline can cause, and refused to make appropriate changes. In my opinion,  the new law should at least consider the deadline of 1996 law “On Bankruptcy”, according to which the court would review the application within 45 days.[7] The differentiation of application deadlines by the legislator in accordance with subjects is an important innovation, which shall be positively evaluated, considering the risks and responsibilities accompanying the application submission. Also, submitting an application by the creditor requires a special assessment because they do not have access to complete information about the debtor, which requires additional effort and time from the court. This all confirms the opinion that the terms established by the current law for considering the application are not enough.        

The court in the proceedings of insolvency

The admissibility of the application is interesting and distinctive as the judge’s involvement in the process begins at this stage. Accordingly, in the cases and within limits provided by the law, the judge starts to implement in practice the rights and duties assigned to him/her.

Special attention should be paid to the role and involvement of the judge. First, since the 1996 law, their powers have changed. Accordingly, their role has a different character depending on the content of the norms of the law. For example, if we consider the rights and duties of a judge under the Bankruptcy Act 1996, their role was divided into two parts: making an order in judicial^[8]  and extra-judicial^[9] rehabilitation to start the rehabilitation regime.

It is believed that the functions of the bankruptcy court were minimized during extra-judicial recovery. This is because it only carried out legal supervision, and the course of rehabilitation and its development were not the subjects of the court’s interest. Court supervision meant bringing the existing private legal dispute between the debtor and the creditor into the legal framework and creating the necessary legal guarantees to settle the dispute.^[10]

In contrast to extra-judicial rehabilitation, judicial rehabilitation was characterized by the active involvement of the court. The court’s involvement in implementing judicial rehabilitation was manifested in accepting and approving the application for bankruptcy settlement, accepting settlement proposals, and developing the proposal by the court itself.^[11] The latter can be considered a special fact of autonomy in implementing the rehabilitation regime. Therefore, in accordance with the Civil Procedure Code, the course of the proceedings in the court is based only on the principles of disposition, competition, and the implementation of justice by the court on the principles of equality of citizens. Accordingly, the course of the proceedings and the opinions related to it are perceived as a means of realizing the rights of the parties and not as a means of realizing the rights of the judge.

We know that usually, in the process of civil cases, the court is actively involved. Its powers in conducting the proceedings of insolvency are different and small. The difference from civil law proceedings is due to the specificity of insolvency. The difference manifests from the application preparation to its acceptance by the court and the issuing of a decision on the opening of the rehabilitation regime.[12]

Although insolvency proceedings are different from civil contentious proceedings, the judge’s activity was manifested in the presiding, which meant ensuring the equality of the parties. Actually, it is considered that - “the role of the court is diminished in individual cases and is limited only to the formal approval of decisions”,[13] however, the same opinion should not be applied to the development of the court’s sentence, at least for the equality of the parties. In the legal literature, there is an opinion that "the promotion of separate groups already means inequality“.[14] If we consider that the court should be actively involved in the proceedings of insolvency, in particular, in the rehabilitation regime, it can be considered favorable for the protection of the equality of the parties to propose a sentence with the active involvement of the parties, which implies the reconciliation of the parties, under the norm of the Civil Procedure Code. [15] The law “On Rehabilitation and Collective Satisfaction of Creditors’ Claims” does not envisage the drafting of any proposal by the court. The word that became the leitmotif of the law: equality, was ensured by the legislator in this context as well, and in case of remaining in management for the debtor, the approval of the project of the rehabilitation plan prepared by him/her depends on the creditors and also provides for the submission of proposals by the creditors.

“The Bangalore Principles of Judicial Conduct can be considered as one of the sources of sharing the mentioned opinion, according to which - “A judge should not make any comments on a case he/she  is conducting”.[16] According to the rules of judicial ethics of Georgia, - “A judge must render justice without showing any preconceived notions”.[17]  While drawing up a reconciliation proposal meant determining the satisfaction of the order of creditors, which is a matter to be determined by the parties to the regime.  In my opinion, the judge’s involvement in the mentioned process and the existence of any of his/her opinions created a basis and doubt in favor of one of the parties or vice versa. Accordingly, I believe that the norms established by the new law ensure the increase of the standard of independence of the judge and the transparent course of the process between the parties, the means of providing of which are guaranteed, as by the mentioned, as well as by other normative-legal acts.

Finally, it can be said that implementing the extra-judicial rehabilitation regime guarantees the interests of the parties and their protection, at least until the Supreme Council of Justice will not raises the field of insolvency to the proper height and will not equalize the economic, financial, labor and international importance of the area with other narrow specialization fields in the court. In particular, by creating an apparatus by judges specializing in insolvency law, which will be staffed directly with judges who know the field of insolvency and not according to the existing practice when judges dealing with commercial, contractual, and other matters consider insolvency cases. In this case, the problem is not only the independence of the field but also the overloading of the general courts of Georgia. There are frequent cases when one judge has more than 300 cases that have to be heard. In such conditions, the deadlines established by the law are very long, which carries a special risk for insolvency cases. Similar to my opinion, the European Court explains the following to eliminate the mentioned problem: - “It is necessary to employ a sufficient number of judges to avoid overloading them with cases and to finish in a reasonable period the cases already assigned to the judges, regardless of their volume”.[18] The European Charter assigns responsibility to the state for hearing the case within a reasonable period - “the state is obliged to ensure that judges have the necessary means for the proper performance of their duties and in particular for hearing cases within a reasonable period of time”.[19]

I believe that if the talks of judicial overloading over the last decade had not been in vain and had been given the proper attention, time, and effort, we would not have seen the dire consequences of the Insolvency Procedure Act in the form of more bankruptcy cases in comparison with the rehabilitation regime. The issue of specialization and independence of the field remains a challenge in the judicial system within the framework of the new law, which requires a radical change from a practical, normative, or scientific point of view.

Implementing the mentioned issue may cause a difference of opinion and raise the question of how to select the insolvency judges by election or appointment?

The organic law of Georgia “On General Courts” recognizes the election and appointment of judges. According to the law, the judge of the Supreme Court is elected by the Parliament of Georgia,[20] and judges of appeal and district (city) courts are appointed by the High Council of Justice of Georgia.[21] Considering that the hearing of insolvency cases throughout the country only occurs in Kutaisi and Tbilisi City Courts, the competence to appoint judges is uniquely the prerogative of the High Council of Justice. Accordingly, an insolvency judge appointed by the Council shall meet all the requirements stipulated by the law, including passing the qualifying examination, which involves the basic legislation of the field.[22] Except for civil law, the branches of law given for examination have very little connection with the law of insolvency. Also, it is worth noting that the law regulating insolvency proceedings and the fields close to it, such as business and tax law, are not part of the exam topic. Accordingly, I can say that the qualification exam for judges cannot ensure the training of insolvency judges according to the current standard, and their passing of the exams is inappropriate under the current standard. In addition to the knowledge of legal norms, in my opinion, an insolvency judge should have a basic understanding of business administration and management. All this is necessary, so the judge has an accurate idea of business management, risks, income, expenses, etc. To support this point, a quote from the opinion of the Consultative Council of European Judges (CCJE) can be cited: “Where judges are appointed or may be appointed from a group of experienced practitioners, the need for examinations is doubtful, and the basis for appointment should be more practical skills and consultation with others, who have direct information about the relevant candidate’s work experience”.[23]

Conclusion

As a result of the summary of the paper, the following can be concluded: 

• The time limits established by the law for the court to discuss the admissibility of the application for insolvency, if the debtor is insolvent/faced with imminent insolvency, is not reasonable. 

It is necessary to create a judicial apparatus specializing in insolvency, which will be staffed by judges who have the 

• Knowledge in the field of insolvency.


• In my opinion, the question of how to select judges of Insolvency, by election or by appointment, the practice of other countries should be shared, and only passing the exam should not be the criterion for evaluating the judge’s knowledge and qualifications.


• If it is a matter of principle that the judges in the field of insolvency shall pass the exam, I think that the judges should be evaluated in such fields that have a close connection with the field of insolvency, because the qualification exam of judges according to the current standard cannot ensure the proper training of the judges of insolvency.           

Considering all the mentioned above, it would be correct to say that in the system of general courts, it is necessary to establish an independent judicial apparatus in the field of insolvency, for judges to pass the qualification exam with appropriate specialization and in case of failure to pass the exam, to select appropriately qualified judges and to set a reasonable time limit for the court to consider the application.

Bibliography

used literature

1. ISET, Regulatory impact assessment of selected issues under the rehabilitation and collective satisfaction of creditors bill, (2019) Final Report. https://info.parliament.ge/file/1/BillPackageContent/27794


2. Lexology GTDT, INSOLVENCY LITIGATION France, Germany, Spain, United Kingdom and 1 more, Generated 21 December 2021. https://www.lw.com/admin/upload/SiteAttachments/Insolvency%20Litigation.pdf


3. Ketiladze M., (2022) The role of the court in accepting the application for the rehabilitation regime, Tbilisi Humanitarian Education University III online international scientific-practical interdisciplinary conference.


4. Migriauli R., (2013) Bankruptcy Law Critics, Newspaper: Banks and Finances.


5. Migriauli R., (2017) Introduction to Bankruptcy and Insolvency Law, 3^rd Revised Edition, Publishing House: World of Lawyers, Tbilisi.


6. Meskhishvili K., Batlidze g., Amisulashvili N., Jorbenadze S., (2021) Insolvency case production Basics According to the Law “On Rehabilitation and the Collective Satisfaction of Creditors’ Claims”, publishing house: GIZ, Tbilisi. http://lawlibrary.info/ge/books/GIZ_Insolvency-reader_2021.pdf


7. Khubua G., (2004) Theory of Law, Publisher: Meridian, Tbilisi.

Normative material

8. Law on Bankruptcy Proceedings 1996. https://matsne.gov.ge/ka/document/view/652?publication=8


9. Bangalore Principles of Judicial Conduct 2002. https://www.supremecourt.ge/files/upload-file/pdf/aqtebi15.pdf


10. Civil Procedure Code of Georgia 1997. https://matsne.gov.ge/ka/document/view/29962?publication=153


11. Insolvency Proceedings Act, 2007. https://matsne.gov.ge/document/view/4993950?publication=0


12. Conclusion #1 of the Consultative Council of European Judges (CCJE) (2001) for the attention of the Committee of Ministers of the Council of Europe on the independence of the judicial corps and the standard of inadmissibility of the termination of the authority of judges.


13. European Charter on the Status of Judges. https://www.supremecourt.ge/files/upload-file/pdf/mosamartleta.qcevis-wes1.pdf


14. Explanatory card on the draft law of Georgia “On Rehabilitation and Collective Satisfaction of Creditors’ Claims, 2020. https://info.parliament.ge/file/1/BillReviewContent/245931


15. Judicial ethics rules of Georgia. http://dcj.court.ge/geo/კანონმდებლობა/ეთიკის_წესები


16. Law “On Rehabilitation and Collective Satisfaction of Creditors’ Claims”, 2020. https://matsne.gov.ge/document/view/4993950?publication=0


17. Organic law of Georgia “On General Courts”. https://matsne.gov.ge/ka/document/view/90676?publication=47


18. Recommendation of the Committee of Ministers #R (94) 12, Explanatory card for member states on the independence, efficiency and role of judges.

Footnotes

[1] Law “On Rehabilitation and Collective Satisfaction of Creditors’ Claims”. 47.4. [Last Viewed Date: December 31, 2022]

[2] Lawyer for Insolvency Law: German Proceedings.  <https://se-legal.de/insolvency-lawyers-germany/?lang=en&fbclid=IwAR0UdnHpQ-S1c3Tmojw3LXsyYlntG22UerEeoLBVs2MoAVo6l8so4QlgHnM>

[3] Law “On Rehabilitation and Collective Satisfaction of Creditors’ Claims”. 47.1. [Last Viewed Date: December 31, 2022].

[4] Law “On Insolvency Proceedings”. Article, 22.2.  [Last Viewed Date: December 31, 2022].

[5] Ibid. Article, 19.1. [Last Viewed Date: December 31, 2022].

[6] Migriauli R., To Critics of the Bankruptcy Law, 2013. Newspaper: Banks and Finances.

[7] See the law “On Bankruptcy Proceedings”, 7.1.  [Last Viewed Date: December 31, 2022]

[8] Note: The active role of the court was typical for judicial rehabilitation. In particular, accepting, approving, etc. bankruptcy settlements.

[9] Note: Extra-judicial rehabilitation was carried out with minimal court involvement. Under the law “On Bankruptcy Proceedings” of 1996, only the debtor was entitled to request a postponement of the opening of the bankruptcy proceedings to develop a rehabilitation plan. The postponement to be achieved, the debtor had to prove to the court the possibility of rehabilitation. The role of the court was revealed in the latter’s decision to postpone the opening of the bankruptcy proceedings, considering the rehabilitation to be expedient. See more law “On Bankruptcy Proceedings” of 1996, Article 10.

[10] R. Migriauli, Introduction to Bankruptcy and Insolvency Law, 3^rd Revised Edition, Publishing House: World of Lawyers, Tbilisi, 2017. p. 239.

[11] The law “On Bankruptcy Proceedings”, Article 23.  [Last Viewed Date: December 31, 2022]

[12] Ketiladze M., The Role of the Court in Accepting the Application for the Rehabilitation Regime, III Online international scientific-practical interdisciplinary conference of Tbilisi University of Humanities, May 28, 2022.

[13] Explanatory card on the draft law “On Rehabilitation and Collective Satisfaction of Creditors’ Claims”.

[14]  Khubua G., Theory of Law, Publishing House: Meridian, Tbilisi, 2004.

[15] Civil Procedure Code of Georgia. Article, 218.2. [Last Viewed Date: December 31, 2022].

[16] Bangalore Principles of Judicial Conduct. 2.4. 2002 [Last Viewed Date: December 31, 2022].

[17] Rules of Judicial Ethics of Georgia. Article 6. [Last Viewed Date: December 31, 2022].

[18] Committee of Ministers Recommendation #R (94) 12, Explanatory note for member states on the independence, effectiveness and role of judges, Commentary 27. [Last Viewed Date December 31, 2022]

[19] European Charter on the Status of Judges. 1.6 [Last Viewed Date December 31, 2022].

[20] Organic law of Georgia “On General Courts”. Article, 36.2. [Last Viewed Date: December 31, 2022].

[21] Ibid. Article, 36.4. [Last Viewed Date: December 31, 2022].

[22] Ibid. Article, 53. [Last Viewed Date: December 31, 2022].

[23]Conclusion of the Consultative Council of European Judges (CCJE) #1 (2001) for the attention of the Committee of Ministers of the Council of Europe on the independence of the judicial corps and the standard of inadmissibility of termination of authority of judges. [Last Viewed Date: 31 December 2022].