Pepeliaev Group advises that on 8 June 2020 the Russian President signed the new federal law No. 166-FZ on measures to ensure the stable development of the economy and to prevent the consequences of the spread of the coronavirus. Article 9 of the federal law contains provisions granting debtors to which the moratorium applies a court instalment plan in bankruptcy cases for the purpose of settlements with creditors.

What is a court instalment plan and how is it used?

A court instalment plan means the suspension for a certain period of a bankruptcy case at the request of a company or an individual entrepreneur to which the moratorium applies (the “debtor”) that meets the established parameters with obligations to the creditors being paid by instalments.

The conditions on which a court instalment plan is granted

Within the scope of a bankruptcy case, a debtor may apply for a court instalment plan, provided that the following conditions are met:

• the bankruptcy case has been initiated by the debtor itself;
• monitoring/restructuring of debts with respect to the debtor has been introduced after the moratorium period has been launched;
• the instalment plan is granted not earlier than the first meeting of creditors was held;
• a drop in revenues (income) of the debtor is over 20% (1) in the reporting period in which a bankruptcy case was initiated as compared with a similar period of a previous calendar year; if at the moment an application for an instalment plan has been filed no reporting period has expired, the figures for the debtor’s revenues (income) are compared for two years preceding the year in which the application was filed;
• the absence of debts to individuals for causing harm to life or health, or salary arrears;
• the creditors at the meeting of the debtor’s creditors refrained from deciding to enter into a settlement agreement or voted against entry into a settlement agreement;
• there are no other applications from creditors, including those returned by a state commercial court under article 9.1(2) of the Bankruptcy Law.

Since a prerequisite for granting a court instalment plan is that this matter should be considered by the meeting of creditors, it is possible to obtain such an instalment plan only five or six months after supervision/debt restructuring procedures have been introduced with respect to the debtor, which significantly reduces the efficiency of the mechanism of an instalment plan in a situation when the debtor’s financial position continues to deteriorate. In view of the above, debtors are advised, if there are prospects of overcoming the crisis, to initiate negotiations with a temporary manager to hold the first meeting of creditors under the supervision procedure immediately after the procedure is completed when creditors’ claims are determined under article 71 of the Bankruptcy Law.

To which obligations does a court instalment plan apply?

The draft law provides for possible payment by instalment of the obligations outstanding as at the date when the bankruptcy case has been initiated and of the obligations to be included in the register of creditors’ claims which mature within a year after the date when the court instalment plan has been granted. Other obligations are to be performed within the timeframes for which a contract or the law provides.

A court instalment plan applies to the claims of all creditors including those which were not included in the register of creditors’ claims. However, it is not taken into account whether the contract with a creditor contains conditions granting the right to claim early settlement of the debt; nor is it taken into account whether there are any conditions regarding other adverse consequences resulting from a deterioration of the debtor’s financial position, from a violation of the schedule for performing obligations or from the procedure being introduced that applies in bankruptcy cases.

The procedure for obtaining a court instalment plan

The debtor’s application for a court instalment plan can be filed with a court under a bankruptcy case not earlier than a month after the moratorium has been introduced.

Following the consideration of the application, a state commercial court issues a ruling containing the conditions on which a court instalment plan is granted, and the bankruptcy proceedings are terminated. The ruling granting the court instalment plan can be challenged.

The period of a court instalment plan, procedure and conditions on which obligations are discharged

The general rule is that a court instalment plan is granted for one year. The period of an instalment plan can be extended by up to two years and for strategic enterprises by up to three years, if the debtor’s revenues have contracted by more than 50%.

The debtor must discharge obligations covered by the court instalment plan every month by equal instalments during the period of the instalment plan.

If an instalment plan is granted for more than a year, the debtor must provide to its unsecured creditors a security in the form of a bank guarantee or a pledge. During the period of such court instalment plan, interest accrues as established in the agreement between the debtor and its contracting party, or if no such interest has been set, in the amount of the key rate of the Bank of Russia.

If there are prerequisites for getting out of the crisis, including with the help of a court instalment plan, we advise that you prepare an economically feasible plan that would help to assess not only the feasibility of anti-crisis measures under consideration and their effectiveness, but also reduce the risks of secondary liability being imposed on controlling persons if a bankruptcy case is resumed or another bankruptcy case is initiated.

The conditions on which a court instalment plan is granted

The conditions for granting a court instalment plan provide for a prohibition on:

• satisfying the claims of the debtor’s members to apportion a share in the debtor's property, the debtor buying out or acquiring the outstanding shares or paying the fair value of a share;
• terminating the debtor’s liabilities by the set-off of a counterclaim of the same kind if this violates the priority for creditors' claims to be met.
• paying dividends and allocating the revenue to the debtor’s members;
• assessing default interest and other financial sanctions for non-performance or improper performance of monetary obligations and for failure to make compulsory payments, except for current payments.

Creditors’ rights during the period of a court instalment plan

Creditors whose claims exceed 10% of the total amount of the register of creditors’ claims (except for those persons who are interested parties with respect to the debtor) are entitled to access information regarding the assets and liabilities of the debtor and to receive a quarterly report on how the court instalment plan is executed.

Consequences of a failure to comply with the conditions of a court instalment plan

If a debtor does not fulfil the conditions of such an instalment plan, such as it fails to discharge its obligations on time, the court, further to a petition of creditors, revokes the instalment plan and resumes bankruptcy proceedings, except for cases when procedures have been initiated against the debtor that are applied under a new bankruptcy case.

When a court instalment plan is revoked, it is terminated with respect to all creditors.

If bankruptcy proceedings are resumed or another bankruptcy case is initiated against the debtor, the periods for which articles 61² and 61³ of the Bankruptcy Law provide for challenging the transactions will be calculated from the date when moratorium was put into effect and will include (i) the relevant period before the moratorium starting date, (ii) the period of the moratorium itself, and (iii) the period before the court instalment plan was revoked or a new bankruptcy case was initiated if the court instalment plan was breached.

Creditors should actively use the rights granted to exercise control over the debtor’s activity in order to avoid siphoning of assets and to apply in time to court for the revocation of the court instalment plan. For those purposes, we advise that if the amount of claims is insufficient you should enter into an alliance with other creditors to jointly protect your rights.

Pepeliaev Group’s lawyers have extensive experience in providing integrated support in bankruptcy cases and are ready to provide such legal support to effectively protect the interests of any persons involved in the procedures that are used in such cases.