1 Legal framework
1.1.1 What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?
The principal law regulating insolvency and restructuring is the Bankruptcy Law (Federal Law 127-FZ, October 26 2002).
1.2 Regulatory climate
1.2.1 On an international spectrum, is your jurisdiction more creditor or debtor friendly?
The amendments introduced into the Bankruptcy Law over the last several years have substantially improved the position of creditors by providing greater protection of their interests in bankruptcy proceedings.
Under the previous legislation, by initiating the bankruptcy proceedings the debtor was entitled to appoint the bankruptcy manager and thus have de facto control over the supervision stage due to the manager’s increased authority. However, the debtor is no longer able to initiate bankruptcy proceedings with the appointment of a friendly manager. Therefore, the debtor cannot retain control of the bankruptcy proceedings, which in the past proved detrimental to creditors. In such case, the court on its own will choose the self-regulatory organisation, and a bankruptcy manager will be chosen from among its members. The provisions thereby secure the independence of such a person from others participating in the proceedings, which should have a positive impact on the position of the creditors.
The creditors’ right to file a petition to contest the transactions of the debtor and to hold the persons controlling the debtor subsidiary liable can be recognised as having a pro-creditor nature. The mechanism recently introduced into the Bankruptcy Law for holding a person controlling the debtor liable is aimed to significantly increase the proprietary risks of the controlling persons connected with the actions contradicting the creditors’ interests. The creditors are now entitled to file petitions for holding controlling persons subsidiary liable at any stage of the bankruptcy proceedings, as well as after completion of the bankruptcy case. This makes subsidiary liability a working mechanism, allowing creditors to receive the funds regardless of the possibility of receiving the funds from the debtor.
1.3 Sector-specific regimes
1.3.1 Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?
The Bankruptcy Law contains special rules governing the bankruptcy of specific categories of legal entity, including:
- financial organisations;
- residential real estate developers;
- town-forming organisations;
- agricultural organisations;
- strategic (mainly defence and infrastructural) enterprises and organisations;
- natural monopolies; and
- clearing banks and their clients.
1.4.1 Are any reforms to the legal framework envisaged?
The State Duma is considering the draft law which provides for the mechanism for implementing the debt restructuring procedure in relation to legal entities and which has been used positively in foreign jurisdictions. Pursuant to the draft law, a debt restructuring plan may provide for such measures as:
- replacing the debtor’s assets;
- novation of its obligation;
- termination of the pledge; and
- debt-for-equity swaps.
For now, the procedure of debt restructuring can be applied only in cases of individuals’ bankruptcy.
2 Director and parent company liability
2.1.1 Under what circumstances can a director or parent company be held liable for a company’s insolvency?
A director of a debtor can be subject to subsidiary, administrative and criminal liability.
The director of the debtor may be subject to subsidiary liability for the debtor’s obligations where the debtor’s assets are insufficient to discharge its obligations if:
- the debtor’s insolvency was caused by illegal actions of the director;
- the necessary accounting and reporting documentation of the assets of the debtor is missing or the relevant information reflecting the economic activity of the debtor is incomplete or untrue, which did not allow identifying the assets which could be used to settle the creditors’ claims; or
- the director made an agreement for alienation of debtor’s assets which was invalidated.
The director of the debtor may also be subject to subsidiary liability if he or she fails to perform his or her obligation to file a petition for declaring a debtor bankrupt when the debtor meets the criteria for bankruptcy.
The Criminal and Administrative Codes provide for penalties for the director of the debtor for wilful bankruptcy when he or she deliberately takes or refrains from taking actions (eg, continuing to trade) that eventually results in the company’s inability to settle in full its creditors’ claims.
The parent company of the debtor is subject to subsidiary liability if the bankruptcy resulted from the wrongdoing of the parent company (ie, the contracts concluded by the debtor were made under the instruction or with the consent of the parent company).
2.2.1 What defences are available to a liable director or parent company?
The director must convince the court that his or her actions (or inaction) did not cause the company’s bankruptcy. Depending on the circumstances of the case, the director can lodge various defences, including:
- evidence proving that the company’s tax delinquency was temporary and minor in nature;
- if there was a change of director during the period preceding the company’s bankruptcy, a statement to this effect which specifies the previous director’s period of responsibility and the effect of the indebtedness and obligations accumulated during this period on the company’s further development; and
- evidence that the company’s bankruptcy did not exclusively result from the director’s actions or that the effect of his or her actions was insignificant.
If the director is ‘nominal’ (the concept of a ‘nominal director’ is new to Russian legislation and was introduced in 2017), he or she can reveal the person who gave the directions and actually controlled the debtor, therefore limiting his or her own liability. The director may also help to identify the assets of the debtor by providing documents or information.
The parent company must prove that the bankruptcy of its affiliate was caused solely by the actions of the affiliate’s management and that the affiliate’s transactions – having led to the bankruptcy – were not undertaken pursuant to the decisions, instructions or approval of the parent company.
2.3 Due diligence
2.3.1 What due diligence should be conducted to limit liability?
To limit liability, directors should fully comply with their obligations under Russian law.
If there is clear evidence that the company will become bankrupt, directors are obliged to file a bankruptcy petition within one month of the signs of bankruptcy arising. Failure to do so will result in their liability for all obligations accruing thereafter.
When initiating bankruptcy proceedings, the director must notify the debtor’s shareholders about the risks of bankruptcy proceedings within 10 days of from the moment that he or she becomes or should have become aware of such risks. A company’s head is also obliged to publish the information regarding the company’s difficult financial situation which can lead to non-performance of the obligations towards its creditors.
The director should exercise control over the company’s transactions and act in good faith and with due diligence while giving instructions or consent regarding the affiliated company’s transactions.
3 Position of creditors
3.1 Forms of security
3.1.1 What are the main forms of security over moveable and immoveable property and how are they given legal effect?
The primary way to secure transactions involving movable or immovable property is through a pledge.
The status of the pledge creditor is considered to be privileged. The claims of a creditor which are secured by pledge are listed in the creditors’ registry as part of the claims of creditors of the third priority, while most of the funds received from the disposition of the subject of a pledge are used to discharge the claims of the pledge creditors.
However, the right of pledge creditors to vote at the creditors’ meetings is sufficiently limited by the Bankruptcy Law. Such creditors are entitled to vote only in cases directly provided for under the law.
3.2 Ranking of creditors
3.2.1 How are creditors’ claims ranked in insolvency proceedings?
The Bankruptcy Law provides for the following order of priority in which creditors’ claims will be settled:
- first-priority – those arising from the debtor’s liabilities for personal injury and moral harm;
- second priority – severance benefits, employees’ salaries (if any are due) and other amounts payable under employment agreements, as well as royalties to authors of intellectual property;
- third priority – all other creditors’ claims in the ranking list, including:
- claims arising out of violation of environmental legislation;
- claims for taxes and other mandatory payments;
- claims of secured creditors;
- claims of unsecured creditors; and
- claims from challenged suspicious or preferential transactions.
The recent judicial practice considered the status of the shareholders of the debtor who provided a loan to the debtor when it was in a poor financial situation and claimed for its recovery in terms of bankruptcy proceedings. The courts considered that financing a company is an obligation of its participants, and unreasonable actions of loan provision by the shareholders aimed at artificial creation of the debt cannot be grounds for inclusion of such a creditor’s claims into the registry along with the claims of other creditors.
Current payments are outside the general order of priorities for satisfaction of the creditors’ claims and are to be satisfied on a first-priority basis as they fall due and before any other payment. ‘Current payments’ refer to monetary obligations, claims for payment of severance benefits and salaries of current and former employees employed under an employment contract, as well as mandatory payments arising after the date of the application for a declaration of bankruptcy. Claims for payment for goods supplied, services provided and works performed after initiation of the bankruptcy proceedings are also considered current payments.
3.2.2 Can this ranking be amended in any way?
The ranking of settlement of creditors’ claims, except for the claims for mandatory payments (the priority of which cannot be amended in any way), may be amended if creditors reach the settlement agreement. If the amount of a creditor’s claims is amended by such an agreement or a creditor’s claims are terminated by it, receiving the consent of this creditor to the terms of the agreement will be required.
3.3 Foreign creditors
3.3.1 What is the status of foreign creditors in filing claims?
The Bankruptcy Law does not provide any specific rights for or impose any specific restrictions on foreign creditors. Foreign creditors filing claims in reference to the bankruptcy of a Russian debtor have the same rights as Russian creditors.
3.4 Unsecured creditors
3.4.1 Are any special remedies available to unsecured creditors?
Once supervision is initiated, unsecured creditors may raise their claims only in accordance with the procedure established by the Bankruptcy Law. This means that the creditors should file a request with the court to include their claims in the register of creditors’ claims. The court will accordingly accept such claims if they are well founded. Creditors vote at the creditors’ meetings by way of votes distributed in accordance with the proportion of their registered claims.
Settlement of creditors’ claims is possible only during the liquidation. After commencement of the liquidation, creditors are eligible to receive settlement of their claims according to their priority rank.
3.5 Debt recovery
3.5.1 By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?
If the creditor is entitled to recover current payments from the debtor, such payments are recovered outside the bankruptcy proceedings.
‘Current payments’ refer to monetary obligations, claims for payment of severance benefits and salaries of current and former employees employed under an employment contract, and mandatory payments arising after the date the application for declaring a debtor bankrupt is accepted for consideration by the court. Claims for payment for goods supplied, services provided and works performed after initiation of the bankruptcy proceedings are also considered as current payments. Such claims for payment are not included in the register of creditors’ claims.
Claims regarding current payments are satisfied in the following order:
- first priority – payments for judicial expenses and performance of obligations by a bankruptcy manager and other persons whose involvement in the bankruptcy proceedings is mandatory;
- second priority – payments of severance benefits and salaries of current and former employees;
- third priority – payments for the performance of obligations by persons engaged by a bankruptcy manager (apart from persons whose involvement is mandatory);
- fourth priority – current utility payments and operational expenses; and
- fifth priority – other payments in chronological order.
3.5.2 Is trade credit insurance commonly purchased in your jurisdiction?
Trade credit insurance is not commonly sought by companies in Russia. Some Russian insurers provide trade credit insurance along with other services, but this type of security is mostly used by companies with high-value business and applying the instrument of adjournment of payment. Trade credit insurance is used mostly in the pharmaceutical, electronics, automobile and chemical industries.
4 Liquidation procedures
4.1.1 What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
A company can be placed into liquidation if the following applies:
- the court determines that the solvency of the debtor cannot be restored and there are no grounds to initiate one of the other rescue procedures or terminate bankruptcy proceedings or dismiss a bankruptcy petition; and
- the creditors’ meeting has requested the court to make the debtor bankrupt and commence the liquidation.
5 Restructuring procedures
4.2.1 What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
The liquidation is the insolvency procedure that may be applied to liquidate an insolvent company.
Liquidation starts with declaration of the debtor’s bankruptcy. This stage involves the appointment by the court of a liquidator in order to sell the assets of the debtor and thus satisfy its debts in accordance with the statutory order of priority. The liquidation of the company is managed by the liquidation manager, who replaces the existing management of the debtor and assumes the powers of the owners of the debtor’s assets.
The difference between the voluntary liquidation and compulsory liquidation lies in the handling procedure. The voluntary liquidation is initiated by the company itself and is handled without court involvement, whereas the compulsory liquidation is made on the application of other persons (eg, legal entities and state bodies) with the initiation of the bankruptcy proceedings and court involvement. The voluntary liquidation procedure may be used if a company has enough assets to settle the claims of its creditors. If the company lacks the assets to settle creditors’ claims, the compulsory liquidation procedure is applied.
4.2.2 How are liquidation procedures formally approved?
The court initiates liquidation where the debtor shows signs of bankruptcy and there are no grounds on which to transfer to another stage of bankruptcy proceedings, approve a settlement agreement or terminate the bankruptcy proceedings. A court ruling is required to terminate one stage of bankruptcy proceedings and commence another. Generally, the court issues its ruling based on the decision of the creditors’ meeting.
4.2.3 What effects do liquidation procedures have on existing contracts?
During liquidation, the bankruptcy manager may terminate the debtor’s contracts if:
- the contract impedes restoration of the debtor’s solvency; or
- the debtor incurs losses from performance in comparison to similar transactions concluded in comparable circumstances.
Abandonment of performance of the debtor’s transactions can be declared only in respect of transactions that have not been fully or partially performed. Such transactions are considered to be terminated from the date on which all parties to the transaction receive the bankruptcy manager’s declaration of abandonment of its performance.
4.2.4 What is the typical timeframe for completion of liquidation procedures?
Liquidation can last up to six months and can be extended by a further six months. Upon a motion of the parties to the case, the court may extend the liquidation procedure more than once if it finds the grounds for extension of the procedure.
4.3 Role of liquidator
4.3.1 How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
In a liquidation procedure, the court approves the liquidator, who replaces the management of the company. The debtor’s shareholders’ rights are also terminated. The liquidator is entitled to:
- manage the debtor’s property;
- dismiss the debtor’s employees;
- make a declaration of refusal to perform the debtor’s contracts; and
- file claims to invalidate transactions entered into by the debtor.
The liquidator must recover damages to the debtor, creditors and other persons, if their losses were caused by non-performance or undue performance of his or her obligations in terms of the debtor’s bankruptcy.
A bankruptcy manager is also appointed during other stages of bankruptcy proceedings, but has different levels of power during the proceedings.
4.4 Court involvement
4.4.1 What is the extent of the court’s involvement in liquidation procedures?
All bankruptcy procedures are supervised by the court, including liquidation.
The court exercises the following powers, among others:
- initiates, completes and terminates the liquidation procedure;
- approves a bankruptcy manager;
- applies interim measures;
- invalidates transactions of the debtor;
- prohibits the debtor from entering into transactions without the bankruptcy manager’s consent; and
- approves the settlement agreement.
4.5 Creditor involvement
4.5.1 What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
Creditors recognised by the court must form the creditors' committee. Creditors included in this committee in terms of the liquidation procedure have the power to:
- apply to the court to initiate the liquidation procedure;
- stipulate additional requirements for bankruptcy manager candidates;
- exercise control over the activities of the bankruptcy manager; and
- raise claims under obligations with a later maturity date, but which fell due on initiation of the bankruptcy procedure.
The creditors are prohibited from:
- raising claims against the debtor outside the bankruptcy procedure;
- claiming for penalties, interest or other financial sanctions for the period starting from the initiation of the bankruptcy procedure;
- foreclosing the debtor’s assets; and
- taking any other actions against the debtor outside the bankruptcy procedure.
4.6 Director and shareholder involvement
4.6.1 What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
On commencement of external administration, the managing bodies are discharged from performing their duties. In the liquidation procedure their powers are assumed by the bankruptcy manager. The shares of the company remain as the property of the shareholders until the moment of their liquidation, but the shareholders cannot make any decisions relating to the debtor.
5 Restructuring procedures
5.1.1 What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?
The Bankruptcy Law provides for a procedure referred to as ‘restructuring’, but which applies only to individuals. The court will accept an application for recognition of the individual’s bankruptcy if the claims against the individual amount to at least Rb500,000 ($8,700) and have not been settled within three months of the date of their due performance.
The Bankruptcy Law provides no special procedure for companies that is specifically referred to as ‘restructuring’, but in practice company restructuring may be achieved through either a financial rehabilitation plan, an external administration plan, settlement or ‘sanation’.
A plan of financial rehabilitation, a plan of external administration, as well as a settlement agreement, must all be approved at the creditors’ meeting and may be introduced on the court’s approval.
Apart from that, financial rehabilitation can be introduced if there is an expression of will of the persons ready to provide collateral for securing the performance of obligations by the debtor.
External administration can be introduced if there are grounds to consider that the debtor’s solvency can be restored.
can be introduced in terms of prevention of the insolvency in case
the participants, founders, creditors or other persons are ready to
provide a company which is in a poor financial state with financial
5.2.1 What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?
The Bankruptcy Law provides for a procedure of debt restructuring in relation to individuals.
Pursuant to the Bankruptcy Law, the aim of restructuring an individual’s debts is his or her financial recovery and recovery of debts to creditors in accordance with the debt restructuring plan. This plan must contain provisions on the order and terms of the proportional recovery of debts and applicable interest. The law provides for a three-year period to implement the plan.
The law requires that a financial administrator be appointed to manage the individual’s bankruptcy. The financial administrator:
- analyses the individual’s financial standing;
- maintains the register of the creditors’ claims;
- summons and oversees the creditors’ meetings; and
- manages implementation of the debt restructuring plan.
There is no special procedure called ‘restructuring’ in relation to legal entities, but restructuring may be achieved through a financial rehabilitation plan, an external administration plan or a settlement agreement.
Financial rehabilitation is applied towards debtor in order to restore its solvency, arrange for outstanding debt to be discharged under scheduled debt repayment and achieve settlement of creditors’ claims. Settlement of creditors’ claims is made based only on the plan of financial rehabilitation and in compliance with the schedule of debt repayment. At the financial rehabilitation stage, the court approves an administrative manager who supervises implementation of the debt repayment schedule and the financial rehabilitation plan. During this stage, the company’s management remains in place, albeit with restricted authority.
The administrative manager must:
- maintain a register of the creditors’ claims;
- summon the creditors’ meetings; and
- exercise control over the execution of the financial rehabilitation plan and repayment schedule.
The administrative manager is entitled to submit a motion for removal of company directors.
External administration is aimed at the restoration of debtor’s solvency and provides for moratorium on debt repayment. This stage includes the appointment of an external administrator to collect debt, make an inventory of assets, prepare a plan for restoring solvency and sanation.
At the stage of external administration, the court approves an external manager. When external administration commences, the powers of the management are terminated and the duty to manage the affairs of the debtor is vested in the external manager.
The external manager must:
- take the debtor’s property into administration and draw up an inventory of such property; and
- develop an external administration plan.
The external manager is entitled to manage the property of the debtor in accordance with the external administration plan, and to make a declaration of refusal to perform the debtor’s contracts.
A settlement agreement may be reached at any stage of the bankruptcy proceedings. That type of agreement specifies the schedule for the debtor for termination of its obligations to certain creditors. As of the date of court approval of the settlement agreement, the bankruptcy proceedings terminate and the debtor must begin repaying the creditors’ claims in accordance with the repayment schedule set out in the agreement.
Sanation is a special mechanism of prevention of insolvency during a pre-insolvency procedure. The aim of this procedure is to provide a debtor with financial assistance sufficient for the repayment of its monetary obligations.
5.2.2 How are restructuring plans formally approved?
The individual’s debt restructuring plan must be approved by a majority of the bankruptcy creditors and authorised bodies (eg, the tax authorities) whose claims are included in the register of creditors’ claims. The plan is also subject to approval by the court.
The financial rehabilitation plan, the external administration plan and the settlement agreement must also be approved by a majority of the creditors. The settlement agreement must obtain the unanimous consent of all secured creditors.
Financial rehabilitation is initiated by the court on the petition of the first creditors’ meeting or the petition of the shareholders of the debtor or other persons willing to put up collateral for the debts of the company.
External administration is initiated by the court on the petition of the creditors’ meeting if there is a real possibility of restoring the debtor’s solvency.
The settlement agreement is approved by the court on the petition of the bankruptcy creditors.
Sanation is offered by the persons interested in the restoration of solvency of a debtor, whereas there is no specific requirement in the legislation providing for its approval by the court.
5.2.3 What effects do restructuring procedures have on existing contracts?
Once the bankruptcy proceedings start:
- all debts under existing contracts are deemed to be due and payable;
- debt recovery by the creditors is suspended; and
- creditors may file claims in relation to outstanding debts only with the court that is hearing the bankruptcy case.
The initiation of the restructuring procedure for an individual’s debts constitutes grounds for the creditor’s unilateral abandonment of performance of a contract providing for the individual’s performance of the creditor’s claim in non-monetary form.
During the debt restructuring procedure (for individuals) and external administration (for legal entities) the bankruptcy manager is entitled to declare the abandonment of performance of all of the debtor’s transactions.
Abandonment of performance of the debtor’s transactions can be declared only in respect of transactions that have not been fully or partially performed, if such transactions are preventing the debtor’s financial recovery and performance of such transactions leads to losses for the debtor in comparison to similar transactions made in comparable circumstances. Refusal to perform applies to contracts not performed or performed only in part by the parties thereto.
Such transactions are considered to be terminated from the date on which all parties to the transaction receive the financial or external manager’s declaration of abandonment of its performance. If a contract is not terminated, both creditor and debtor must perform their obligations under it, including outstanding obligations.
From the day of commencement of supervision, enforcement of set-off provisions is allowed if it does not conflict with the statutory priority of the creditors’ claims or such discharge does not result in the preferential settlement of claims of one creditor over another. Meanwhile, the termination provisions can be enforced in any time during the bankruptcy proceedings.
5.2.4 What is the typical timeframe for completion of restructuring procedures?
The term for implementation of an individual’s debt restructuring plan cannot exceed three years. If the creditors’ committee does not approve the individual's debt restructuring plan, the court is entitled to approve this plan under certain conditions. However, in this case the term for its implementation cannot exceed two years.
A company restructuring can last no longer than the timeframe set for the relevant bankruptcy procedure used to effect the restructuring. Financial rehabilitation can last no more than two years. External administration, as well as sanation, can last up to 18 months and can be extended by a further six months.
5.3 Court involvement
5.3.1 What is the extent of the court’s involvement in restructuring procedures?
All bankruptcy proceedings are supervised by the court that assigns a significant role to the bankruptcy manager, whose status and powers will differ on the stage of the bankruptcy procedure in question.
The court has the power to:
- initiate and complete the procedure;
- appoint a bankruptcy manager and relieve or suspend him or her from his or her obligations;
- approve or reject the restructuring plan/plan of external administration/plan of financial rehabilitation;
- apply the amendments made in the restructuring plan/plan of external administration/plan of financial rehabilitation; and
- terminate the restructuring plan/plan of external administration/plan of financial rehabilitation.
5.4 Creditor involvement
5.4.1 What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?
Creditors can have a say on the key matters concerning the restructuring procedure by participating in the creditors’ meeting. Creditors vote at the creditors’ meeting in proportion to their claims.
Debt restructuring plans, plans of external administration, plans of financial rehabilitation and settlement agreements must be approved by the creditors’ meeting and may be instituted with the court’s approval. Decisions are generally adopted by a simple majority of creditors attending the meeting, provided that at least one-half of the registered creditors are present at such meeting.
Illegal decisions of the creditors’ meeting can be challenged in court.
5.4.2 Under what conditions may dissenting creditors be crammed down?
The decision of the majority creditors will be binding on the minority creditors and the debtor cannot influence such a decision. No cram down is available. Exceptions can occur when stakeholders unreasonably fail to make a decision on proceedings of the bankruptcy case, even after receiving the instructions regarding the necessity to make such a decision. The court on its own initiative must make a decision regarding introducing the following bankruptcy procedure. This exception is not the only case where the court can make a decision on its own if stakeholders fail to perform certain actions in violation of the legislative requirements.
5.5 Director and shareholder involvement
5.5.1 What is the extent of directors’ and shareholders’ involvement in restructuring procedures?
In the course of financial rehabilitation, the functions of company management are still performed by its governing bodies. The managing bodies of the debtor (directors and the shareholders’ meeting) may exercise their powers of managing the company’s affairs and disposing of its property, with certain limitations. In order to exercise control over the debtor’s compliance with the schedule of debt repayment, the court will appoint an administrative manager.
On commencement of external administration, the managing bodies are discharged from performing their duties.
5.6 Informal work-outs
5.6.1 Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?
In Russia, it is possible to implement informal work-outs. Pursuant to recent legislation amendments, exercising such work-outs is a mandatory extrajudicial procedure aimed at preventing bankruptcy. Due to the absence of the legal regulation of informal work-outs in relation to companies, any actions and transactions made for the prevention of bankruptcy will be construed not as special pre-bankruptcy mechanisms but as regular actions and transactions, the conclusion and performance of which are regulated by general civil law rules.
Absence of a specific status of such actions and transactions obstructs the spread of informal work-outs due to lack of special remedies applicable in case of their violations.
Moreover, the provisions of the Bankruptcy Law allow for the risk of challenging the methods of informal work-out. Any payments to the creditor under an existing facility made within the suspect period may be subject to a clawback by the debtor. At the same time, additional funds provided under a new facility would be subject to repayment according to a statutory order of priority in the course of the debtor’s bankruptcy. The creditor’s abandonment of the rights of bringing a claim against the debtor for the relatively determined amount of the indebtedness can be qualified as a gift between the commercial organisations, which is inadmissible.
6 Transaction avoidance
6.1 Setting aside transactions
6.1.1 What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?
Transactions concluded with the debtor can be invalidated on the general grounds established by civil legislation and on specific grounds established by the Bankruptcy Law.
Specific types of voidable transaction and debtor action (eg, payment, transfer of property and performance of other obligations) may be challenged in court, namely:
- suspicious transactions; and
- preferential transactions.
These transactions may be challenged by several persons – including the bankruptcy manager and creditors – at the external administration or liquidation stage.
Transactions can be challenged on the general grounds established by civil legislation only by the parties to the transaction and beyond the bankruptcy proceedings.
7 Operating during insolvency
7.1.1 Under what circumstances can a company continue to conduct business during an insolvency procedure?
A company subject to bankruptcy proceedings continues to conduct its business at all the stages of the proceedings.
7.2 Stakeholder and court involvement
7.2.1 To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?
The bankruptcy manager plays a key role in the bankruptcy proceedings. He or she supervises and controls the actions of the debtor, has the authority to enter claims in the creditors’ register and convenes the creditors’ meeting.
All creditors preserve their rights before the debtor. Creditors whose claims are included in the register of creditors’ claims form the creditors’ committee. The decisions of the creditors’ committee can influence the operations of the debtor before and after initiating any stage of the bankruptcy proceedings.
Directors and managing bodies (including the shareholders’ meeting) are involved in the company’s activities until external administration is commenced.
The court exercises significant influence on the company’s activities through procedural acts.
7.3.1 Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?
At all stages of bankruptcy proceedings, the managing bodies of the debtor that are authorised by its constitutive documents to make decisions on major transactions (or interested-party transactions) are entitled to enter into agreements with third parties for the provision of funds needed to fulfil the debtor’s obligations. Such loan agreements may, depending on the stage of the bankruptcy proceedings, require the approval of the creditors’ committee or the bankruptcy manager.
8.1 Effect of insolvency on employees
8.1.1 How does a company’s insolvency affect employees and the company’s legal obligations to employees?
Employees of a debtor company have the right to apply to the court for recognition of the company as bankrupt. In the process of repaying the company’s debts, the claims of the employees take second priority.
The debtor’s director is obliged to notify employees of the initiation of bankruptcy procedures. In terms of the liquidation procedure, the liquidator is entitled to dismiss employees.
9 Cross-border insolvency
9.1 Recognition of foreign proceedings
9.1.1 Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?
There is no specific law in Russia relating to recognition of foreign restructuring or insolvency proceedings. However, the decisions of foreign courts relating to bankruptcy proceedings in foreign countries are recognised and enforced in Russia based on international treaties and the principle of reciprocity.
Bankruptcy proceedings against Russian companies can be commenced only in Russia.
9.2 Winding up foreign companies
9.2.1 What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?
Companies incorporated in a foreign jurisdiction cannot be restructured in Russian courts. However, foreign creditors may initiate proceedings against a Russian debtor in the Russian courts.
9.3 Centre of main interests
9.3.1 How is the centre of main interests determined in your jurisdiction?
The concept of a ‘centre of main interests’ does not exist in Russian legislation.
9.4 Cross-border cooperation
9.4.1 What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?
The decisions of foreign courts relating to bankruptcy proceedings in foreign countries are recognised and enforced in Russia based on international treaties and the principle of reciprocity. There is no Russian law relating to recognition of foreign restructuring or insolvency procedures. Therefore, there is no cooperation between Russian and foreign courts in respect of the administration of cross-border insolvency cases.