The right to waive the moratorium on bankruptcy

Pepeliaev Group advises that on 27 April 2020 Federal Law No. 149-FZ dated 24 April 2020 came into force, introducing significant changes to the Law on bankruptcy[1] regarding the moratorium on bankruptcy.

Provision has been made for a waiver of the moratorium regime

Article 19(1) of the Law on bankruptcy has been supplemented with a provision regarding the right of a company or of an individual entrepreneur to whom moratorium applies[2] to declare a waiver of the moratorium being applied to it by entering relevant information in the Unified Federal Register of Bankruptcy Information (UFRBI).

If the Russian Government elects to extend the moratorium[3]:

• an application to waive the moratorium made previously loses its force;
• a person to whom the moratorium applies may again declare its waiver of the moratorium in accordance with a similar procedure.

Once a relevant application is published, creditors and a competent authority will be able to enforce any debt, including filing a petition for bankruptcy, and to accrue penalties. Companies’ CEOs and members will have their obligation reinstated to initiate their own bankruptcy if they have relevant grounds to do so. Furthermore, restrictions will be lifted from the entity to which moratorium applies to consummate transactions, pay dividends and distribute profits, buy out or acquire outstanding stock, apportion a share in property and pay the actual value of the share. In view of the above, before you decide to terminate the status of a company to which the moratorium applies, you need to analyse the financial and economic consequences of continuing your company’s operations under the standard regime, and to assess bankruptcy risks and associated adverse consequences (transactions being challenged, including paying out of dividends, and secondary liability of controlling persons). If required, we recommend that you devise an economically feasible recovery plan for the company to mitigate the risks of liability for managers and owners of the company.

The rule that transactions consummated during the moratorium are void has been cancelled

The law which has been enacted excludes clause 4(4) from article 9.1 of the Law on bankruptcy, which stipulated that, in bankruptcy cases initiated three months after the moratorium ends with respect to the person to whom moratorium applies, transactions consummated during the moratorium to dispose of debtor’s property will be recognised to be void, except for those which were consummated in the ordinary course of business and do not exceed 1% of the size of the assets.

It is important that, as expressly prescribed by article 4(4) of Federal Law No. 149-FZ dated 24 April 2020, transactions consummated before the above provisions of article 9.1 of the Law on bankruptcy were repealed will not be recognised to be void.

Although the provision regarding transactions of certain categories being void has been excluded from the Law on bankruptcy, one should bear in mind the risk of such transactions being invalidated as voidable transactions if a bankruptcy case is initiated against the company within three years after such transactions were consummated. In view of the above, we recommend that companies experiencing financial difficulties, whether or not article 9.1 of the Law on bankruptcy applies to them, pay greater attention to transactions consummated with related parties during the crisis, as well as to transactions that are substantially different in their terms and conditions from those such companies consummated previously or which exceed 1% of the size of balance assets.

Pepeliaev Group’s lawyers have extensive experience of providing services in the area of risk management in terms of the requirements of bankruptcy legislation, including the consequences of applying provisions of the moratorium. We also provide comprehensive legal defence of the interests of any persons involved in bankruptcy cases, including individual disputes concerning the invalidation of transactions and the imposition of subsidiary liability or any other liability.