Understanding the Russian Insolvency Law

Despite your best efforts, you may reach a point at which your business is no longer profitable and, in fact, has become insolvent or bankrupt. An insolvency is defined as the inability of a debtor to satisfy in full the claims of his creditors or to settle mandatory payments. This inability to pay must have been recognized by a legal authority through arbitration.

Under the Insolvency Law, the following factors indicate that a debtor is insolvent:

  • A court has recognized the debtor’s inability to meet creditors’ claims and/or fulfill mandatory payment obligations within three months from the date they were due.
  • The aggregate amount due and outstanding exceeds RUB 100,000.

Also, when a debtor’s aggregate liabilities are greater than the aggregate value of the assets, the general director must file for the company’s insolvency. If that general director fails to meet this obligation, he will bear, jointly with the debtor, a subsidiary liability.

Initiating Bankruptcy Proceedings

In order to initiate bankruptcy proceedings, an authorized agent of the company must file an application with the court. The following agents are permitted to file an application to have a debtor declared insolvent:

  • The debtor himself
  • A bankruptcy creditor
  • A federal executive body authorized by the Russian government (such as the Federal Taxation Service, the executive bodies of constituent entities of the Russian Federation, or municipal authorities)

Once the application has been filed, the proceedings can begin.

The Five Stages of a Bankruptcy Procedure

Depending on the insolvent company’s circumstances, the following five procedures may be applied in the course of consideration of debtor's case:

Supervision

Supervision is a provisional procedure which operates via a temporary manager. The temporary manager is nominated from members of a self-regulating organization of insolvency practitioners. Supervision aims to preserve a debtor's property, to carry out the analysis of a debtor's financial status, complete a creditors’ register, and hold the first creditors’ meeting. Supervision commences when the court rules that a bankruptcy petition is well-founded, introduces supervision, and approves the appointment of a temporary manager. Supervision is terminated on the date a court makes a ruling to that effect and another stage of insolvency proceedings is entered.

Financial rehabilitation

The goal of this procedure is to restore the debtor’s solvency and to repay debts in accordance with a schedule of debt repayment. Financial rehabilitation may last up to two years and commences immediately upon a court’s ruling.

External administration

The intent of this insolvency procedure is to restore the debtor’s solvency and may last up to 18 months (with a possible six-month extension). The combined duration of financial rehabilitation and external administration may not exceed two years. This stage of the proceeding commences upon a court ruling which is based upon the decision of a creditors’ meeting.

Insolvent liquidation

This procedure is designed to make a settlement of creditors’ claims through the sale of a debtor’s assets. This procedure can be instituted for up to six months (with a possible further six-month extension).

The Insolvency Law provides a specific priority order in which claims will be met. The priority order is certain “current claims” followed by first-, second-, and third-priority claims. Current claims must be met before first-priority claims.

Current claims include claims made before the bankruptcy petition was accepted, any expenses related to the bankruptcy procedures (including the payment to employees and contractors), and operational expenses. First-priority claims include personal injury claims. Second-priority claims include severance benefits, the wages of the debtor’s employees, and copyright royalties. Third-priority claims include all other claims (both secured and unsecured).

Voluntary arrangement

This insolvency proceeding may be applied at any stage of an insolvency in order to terminate proceedings and to give effect to an agreement between the debtor and creditors. At the creditors’ meeting, the decision to enter into a voluntary arrangement with the creditors or an authorized body must be approved. The voluntary arrangement may only be instituted with the approval of the court.

We Are Experienced With Russian Insolvency Law

If you find yourself in a bankruptcy situation, you want an experienced Russian bankruptcy attorney on your side. Contact our office through the link on this page and we will be in touch with you soon to schedule an evaluation of your case.

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