Corporate Insolvency and related proceedings in the Russian Federation

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1 CMS Adonnino Ascoli & Cavasola Scamoni CMS Albi nana ~ & Suárez de Lezo CMS Bureau Francis Lefebvre CMS Cameron McKenna CMS DeBacker CMS Derks Star Busmann CMS von Erlach Henrici CMS Hasche Sigle CMS Reich-Rohrwig Hainz Corporate Insolvency and related proceedings in the Russian Federation February 2009

2 Contents 1 Introduction 3 2 Insolvency Procedures Preliminary step: Commencement of proceedings 2.2 Procedure I: Supervision 2.3 Procedure II: Financial rehabilitation 2.4 Procedure III: External administration 2.5 Procedure IV: Insolvent liquidation 2.6 Procedure V: Voluntary arrangement 3 Challenging transactions Void and voidable transactions 3.2 Consequences of a successful challenge 3.3 Methods of challenge 3.4 Under the Insolvency Law 4 Potential liability Civil liability 4.2 Criminal liability 4.3 Administrative liability If you would like to know more about the subjects covered in this document or any of our other services, please do not hesitate to contact one of the named contacts below, or your usual CMS contact. Russian Federation Grant Williams T E grant.williams@cmslegal.ru Sergei Yuriev T E sergei.yuriev@cmslegal.ru John Hammond T E john.hammond@cmslegal.ru Karen Young T E karen.young@cmslegal.ru CMS Gogolevsky Blvd, Moscow Russia Tel Fax This commentary is not a full review of the topics it covers and does not purport to give legal advice. If you would like to receive specific legal advice, please contact your usual CMS attorney. All liability for damages arising from the information provided is explicitly excluded.

3 Introduction This document sets out general features of the insolvency law applicable to companies registered in the Russian Federation. In particular, it aims to provide fundamental details of the key stages of Russian insolvency proceedings, how transactions can be challenged under the insolvency law and what liability could be imposed. Separate rules are applicable to the insolvency of Russian financial institutions and certain state companies and enterprises have protection from insolvency under Russian law. 1.1 What is Insolvency? Under Russian insolvency law, a debtor is insolvent where it is unable to: has debts of more than RUB 100, 000; and has failed to settle such debts within three months after they become due. meet the claims of creditors in relation to Monetary Obligations; and/ or complete Mandatory Payments, as recognised by an arbitrazh court ( Insolvency ). Mandatory Payments (obyazátelnye platezhý) are recognised as: taxes, fees and mandatory contributions owed to the federal and state budget or otherwise to the Russian Federation; fines and penalties under the Criminal Code and Code of Administrative Offences; and fines, penalties and sanctions incurred through the non-payment of other Mandatory Payments. Monetary Obligations (dénezhnye obyazátelstva) are the obligations of a debtor to pay a specific outstanding amount in a civil transaction governed by the civil and budgetary regime of the Russian Federation. There is a low threshold for the commencement of insolvency proceedings under Russian law. Insolvency proceedings may be commenced against an entity if it: 1.2 Governing legislation The legislation governing insolvency proceedings in the Russian Federation principally consists of: the Civil Code of the Russian Federation 1 (the Civil Code ); Federal Law No.127-FZ on insolvency (bankruptcy), 26 October 2002 (as amended) (the Insolvency Law ). This is the principal legislation on insolvency in the Russian Federation; and Regulation of the Government of the Russian Federation of 29 May 2004 (the Regulation ). We have also made reference in this document to: the Criminal Code of the Russian Federation, No. 63-FZ, 13 June 1996 (the Criminal Code ); the Code of Administrative Offences of the Russian Federation, No. 195-FZ, 30 December 2001 (the Code of Administrative Offences ); the Joint Stock Company Law, No. 208-FZ, 26 December 1995 ( JSC Law ); and the Limited Liability Companies Law, No. 14-FZ, 8 February 1998 ( LLC Law ). 1 Pt I No. 51-FZ, 30 November 1994; Pt II No. 14-FZ, 26 January 1996; Pt III No. 146-FZ, 26 November 2001; and Pt IV No. 230-FZ, 18 December Corporate Insolvency and related proceedings in the Russian Federation Introduction 3

4 2. Insolvency procedures There are five types of insolvency procedure which may be commenced as relevant to the company s circumstances. supervision; financial rehabilitation; external administration; insolvent liquidation; and voluntary arrangement. 2.1 Preliminary step: Commencement of proceedings Initial commencement of insolvency proceedings operates on a provisional basis. It determines which parties are able to apply to the court for a debtor s Insolvency, and when they are able to do so. An application to an arbitrazh court to declare a debtor insolvent may only be filed by: the debtor itself; a creditor; or a federal executive body authorized by the Government of the Russian Federation (an Authorised Body ) Insolvency application by the debtor Voluntary application The debtor is entitled to voluntarily apply to an arbitrazh court to open a case for its Insolvency. This right is restricted to when: (i) Insolvency is anticipated by the debtor; and (ii) circumstances exist to clearly indicate that the debtor will be incapable of meeting the claims of creditors or completing Mandatory Payments. Compulsory application An entity must apply to an arbitrazh court to open a case for its Insolvency within one month of the occurrence of any of the below circumstances: the fulfillment of claims of one or more creditors means that the debtor is unable to discharge its Monetary Obligations, Mandatory Payments and payments to other creditors; persons within the debtor authorised to take the decision to apply for liquidation decide to petition the court for the commencement of insolvency proceedings; the body authorised by owners of the debtor s property (where the debtor is a Unitary Enterprise 1 ) decides to apply for the debtor s Insolvency; and/or the enforcement of claims against the debtor s assets means that the debtor is unable, or significantly restricted in continuing its operations Insolvency application by the creditor The creditor is entitled to apply for the debtor s Insolvency when a court order enforcing Monetary Obligations from the debtor becomes effective Insolvency application by an Authorised Body Applications by an Authorised Body are governed by the Insolvency Law and Regulation. They set out the necessary requirements and procedure to submit claims in respect of outstanding Mandatory Payments against the debtor and when an application can be made to the court for the debtor s Insolvency. The Insolvency Law provides that an Authorised Body may petition the court for the debtor s Insolvency: (i) 30 days following the decision of a tax/ customs authority or an arbitrazh court to enforce indebtedness from the debtor. The demands of the Authorised Body for Mandatory Payments will be taken into account; or (ii) between days following the resolution of a tax authority to enforce tax indebtedness against the debtor, or days after the necessary writ of execution has been forwarded to the bailiff; or (iii) 30 days after the Authorised Body is notified by a federal executive body that the debtor s indebtedness exists in relation to Mandatory Payments or Monetary Obligations. 1 A Unitary Enterprise (unitarnoe predpriyatie) is a type of commercial organisation that may only be formed by state and municipal establishments. The Unitary Enterprise cannot own assets and property supplied for its establishment. These are instead owned by the Russian Federation or a region or municipality of the Russian Federation. 4 Insolvency procedures Corporate Insolvency and related proceedings in the Russian Federation

5 Preliminary step: Commencement of proceedings PARTIES WHO MAY PETITION FOR THE DEBTORíS INSOLVENCY DEBTOR CREDITOR AUTHORISED BODY VOLUNTARY APPLICATION COMPULSORY APPLICATION WHEN THE PARTY MAY APPLY Insolvency is anticipated by the debtor; and circumstances exist to clearly indicate that the debtor will be incapable of meeting creditors claims or completing Mandatory Payments. The entity must apply within one month of: the satisfaction of one or more creditors claims leading to an inability to discharge other creditor claims or Mandatory Payments; persons within the debtor with the authority to decide upon applications for liquidation, petition the court to commence insolvency proceedings; the body authorised by owners of the debtor s property (where the debtor is a Unitary Enterprise) decides to apply for the debtor s Insolvency; and/ or claims enforced against the debtor's assets significantly restrict its continuing operations. From the date a court order enforcing Monetary Obligations from the debtor becomes effective. 30 days following the decision of a tax/ customs authority or arbitrazh court to enforce indebtedness from the debtor (the demands of the Authorised Body for Mandatory Payments will be taken into account); days following the resolution of a tax authority to enforce tax indebtedness against the debtor, or days after the necessary writ of execution has been forwarded to the bailiff; or 30 days after an Authorised Body is notified by a federal executive body that the debtor s indebtedness exists in relation to Mandatory Payments or Monetary Obligations. Corporate Insolvency and related proceedings in the Russian Federation Insolvency procedures 5

6 2.2 Procedure I: Supervision (nablyudeniye) Supervision operates via an interim administrator as a provisional procedure to analyse the current financial state of the debtor and take an overview of claims against it. Further, it aims to preserve the debtor s property by restricting the actions of the debtor and lasts a maximum duration of seven months. This stage commences when the court: verifies the creditor s or Authorised Body s application to initiate insolvency proceedings against the debtor; or accepts the debtor s application to initiate insolvency proceedings against the debtor; and approves the appointment of an interim administrator The interim administrator Role Some of the central duties of the interim administrator involve preserving the debtor s assets, analyzing its financial state, revealing all creditors and notifying them of the debtor s insolvency proceedings. Appointment The interim administrator is nominated from the members of a self-regulating organisation of arbitrazh insolvency practitioners. The party filing the insolvency petition may propose the self-regulating organisation and may also nominate an individual from that organisation. Where the party filing the insolvency petition does not propose the individual, the interim administrator is nominated by the self-regulating organisation of arbitrazh insolvency practitioners. In both circumstances the appointment is subject to court approval. Powers Some of the principal powers of an interim administrator include the ability to implement the below: petition the court to declare certain transactions as invalid; petition the court for the removal of an executive of the debtor; obtain information and documents pertaining to the debtor s activity; and veto particular transactions, especially those relating to the debtor s property Restrictions On payments Once supervision is initiated, the Insolvency Law governs the procedure by which creditors present their claims in relation to outstanding monetary obligations and Mandatory Payments. Creditor claims and the enforcement of proceedings against the debtor s property are suspended. Set-off is also prohibited at this stage. On transactions The Insolvency Law governs dealings in relation to property of the debtor that accounts for more than 5% of its balance sheet value. These transactions, together with transactions relating to loans and the granting of security are subject to the interim administrator s consent. Of management The Insolvency Law curtails the powers of the debtor s management and negates their ability to: undertake reorganisation of the debtor (merger, accession, demerger, spin-off, transformation) or its liquidation; set up legal entities or to participate in other legal entities; open branch or representative offices; pay dividends or distribute profits among shareholders; issue bonds or other issued securities, except shares; cease being a shareholder of the debtor or purchase its treasury shares; participate in associations, unions, holding companies, financial and industrial groups and other corporate groupings; and enter into general partnership agreements. seek injunctions to preserve the debtor s assets; 6 Insolvency procedures Corporate Insolvency and related proceedings in the Russian Federation

7 Procedure I: Supervision Court verifies the creditor s or Authorised Body s petition for Insolvency Court accepts the debtor s petition for Insolvency Court approves the appointment of an interim administrator SUPERVISION INTERIM ADMINISTRATOR RESTRICTIONS ROLE Involves preserving the debtor s assets; analysing its financial state; revealing all creditors; and notifying creditors of the debtor s proceedings. APPOINTMENT Party filing the petition nominates a self-regulating organisation of arbitrazh insolvency practitioners and may also specify the individual. The individual is otherwise internallynominated from this organisation. Actual appointment is subject to court approval. POWERS Include the ability to veto and implement: petitioning the court to remove a director; petitioning the court to declare transactions invalid; seeking injunctions to preserve the debtor s assets; and obtaining information and documents pertaining to the debtor s activity. ON PAYMENTS The Insolvency Law governs outstanding creditor claims and Mandatory Payments. Creditor claims and enforcement against the debtor s property are suspended. ON TRANSACTIONS The Insolvency Law governs dealings related to property comprising more than 5 % of the debtor s balance sheet value. The interim administrator s consent is required for such dealings and for transactions relating to loans and the granting of security. OF MANAGEMENT The Insolvency Law significantly curtails the decision-making powers of the management. TERMINATION OF SUPERVISION The court insolvency hearing must take place within seven months of the initial insolvency application. The court will issue a ruling on the basis of the decision of the first creditors meeting. If the creditors are unable to make a decision by the 7 month deadline, the court is able to make a ruling appropriate to the circumstances to terminate supervision. Corporate Insolvency and related proceedings in the Russian Federation Insolvency procedures 7

8 2.2.3 Termination A court ruling is required to terminate supervision and commence another stage of insolvency proceedings. The insolvency hearing must be considered within seven months of receiving the application for Insolvency. The court bases its ruling on the decision of the first creditors meeting and will issue one of the following rulings: termination of insolvency proceedings; initiation of financial rehabilitation; initiation of external administration to restore the debtor s solvency; declaration of the debtor s Insolvency and the commencement of winding-up; or approval of a voluntary arrangement. If the first creditors meeting is unable to reach a decision with respect to the above options, the creditors are required to reconvene to do so. The court may postpone the insolvency hearing up until the sevenmonth deadline. If this deadline is not met, the court may issue the ruling deemed the most appropriate of: commencing financial rehabilitation; external administration; or declaring the debtor Insolvent and commencing wind-up Discharge of Mandatory Payments by other parties Mandatory Payment claims included in the creditor claims register against the debtor may be discharged by: the debtor s shareholders; the owner of the debtor s property (where the debtor is a Unitary Enterprise); and third parties. Applications to discharge the debtor s Mandatory Payment obligations must be made to satisfy all the claims in the creditor claims register. This procedure is governed by the Insolvency Law and also applies to the insolvency procedures of financial rehabilitation and liquidation. The debtor or a third party can propose financial rehabilitation to the first creditors meeting Financial rehabilitation proposal The proposal for financial rehabilitation to the first creditors meeting will differ slightly according to the party applying, but will include amongst other things: a financial rehabilitation plan; a debt repayment schedule; information on the security offered for performance of the debtor's obligations under the debt repayment schedule; and in the case of a debtor proposal, minutes from the general meeting of shareholders authorizing the decision Financial rehabilitation plan This will be prepared by the debtor s shareholders and must be submitted to the first creditors meeting. The plan is only required where there is no security assuring the debtor s liabilities. The plan should display a means to obtain sufficient funds to meet creditor claims under the debt repayment schedule Debt repayment schedule This must provide for all registered claims to be satisfied one month prior to the expiry of the rehabilitation term and for first and second priority rating creditors to be paid within the first six months of financial rehabilitation Rehabilitation administrator Role The role of the rehabilitation administrator is predominantly a monitoring role. Central duties include maintaining a register of creditor claims; examining reports on the progress of the financial rehabilitation plan; monitoring the debtor s timely discharge of the current claims; and enforcing the performance of guarantors. Appointment 2.3 Procedure II: Financial rehabilitation (finansovoye ozdorovleniye) This procedure aims to restore the debtor s solvency and arrange for outstanding debt to be discharged under rescheduled debt repayment. This stage of insolvency proceedings may last up to two years and commences upon court ruling, which will specify the exact financial rehabilitation term. When the court institutes financial rehabilitation on the basis of the decision of the creditors meeting, a rehabilitation administrator will also be approved by the court. Powers These are similar to those of an interim administrator as the rehabilitation administrator may amongst other things: petition the court for the removal of a director of the debtor; 8 Insolvency procedures Corporate Insolvency and related proceedings in the Russian Federation

9 Procedure II: Financial rehabilitation Debt repayment schedule Information on offered security Financial rehabilitation plan (where no security given) FINANCIAL REHABILITATION PROPOSAL Made to the first creditors meeting and approved by court ruling Further documentation e.g. corporate documents FINANCIAL REHABILITATION COMMENCES Lasts for a maximum of 2 years. Aims to restore the debtor s solvency and discharge debt through rescheduling REHABILITATION ADMINISTRATOR RESTRICTIONS ROLE Predominantly a monitoring role. Maintains register of creditor claims; examines progress reports on financial rehabilitation plan; and monitors discharge of debtor s obligations amongst other things. APPOINTMENT The court approves a rehabilitation administrator when it insitutes the procedure of financial rehabilitation. POWERS Similar powers to an interim administrator. Includes the ability to implement: petitioning the court to remove a director; petitioning the court to declare transactions invalid; seeking injunctions to preserve the debtor s assets; and participation in stock-taking of the debtor s assets. ON PAYMENTS Consent required for dealings: with debtor property accounting for more than 5% of the balance sheet value of assets;or which will increase the debtor s outstanding debt by more than 5% of the sum of registered claims. ON TRANSACTIONS Creditor claims, apart from Current Payments, are suspended. The enforcement of any proceedings against the debtor s property is also suspended. TERMINATION OF FINANCIAL REHABILITION TRANSITION TO EXTERNAL ADMNISTRATION DECLARATION OF BANKRUPTCY TWO YEARS SINCE COMMENCEMENT EARLY SATISFACTION OF CREDITOR CLAIMS EARLY TERMINATION Corporate Insolvency and related proceedings in the Russian Federation Insolvency procedures 9

10 petition the court to declare transactions as invalid; seek injunctions to preserve the debtor s assets; demand information on the debtor s current activity; and participate in stocktaking of the debtor s assets Restrictions On payments Like supervision, the Insolvency Law governs the procedure by which outstanding creditor claims and Mandatory Payments are presented to the debtor during financial rehabilitation. Creditor claims, apart from Current Payments, 1 are suspended. The enforcement of proceedings against the debtor s property is also suspended. On transactions Creditors meeting consent is required for dealings in relation to the debtor s property which accounts for more than 5% of the balance sheet value of the debtor s assets (calculated from the accounting date prior to the transaction conclusion date). Rehabilitation administrator consent is required where dealings will result in an increase in the debtor s outstanding debt by more than 5% of the sum of registered creditor claims Termination The procedure of financial rehabilitation may terminate before the due date in the following circumstances: Early satisfaction of claims The debtor discharges all creditor claims earlier than anticipated by the debt repayment schedule prior to the expiry of the financial rehabilitation term. Early termination (i) Failure to provide security for the debtor s obligations under the debt repayment schedule within 15 days of the institution of financial rehabilitation; or (ii) Repeated or significant breach of scheduled payment dates (exceeding 15 days). Declaration of Insolvency Where there are no grounds to initiate external administration, the debtor is declared Insolvent and winding-up commences. At least one month prior to the expiry of the financial rehabilitation term the debtor must file a report with the administrative receiver on the results of the financial rehabilitation, detailing the debtor s: balance sheet as at the last accounting date; profit and loss statement; and documents confirming repayment of creditor claims. Within ten days of receipt of the debtor s report, the rehabilitation administrator must file a progress and adherence report with the court and registered creditors. If claims remain outstanding at this time, or the report is not filed with the rehabilitation administrator in time, the creditors may petition the court for external administration or for the Insolvency of the debtor Transition to external administration The court is able to progress insolvency proceedings through to external administration where: there is a genuine possibility that the debtor s solvency can be restored; the creditors meeting petitioned for a transition to external administration, in accordance with the Insolvency Law; the creditors meeting petitioned for the debtor s Insolvency, but circumstances emerged to indicate a genuine possibility that the debtor s solvency can be restored. The court cannot move proceedings towards external administration where more than 18 months have elapsed since the commencement of financial rehabilitation. The aggregate term of the two procedures must not exceed two years. 2.4 Procedure III: External administration (vneshneye upravleniye) This insolvency proceeding intends to restore the debtor s solvency and may last up to eighteen months (subject to the ability to extend a further six months). This stage of proceedings commences upon court ruling based upon the decision of a creditors meeting External administrator Role When external administration commences, the powers of the management are terminated and the duty to manage the affairs of the debtor is vested in the external administrator. Amongst other things, the external administrator will manage and record the debtor s property; account for financial and statistical records; maintain a register of creditor claims; and submit an external administration plan to the creditors for approval within a month of appointment. 1 Current Payments (tekýshie platezhý) are creditor claims incurred once an arbitrazh court accepts an application for the debtor s Insolvency. These claims include Monetary Obligations and Mandatory Payments. 10 Insolvency procedures Corporate Insolvency and related proceedings in the Russian Federation

11 Procedure III: External administration Creditors meeting petition for external administration Court approves the institution of external administration EXTERNAL ADMINISTRATION Maximum duration of 18 months (plus 6 month extension) EXTERNAL ADMINISTRATOR RESTRICTIONS ROLE Includes management of debtor s property; accounting for financial and statistical records; and submitting an external administration plan for creditor approval. APPOINTMENT Court approves appointment at the time of instituting external administration. POWERS Amongst other things may implement: disposal of debtor s property in line with the plan; entry into a voluntary arrangement in the debtor s name; rescinding contracts that inhibit restoration of the debtor s solvency; and petitioning the court to declare transactions invalid. EXTERNAL ADMINISTRATION PLAN The plan must be submitted for creditor approval within one month of the external administrator s appointment. It establishes measures to restore the debtor s solvency and the competency of the creditors meeting and committtee in approving debtor transactions. ON PAYMENTS A wide-ranging moratorium is imposed upon the initiation of this proceeding. It extends to creditor claims and Mandatory Payments (excluding Current Payments). ON TRANSACTIONS The debtor s CEO is revoked of managerial powers, which are vested in the external administrator. Major or interested party transactions require creditor meeting consent. Debtor discharges creditor claims Creditors may petition for: Creditors meeting rejects external administration plan Creditors meeting fail to approve external administration plan in time LIQUIDATION LIQUIDATION termination of external administration entry into a voluntary arrangement declaration of debtor s Insolvency Corporate Insolvency and related proceedings in the Russian Federation Insolvency procedures 11

12 Appointment On transactions The court will approve the appointment of the external administrator at the time of instituting external administration proceedings. Powers Amongst other powers, the external administrator is able to: implement and veto the disposal of the debtor s property to accord with the external administration plan; enter a voluntary arrangement in the name of the debtor; rescind contracts if their performance inhibits the restoration of debtor solvency or creates loss in comparison to other transactions; and petition the court to declare transactions as invalid External administration plan The external administration plan should outline measures to restore the debtor s solvency and a feasibility study relating to implementation. In order to restore the debtor s solvency it may, amongst other measures, propose the following: closing unprofitable production facilities; selling portions of the debtor s business or property; assigning the debtor s rights of claim. This is subject to creditor meeting consent; or increasing the authorised share capital by way of floating additional ordinary shares. It should also establish the competence of the creditors meeting and committee in approving transactions of the debtor. Approving and amending the external administration plan is within the sole remit of the creditors meeting Restrictions On payments As external administration commences, a moratorium extending to the settlement of creditor claims and Mandatory Payments (excluding Current Payments) is imposed. The moratorium covers a broad range of payments including penalties and other financial sanctions for default and creditors claims for losses incurred due to non-performance of executed contracts. The powers of the debtor s Chief Executive Officer ( CEO ) are revoked upon the commencement of external administration. These powers are instead vested in the external administrator. Creditor meeting consent is required to enter into major or interested party transactions if not provided for in the external administration plan. However, the debtor s management is afforded limited powers relating to transactions concerning capital and additional share issues and entry into specified major transactions (subject to creditors meeting consent). Unitary Enterprises If the debtor is a Unitary Enterprise, the owner of enterprise s property (e.g. another State entity) is likely to be involved alongside external management. Under the Insolvency Law the owner may: make proposals to sell the business/ enterprise of the enterprise; replace the debtor s assets with other assets; and enter agreements under which third parties may pay the enterprise s obligations Termination External administration will terminate prematurely if the debtor discharges all creditor claims. The external administrator will present a report to the creditors meeting to allow them to petition for: the termination of external administration; declaration of the debtor s Insolvency; or entry into a voluntary arrangement. External administration will terminate and liquidation commence where: the creditors meeting rejects the external administration plan and petitions for Insolvency; no external administration plan approved by a creditors meeting has been presented to the court and no petition has been filed by the creditors meeting within four months of the institution of external administration; or no external administration plan approved by a creditors meeting has been presented to the court and no petition has been filed by the creditors meeting within two months of the institution of external administration, following the inability of the debtor to comply with a debt repayment schedule under financial rehabilitation. 12 Insolvency procedures Corporate Insolvency and related proceedings in the Russian Federation

13 2.5 Procedure IV: Insolvent liquidation (konkursnoye proizvodstvo) This procedure focuses on the realisation and distribution of the assets of the debtor, and may be instituted for a 6 month term (with a 6 month extension). In this procedure, the winding-up of the debtor is carried out Consequences of winding-up The powers of the management of the debtor are immediately terminated and vested in the liquidator. All monetary and Mandatory Payments of the debtor incurred prior to insolvent liquidation will be deemed due. Further, any accrual of interest, financial and other sanctions for the debtor s: non-performance or improper-performance of Monetary Obligations; and/or non-payment of Mandatory Payments, (except Current Payments) shall terminate. Additionally, all creditor claims relating to debt and Mandatory Payments or other claims on property (except Current Payments) can only be presented during this winding-up procedure. The seizure and injunctions preventing disposal of the debtor s property will also be deemed lifted. Further, information regarding the debtor s financial state is no longer deemed confidential The liquidator The court appoints the liquidator when the ruling for insolvent liquidation is issued. The liquidator will act until the winding-up process or court procedures are completed. Role The principal role of the liquidator is to realize the assets of the debtor and to distribute them to those entitled. The role includes amongst other things: control over the debtor s property; performance of an inventory and arranging for an appraisal of the debtor s assets; maintaining a register of creditor claims; obtaining the debtor s accounting and other documentation, seals, rubber stamps, materials and other valuables within 3 days of appointment; b) Powers submitting a report of the results of insolvent liquidation to the court. The liquidator assumes the powers of the management of the debtor (and the owners of the debtor s assets) upon appointment. Amongst other things, the liquidator has the power to: notify the debtor s employees of impending dismissal (within one month of the commencement of winding-up); refuse to perform contracts and other transactions in accordance with the Insolvency Law to preserve the debtor s property; dispose of the debtor s property in accordance with the Insolvency Law; petition the court to declare transactions invalid; and reveal and recover the debtor s property in the possession of third parties Publication of debtor s Insolvency The liquidator is responsible for ensuring that the following information is published in relation to the debtor s Insolvency: name and identifying details of the debtor; address of the debtor to allow creditors to present outstanding claims; name of the court responsible for insolvency proceedings and the case number; date of the declaration of Insolvency and when winding-up commenced; the date that the register of creditors claims will be closed (two months following publication of the debtor s Insolvency); and professional information on the assigned liquidator Pooling of assets The property of a debtor available at the commencement of winding-up is deemed the estate of the debtor (exceptions are governed by the Insolvency Law). Assets subject to a pledge or mortgage will be accounted for separately and subject to a compulsory appraisal. The liquidator will be entitled to recruit auditors and other specialists to appropriately appraise the debtor s assets. publication of the debtor s Insolvency within 10 days of appointment; and Corporate Insolvency and related proceedings in the Russian Federation Insolvency procedures 13

14 Procedure IV: Insolvent liquidation LIQUIDATION Aims to realise and distribute the assets of the debtor IMMEDIATE EFFECTS These include: the debtor s CEO and management powers are terminated and vested in the liquidator; monetary obligations and Mandatory Payments incurred by the debtor are deemed due; any accrual of interest, financial and other sanctions for the debtor s non or improper performance of Monetary Obligations, and/or non-payment of Mandatory Payments (except Current Payments) shall terminate; and information regarding the debtor s financial state is no longer deemed confidenial. POOLING LIQUIDATOR OF ASSETS The property of the debtor available at the commencement of winding-up is deemed the debtor s estate. The debtor s assets will be professionally audited. OF ACCOUNTS The liquidator will close surplus accounts and transfer cash balances to a principal account from which the creditor payments will be made. ROLE The liquidator principally realises the assets of the debtor to distribute them to those entitled. PUBLICATION OF DEBTOR S INSOLVENCY The liquidator is responsible for ensuring that specific identifying information is published about the debtor and its declared Insolvency. The publication should provide potential creditors sufficient information to approach the debtor directly with claims. POWERS The liquidator assumes the powers of the debtor s CEO, management and asset holders. Amongst other thing the liquidator may: notify the debtor s employees of impending dismissal; refuse to perform contracts or transactions to preserve the debtor s property; and reveal and recover the debtor s property in the possession of third parties. LIQUIDATION ORDER OF PRIORITIES The Insolvency Law governs the order of priority assigned to creditor claims and the order in which they will be met. POSSIBLE TRANSITION TO EXTERNAL ADMINISTRATION Can only occur where: financial rehabilitation and/or external administration proceedings have not been undertaken for the debtor; there are grounds to believe the debtor s solvency can be restored (backed by financial data); and the debtor has sufficient property to pursue independent economic activity. 14 Insolvency procedures Corporate Insolvency and related proceedings in the Russian Federation

15 2.5.5 Pooling of accounts The liquidator shall operate from a singular principal account of the debtor during wind-up. All other accounts of the debtor known at the institution of insolvent liquidation, or discovered during wind-up are closed and cash balances forwarded to the principal account. This account will also receive funds from the windingup process and will be used to make payments outstanding to creditors, as governed by the Insolvency Law Insolvent liquidation order of priorities (d) (e) The Insolvency Law provides a specific order of priority in which claims will be met. These are established as: certain current claims then first, second and third priority claims. Creditor claims made after the court s acceptance of an application to commence insolvency proceedings. This is a type of Current Payment; All other Current Payments. In order of priority, this includes: judicial expenses and remuneration to persons involved in administering the insolvency process; remuneration to employees engaged during the insolvency process; costs towards communal living arrangements and operational expenses necessary for the debtor to carry out normal activities; and claims for all other Current Payments. Claims ranked within the first priority : personal injury claims; Claims ranked within the second priority : severance benefits, wages for employees of the debtor and copyright loyalties; Claims ranked within the third priority in the order: Secured claims Unsecured claims Secured creditors Secured claims are settled from the enforcement of the security. The Insolvency Law governs the procedure by which the property is sold. During financial rehabilitation and external administration stages, secured creditors have the option to enforce their security or to waive this right in exchange for being able to vote at creditors meetings during these stages. Secured creditors would retain the rights to vote supervision. Application to enforce also needs to be made to an arbitrazh court, which may prevent enforcement if as a consequence restoration of the debtor s solvency would not be possible. If an arbitrazh court approves the secured creditor s application to enforce specific security, the assets will be disposed of under the procedures set out in the Insolvency Law. If there is a shortfall against the secured party s liability, the outstanding balance may be claimed under the third priority category of claims. Under the Insolvency Law, enforcement of security would appear to present the ability of a secured creditor to realise (potentially) 100% of enforcement proceeds (subject to payment of current claims described above). During the liquidation stage of insolvency, a secured creditor would be entitled to benefit from the application of proceeds as follows. From secured claims (other than under a facility agreement): 70% to the secured creditor. This cannot amount to a value greater than the sum of the original principal amount secured and the interest accrued on that amount; 20% to creditors of the first and second priority. This distribution only applies where there are insufficient funds to otherwise discharge these claims; and 10% to expenses incurred due to insolvency proceedings (e.g. judicial fees etc). From secured claims under a facility agreement: 80% to the secured creditor. This cannot amount to a value greater than the sum of the original principal amount secured and the interest accrued on that amount; 15% to creditors of the first and second priority. This distribution only applies where there are insufficient funds to otherwise discharge these claims; and 5% to expenses incurred due to insolvency proceedings (e.g. judicial fees etc). The above applications of proceeds under the Insolvency Law would appear to have the benefit for a secured lender of setting statutory support for secured creditor claims where (on a proportionate basis) current claims may otherwise diminish a secured creditors return. Corporate Insolvency and related proceedings in the Russian Federation Insolvency procedures 15

16 2.5.8 Possible transition to external administration Where financial rehabilitation and/or external administration proceedings have not previously been instituted for the debtor, the creditors meeting may petition the court for a transition to the external administration procedure. To do so there must be grounds to believe that the debtor s solvency can be restored, backed by financial data. The transition may only be issued if the debtor has sufficient property to pursue independent economic activity. 2.6 Procedure V: Voluntary arrangement (mirovoye soglasheniye) This insolvency proceeding may be applied at any stage of an insolvency case in order to terminate proceedings and give effect to an agreement between the debtor and creditors. The debtor itself; the creditors; third parties assuming the rights and duties of the voluntary arrangement; and Authorised Bodies are entitled to enter into a settlement or voluntary arrangement The creditors meeting is responsible for approving the decision to enter into a voluntary arrangement by the creditors or Authorised Body, and is instituted by court approval. A voluntary arrangement can only be terminated in respect of all creditors and/ or Authorised Bodies. The application for termination may be put forward by creditors and/or Authorised Bodies who held at least a quarter of the value of creditor claims at the institution of the voluntary arrangement. These parties are entitled to file for the termination of the voluntary arrangement where the debtor defaults or significantly violates the terms of the voluntary arrangement. 16 Insolvency procedures Corporate Insolvency and related proceedings in the Russian Federation

17 3.Challenging transactions Transactions entered into and implemented by the debtor prior to the onset of insolvency proceedings can be challenged under the Insolvency Law and Civil Code via alternative methods. 3.1 Void and voidable transactions According to the Civil Code, a transaction can be invalid if it is void or voidable. A void transaction is one that cannot be completed or performed at all, and will be void from its onset. A voidable transaction is one that can only be declared invalid through a court ruling. As generally provided under the Civil Code, void transactions are those that are inconsistent with the law or entered into in a manner contrary to public policy. Voidable transactions would include transactions where a party lacks capacity to take part, has taken part under duress, or where the transaction is fraudulent. A void transaction can be challenged for a period of ten years from the date of its performance. Voidable transactions have to be challenged in a much shorter period of time; an innocent party must file a claim seeking a declaration of invalidity within one year of the date from which that party knew, or should have known, of the circumstances on which such invalidity will be based. 3.2 Consequences of a successful challenge A successfully challenged transaction is deemed invalid. Under the Civil Code, invalid transactions are immediately unable to entail legal consequences. Further, all parties to the invalid transaction are required to reciprocally reinstate one another with any gain from the transaction. 3.3 Methods of challenge Transactions entailing preference Under the Insolvency Law, the court can declare that transactions create a preference and invalidate them. For the challenge to succeed the transaction must: be deemed a transaction under the Insolvency Law; provide advantage to a specific creditor over others; and have been entered into or executed during insolvency proceedings, or in the six months prior to the petitioning for the debtor s Insolvency Transactions with interested parties The Insolvency Law governs that the court may also declare transactions executed with interested parties as invalid. For the challenge to succeed the transaction must: be deemed a transaction under the Insolvency Law; be executed with an interested party as defined by the Insolvency Law; and cause or may cause loss to the debtor or creditors as a result of the transaction. 3.4 Under the Insolvency Law Once insolvency proceedings have commenced, an administrator appointed by the court can challenge transactions and decisions of the debtor at any stage of the proceedings. Transactions entered into before and after the proceedings have begun can also be challenged, in the event of external management and insolvent liquidation, under the grounds described above. No limitation periods operate with regard to the powers of such a courtappointed administrator. Consequently, the general provisions of the Civil Code dealing with voidable transactions will apply. Corporate Insolvency and related proceedings in the Russian Federation Challenging transactions 17

18 Challenging transactions in Insolvency INTERESTED PARTIES 10 years before the date of challenge VOID Transactions that are incompatible with the law and contrary to public policy. eg Ultra vires and fraudulent transactions. Transactions implemented by the debtor with interested parties are deemed invalid by the court where they: are a transaction under the Insolvency Law are concluded with an interested party ; and cause, or may cause a loss to the debtor or creditor 6 years before the date of challenge VOIDABLE Transactions and decisions of the debtor can be challenged at any stage of insolvency proceedings, as governed by the Insolvency Law. In external administration and insolvent liquidation the Insolvency Law governs the abiity to challenge transactions both before and after insolvency proceedings. 6 months before filing of the insolvency petition PREFERENCES Filing of insolvency petition Transactions entailing the preferential satisfaction of a creditor over other creditors are deemed invalid by the court where they: are a transaction under the Insolvency Law; are performed or agreed by the debtor in the last six months; and result in the preferential satisfaction of one or more creditors. Date of challenge 18 Challenging transactions Corporate Insolvency and related proceedings in the Russian Federation

19 4.Potential liability 4.1 Civil liability Failure to file for Insolvency Filing for Insolvency is required by the following individuals in the circumstances below: The CEO of the debtor if: (i) satisfying the claims of one or more of its creditors would render the debtor unable to make Mandatory Payments and/or fulfil its payment obligations to other creditors; or (ii) the shareholder or participants of the debtor decide to file an Insolvency petition; The CEO of the debtor; the owner of the Unitary Enterprise or participant; the liquidator; and other members of the liquidation commission of the debtor, if in the course of a solvent liquidation it is discovered that the debtor possesses insufficient assets to fully satisfy creditor claims; and The CEO and founder of the debtor if it is discovered during solvent liquidation when the liquidation commission has not yet been established, that the debtor possesses insufficient assets to fully satisfy creditor claims. As a general rule, CEOs must file for Insolvency within one month of the applicable circumstances arising. Failure to do so may lead to liability under the Insolvency Law for allowing new debts to arise after the obligation to file an insolvency petition became due. This liability potentially extends to all unsatisfied financial obligations Determining Persons Persons with the right to give instructions binding on a company or persons who otherwise have the authority to determine the actions of the company ( Determining Persons ) face potential liability under the Civil Code and Insolvency Law. Civil Code and Insolvency Law Where it is determined that the actions of Determining Persons caused the insolvency of a company which has insufficient assets to fulfill its debts, the Determining Persons may bear subsidiary liability for the company s outstanding obligations. Although the Civil Code focuses on founders and shareholders of the debtor, members of the board of directors and the CEO also fall within the definition of a Determining Person. The Insolvency Law expressly refers to the CEO as a Determining Person. Limited Liability Companies Law Much like the Civil Code and Insolvency Law, the LLC Law contains certain provisions that incur subsidiary liability on a company s participants or other Determining Persons where the company s Insolvency was deemed caused by their actions and the company has insufficient assets to fulfil its debts. Joint Stock Companies Law The JSC Law restricts the scope of liability borne by the Determining Persons of joint stock companies. The JSC Law adds the requirement of knowledge that Insolvency would result from that person s acts. Liability is only imposed where that person has acted with the intent that the company takes an action with knowledge that such action would result in its Insolvency Parent company A parent company ( Parent Company ) is able to determine the activities of another company ( Subsidiary Company ). Such control can derive from the Parent Company s shareholding in the Subsidiary Company or from a provision in an agreement entered into between the two entities. Joint Stock Companies Law Where a Subsidiary Company s bankruptcy is caused by its Parent Company, the JSC Law imposes responsibility for the Subsidiary Company s debts on the Parent Company. This liability is imposed where the Parent Company deliberately exercised its right or its ability to give the Subsidiary Company instructions, and had actual knowledge that this would result in the Subsidiary Company s Insolvency. Limited Liability Companies Law The LLC Law similarly provides that a Parent Company Corporate Insolvency and related proceedings in the Russian Federation Potential liability 19

20 bears liability for the debts of its Subsidiary Company if the latter s assets are insufficient to fulfil its debts, and the Insolvency is caused by the Parent Company. A Parent Company would be considered a Determining Person as discussed above Creditor There is no specific civil liability applicable to creditors in the context of insolvency. 4.2 Criminal liability The Criminal Code imposes criminal liability for: deliberate insolvency, i.e. wilfully causing or contributing to Insolvency; and fraudulent insolvency, i.e. making a public announcement of Insolvency with the intent to deceive creditors. The above two provisions are likely to apply to the CEO and members of the board of directors. Substantial damage must be caused as a result of such actions for these to constitute a crime Unlawful actions during bankruptcy include: concealing property or property obligations; withholding information on property, its size, location or any other information; transferring property to others; alienating or destroying property; and concealing, destroying or falsifying accounting documents; the CEO or the owner of the debtor knowingly and unlawfully satisfying claims of particular creditors, despite the onset of the debtor's factual Insolvency and to the detriment of other creditors; or unlawfully opposing the activities of an arbitrazh manager or of the provisional administration of a credit institution Criminal liability of CEO or owner As mentioned above, the CEO or owner of the debtor can be criminally liable where they knowingly and wilfully satisfy the claims of particular creditors. Three key factors must be present to incur criminal liability: Unlawful satisfaction Unlawful satisfaction is constituted by the satisfaction of certain creditors in contravention of the order of priorities set out by the Insolvency Law. It is also a payment made in violation of the law e.g. under an invalid transaction. Onset of factual Insolvency This is most likely to occur if the CEO or owner of the debtor is aware the debtor is unable to meet debts within three months of them becoming due.factual insolvency can also occur where a company must file for Insolvency under the Insolvency Law but has not yet done so, or its petition is yet to be accepted. Substantial damage The Criminal Code determines substantial damage as damage exceeding a value of RUB 250, Defences The Criminal Code specifies the below general defences. Active repentance. This involves repayment of all damage; Expiration of the limitation period for liability. The length of this period depends on the severity of the offence; and Insanity. Defences and may relieve a party from criminal liability and the severity of penalty. Defence may avert criminal liability altogether. 4.3 Administrative liability Offences There are also several offences with respect to insolvency under the Administrative Offences Code, including: Fraudulent insolvency this requires the CEO or founder/ participant to knowingly make a fraudulent declaration of Insolvency; Deliberate insolvency this requires wilfully causing or contributing to Insolvency; 20 Potential liability Corporate Insolvency and related proceedings in the Russian Federation