The moratorium on the initiation of bankruptcy cases: consequences and recommendations

On 26 March 2020 a draft law was put before the State Duma; this draft law grants a right to the Russian Government to introduce a moratorium on the initiation of bankruptcy cases in extraordinary cases. Taking into account the current situation, we can expect that the draft law will be promptly adopted and applied.

Who is covered by the moratorium?

The moratorium will cover only companies of certain categories, sectors and types of activities, the list of which will be determined by the Russian Government.

At the same time the moratorium covers only the initiation of bankruptcy by creditors and it suspends only the obligation of debtors to file a petition for their own bankruptcy (the duration of the corresponding timeframes for filing the petition).

The right of a debtor, even in a category established by the Russian Government, to apply with its own bankruptcy petition remains.

Recommendations:

1. All categories of debtor companies that are not included in the list approved by the Russian Government, as well as their creditors, are recommended to use the bankruptcy mechanism under the ordinary procedure, if there are grounds for doing so. In the conditions of court hearings being suspended, the check of whether bankruptcy petitions are justified might be taken more than 30 days, but from the standpoint of consequences of the bankruptcy petition being accepted, the necessary effect will be achieved.
2. Why it is not worth postponing the filing of petitions concerning the bankruptcy of debtors that are not included in the approved list:

• if a debtor started to show signs of bankruptcy before the moratorium was initiated, then the continuation of the activity of such company decreases the chances of creditors to have their claims satisfied and simultaneously increases the risks for the debtor and its controlling parties (in particular, an additional ground for imposing liability originates in the failure to file the petition, and the volume of liability also increases);
• the suspension of timeframes, etc. (see the section ‘Calculation of timeframes’ below) may be not applicable if, for example, the debtor had an obligation to file the bankruptcy petition before the moratorium was introduced;
• the timely initiation of bankruptcy will allow the risks of transactions being challenged and subsidiary liability (its volume) to be decreased.

What will happen with notifications concerning the intent to initiate bankruptcy and bankruptcy petitions of debtors to which moratorium applies?

Starting from the day when the moratorium is introduced all published notifications of a creditor concerning the intention to file for the bankruptcy of companies included in the established list lose their force, and the court returns bankruptcy petitions filed by creditors against debtors in the corresponding categories.

If a petition has been accepted for court proceedings before the date when the moratorium was initiated, but the first bankruptcy procedure has not yet been introduced, the court will suspend proceedings on this case for the period while the moratorium is in force.

What will happen with debtors which are not covered by the moratorium and creditors’ claims with respect to them?

From the date when the moratorium is introduced certain consequences occur which are stipulated for the initiation of the supervision procedure:

• payments associated with the withdrawal of members are not allowed; the debtor is not allowed to purchase or acquire placed shares;
• it is not allowed to terminate monetary obligations of the debtor by set-off if this violates the priority of satisfaction of creditors’ claims established by article 134(4) of the Bankruptcy Law.
• the payment of dividends and income according to membership interests (equity units), as well as a distribution of profit between members of the debtor are not allowed;
• penalties (fines and default interest) and other financial sanctions shall not accrue for the failure to perform or for the improper performance of monetary obligations and obligatory payments,
• foreclosure on pledged property is not allowed, including under an out-of-court procedure;
• enforcement proceedings are suspended, as are enforcement measures provided for by the legislation on enforcement proceedings

Recommendations:

• after the draft law has been adopted, we recommend analysing all your contracting parties in order to identify parties to which the moratorium applies and to avoid the application by them of the above methods of performing obligations;
• members and shareholders of companies that are included in the list approved by the Russian Government need, when they exercise their rights, to take into account the introduced restrictions and the financial risks arising in this regard.

Invalidation of transactions entered into while the moratorium is in force

In accordance with the text of the draft law, all transactions are recognised as void that involve the disposal of the debtor’s property performed within the period when the moratorium was in force, except for those performed within the framework of the debtor's ordinary business activity which do not exceed 1% of the amount of the debtor’s assets.

Recommendations:

Please be reminded that a transaction amount of less than 1% does not in itself mean that the transaction will be classified as ordinary. The transaction should also be ordinary from the standpoint of the circumstances in which is it carried out. For example this preference does not apply to deferred payments.

Calculation of timeframes and determining the amount of obligations during the moratorium

The period for suspicion when transactions are challenged and timeframes for recognising the party as an interested party shall be calculated from the date when the moratorium was introduced in case of filing a bankruptcy petition within three months from the date when moratorium expires.

The contents and volume of monetary obligations and the exchange rate of the rouble are determined on the date when the moratorium is introduced if the bankruptcy petition is filed within three months from the date when the moratorium expires.

Meetings by absentee ballots are permitted

While the moratorium is in force it is permitted to hold meetings of creditors, committees of creditors, participants in construction and employees of a debtor using absentee ballots.

Good news for debtors concerning the entry into amicable agreements

In bankruptcy cases initiated by the debtor within the period when the moratorium is in force an amicable agreement can be approved by the court further to the debtor’s petition even if the amicable agreement has not been approved by the creditors’ meeting.

The terms and conditions of amicable agreements entered into further to a debtor’s petition during the moratorium and in bankruptcy cases initiated within three months after the moratorium, cover even creditors’ claims that are not included in the register of creditors’ claims.