Legal Loophole in Russia

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The Financial Times of July 25, 2000, reports a legal loophole in the Russian capital market that can leave stockholders with nothing if the company has a cash flow problem. In the United States, if a company is not able to make debt payments, the company can first try to work out the payments privately. If that does not work, then the company enters bankruptcy proceedings, where the legal system decides the allocation of the companies remaining assets. The US legal system, with its large army of expensive lawyers, is often not seen as the most efficient method of resolving conflict, but one can see some benefits when compared to the risky Russian system, which fails to protect investors (who can afford lawyers).

The Russian system reported on in the Financial Times article, "Russian Oligarchs Take the Bankruptcy Route to Expansion," is a simpler bankruptcy proceeding. When a Russian company cannot make debt payments, the debt-holders take the company to court and receive ownership of the company. Even in viable, profitable companies, if the cash flow is not there to make the debt payments, stockholders can end up with nothing.

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