The draft law on external administration of companies with foreign membership

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Pepeliaev Group advises that draft law No. 104796-8 “On external administration for the management of a company” has been put before the State Duma.

The draft law purports to be aimed at protecting the national interests of the Russian Federation. The initiative is grounded in the suspension or termination of the activities of companies owned by foreign persons after sanctions were imposed on Russia.

Unlike the initial draft law, which we commented on  here, the version put before the State Duma has been substantially adjusted. The most significant amendment is that the list of entities that may be subject to external administration has been substantially reduced.

What does the appointment of external administration mean?

The introduction of external administration involves a temporary transfer of a company's management to an entity authorised by the state.

Who is covered by the draft law?

The draft law applies to entities which meet 2 criteria simultaneously:

  • at least 25 % of the entity’s voting shares or membership interests in the issued capital are controlled or owned by a person which is connected with a “hostile” foreign state (this includes cases when such person is connected with such state through citizenship, the place of its registration, the place where it performs most of its business operations or generates most of its profit), and at the same time;
  • the activity of such entities is significant for ensuring economic stability and a stable business environment, protecting the rights and lawful interests of the public in Russia or in a particular constituent entity of Russia.

The provisions of the draft law do not apply to credit and insurance organisations, and to non-public pension funds, except for individual provisions regulating the procedure for replacing assets and selling shares (membership interests) of a newly established business entity.

What companies are treated as significant in the context of the draft law?

It is assumed that the second criterion of entities that may be subject to external administration is met by the following companies:

  • those which perform activity in the area of manufacturing, processing, or selling food products of social importance and essential products, or products whose prices the state may regulate;

  • which perform activity in the conditions of a natural monopoly and/or of a dominant position in the commodities market;

  • which are sole manufacturers or sole suppliers of products which have no equivalents in Russia;

  • which employ at least 25 % of the working population of the relevant population centre;

  • whose termination or disruption of activity may entail:

    • man-made and/or environmental disasters or loss of life, as well as the operation of socially important facilities being discontinued; 

    • the destabilisation of and an ungrounded increase in retail prices for the above goods (work, services);

    • the termination of the activity of other entities listed above.

However, a decision of the Inter-Departmental Commission created by the Ministry for Economic Development (the “Inter-Departmental Commission”) may classify other entities as meeting the criterion of being significant for ensuring economic stability and a stable business environment.

Conditions for the external administration to be appointed

External administration can be appointed if one of the following circumstances is present:

  • the management bodies and/or shareholders (members) have terminated the management activity and this has resulted in a substantial decrease in the value of the entity’s property and/or has made the entity unable to perform its obligations;

  • the listed persons perform activities which may entail an unjustified termination of the activity, liquidation or bankruptcy of the entity, or harm being caused to such entity;

  • the entity’s activity has been terminated (disrupted) or suspended and/or the production volume and sales of products and goods (work performed, services supplied) has substantially decreased (which is manifested by a decrease in revenues by 30 %);

  • continuing the activity without external administration being appointed creates a threat of the above consequences and of grounds emerging for external administration to be appointed, and/or a threat of disasters and the destabilisation of prices;

  • the elimination of the above grounds for external administration to be appointed may require the funds to be spent from Russia's federal budget and/or from the budget of a constituent entity of Russia.

The Russian Government may establish additional grounds for the Inter-Departmental Commission to decide that a petition should be filed with the court for external administration to be appointed.

Who performs the functions of external administration and what powers does such person possess?

As a general rule, the functions of the external administration are assigned to the State Corporation VEB.RF. However, subject to a decision of the Inter-Departmental Commission a different person may be proposed to the court.

There are only two options for the powers of the external administration:

  • trust management of all or part of the shares (membership interests in the issued capital) of an entity;
  • the powers of the entity’s manager.

The draft law allows for switching from one type of powers to the other. In this case, the entity performing the functions of the external administration may change and the term of its powers may recommence.

The draft law regulates the procedures for both options for the administration's powers to be exercised.

The mechanism of appointing the external administration

Only the Commercial Court for the city of Moscow appoints the external administration further to an application of the authorised body (the Russian Federal Tax Service).

Before a petition is filed with the court, the Inter-Departmental Commission should issue a decision based on the decisions of the head of the sector-specific federal executive body and the head of the supreme state executive body of the constituent entity of the Russian Federation in which the entity is registered or performs activity.

Information regarding a petition being filed to have external administration appointed shall be included by the applicant in the Unified Federal Register of Information of Legal Significance About the Facts of Activities of Legal Entities (the “Unified Federal Register”) no later than the day when it is filed with the court. The petition is filed with the entity before the same deadline.

The court adopts a decision to accept, for processing, the petition to have external administration appointed on the day when it is received and should examine such petition not earlier than 5 and not later than 7 business days from the day when it is accepted, without any preliminary hearing.

If there are no grounds for the appointment of external administration to be denied, the court will decide to appoint external administration. A shareholder (a member) of the entity may contest this decision under an appeal procedure.

Interim measures

On the basis of the applicant's motion, the court, simultaneously with initiating a case, can take interim measures that can be aimed at prohibiting:

  • transactions with assets;

  • the dismissal of employees;

  • the termination of the entity's agreements;

  • a disposal of shares (membership in the issued capital) of the entity.

Moreover, based on a decision of the Inter-Departmental Commission the Russian Federal Tax Service may file a motion that, simultaneously with the proceedings in the case being initiated, interim measures should be taken in the form of a transfer to the entity specified in the petition to be appointed as the external administration, of the powers of the manager of the entity with the right to access without hindrance the property of the entity and to cancel decisions of the entity's management bodies.

Is there a way to prevent external administration from being introduced or to terminate its powers before term?

Before the date of the court hearing the manager of the entity or its shareholders (members) who own 50 % and more of the shares (membership interests) may file a motion seeking for external administration to be denied. A condition for external administration to be denied is that the shareholders (members) should undertake obligations to renew/continue the activity of the entity in Russia, including in connection with the planned disposal of shares (membership interests) or the transfer of them into trust management to a person who is not among the parties that are subject to the draft law. Such transaction to dispose of the shares (membership interests) should take place within 3 months from the date when the court decides to deny the appointment of external administration.

Moreover, during the period of the external administration, shareholders (members) who own 50 % or more of the shares (membership interests) may file a petition with the Inter-Departmental Commission to terminate the powers of the external administration before term. Such powers are terminated on the ground that the shareholders (members) undertake obligations to eliminate the grounds for the administration to have been appointed, including in connection with the above-planned transaction or the transfer of the shares (membership interests) into trust management. In the event of a positive decision of the Inter-Departmental Commission and further to such a decision, the Russian Federal Tax Service files a petition to this effect with the court, and the court terminates external management.

For what period is external administration appointed?

The period of the powers of external administration is 18 months and may be extended for the same period.

The consequences of external administration being appointed in the form of the powers of the entity’s manager being transferred

Apart from the consequences of the appointment of external administration which are similar to those in the event of bankruptcy, we should point out a prohibition for contracting parties to unilaterally and out of court repudiate a contract with the entity or to amend such contract.

The rights and obligations of external administration

The draft law provides that the external administration should act in good faith and reasonably for the benefit of the entity, its creditors, employees, and society.

Its primary rights and obligations are as follows:

  • to exercise the powers of the manager of the entity, among them to dispose of its property, including funds on the bank account; to take measures to ensure the renewal or continuation of the entity’s activity and to prevent its bankruptcy;

  • to take measures to secure the entity’s property and workplaces.

The register of creditors’ claims

The external administration independently identifies the creditors of the entity and notifies them of their inclusion in the register of claims. Creditors have the right to independently submit their claims to the external administration within 1 month from the date when the information about the external administration's appointment is published in the Unified Federal Register. The external administration decides on the inclusion of claims in the register within 10 business days, notifies the creditor to this effect, and publishes information about the decision made in the Unified Federal Register. The decision may be contested in court within 10 business days from the date when the creditor became aware or should have become aware of it.

Replacing the entity’s assets

The Inter-Departmental Commission may decide, based on a motion of the external administration, that the entity’s assets should be replaced. In this case, based on the entity's entire assets another business entity is created, the only member of which is the company. The shares (membership interests in the issued capital) of the business entity that is created are to be sold at an auction.

The replacement of assets is carried out in accordance with the rules of the Law on Bankruptcy and has the following nuances:

  • the amount of the issued capital of the entity created is determined in the amount of the residual value of all of its assets;

  • the residual value of the shares (membership interests) of the company created is equal to the residual value of all of its assets;

  • the provisions of the legislation on guarantees of creditors’ rights do not apply in the event of a reorganisation in the form of a spin-off.

The liquidation or bankruptcy of an entity

If there are grounds for compulsory liquidation and/or signs of insolvency, the external administration is obliged to apply to the Interdepartmental Commission, and subsequently, with the commission’s consent, to the court with a petition to have the company declared bankrupt. At the same time, the replacement of assets occurs in any case and the external administration attaches to the bankruptcy petition a regulation on bidding for the sale of shares or membership in the company’s issued capital.

The compulsory liquidation or bankruptcy is carried out according to the rules of the Bankruptcy Law, but the functions of the liquidator or the receiver are performed by the external administration. At the same time, the only procedure used is receivership proceedings.

The expected procedure for the law to enter into force and its retroactive effect

It is expected that, if the draft law is passed, it will come into force starting from the day when it is officially published. At the same time, its provisions will apply to companies that have committed actions that entail the possibility of appointing external administration before the date when the law enters into force.

What to think about and what to do

Given the prompt speed of forming anti-sanctions legislation, we can expect the corresponding draft law will be considered and adopted in the near future. We recommend foreign members and shareholders of companies registered in Russia who have announced the termination of the company's activities or are planning such termination (suspension) to focus on the version of the draft law that we are commenting on here and to analyse the risks of appointing external administration. Only after assessing all the consequences of the application of anti-sanctions regulations and draft laws should decisions be made to curtail business, terminate contracts and reduce the headcount/dismiss employees of companies.

Help from your adviser

Pepeliaev Group’s lawyers have extensive experience in the anti-crisis protection of business. We are ready to provide legal support in terms of assessing and preventing risks in relation to bankruptcy and sanctions legislation in a case of the restructuring of a business, the termination of activities of subsidiaries and structural divisions, the termination of contracts, and providing legal support during voluntary liquidation or bankruptcy. 

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