In response to the coronavirus (COVID-19) pandemic, Russia has changed its bankruptcy laws to provide for a moratorium on bankruptcies and a freeze on certain transactions. While the situation is dynamic, these amendments are relevant for ongoing or potential transactions in Russia, as well as a party’s ability to enforce pledges and other types of security interests or to seek other remedies against Russian companies.
In April, Russia amended its legislation on bankruptcy to allow the Russian government to introduce temporary freezes on the initiation of bankruptcy proceedings in extraordinary situations including natural disasters, technical emergencies, substantial fluctuations of the ruble exchange rate, and other similar circumstances.
The government used its newly vested powers to introduce a six-month moratorium in respect of eligible companies by Resolution of the Government No. 428, On Introduction of Moratorium in Respect of Initiation of Bankruptcy at the Request of Creditors in Relation to Certain Debtors, dated 3 April 2020 (the Moratorium). The Moratorium also applies to individual entrepreneurs who operate in the industries most affected by COVID-19, but we do not address individual entrepreneurs in this LawFlash.
The key rules on the Moratorium are in a new Article 9.1 of the Federal Law on Insolvency (Bankruptcy) (the Bankruptcy Law). They were initially introduced on 1 April 2020 among other amendments related to emergency prevention and response to COVID-19 made into several laws (Federal Law No. 98-FZ on 1 April 2020). The Moratorium rules were then amended on 24 April 2020 (Federal Law No. 149-FZ dated 24 April 2020) (the 24 April amendments).
The Moratorium applies to the following companies:
The Russia Federal Tax Service has a tool where one can search whether a particular company is eligible, using the company’s individual taxpayer number or principal state registration number. The Federal Tax Service also aims to keep a list of eligible companies, but as of this writing the list is not complete.
The situation is exceptionally dynamic, and obtaining information on eligible companies often requires consulting more than one resource as well as double-checking against the latest legislative requirements.
Debtor vs. Eligible Company
The Moratorium is a part of the Bankruptcy Law. In general, the Bankruptcy Law applies to so-called “debtors.” The Bankruptcy Law defines a legal entity as a “debtor” when it meets the insolvency criteria: It has been unable to satisfy creditors' claims for monetary obligations or claims for severance or remuneration in respect of its present or past employees, or to make mandatory payments, in the amounts and within the periods established by the Bankruptcy Law.
The basic threshold that allows initiation of bankruptcy proceedings is a debt of 300,000 rubles that remains outstanding for three months. For the companies deemed strategic (included in the two pre-pandemic lists mentioned above), the threshold is higher: 1 million rubles in outstanding debt for six months.
There is no express requirement that an eligible company must be a debtor for the Moratorium to apply. Most likely, the intent is for any eligible company to qualify for the Moratorium regardless of whether it actually meets the insolvency criteria.
As clarified by the Russia Supreme Court, a court must not accept bankruptcy petitions filed against an eligible company, and the inclusion of the company in the list of eligible companies is sufficient grounds for this. Circumstances that lead to a company’s indebtedness are irrelevant, including whether the indebtedness resulted from the pandemic or the time period when it arose (item 9 of the Supreme Court's first overview in respect of COVID-19, adopted by the Presidium of the Supreme Court on 21 April 2020 (the Supreme Court First Overview on COVID-19)).
The Supreme Court, however, expressly excludes from the Moratorium the eligible companies that initiate liquidation proceedings. The Supreme Court reasons that the primary goals of the Moratorium are to protect an eligible company from negative effects of COVID-19 and to support its subsequent financial recovery. Therefore, companies that decide to liquidate do not qualify for the Moratorium (item 9 of the Supreme Court's second overview in respect of COVID-19, adopted by the Presidium of the Supreme Court on 30 April 2020 (the Supreme Court Second Overview on COVID-19)).
The 24 April amendments allow an eligible company to opt out from the Moratorium. To do so, it must submit a notice into the Unified Federal Register of Information About Bankruptcy. Upon publication of the notice, the Moratorium (including other applicable restrictions) ceases to apply to the company and its creditors.
If the government extends the Moratorium beyond the initial six months, an eligible company that wishes to continue opting out will need to submit a notice again; otherwise it will qualify for the extended Moratorium by default.
Currently, the Moratorium is for six months, from 3 April until 3 October 2020. The government has powers to extend it.
During the term of the Moratorium, the following conditions apply:
The Moratorium implies a number of other restrictions, as follows:
The Bankruptcy Law used to contain another more generic freeze on transactions. It provided that any transaction on the transfer of property or the assumption of obligations (duties) committed outside the ordinary business during the period of the Moratorium, and which value exceeded 1% of the value of the debtor's assets, is null and void in respect of those companies where bankruptcy proceedings commenced within three months after the termination of the Moratorium. This provision faced much criticism from the business community, and it was abolished by the 24 April amendments.
The Moratorium is a new feature for the Russian legislation. It is yet to be seen how eligible companies will benefit from it and whether there will be further laws addressing it, including in respect of its discontinuation post-pandemic.
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