Restructuring and insolvency in Russian Federation: overview

A Q&A guide to restructuring and insolvency law in Russia.

The Q&A gives a high level overview of the most common forms of security granted over immovable and movable property; creditors' and shareholders' ranking on a company's insolvency; mechanisms to secure unpaid debts; mandatory set-off of mutual debts on insolvency; state support for distressed businesses; rescue and insolvency procedures; stakeholders' roles; liability for an insolvent company's debts; setting aside an insolvent company's pre-insolvency transactions; carrying on business during insolvency; additional finance; multinational cases; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Restructuring and Insolvency Country Q&A tool.

This Q&A is part of the Global Guide to Restructuring and Insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructure-guide.

Contents

Forms of security

1. What are the most common forms of security granted over immovable and movable property? What formalities must the security documents, the secured creditor or the debtor comply with? What is the effect of non-compliance with these formalities?

Immovable property

Common forms of security and formalities. Mortgages are the most common form of security granted over immovable property.

All types of deeds of pledge, including mortgages, must comply with certain formalities. Deeds of pledge must:

  • Be in writing.

  • Provide a sufficient description of the pledged property to identify it.

  • Place a value on the pledged property.

  • Describe the essential conditions of the obligation secured with the pledge or make a clear reference to the agreement secured.

There are other, more detailed, requirements for formalising pledges.

Mortgage deeds must also comply with the following formalities:

  • They must be registered in a specific state register of rights over immovable property.

  • They must contain a description of the mortgagor's title over the mortgaged property.

A deed of mortgage may provide for extrajudicial (out-of-court) enforcement of the debt.

Effects of non-compliance. If a mortgage deed does not comply with the required formalities, it is null and void a priori. This means that it is simply invalid and there is no need for a court to decide whether the mortgage is void.

Movable property

Common forms of security and formalities. A pledge is the usual form of security over movable property.

The content and form of a pledge must comply with various requirements, which may depend on the nature of the movable property, for example:

  • A pledge over a participatory interest (share) in a limited liability company must be notarised and information about the pledge must be entered in the state register.

  • A pledge over IP rights must be registered with Rospatent, the competent state body.

Rights of retention are another form of security over movable property. A right of retention is a creditor's specific right to keep an item that is due to be transferred to the debtor until the debtor fulfils its obligations towards the creditor. A creditor can exercise the security and execute their right of retention by selling the retained property. The creditor can also be compensated for the expenses of enforcing the debt from the sale proceeds.

A creditor's right of retention remains valid even if the debtor alienates the withheld property to a third party. A creditor always has a right of retention unless the contract with the debtor specifically prohibits this right.

Recently, a new rule of the Civil Code of Russian Federation has been enacted. Under the rule, assets held under an injunctive relief should be deemed as pledged, that is, respective creditors will have the same right as the pledgee.

 

Creditor and contributory ranking

2. Where do creditors and contributories rank on a debtor's insolvency?

On insolvency, creditor claims are ranked in the following order:

  • Out-of-ranking claims or current payments. These are monetary obligations incurred after the court accepted the insolvency application. These are ranked as follows:

    • legal costs for the dissolution of the debtor, including the receiver's remuneration;

    • remuneration of the employees of the debtor (whose employment continues after the date of the bankruptcy claim acknowledgment by a court) unless the remuneration is a severance payment for the debtor's senior managers. Severance payments are paid after third-rank claims;

    • remuneration of the employees engaged by the receiver;

    • utility and operational costs necessary to support the debtor's business; and

    • other running costs.

  • First rank claims. These are claims connected with compensation for loss of life or health caused by the debtor (excluding compensation for moral damages).

  • Second rank claims. These are claims by the debtor's employees and the copyright owners of intellectual property used by the debtor.

  • Third rank claims. These are all other claims. However, creditors whose rights are secured by pledges have a priority within this category of claims. As a general rule, 70% of the proceeds from a sale of pledged property will be directed to settle the pledgee's claims. In the case of claims under a credit agreement, the percentage is 80%. In the case of the insolvency of a banking entity, proceeds from pledged property is used to settle the claim secured by the pledge, once the claims of the first and second ranked creditors are satisfied in full.

Some types of claim fall outside the scope of the priority ranking. If a court rules that the claim of a counterparty in a transaction or agreement with the debtor is void as it is questionable (see Question 10), the claim falls out from the category of third rank claims. Such claims may only be settled after all other creditors' claims are settled.

 

Unpaid debts and recovery

3. Can trade creditors use any mechanisms to secure unpaid debts? Are there any legal or practical limits on the operation of these mechanisms?

The most popular mechanisms trade creditors use to reduce the risk of a debtor's non-payment are:

  • Bank guarantees.

  • Sureties, provided by third party guarantors.

  • Letters of credit.

  • Factoring.

 
4. Can creditors invoke any procedures (other than the formal rescue or insolvency procedures described in Questions 6 and 7) to recover their debt? Is there a mandatory set-off of mutual debts on insolvency?

In addition to the standard insolvency procedures in Questions 6 and 7, the debtor and its creditors may enter an amicable arrangement to agree on a procedure and terms to discharge the obligations. The insolvency procedure ceases once an amicable arrangement is agreed.

Set-off is generally only allowed if it does not conflict with the statutory priority of the creditor's claims (see Question 2). Debt set-off is prohibited during insolvency procedures relating to credit (banking) organisations.

 

State support

5. Is state support for distressed businesses available?

State support is not available for the majority of private companies.

However, some types of legal entity, including township-forming companies may obtain a state support in the form of a surety issued by the Russian Federation. A township-forming company is a company that employs more than 25% of the working population of the relevant town.

Certain companies obtain special rights for state support in the event of bankruptcy, including strategic companies involved in defence and security, and scientific industries.

 

Rescue and insolvency procedures

6. What are the main rescue/reorganisation procedures in your jurisdiction?

The main rescue procedures for insolvent non-banking entities are:

  • Supervision (nablyudeniye).

  • Financial rehabilitation (finansovoe ozdorovleniye).

  • External administration (vneshneye upravleniye).

Supervision (nablyudeniye)

Objective. Commercial courts (arbitrazhnye suhdy) initiate the supervision process to evaluate the debtor's financial situation and to secure the debtor's property. The commercial courts of the territory in which the debtor has its main location have jurisdiction over the bankruptcy proceedings.

Initiation. The court initiates the supervision process after it has examined a filed insolvency claim. The debtor, tax authorities, or creditors (including current or dismissed employees, as from September 2015) may file the insolvency claim.

The supervision process does not apply to credit or financial organisations. The debtor's chief executive officer must autonomously request a court for initiating the supervision if:

  • Settling some creditor claims would make it impossible for the debtor to fulfill other obligations.

  • Execution on the debtor's property means the debtor's business has to cease.

  • The debtor's business is insolvent, that is, the debtor has insufficient assets to fulfil its obligations.

Substantive tests. A court will initiate the supervision procedure if the debtor meets certain indicators of bankruptcy, which are:

  • The total of creditors' claims exceeds RUB300,000.

  • The claims have been unsettled for more than three months.

Consent and approvals. A court will initiate a supervision procedure at its own discretion without taking into account the decision of creditor's meeting and other stakeholders.

Supervision and control. The court initiates a supervision process by appointing a receiver known as a temporary manager (vremenni upravlayuschi).

The start of the supervision procedure does not entail the dismissal of the debtor's management. However, the debtor's transactions during the supervision must be approved by the temporary manager if such transactions:

  • Relate to buying or selling more than 5% of the accounting value of the debtor's assets.

  • Are connected with loans or credit, guarantees, sureties and assignments of claims.

Temporary managers have the power during the supervision procedure to:

  • Challenge in court any of the debtors' transactions that are questionable.

  • File objections to creditors' claims.

The debtor's management must provide information about the debtor's business and activities to the temporary manager.

Protection from creditors. Once the supervision procedure starts, all execution proceedings over the debtor's property are suspended. All court proceedings concerning recovery of debts can also be suspended, on petition by the creditor.

The debtor's debts must not be set off during the supervision process if the set-off affects the debtor's ability to pay another debt that ranks higher in the priority order of creditor's claims.

The supervision procedure also stops the accrual of further penalties and other financial sanctions for non-payment of debts.

Length of procedure. The supervision procedure must not last more than seven months from the date the court receives the bankruptcy claim by a creditor.

Conclusion. The supervision process ends when the court makes one of the following decisions:

  • To start a different rescue procedure, either financial rehabilitation or external administration.

  • To initiate the insolvency procedure.

  • To approve an amicable arrangement between the debtor and its creditors and the consequent cessation of the rescue procedure.

Financial rehabilitation (finansovoe ozdorovleniye)

Objective. The aim of financial rehabilitation is to carry out any necessary measures to restore the debtor's solvency and settle its debts. The court and the creditors control the process.

Initiation. This procedure is not mandatory for the debtor. A court can initiate financial rehabilitation if the debtor, its shareholders or any other party files the appropriate application. The application must include a rehabilitation plan that ensures the debtor's obligations will be settled.

Substantive tests. A creditors' meeting examines the application for financial rehabilitation. The court initiates the procedure for financial rehabilitation based on the decision of the creditors' meeting.

Consent and approvals. The approval of the creditors at the creditors' meeting is required for financial rehabilitation.

Supervision and control. The court appoints a receiver to be the administrative manager (administrativni upravlayuschi). The administrative manager supervises and controls the debtor's affairs during the period of financial rehabilitation. The administrative manager examines the debt repayment schedule and monitors any financial restructuring plans.

Protection from creditors. The start of the financial restructuring process results in the suspension of:

  • Litigation in which the debtor is a defendant to claims for the recovery of debt.

  • Execution proceedings over the debtor's property.

There must not be any set-off of the debtor's debts during the financial rehabilitation process if the set-off would mean that a higher-ranking claim could not be paid.

Length of procedure. The financial rehabilitation process may not usually last more than two years from the date of the court decision to initiate the process.

Conclusion. At least one month before the period of financial rehabilitation expires, the debtor must provide the administrative manager with a report on the results of the financial rehabilitation.

Once the administrative manager has examined the debtor's report, the manager must prepare an opinion on the extent to which debts have been paid and the financial restructuring plan has been achieved. The opinion is submitted to the court.

The court examines the results of the financial rehabilitation process and the administrative manager's opinion and may then make one of the following rulings:

  • To end the bankruptcy proceedings (if there are no outstanding debts or all of the outstanding creditors' claims are recognised as unfounded).

  • To order external administrators to manage the company (if there is a possibility of restoring the debtor's solvency).

  • To declare the debtor bankrupt and initiate the insolvency procedure. The court will make this decision if there is no reason to appoint external administrators and the debtor still appears to meet the indications of bankruptcy.

External administration

Objective. The objectives of external administration are to restore the debtor's solvency by applying special measures under an external administration plan and replace the debtor's CEO with an independent external manager (vneshni upravlyayuschi).

Initiation. The procedure is not mandatory for the debtor. It can be initiated by either:

  • A resolution of the court based on the decision of the creditors' meeting.

  • The court's exercise of its own discretion. If the court ascertains that there are no grounds to initiate a financial rehabilitation process, the court may decide to initiate external administration.

Supervision and control. Once the procedure begins, the court appoints a receiver known as the external manager.

The external manager must draft an external administration plan setting out the measures necessary to restore the debtor's solvency within the period of the external administration procedure.

In accordance with the external administration plan, the external manager supervises and controls the actions of the debtor during the period of the external administration.

The court may decide to discharge an external manager who fails to fulfill his responsibilities properly or fails to take the measures set out in the external administration plan.

The external manager may only carry out certain types of transactions related to the debtor's property and certain transactions not included in the external administration plan with the prior consent of the creditors' meeting. These transactions are generally major and interested party transactions.

Protection from creditors. Once the period of external administration begins, the court declares a moratorium on payments of creditor's claims, except for current payments and the claims of creditors in the first and second category (see Question 2).

Length of procedure. External administration may be initiated for a period of 18 months. The meeting of creditors may extend the period, but not by more than six months.

Conclusion. At the end of the period of external administration, the external manager prepares and submits a report to the creditors' meeting together with one of the following proposals:

  • To end judicial proceedings as all creditors' claims have been settled.

  • To extend the external administration period.

  • To end external administration as the debtor is now solvent and to proceed to settle claims with the creditors.

  • To complete external administration and file the application to declare the debtor bankrupt and initiate the insolvency procedure.

On basis of the report, the creditors' committee provides the court with the appropriate application.

The external administration ends with the court making one of the following decisions:

  • Provided all creditors' claims are satisfied, to end rescue proceedings.

  • To end external administration and to proceed to settle with creditors.

  • To declare the debtor bankrupt and initiate the insolvency procedure.

 
7. What are the main insolvency procedures in your jurisdiction?

Insolvency (konkursnoe proizvodstvo)

Objective. The purpose of the insolvency procedure is to sell the debtor's property and use the proceeds to pay creditors' claims on a pro rata basis.

Initiation. The court may initiate the insolvency process straight after the completion of one of the following rescue procedures:

  • Supervision.

  • Financial rehabilitation.

  • External administration.

The court will initiate insolvency if all of the following apply:

  • The creditors' meeting has requested the court to make the debtor insolvent.

  • The court agrees the debtor is bankrupt.

  • There are no grounds for initiating or completing one of the other types of rescue procedures.

Supervision and control. The court appoints a receiver, known as the insolvency manager (konkursny upravlyayuschi), to replace the debtor's CEO. The insolvency manager identifies and auctions the debtor's property. The insolvency manager may also judicially challenge any suspicious transactions.

The court and creditors control the activity of the insolvency manager. The insolvency manager must provide progress reports at least quarterly.

The court can dismiss an insolvency manager and the creditors may apply for the court to do so if the manager does not fulfill his duties.

Protection from creditors. All of the debtor's obligations become due and payable as soon as the insolvency procedure begins. However, interest and financial penalties stop accruing.

Length of procedure. Generally, the insolvency procedure lasts no more than six months. The courts can, generally, only make one further six-month extension.

Conclusion. At the end of the insolvency procedure, the court reviews the list of satisfied and unsatisfied claims.

If the creditors' claims are fully satisfied, the court rules that the bankruptcy process is complete, the debtor company remains operating and all restrictions be ceased.

If creditors' claims are not satisfied, the court terminates the insolvency procedure and winds up the company by excluding it from the state register of legal entities.

At the end of the insolvency procedure, creditors can also decide to enter into an amicable agreement with the debtor to complete the insolvency procedure or to initiate an external administration procedure.

 

Stakeholders' roles

8. Which stakeholders have the most significant role in the outcome of a restructuring or insolvency procedure? Can stakeholders or commercial/policy issues influence the outcome of the procedure?

Very detailed regulations apply to all participants in bankruptcy procedures. However, in practice, the official receivers appointed by a court have a strong influence on procedure.

The official receiver has the authority to:

  • Challenge any suspicious transactions.

  • Enter creditors' claims in the creditors' register.

  • Determine the order or ranking of creditors' claims.

The meeting of creditors also plays a significant role in the outcome of a restructuring or insolvency procedure, as most of the important issues during these procedures are resolved by a vote at the creditors' meeting. Importantly, the creditors' meeting decides the type of rescue procedure it asks the court to order.

Special laws determine the specific features of bankruptcy procedures involving township-forming, agricultural, at "private investor costs" developing companies, and any other companies where the state is concerned to ensure business continues.

 

Liability

9. Can a director, partner, parent entity (domestic or foreign) or other party be held liable for an insolvent debtor's debts?

Director or parent entity (domestic or foreign)

The following persons may have subsidiary (additionally) liability for the primary debtor's obligations if their actions or directions caused the insolvency:

  • Persons who are "controlling persons of the debtor". A "controlling person of the debtor" is someone who is entitled to give instructions to the debtor or has powers to direct the debtor's actions in other ways.

  • A director or a parent entity/shareholder.

Partner

If a partnership becomes insolvent, each partner bears subsidiary responsibility for the partnership's debts, even after they have withdrawn from the partnership. No claim can be made against a partner more than two years from the date the partners approved the annual report and accounts for the year the partner withdrew.

 

Setting aside transactions

10. Can an insolvent debtor's pre-insolvency transactions be set aside? If so, who can challenge these transactions, when and in what circumstances? Are third parties' rights affected?

On behalf of the debtor, the official receiver can challenge certain pre-insolvency transactions.

Transactions executed by the debtor or by third parties at the debtor's cost can be set aside during a period either before or after the initiation of bankruptcy proceedings.

The period during which certain of the debtor's transactions can be challenged and the specific conditions under which the transactions may be invalidated, depends on whether the transaction is determined to be a questionable transaction or a preferential transaction.

Questionable transactions

The court can declare questionable transactions invalid. Questionable transactions are transactions entered into by the debtor within either:

  • One year before the bankruptcy filing, where the consideration provided by one of the parties is obviously inadequate in comparison to normal market practice for the transaction. In other words, the transaction price paid to the debtor is substantially lower than the price usually payable in a similar transaction.

  • Three years before the insolvency proceedings began, with the purpose of damaging the creditors' property rights.

Preferential transactions

These are transactions entered into by the debtor within a period of one to six months before the bankruptcy filing which are challenged as they result in one creditor being preferred or favoured in comparison to the others.

If a transaction is invalidated, the property transferred under the transaction is returned to the insolvent estate. If it is impossible to return the property, for example, the property was transferred to a bona fide purchaser, the party to the invalidated transaction must compensate the debtor at the current market value of the asset transferred.

 

Carrying on business during insolvency

11. In what circumstances can a debtor continue to carry on business during rescue or insolvency proceedings? In particular, who has the authority to supervise or carry on the debtor's business during the process and what restrictions apply?

A debtor can carry on business normally during two types of rescue proceedings:

  • Financial rehabilitation.

  • External administration.

The temporary or administrative manager may impose certain conditions on the debtors' business and the debtor will need the consent of the manager to carry out its activities.

The debtor's business can be continued within the external administration, provided that the debtor's CEO is dismissed and the CEO's executive powers are transferred to the external manager.

Once a court rules that an entity is insolvent, it ceases to function and its insolvency manager takes primary responsibility for the insolvency process.

 

Additional finance

12. Can a debtor that is subject to insolvency proceedings obtain additional finance both as a legal and as a practical matter (for example, debtor-in-possession financing or equivalent)? Is special priority given to the repayment of this finance?

A shareholder of a debtor or any third party can act as a guarantor for a debtor or settle a debtor's obligation. However, the guarantor (supporter) would not have a right to then make a claim against the debtor for the amount of the guarantee.

 

Multinational cases

13. What are the rules that govern a local court's recognition of concurrent foreign restructuring or insolvency procedures for a local debtor? Are there any international treaties or EU legislation governing this situation? What are the procedures for foreign creditors to submit claims in a local restructuring or insolvency process?

There is no law relating to concurrent or parallel proceedings. Accordingly, the decisions of foreign courts relating to bankruptcies in other countries are recognised and enforced based on international treaties and principles of reciprocity.

Recognition

The Russian Federation is not party to any of the special international treaties on bankruptcy.

The Russian Federation is, however, a party to a large number of bilateral international treaties that provide for mutual recognition and execution of court decisions in civil cases.

If there is no treaty between the Russian Federation and a particular state, a Russian court may recognise and execute the decision of the foreign court on the principle of reciprocity.

In practice, for a Russian court to order the execution of an order of a foreign court, foreign creditors will need to establish reciprocity by proving that a decision of a Russian court has been executed in their jurisdiction.

Recognition of foreign courts' decisions is carried out through a special judicial procedure.

Procedures for foreign creditors

As a rule, Russian law governs the procedures for foreign creditors of local debtors unless an international treaty to which the Russian Federation is a party provides otherwise. However, the Russian Federation is not joined to or a party to any international treaty that governs insolvency procedures with foreign parties.

 

Reform

14. Are there any proposals for reform?

The Ministry of Economic Development of the Russian Federation is currently developing a draft law regarding significant amendments to the present bankruptcy legislation. According to the preliminary discussions, these amendments will consolidate the current rescue proceedings of financial rehabilitation and external administration (see Question 11) into one single "restructuring" procedure. The amendments also involve the subdivision of the third rank claims (see Question 2) and the pre-trial restructure of the debtor's obligations. The draft law was presented by Ministry of Economic Development to the Russian Government and is expected to be introduced shortly to the national legislature.

 

Online resources

Online federal legislation

W http://pravo.gov.ru/

Description. Official internet site for legal information in the Russian Federation maintained by the Federal Protective Service of Russia.

Official electronic bulletin

W www.szrf.ru/

Description. Official internet versions of the state-governed periodical journal that publishes the legislation of the Russian Federation.

Russian Civil Code

W www.wipo.int/wipolex/en/text.jsp?file_id=385284

Description. Unofficial English translation of the Russian Civil Code. The website is maintained by the World Intellectual Property Organisation (WIPO).



Contributor profiles

Evgeny Branetsky

Edas Law Bureau

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W www.edaslawfirm.ru

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Edas Law Bureau

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Pavel Prokofyev

Edas Law Bureau

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