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Moratorium on Bankruptcy Proceedings in Russia: First Months Results

Russian Translation Included

Client Updates

 

Introduction 

On 1 April 2020 the State Duma of the Russian Federation adopted new Article 9.1 of the Bankruptcy Law1 that authorized the Russian Government in exceptional situations (such as emergencies or significant change of Russian ruble exchange rate) to introduce a moratorium on the ability of creditors of persons specified in the relevant governmental resolution (the "Designated Persons") to instigate insolvency proceedings against such Designated Persons. On 3 April 2020 the Government of the Russian Federation passed Resolution No. 428 ("Resolution No. 428") introducing six-month moratorium applicable to certain type of debtors. This moratorium came into force on 6 April 2020 and shall continue until 5 October 2020.

Designated Persons under Resolution No. 428: Legislative Requirements and Existing Court Practice

The following groups of companies and individual entrepreneurs automatically fall within the scope of the Resolution No. 428 and therefore become Designated Persons for the purposes of Article 9.1 of the Bankruptcy Law:

(a) Companies and individuals registered as entrepreneurs conducting activities in the economic sectors most adversely affected by COVID-19 (according to the Government Resolution No. 434 dated 3 April 2020 ("Resolution No. 434"), these activities include air transportation, entertainment, sport, tourism, hotel services, food services, non-grocery retail and certain others. A person will fall within this group of Designated Persons only if its main type of activity under Russian Classification of Economic Activities (OKVED 2) is listed in the Resolution No. 434.

Formally, this test excludes the application of moratorium to persons whose actual type of activity relates to any of the affected economic spheres as per Resolution No. 434, but is not mentioned as its "main activity" (according to its constitutional documents / information contained in the Unified State Register of Legal Entities).  The law and existing court practice are also silent as to whether creditors of a Designated Person may prove that it actually does not carry out its main type of activity under OKVED-2 and, consequently, should not enjoy the moratorium regime under the Resolution No. 428.

Current position of Russian courts is rather straightforward: the courts rely on the specified main type of activity as per OKVED 2 2. 

(b) Legal entities that are considered to be of a significant importance for particular economic sectors (the so-called "systemic" legal entities) included into the list approved by the Governmental Commission on Increasing Stability of Development of Russian Economy.

Currently such list is approved by the Letter of the Ministry of Economic Development of Russia No. 8952-РМ/Д18 dated 23 March 2020 (the "Letter No. 8952-РМ/Д18"). The up-to-date list of the systemic legal entities can also be found on the website of the Ministry of Economic Development: https://data.economy.gov.ru/.

In one of its Resolutions the Arbitrazh Court of the Republic of Mordovia3  applied the moratorium regime to an affiliate of JSC "Evrocement Group", which is included in the foregoing list. The court ruled that the company in question is a member of "Evrocement Group" holding and, thus, is subject to moratorium.  Although the Resolution is not clear as to the underlying grounds for such ruling, presumably, it could be based on the fact that Letter No. 8952-РМ/Д18 effectively extends the list of systemic entities to companies "forming part of a holding".4  The criteria for inclusion of a company into the list of systemic entities (approved by the Governmental Commission on Increasing Stability of Development of Russian Economy on 10 April 2020) also states that the list of systemic entities includes companies "taking into account their affiliation within one holding structure (group of companies)".

In a more recent case Arbitrazh Court of Sverdlovsk Oblast 5 agreed with position of another affiliate of "Evrocement Group" which argued that it was subject to moratorium as a company forming a part of holding of the systemic legal entity listed in the Letter No. 8952-РМ/Д18 (i.e. JSC "Evrocement Group"). Therefore, it is likely that other Russian arbitrazh courts will follow such approach and extend moratorium to the companies within the same group with a systemic legal entity.

(c) Strategic legal entities listed in the Order of the President of the Russian Federation No. 1009 dated 4 August 2004 and the Resolution of the Government of the Russian Federation No. 1226-p dated 20 August 2009.

Waiver Option

Due to controversial market response on limitations on activity of Designated Persons introduced by the Article 9.1 of the Bankruptcy Law the State Duma of the Russian Federation approved amendments the Bankruptcy Law6  pursuant to which each Designated Person may waive its status of a person which is subject to moratorium by way of filing of notification to the Unified Federal Register of Bankruptcy Notifications ("UFRBN"). In case moratorium is extended beyond the initial six-month period, the notification (if necessary) should be filed once again.

List of Designated Persons under the Resolution No. 428 who agreed to disapply the moratorium regime in relation to them can be found on the UFRBN website (updated on a daily basis): https://bankrot.fedresurs.ru/BankruptcyMoratorium.aspx.

The Federal Tax Service introduced the on-line electronic database of the Designated Persons under the Resolution No. 428 (available on: https://service.nalog.ru/covid/). The on-line search is effected using tax identification number (INN) or principal state registration number (OGRN / OGRNIP) of the company or individual entrepreneur. That being said, the Federal Tax Service database may contain information on the person who waived its status of the Designated Person. Therefore, it is recommended to additionally check the UFRBN website in each instance.

Supreme Court Clarifications and Court Practice

Filing of a Bankruptcy Petition during the Moratorium Regime

Article 9.1 of the Bankruptcy Law prescribes that the arbitrazh court shall disregard a creditor’s petition to declare a Designated Person bankrupt, if such petition is filed during the moratorium7or was not considered by the court prior to adoption of the moratorium regime.8  Pursuant to recent clarifications of the Supreme Court of the Russian Federation (the "Supreme Court"):

(a) Status of a Designated Person is per se a sufficient ground to disregard a bankruptcy petition in relation to a debtor which means that the court will not take into account other circumstances of the case9 , e.g. the fact that prior to adoption of the moratorium a person already had financial difficulties which were not connected with the COVID-19 pandemic and governmental response measures and actually met bankruptcy tests.

Court practice also evidences that, in addition to an on-line search on the Federal Tax Service database, courts verify that the Designation Person had not waived its status.10 

(b) The creditor willing to declare the debtor bankrupt has to file a new petition with the arbitrazh court after the moratorium regime expires or the debtor is excluded from the list of the Designated Persons.11

During the moratorium regime obligations of, among others, the CEO and controlling person of the Designated Person to file for its bankruptcy under Article 9 of the Bankruptcy Law are postponed. However, the Bankruptcy Law does not prohibit a Designated Person itself to file a voluntary debtor’s bankruptcy petition as per Article 8 of the Bankruptcy Law. 

In addition to the foregoing, if the authorized governing body of a Designated Person initiates a liquidation procedure in relation to it, the creditors may, and the liquidation commission / liquidator shall (provided that in each case the bankruptcy criteria are in place), file the bankruptcy petition.12 

Other Key Provisions of Article 9.1 of the Bankruptcy Law and Related Clarifications of the Supreme Court

During the moratorium regime in relation to the Designated Persons:

(a) The following actions are restricted:

repayment of equivalent of the fair value of the participation interest to a participant of a limited liability company (LLC) willing to exit the LLC or to the creditors of such participant for his debts;

share buyback by a joint-stock company;

set-off if it breaches priority of satisfaction of the creditors’ claims;

distribution of profits;

enforcement over the pledged assets of the Designated Person (including by way of out-of-court enforcement procedure).

(b) Fines / penalties and other financial sanctions (including those determined under Article 395 of the Civil Code of the Russian Federation13 ) will not accrue for failure to perform or improper performance of the Designated Person’s14

(c) All current enforcement proceedings under issued writs of execution in relation to the Designated Person are to be postponed. Among other things, that means that the bank which services account of the Designated Person upon receipt of a writ of execution shall not debit the funds of the Designated Person to satisfy its creditors’ claims.15  However, all arrests and any other restrictions on disposal of assets imposed under a writ of execution will remain in force. The Supreme Court has pointed out that during the moratorium regime the law does not prohibit the court from considering a claim in relation to the Designated Person and issue a writ of execution. Such writ of execution can be used to restrict disposals of the Designated Person’s assets (e.g. arrest). 16

At the same time we are aware of precedents when, contrary to position of the Supreme Court in some cases (including those resolved after the foregoing construction of the Supreme Court had been published), courts pointed out that a writ of execution cannot be issued before the termination of the moratorium applicable to the debtor.17 

If a bankruptcy proceeding is initiated against a Designated Person within three months after expiry of the moratorium regime ("Post Moratorium Bankruptcy"), among other things, any debt occurred prior to introduction of the moratorium and nominated in a foreign currency will be determined in Russian rubles at the smaller of the following Central Bank’s of Russia exchange rates: as of the date of moratorium or as of the date initiation of the bankruptcy proceeding (Article 9.1(4)(3) of the Bankruptcy Law). 

Also, we note that initially under Article 9.1 of the Bankruptcy Law for the purposes of Post Moratorium Bankruptcy a transaction with a Designated Person made during the moratorium regime and related to disposal of assets or assumption of obligations was declared void unless such transaction fell within the ordinary course of business and (together with inter-related transactions) did not exceed one percent of the book assets of the Designated Person as of the latest reporting date preceeding the moratorium (Article 9.1(4)(4) of the Bankruptcy Law). However, following the market negative feedback on Article 9.1(4)(4), it was removed by the Amendment Law.

Designated Persons’ Judicial Debt Rescheduling

On 22 May 2020 the State Duma of the Russian Federation adopted in third reading the law on amendments to certain legislative acts (still to be approved by the Federation Council and signed by the President of the Russian Federation).18  According to this law a Designated Person may apply for a judicial debt rescheduling of claims of all creditors of such Designated Person, provided that certain conditions are met, including the following: 

(a) The Designated Person should first file a voluntary bankruptcy petition (Article 8 of the Bankruptcy Law) during the moratorium period (but not earlier than one month after the introduction of the moratorium).

(b) Revenues of such Designated Person for the reporting period of the calendar year when the voluntary bankruptcy is initiated should be at least 20% less than its revenues for the similar reporting period during the last calendar year.

(c) There are no claims related to payments of salary or compensations related to harm caused to life or health of particular individuals.

(d) There are no creditors’ decision on settlement or creditor’s petitions to declare the Designated Person bankrupt rejected by the arbitrazh court pursuant to Article 9.1 of the Bankruptcy Law as described above (see section Filing of a Bankruptcy Petition during the Moratorium Regime).

As a general rule, the debt rescheduling is to be granted for one year; such term is extended (i) for two years, if revenues of the Designated Person  are dropped by at least 50% or (ii) three years, if the Designated Person is a strategic legal entity (see limb (c) of part Designated Persons under Resolution No. 428: Legislative Requirements and Existing Court Practice).

The court approving the debt rescheduling specifies its terms and conditions that should follow certain legislative requirements. Adoption of the debt restructuring scheme means that the bankruptcy proceeding initiated by the voluntary debtor’s petition is to be terminated. However, in case the debt restructuring conditions are breached the court upon application of the Designated Person’s creditors should terminate the debt restructuring scheme in relation to all creditors and resume the bankruptcy proceeding (unless a bankruptcy procedure related to a new bankruptcy case in relation the Designated Person has been already implemented). 

To view the Russian translation please click here.

 


 

1. Federal Law No. 127-FZ "On Insolvency (Bankruptcy)" dated 26 October 2002.
2. See, for instance, Resolution of the Arbitrazh Court of Rostov Oblast dated 29 April 2020, case No. А53-8018/2020; Resolution of the Arbitrazh Court of Saint-
Petersburg and Leningrad Oblast dated 28 April 2020, case No. А56-32633/2020.
3. See, Resolution of the Arbitrazh Court of the Republic of Mordovia dated 21 April 2020, case No. А39-3364/2020
4. The same approach can be found in the previous list of systemic entities approved by the Letter of the Ministry of Economic Development, dated 8 February 2015 (which specifically stated that the list refers to the name of the management company or main (holding) company of the group).
5. Resolution of the Arbitrazh Court of Sverdlovsk Oblast, dated 18 May 2020, case No. 60-18877/2020.
6. Federal Law No. 149-FZ dated 24 April 2020 (the "Amendment Law"). 
7. See, for instance, Resolution of the Arbitrazh Court of Saint-Petersburg and Leningrad Oblast dated 14 April 2020, case No. А56-27115/2020.
8. See, for instance, Resolution of the Arbitrazh Court of the City of Moscow dated 28 April 2020, case No. А40-5031/20-128-10.
9. Question 9 of the COVID-19 Review No.1 issued by the Presidium of the Supreme Court on 21 April 2020 (the "COVID-19 Review No.1"). 
10. See, for instance, Resolution of the Arbitrazh Court of Perm Krai dated 28 April 2020, case No. А50-7803/2020.
11. Question 8 of the COVID-19 Review No.2 issued by the Presidium of the Supreme Court on 30 April 2020 (the "COVID-19 Review No.2").
12. Question 9 of the COVID-19 Review No.2. 
13. Question 10 of the COVID-19 Review No.2.
14. As an example of application of this rule please see Resolution of the Arbitrazh Court of Sverdlovsk Oblast, dated 28 April 2020, case No. А60-9357/2020.
15. Question 11 of the COVID-19 Review No.2.
16. Question 10 of the COVID-19 Review No.1.
17. See, for instance, Resolution of the Arbitrazh Court of Sverdlovsk Oblast dated 27 April 2020, case No. А60-8814/2020.
18. Available on: https://sozd.duma.gov.ru/bill/953580-7. 

 

 

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