RESTRUCTURING/INSOLVENCY — RUSSIA

There was a rise in bankruptcy in Russia in 2016 and the trend is expected to continue in 2017. At the same time, bankruptcy-related legislation has been significantly amended over past years and there are new changes that will come into force shortly, that are very significant to foreign investors.

The main legal act regulating bankruptcy is Federal Law No. 127-FZ On Insolvency.

Bankruptcy in Russia is handled by state commercial courts that appoint an independent administrator. Currently, the bankruptcy procedure is a lengthy process. As a general rule, first the debtor undergoes the supervision procedure, which may last 5 to 6 months. In that time, the administrator analyses the debtor’s financial position to establish whether it may be restored to solvency. Its creditors submit their claims and the court takes a decision which insolvency-related procedure will be applied. One of the following procedures may be introduced: financial rehabilitation or external administration. Financial rehabilitation means that the debtor should settle its debt with creditors in accordance with the approved schedule. Externally managed restructuring aims to restore the debtor to solvency by restructuring its business. However, it must be noted that the use of financial rehabilitation is currently extremely rare in Russian bankruptcy. This is partly due to the fact that many bankruptcies are initiated too late into the insolvency and the debtors rarely have assets that could be used in a rehabilitation process.

The bankruptcy law reform was started in 2014 and a number of law amendments have been introduced that have significantly increased the guarantees to investors.

One such improvement is the increased transparency of a bankruptcy procedure by the publication of information concerning the status of a bankruptcy online, in the Unified Federal Register of Bankruptcy Information http://bankrot.fedresurs.ru/. The source includes information concerning principal events (such as procedures being implemented, time frames for creditors to raise claims or names of administrators being appointed by a court) as well as data relating to stocktaking, valuation, disposal of the debtor’s assets and any resolutions passed by creditors’ meetings.

Other law amendments seek to increase the use of the financial rehabilitation procedure to bring debtor companies back to solvency. The effort is also made to reduce the number of procedures applicable to companies in bankruptcy and cut the time required for its implementation. 

In Russia, 2016 was marked by the growing number of the insolvencies filed by individuals, although it was possible to declare individual bankruptcy from 1st October 2015. This market trend is important to foreign investors as personal guarantees of company owners and managers are widely used in Russia. This includes large bank debt where personal guarantees are used as a security.

It should be noted that Russian bankruptcy legislation is favourable to creditors and the current and proposed amendments have substantially strengthened the creditors' legal position. Creditors now can challenge debtors' transactions that may be deemed as an attempt to sell off company assets or give a preference to certain creditors. On the other hand, investors should consider the risks that such challenges pose to their deals with Russian counterparties. In general, there is a three-year limit before the bankruptcy has been started on challenging such transactions. Most importantly, if a transaction of a Russian company in bankruptcy is to be challenged on the grounds and within procedures set out in the bankruptcy law, it will be Russian courts that will hear the case, irrespective of any arbitration clauses or applicable law agreement set out in the contract.

Investors who are creditors of Russian companies or founders of subsidiaries in Russia are also advised to pay special attention to the rules of secondary liability applicable to the parties in control of the debtor. In 2017, new provisions are to come into force which make it possible to impose secondary liability on the beneficial owners and members of governing bodies of Russian companies even after the relevant legal entity has been wound up (and the receivership proceedings have come to an end) as well as in cases when no bankruptcy has been initiated. Our experience shows that many CEOs of companies are unaware of such obligations and liability.

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