Draft law on the extraordinary fulfillment of obligations aimed at preventing disasters

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Pepeliaev Group advises that a draft law ‘On amending articles 126 and 134 of Federal Law “On insolvency (bankruptcy)”’ has been put before the State Duma [1]. The draft law was triggered by Resolution No. 4-P of the Russian Constitutional Court dated 1 February 2022[2], adopted following a claim of PJSC T Plus which was drafted by Pepeliaev Group’s bankruptcy and anti-crisis protection of business Practice. 

The proposed amendments concern establishing the order of priority and criteria for classifying as priority obligations the obligations of the bankrupt company to contracting parties that ensure the prevention of risks of a man-made and/or environmental disaster or human deaths (“hazardous consequences”).

Please find below the basic provisions of the draft law.

The priority order of expenses on taking measures to reduce the thereat of and/or to prevent hazardous consequences

Expenses (including those incurred in the ordinary course of business) on taking such measures should be reimbursed as a priority with respect to any other current payments.

Criteria for assessing whether the threat is real

The draft law contains the following open list of risks (circumstances) evidencing that the threat is real and that hazardous consequences need to be prevented:

  • the structure of a hazardous production facility (“HPF”) is damaged and its integrity is violated;

  • such risks may be identified as a result of delayed maintenance of the HPF and checks of its technical condition;

  • the functioning of the debtor’s enterprise has been undermined (for example, temperature conditions in the premises have been violated resulting in safety risks for the environment, personnel and other third parties).

The criteria for the priority nature of the current payments

Current payments (including maintenance payments) are classified as priority payments if making such payments affects the factors that determine whether the threat of hazardous consequences persists, increases or reduces.

Circumstances that pose a threat of a catastrophe or human deaths may result from:

  • the accumulation of a critical mass of threats inside the facility itself;

  • a change in the effect that the external environment produces on such facility owing to the entire facility or individual elements of it no longer receiving an energy resource.

It should be noted that a contractual obligation may be declared a priority obligation if such contract was concluded as part of the ordinary course of business.

Amount of priority payments

The amount of priority payments is determined based on the minimum amount that is required for the catastrophe or human deaths to be avoided.

The possible mechanism for confirming that the threat is real

That the threat is real may be confirmed at the request of the receiver or court by:

  • executive bodies that exercise governmental control (supervision) in the relevant area of activity at the level of the Russian Federation, constituent entities of the Russian Federation and municipalities;

  • the State Atomic Energy Corporation Rosatom.

Such confirmation or a justification of why it cannot be prepared should be provided free of charge within 10 days from the date when the request was received. If needed, a field assessment of threats is carried out (outside of control (supervisory) measures) or a decision is taken into account that was made following a previously held measure.

The confirmation received is not mandatory for the court and is only one piece of evidence in the case and may be contested only when the court is checking whether the receiver incurring priority expenses was justified.

Experience has shown that proving that there is a threat of a catastrophe requires consistent effort to be made by the contracting party under a contract whose subject matter is somehow connected with hazardous industrial facilities. It is necessary at the stage when the contract is concluded to obtain documents confirming such nature of the facility, to have emergency situations documented by a commission, to send a written notice about such situations not only to the other party to the contract, but also to local management bodies and governmental organisations, and to initiate meetings at the level of municipal and regional bodies. This is especially important when interacting with a company that has signs of a disadvantageous financial condition.

Specific aspects of proving that the threats are real

Insurmountable doubts as to whether circumstances are present that are indicative of whether the threat is real and/or of whether there is a need for preventing hazardous consequences are interpreted as confirming that such circumstances are in place.  

The procedure for a priority discharge of claims

The receiver may independently, without the court's authorisation, make a decision to discharge the above current obligations as a priority.

We recommend that creditors should control the forming of the register of the debtor’s current obligations and the order of priority of settlements. If the order of priority is violated of repaying priority expenses, a claim regarding disagreements and/or a complaint against the actions of the receiver should immediately be submitted to the court. There is also an option to file a claim to recover losses from the receiver if, after the payments made in violation of the order of priority, the ‘priority’ current creditor has not received satisfaction and at the same time the bankruptcy estate is insufficient.

Compelling the creditor to perform its obligations for catastrophes to be avoided

Further to an application of a party to the bankruptcy case, the commercial court may issue a ruling obliging the creditor whose claims have been upheld or are to be upheld as a priority to continue to perform the minimum essential activity to ensure the safety of the relevant facility.

What to think about and what to do

Organisations interacting with contracting parties based on public contracts and entering into legal relationships with a company against which a bankruptcy case has been initiated, should not only form evidence in advance which confirms that there is a threat of hazardous consequences, but also devise a mechanism for calculating minimum expenses on preventing them. Utilities providers should pay attention to the separate accounting for the energy supplied to hazardous and other facilities of consumers’ asset complexes.

Help from your adviser

Our Bankruptcy and Anti-Crisis Protection of Business Practice has extensive experience of providing comprehensive support in bankruptcy cases and in cases involving the defence of debtors’ counterparties in standalone disputes, including those involving an examination of disagreements regarding the order of priority of discharging the creditors’ claims. We are ready to provide legal assistance in courts of any levels, including the Russian Constitutional Court.

[1] Draft law No. 212656-8.  https://sozd.duma.gov.ru/bill/212656-8#bh_histras.

[2] The Russian Constitutional Court’s Resolution No. 4-P dated 1 February 2022 “On a case concerning checking the constitutionality of para 2 of article 134(1) of the Federal Law “On insolvency (bankruptcy)” further to a complaint of Public Joint Stock Company T Plus”.

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