“Restructuring & Workouts: Strategies for Maximising Value” by Ed Ben Larkin, BLP.

21.01.2014

Chapter “Russia” by Marina Ivanova, Anton Panchenkov and Elena Trusova, Goltsblat BLP

1. Background
The Law on Insolvency (127-FZ) came into force on October 26 2002. The statute:

  • defines the term 'insolvency';
  • sets out the grounds and criteria for insolvency;
  • regulates bankruptcy procedures;
  • defines the status, rights and obligations of insolvency officers;
  • provides rules for settlement with creditors; and
  • sets out other key mechanisms for insolvency in Russia.  

This is the third Russian federal law on insolvency, replacing the laws of 1998 and 1992. Since its adoption, the law has been subject to amendments introduced by more than 30 legal acts. The most significant amendments were made in 2008 and 2009, affecting more than two-thirds of the document.      

The recent amendments were aimed at strengthening the protection of creditors' rights and preventing bankruptcy from constituting an unfair mechanism through which to acquire companies or company assets. Russia's insolvency legislation is becoming more complex; despite the fact that the Law on Insolvency is not ideal, it is certainly more balanced than the preceding regulations.      

This chapter provides a general introduction to the Russian insolvency regime, but does not cover the specifics of rules related to particular debtor categories (eg, a special Law on Insolvency of Credit Institutions (40-FZ) relates to the insolvency of banks and other credit institutions).      

The Law on Insolvency provides only general guidelines related to the bankruptcy of individuals in Russia. A separate draft federal law specifically related to the bankruptcy of individuals is under consideration by the State Duma (the lower house of Parliament).

2.  Overview      

Under Article 2 of the Law on Insolvency, 'insolvency' (bankruptcy) is defined by arbitration courts  as a debtor's inability to satisfy creditors' claims and/or fulfil mandatory payment obligations.

In general, a company is considered to be incapable of satisfying creditors' claims if:      

  • its outstanding monetary obligations and/or mandatory payments exceed Rb100,000, as confirmed by a court ruling; or      
  • it fails to discharge its monetary obligations and/or fulfil mandatory payments within three months of their due date.

Arbitration courts enjoy exclusive jurisdiction to administer bankruptcy proceedings.      

The right to file an application with an arbitration court for declaration of bankruptcy is granted to:      

  • the debtor;
  • insolvency creditors; and
  • authorised bodies.          

In some cases, a debtor is obliged to file an application with the arbitration court if:

  • meeting the claims of one or more creditors would make it impossible for it to discharge monetary obligations or make mandatory payments and/or other payments in full to other creditors; or
  • levying of execution would significantly hinder or render impossible pursuit of its economic activity.  

A director who fails to perform this obligation may face an administrative penalty, which may result in his long-term disqualification (i.e., a ban on performing management activities in any form for up to two years).

According to the Law on Insolvency, bankruptcy proceedings consist of five stages:      

  • supervision;
  • financial rehabilitation;
  • external administration;
  • receivership; and       
  • amicable agreement.

Each stage has its own objectives and regulations (discussed further in section 4).

3. Insolvency officer

The key figure in insolvency proceedings is the insolvency officer, who is appointed by the arbitration court. Initially, the insolvency officer is nominated by the petitioner for bankruptcy; during bankruptcy proceedings, the insolvency officer is nominated by the creditors' meeting. The insolvency officer's tasks and powers differ from one stage to the next (discussed further below).       

Since the introduction of Russian insolvency law in the early 1990s, the role of the insolvency officer has been subject to controversy and suspicion. In the past, insolvency officers had more power than they do now, which many skilfully combined with certain loopholes in the previous insolvency legislation to act as independent market players, offering 'clients' attractive assets and full control over a given insolvency as a type of turnkey product. Few insolvency officers safeguarded the rights of creditors.      

However, the latest set of amendments to the Law on Insolvency, adopted in 2009, sought to reverse this trend - at least in the longer term. The new version of the law explicitly states that insolvency officers must serve the creditors' interests and will be accountable to them.      

3.1. Legal status      

An insolvency officer must be a Russian citizen engaged in professional private practice, subject to the legislative requirements imposed by the Law on Insolvency. According to the provisions introduced into the law over the past three years, the main activity of an insolvency officer should not be deemed to be entrepreneurial; however, he can still undertake other types of professional activity, including entrepreneurial activity, provided that this does not affect his obligations under the Law on Insolvency. An insolvency officer must be a member of one (and only one) self-regulating organisation of insolvency officers.

Besides the standard criteria  set by a self-regulating organisation for its members (eg, a higher education qualification, professional administrative experience or completion of an insolvency officer assistant traineeship course), an organisation can impose additional requirements related to expertise, independence and reputation.  Moreover, in insolvency proceedings, a petitioner may demand that an insolvency officer meet additional criteria (eg, must hold a degree in the field of the debtor's activity or possess a track record of a certain number of previously conducted insolvency proceedings).      

An insolvency officer should receive corresponding remuneration for his services, encompassing a fixed fee (expressly provided for by the Law on Insolvency) and an additional payment, which incorporates a fixed amount that is set legislatively, plus a fee calculated on the basis of the debtor's asset value. Creditors may decide to pay additional remuneration to the insolvency officer out of their own funds or the funds owed to them by the debtor.      

The insolvency officer's legal liability is subject to mandatory standard and case- specific civil insurance, covering potential damages to be paid to the participants in the insolvency case.       

Each insolvency procedure within the scope of the proceedings has its own type of insolvency officer:      

  • supervision - interim administrator;
  • external administration - external administrator;
  • financial rehabilitation - administrative manager; and
  • receivership - bankruptcy receiver.

3.2  Nomination, appointment, discharge and dismissal  

The first insolvency officer is appointed by the state arbitration court on the basis of an insolvency application submitted by either the debtor, a creditor or an authorised body. The applicant may suggest a specific insolvency officer to be appointed during the first stage (supervision) or may delegate such nomination to a specific self¬regulating organisation. In practice, this means that the first party to submit an insolvency application has a strong chance of placing at least the supervision procedure under the control of its own candidate.  

It is highly recommended to try to win the 'procedural race' and promote a trusted candidate from the outset of the insolvency proceedings. The key rights and duties of an insolvency officer are discussed below in order to provide a basic understanding of how influential this figure can be.  

An insolvency officer should be discharged from his position if he leaves the self-regulating organisation of which he was a member. An insolvency officer should be dismissed in the event of expulsion from his self-regulating organisation or improper performance of duties during the insolvency proceedings. However, such decisions are subject to a state arbitration court ruling.

3.3  Main rights and duties  

In addition to certain rights and duties related to a specific procedure, during insolvency proceedings, insolvency officers shall:

  • maintain the claims register (the insolvency offer also has the right to object to any creditors' claim in court);   
  • analyse the debtor's financial position;   
  • conduct an inventory of the debtor's assets;   
  • organise and lead creditors' meetings; and   
  • prepare reports on his activities during each procedure.  

The key rights enjoyed by an insolvency officer include:

  • challenging transactions entered into by the debtor in breach of the Law on Insolvency (discussed further in section 6);
  • appealing for limitation of management powers or even dismissal of the debtor's general manager, while also exercising all powers of the general manager (during receivership); and  
  • receiving any necessary information related to the debtor.  

4. Stages of bankruptcy proceedings

4.1 Supervision
In most cases, the first stage of bankruptcy is supervision.The arbitration court initiates this stage after considering the bankruptcy application and finding it to be valid.

Initiation of supervision involves the following principal consequences for the debtor:   

  • Monetary claims and claims regarding mandatory obligations that arose during the period before the bankruptcy application was filed may be filed against the debtor only with the arbitration court administering the bankruptcy proceedings, not in the usual manner;
  • Enforcement of writs of execution is suspended;   
  • Discharge by virtue of set-off is prohibited if this prioritises one creditor over others; and   
  • Payment of dividends and distribution of profit are prohibited.

The debtor's general director and management body remain in control of the debtor and continue to exercise their powers, but can undertake the following functions only with the insolvency officer's written consent:  

  • conclude agreements connected with the acquisition or disposal of the debtor's property amounting to more than 5% of the balance-sheet value of its assets; and   
  • conclude credit and/or loan agreements, agreements on the assignment of rights and/or the transfer of debts, issue guarantees and establish trusts.

During supervision, the insolvency officer must secure the debtor's property, identify the debtor's creditors, register creditors' claims, and arrange and conduct the first creditors' meeting.

One of the most important functions of the insolvency officer at this stage involves analysis of the debtor's financial standing. The insolvency officer analyses the debtor's balance sheets, profit-and-loss statements and other financial documentation. The insolvency officer then assesses whether it is possible to restore the debtor's solvency and whether the value of the debtor's property is sufficient to cover the expenses that will arise during the bankruptcy proceedings. The insolvency officer will prepare a report on the basis of this financial analysis and submit it to the first creditors' meeting for approval.  

The insolvency officer will also recommend to the first creditors' meeting which bankruptcy stage it is reasonable to initiate next. The first creditors' meeting has the right to choose any of the four stages mentioned above. Once the first creditors' meeting has chosen the next stage of the bankruptcy, the insolvency officer files an application with the arbitration court to close supervision and initiate the next stage.

4.2 Financial rehabilitation  

According to the Law on Insolvency, the court has the right to initiate financial rehabilitation.  

Financial rehabilitation is initiated only with respect to debtors whose solvency may be restored, which is why it is reasonable to do so while debtors continue to operate and generate money or other assets.  

The parties entitled to propose initiation of financial rehabilitation to the creditors' meeting are:  

  • a shareholder or holder of a state enterprise's assets; or   
  • any third party.

The repayment schedule should include the dates on which all debts on the debtor's claims register are scheduled to be paid. The repayment schedule should be submitted to the creditors' meeting.  

The shareholder or holder of a state enterprise's assets may secure the repayment schedule by pledge, guarantee or other type of security, excluding penalty, retention or deposit. However, if a third party proposes financial rehabilitation, it is obliged to secure the repayment schedule.  

In general, initiation of financial rehabilitation involves the same principal consequences for the debtor as supervision.  

The debtor's general director and management team remain in place and in control of the debtor, with the following limitations:

  • Agreements connected with the acquisition or disposal of the debtor's property amounting to more than 5% of the balance-sheet value of the debtor's assets may be concluded only with the consent of the creditors' meeting;   
  • Credits, loans and guarantees may be issued and trusts may be established only with the written consent of the creditors' meeting;   
  • The debtor may obtain or dispose of property (other than that produced during the course of ordinary business) only with the insolvency officer's consent;   
  • Agreements on the assignment of rights and/or transfer of debts may be made only with the insolvency officer's consent; and   
  • Credits and loans may be obtained only with the insolvency officer's consent.  

If the debtor repays all its debts in full conformity with the repayment schedule and no longer has any other debts, the arbitration court will terminate the bankruptcy proceedings and declare that the debtor's solvency has been restored.

If the debtor fails to meet the repayment schedule, the court may terminate the financial rehabilitation early and initiate the next stage of bankruptcy, as chosen by the creditors' meeting.

If the repayment schedule was secured and the debtor fails to repay its debts accordingly, the insolvency officer must file a claim for repayment against the party that granted the security. After this party has paid the debtor's debts, it may bring an action against the debtor in the usual manner.

4.3 External administration  

The Law on Insolvency empowers the court to initiate external administration, which is also a rehabilitation procedure.

External administration is initiated when the debtor's solvency can be restored.

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