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COVID-19: transactions prohibited during the moratorium on bankruptcy

Pepeliaev Group advises on the rules for identifying entities with respect to which the moratorium on bankruptcy was enacted in the light of the coronavirus COVID-19 pandemic, and concerning certain types of transactions which such organisations have no right to enter into while the moratorium is in force

On 1 April 2020, Federal Law No. 98-FZ [1]“On amending certain items of the legislation of the Russian Federation on the forestalling and elimination of emergency situations” came into force, supplementing the Federal Law on Bankruptcy[2] with the new article 9.1. In accordance with the specified provision the Russian Government has been empowered in certain situation to introduce a moratorium on the initiation of bankruptcy cases under petitions filed by creditors. In furtherance of the provisions of this article, the Russian Government issued Resolution No. 428[3] (“Resolution No. 428”), by which on 6 April 2020 a 6-month moratorium[4] was enacted with regard to initiating bankruptcy cases under a petition of creditors against specific categories of debtors.

(А) Entities covered by the moratorium

According to clause 1 of Resolution No. 428 the moratorium is introduced with respect to:

  • organisations and individual entrepreneurs whose code of primary type of activity in accordance with the Russian classifier[5] of types of economic activity (known in Russian as "OKVED") is specified in the list[6] of specific areas of activity adversely affected in the conditions of the deterioration of the situation in connection with the spread of the new coronavirus infection;
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Please note the following circumstances:

(1) for the specified purposes only the code of primary type of activity according to the OKVED classifier as at 1 March 2020 is used; additional OKVED codes are not taken into account;

(2) if in fact the primary type of activity performed by a company does not coincide with the type of activity according to its primary code from OKVED, we do not recommend changing the primary OKVED code throughout the entire period of moratorium;

(3) if the activity performed in fact by a company does not coincide with the primary OKVED code as at 1 March 2020 or significantly differs from it, nonetheless, the company is formally covered by the moratorium on bankruptcy, and in this case we cannot rule out implications in the future that will be connected with the violation of restrictions provided for by the moratorium (for example, the invalidation of transactions, payment of dividends, actions being treated as abuse of right);

(4) the list of separate areas of activity and the list of core organisations may be amended by a decision of the Government Commission when the stability of the Russian economy's development increases;

(5) A special service has started working on the website of the Russian Federal Tax Service https://service.nalog.ru/covid/ to implement the provisions of Resolution No. 428; using this service a company may check whether it is covered by the moratorium.

  • core organisations[7];
  • strategic enterprises and strategic joint stock companies[8];
  • strategic organisations and federal executive bodies ensuring the implementation of unified state policy in sectors of the economy in which the above organisations carry out their activities[9].

(Б) Prohibitions on the consummation of transactions with companies covered by the moratorium

1. New grounds for the invalidation of transactions

According to article 9.1(4)(4) of the Federal Law on Bankruptcy, in bankruptcy cases initiated within three months after the moratorium is terminated with respect to debtors covered by it, the transactions with respect to the transfer of property and acceptance of obligations or duties performed during the moratorium are invalidated (except for a transaction performed by the debtor in the course of its ordinary business activity, if the price of property transferred under one or several related transactions, or the amount of accepted obligations or duties, does not exceed one percent of the value of the debtor’s assets which is determined based on the accounting reports of the debtor for the last reporting period as at the date when the moratorium was introduced).

Therefore, transactions with respect to the disposal of property or acceptance of obligations performed during the moratorium by a company covered by the moratorium can be invalidated if:

  • such transactions are extraordinary (non-typical), which means performed by the company outside of the scope of its ordinary business activity, irrespective of the value threshold; or
  • the price of the corresponding transaction (irrespective of whether it is extraordinary or not) exceeds 1% of the company’s asset value.

2. How to determine whether a transaction is extraordinary

In order to determine whether a specific transaction is outside of the ordinary business activity for the purposes of the application of article 9.1 of the Federal Law on Bankruptcy, the debtor is recommended to be guided by the provision of clause 14 of Resolution No. 63 of the Plenum of the Russian Supreme Commercial Court dated 23 December 2010 “On certain issues connected with the application of chapter III.1 of the Federal Law “On insolvency (bankruptcy)””.

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Please note the following circumstances:

(1) the performance of a transaction in an area which falls within the primary types of the debtor’s activity in accordance with its statutory documents is not sufficient for the transactions to be recognised as being performed in the process of its ordinary business activity;

(2) the rules for the invalidation of transactions also cover actions aimed at the performance of such transactions, which involves payments, including payments aimed at the performance of obligations to the state budget[D.1] ;

(3) a transaction (payment or other performance) the amount of which does not exceed 1% can be invalidated even if it is typical for the debtor, but has been performed, for example, in conditions when the contracting party was aware of the debtor's insolvency, or of a significant delay in the performance of its obligations;

(4) criteria for determining the range of transactions performed within the scope of ordinary business activity provided for by corporate legislation (article 78(4) of the Federal Law On Joint Stock Companies[10] and article 46(8) of the Federal Law on Limited Liability Companies[11]) are not applied for the purposes of the application of article 9.1 of the Federal Law on Bankruptcy.

It is worth remembering which main criteria should be taken into account when determining the standard of ordinary business activity according to the specified explanations of the court, and what is meant by transactions for the transfer of property:

- criteria of ordinary transactions: transactions performed in the course of the debtor's ordinary business activity are transactions which do not significantly differ by their general terms and conditions from similar transactions which the debtor had previously been performing over an extended period of time;

- examples of ordinary transactions: the following transactions may be classified as transactions performed in the process of ordinary business activity, in particular, taking into account all circumstances of the case:

  • repayment of the corresponding part of a loan pursuant to the schedule;
  • payment of monthly rent;
  • salary payment;
  • payment for utility services;
  • payments for mobile services and the Internet;
  • payment of taxes;
  • similar transactions / operations with respect to making payments under long-term obligations.

comment.jpgPlease note that when the court assesses actions of the debtor with respect to its performance of an obligation to pay mandatory payments, the court takes into account to what extent they were ordinary in terms of their volume and the deadline for their performance in comparison with a mandatory payment which had been performed numerous times before by the debtor or at its expense.

- which transactions cannot be classified as ordinary:

  • payments with a significant delay;
  • the granting of compensation;
  • the early repayment of a loan not justified by reasonable economic grounds.

comment.jpgThe courts also take into account whether the corresponding transactions have been performed by the debtor itself or by a third party further to its request. In the courts’ opinion the latter circumstance also cannot evidence ordinary business nature.

examples of transactions with respect to the transfer (disposal) of the property:

  • payment or transfer of the ownership of other property for the performance of a contractual obligations, including for the repayment of the loan;
  • sale and purchase agreements (for the seller);
  • exchange agreements;
  • donation agreements;
  • credit agreements (for the creditor);
  • and other similar transactions.

the following are considered examples of transactions with respect to acceptance of obligations:

  • sale and purchase agreements (for the buyer);
  • contractor agreements (for the client);
  • credit agreements (for the borrower);
  • suretyship agreements;
  • pledge agreements;
  • other agreements which provide for the debtor to pay money.

3. Agreements that provide for an out-of-court procedure to foreclose on the debtor’s property

Pursuant to article 9.1(3)(3) of the Federal Law on Bankruptcy foreclosure on pledged property is not allowed, including under an out-of-court procedure. In our opinion, an agreement for foreclosure on pledged property entered into by the debtor during the moratorium is an invalid transaction.

What to think about and what to do

Ø It is advisable for organisations to determine whether they or their contracting parties are covered by the bankruptcy moratorium and to monitor the amendments made in the list of companies under the moratorium. If an organisation is covered by the moratorium, we recommend not changing the primary code in OKVED throughout the entire period of the moratorium.

- It is necessary to analyse all the transactions being performed (or that have been performed) and also those that are planned to be performed, featuring the company covered by the moratorium in terms of whether such transactions comply with requirements and restrictions established for the period of the moratorium (among other things it is recommended to critically assess all planned investment transactions or transactions aimed at attracting financing from third parties).

- We recommend adjusting corporate procedures (with regard to debt procedures, or to the exercise of the rights of participants or shareholders of subsidiaries).

- The companies covered by the moratorium need to develop an economically justified plan for resolving the crisis situation in order to mitigate risks of bankruptcy. In the absence of grounds for restoring solvency, we recommend using the right to initiate one's own bankruptcy in order to mitigate risks of transactions being challenged and liability being imposed on controlling persons.

Help from your adviser

Pepeliaev Group’s lawyers are closely monitoring the changes in legislation arising from the current epidemiological situation and are ready to provide any type of assistance to the business in the area of the application by companies of corporate and civil legislation. This includes in conducting due diligence of a company's contractual and corporate relationships during the moratorium on bankruptcy or in assessing the terms and conditions of specific contracts (that have been or are planned to be entered into) in terms of their compliance with the requirements and restrictions established in connection with the moratorium on bankruptcy, as well as in initiating and ensuring full, comprehensive legal support for cases concerning the bankruptcy of debtors covered by the moratorium, including under their own petition.



[1] Federal Law No. 98-FZ dated 1 April 2020 “On amending certain items of legislation of the Russian Federation regarding the forestalling and elimination of emergency situations” dated 1 April 2020

[2] Federal Law No. 127-FZ dated 26 October 2002 “On insolvency (bankruptcy)”

[3] Resolution No. 428 of the dated 3 April 2020 “On introducing a moratorium on initiating a bankruptcy case under a creditors' petition with respect to specific debtors”

[4] Please note that the moratorium can be extended further to the decision of the Russian Government unless the circumstances which served as a ground for its introduction cease to exist

[5] “ОK 029-2014 (KDES Ver.2) Russian Classifier of Economic Activity (approved by Order No. 14-st of the Russian Federal State Statistics Service (Rosstandart) dated 31 January 2014)

[6] Approved by Resolution No. 434 of Russian Government dated 3 April 2020 “On approving the list of sectors of the Russian economy adversely affected in the conditions of the deterioration of the situation with the spread of the new coronavirus infection (as amended by Resolution No. 479 dated 10 April 2020 “On amending the list of sectors of the Russian economy adversely affected in the conditions of the deterioration of the situation with the spread of the new coronavirus infection”)

[7] According to the list of core organisations of the Russian economy, approved by the Protocol No. 3 of the Meeting of the Government Commission for the Increase of the Stability of Development of the Russian economy dated 20 March 2020

[8] According to the list of strategic enterprises and strategic joint stock companies approved by Decree No. 1009 of the Russian President dated 4 August 2004 “On approving the list of strategic enterprises and strategic joint stock companies”

[9] According to the list approved by instruction No. 1226-r of the Russian Government dated 20 August 2009

[10] Federal Law No. 208-FZ dated 26 December 1995 (as amended on 4 November 2019 and on 7 April 2020) “On Joint Stock Companies”(as amended and supplemented starting from 1 January 2020)

[11] Federal Law No. 14-FZ dated 8 February 1998 (as amended on 4 November 2019 and on 7 April 2020) “On Limited Liability Companies”

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