Pepeliaev Group advises of Russian creditors’ (including the Federal Tax Service’s) new mechanism for collecting debts through commercial courts. This is done through the bankruptcy of foreign companies and their estate in Russia.
In 2024, the Federal Tax Service alone initiated 543 bankruptcies of such debtors, of which:
- 53 companies are already under receivership proceedings;
- 180 debtors are expecting an audit to check whether the petition for bankruptcy is justified;
- 310 companies have fully performed their obligations to the governmentSee the article in Kommersant published on 5 December 2024: “The FTS has filed bankruptcy petitions with respect to more than 500 foreign companies owing to their tax debts”. (https://www.kommersant.ru/doc/7347420?query=%D0%BD%D0%B0%D0%BB%D0%BE%D0%B3).
Other Russian creditors have started actively using a similar tool.
The Russian Supreme Court (the “Supreme Court”) has formulated the rules for instigating bankruptcy through Russian courts with respect to foreign companies or their estate in its Ruling dated 8 February 2024 in case No. А40-248405/2022 (the “Ruling of 8 February 2024”). This Ruling has become known as a “mini-code”
See also our video On the Bankruptcy of Foreign Companies in Russia: (https://www.pgplaw.ru/analytics-and-brochures/video/novosti-bankrotstva-bankrotstvo-inostrannykh-kompaniy-v-rossii-yuliya-litovtseva/).
What foreign companies are subject to bankruptcy?
Entities registered abroad are subject to bankruptcy through Russian courts, specifically:
1. Companies whose centre of main interests is closely connected with the territory of Russia (in this situation the primary bankruptcy proceedings will be carried out in a Russian court);
Primary proceedings:
- proceedings have an effect for all other jurisdictions;
- proceedings extend to the entire property of the debtor regardless of the country where the debtor is located;
- proceedings extend to all creditors including foreign creditors;
- the powers of the foreign receiver are determined by the judgment of the Russian court.
2. Companies whose centre of main interests is not in Russia (in this situation, the bankruptcy proceedings in Russian courts will be secondary, even if no primary proceedings are taking place in the country of registration or the country where the debtor’s centre of main interests is located).
Secondary proceedings:
- proceedings are instigated with respect to the standalone property estate of the debtor that is located in or connected with the territory of Russia;
- proceedings extend to creditors connected with the legal entity’s business in Russia;
- the receiver has powers only with respect to the debtor’s property in Russia.
The conditions for examining cases of the bankruptcy estate of a foreign company in Russian courts
In the Ruling of 8 February 2024 the Supreme Court formulated the following criteria that allow for the bankruptcy of a foreign person (the “FP”) to be attributed to the jurisdiction of Russian courts:
- that the FP conducts business activity in Russia;
- that persons under Russian jurisdiction are the target of the FP’s business;
- that the following are located in Russia:
- the centre of the FP’s main interests;
- the FP’s property;
- the management body of the FP, or a branch office or representative office of it;
- that the Russian court imposes secondary liability on the FP as a person controlling the activities of the Russian company;
- that the owners controlling the FP have Russian citizenship or a temporary or permanent residence permit in Russia, or corporate legal relationships with Russian legal entities;
- that the main part of creditors are Russian persons or entities whose activity is closely connected with the territory of Russia;
- that the place of performance for a considerable part of the debtor’s transactions is in Russia;
- that the main evidence in the case is in the territory of Russia.
The circumstances and factors affecting the competence of the Russian court are not limited by the above list. Courts may independently determine the possibility that an FP is bankrupt in each specific case.
In terms of determining the jurisdiction, not only do the circumstances existing on the date when it is examined whether the change of jurisdiction is justified (to rule out an artificial change of jurisdiction) have legal significance, but so do the circumstances that preceded the instigation of the bankruptcy proceedings.
It is sufficient for the applicant to prove that circumstances pointing to the debtor being closely connected with the territory of the Russian Federation have legal significance. After that, the burden of refuting such a connection is imposed on the debtor.
The grounds for initiating the bankruptcy of an FP or its property estate
Taking account of the recent changes in article 6(2) of the Federal Law “On insolvency (bankruptcy)”, to initiate bankruptcy proceedings it is sufficient to have:
- confirmation in the form of a court’s decision that has come into force that funds in the amount of at least RUB 2 million be recovered from the FP (its subsidiary);
- a decision of the tax authority that execution be levied on the funds or property of such taxpayer.
Please note that Russian courts tend to apply with exceeding frequency article 248.1 of the Commercial Procedure Code about the exclusive competence of Russian commercial courts in disputes involving persons with respect to whom measures of a restrictive nature have been established (including FPs from “unfriendly” jurisdictions, but not exclusively from such jurisdictions). The debt is collected from foreign defendants under this rule of law irrespective of whether the parties to the contract have agreed upon any other jurisdiction for examining disputes.
Even more important is that practice has been formed with the force of a precedent of debt being collected jointly not only from the foreign debtor itself, but also from its Russian subsidiaries. This creates the risks of bankruptcy not only for the property estate of the FP, but also for perfectly “healthy” foreign companies that are not directly connected with the creditor (do not have their own debt to the government).
What to think about and what to do
That Russian creditors or the tax service have property claims against an FP that has assets in Russia is a serious reason for such company to assess the risks of its debt being recovered at the expense of any assets of the group of companies in Russia and of other companies of such a group becoming bankrupt.
We remind you that the bankruptcy being instigated of any company with foreign capital may result in property liability (secondary liability, and the collection of corporate and creditor losses) being imposed on other persons of the group, including personal risks, such as risks under criminal law. Anti-sanctions legislation and the special attention state authorities are paying to the activities of FPs in Russia are factors that considerably increase the risks of the specified persons.
In turn, creditors should assess the prospects of using the mechanism of protecting their interests in disputes with foreign companies in Russian courts, including applying the mechanism of bankruptcy.
Help from your adviser
Pepeliaev Group’s Practice of Bankruptcy and Anti-Crisis Protection of Business provides support in cases of the bankruptcy of foreign companies and their property estate within Russia, both on behalf of debtors and creditors.
We pay special attention to preventing the risks of assets being lost: identifying risks, preparing documentation and the documentary basis for a defence, and developing anti-crisis plans.
Our professionals have many years of experience in protecting beneficiaries, top managers and other controlling persons from personal liability of all kinds.
