Debt collection in Russia



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By Andrey Zelenin, Lidings Law Firm Debt collection in Russia Foreign companies doing business in Russia generally have several main options of dispute resolution to choose: (i) international commercial arbitration; (ii) alternative dispute resolution; (iii) domestic court of the foreign party; or (iv) the Russian national court. However, even if a foreign forum has been selected, after getting a judgment or award there, it might be necessary to initiate recognition and enforcement proceedings in Russia (unless the debtor has fulfilled it voluntary or has assets abroad). When litigating a case in the Russian national court a foreign investor should keep in mind that justice in the Russian Federation is conducted solely by courts, which means that no other authority rather than the court has the power to render an obligatory decision to the parties of the trial. The judicial power is exercised by means of constitutional, civil and criminal proceedings. The peculiarity of civil proceedings in Russia is that they are split between two systems of courts: courts of general jurisdiction and arbitrazh courts. The general jurisdiction courts mainly resolve disputes that involve participation of individuals divorces, employment, consumer rights protection etc.; whereas arbitrazh courts are vested with the authority to resolve commercial and economic disputes and to conduct other business related proceedings (bankruptcy, corporate and enforcement of foreign arbitral decisions). The vast majority of business cases that involve foreign companies are heard in the arbitrazh courts. The Russian system of arbitrazh courts is divided into four hierarchy tiers. The first tier consists of the Federal arbitrazh courts that operate in each region of Russia. The second tier is formed of the twenty Federal arbitrazh courts of appellate instance which revise decisions of the first tier courts. The third level is the Federal arbitrazh district courts that function as courts of cassation instance (second appeal). The third tier is formed by ten district courts: Volgo-Vyatsky, East Siberian, Far East, West Siberian, Moscow, Volga region, Northwest, North-Caucasian, Ural and Central district. The fourth and the highest tier is represented by the Supreme Arbitrazh Court which serves as a supreme arbitrazh judicial body for settling economic disputes and revises decisions in the supervision order. Notwithstanding the fact that Russia is a civil law country where court precedents are not recognized as the source of law, most important function of the Supreme Arbitrazh Court is issuing guidelines and reviews of the arbitrazh court practice that is mandatory for lower courts. The general timeline for litigating a case in Russia is as follows. The claim filed to the competent first tier (court Federal arbitrazh court of the region where the resapondent has its residence, if not otherwise prescribed by law or contract) is accepted and prepared for the first preliminary hearings within one month from the filing date. Consideration of a case solely by the judge, court proceeding and rendering a decision in the court of the first instance will take from three to four months. As a matter of fact, almost every decision rendered by the court of the first instance is appealed in the court of appeal. A party has one month to file an appeal to the appellate court after

the decision of the first instance court was rendered. In case an appeal was not filed within a month, an interested party is entitled to receive an order (writ) for enforcement of the judgment. Subsequent examination of the case in the court of appeal can takes not more than two months The court of appeal revises the case, and if it finds any reasonable causes, sets aside prior judgment and delivers a new decision. After a decision of the appellate court was rendered it immediately enters into legal force, and the parties to the proceedings during two months can file an appeal to the cassation court. Examination of the case in the cassation court cannot take more than two months as well. The cassation court examines the compliance of the procedure (however, does not reconsider the case on its merits) and, if it finds reasonable grounds, sets aside prior decision and submits it for reconsideration or delivers its own judgment. Within three months from the date when the final act was rendered, the judgment can be appealed in the Supreme Arbitazh Court. The Supreme Court examines whether the rendered judgment violates consistency of the legislation and court practice. Less than one percent of the total amount of claims the highest court instance every year and it is considered to be a great success if a case was taken for consideration by the Supreme Arbitrazh Court. Therefore, an initial judgment can be rendered in three months from the moment of the first filing to the court, however, challenging the judgment in the higher appellate courts can increase the term for the examination of the case up to (and sometimes well over) one year. However, as elsewhere in the world, winning a court case is usually not enough to get the money or other relief from the debtor. In fact it s only the beginning of a lengthy and a challenging process of execution of court judgments and collecting debts. The Russian court judgments are subject to direct and straightforward execution by a special governmental agency Federal Bailiffs Service. The conditions and procedure of enforcement proceedings of rulings by court and other authorized agencies and officials are set forth in the Federal Law On Enforcement Proceedings No. 229-FZ dated 2 October 2007, which entered into force on 1 February 2008. Legislation on enforcement proceedings also includes Federal Law On Bailiffs No. 118-FZ dated 21 July 1997, and other federal laws, acts of other authorities and officials, regulating the conditions and procedure of enforcement proceedings. The enforcement of court judgments and arbitral awards in commercial cases is mainly initiated on the basis of an enforcement order, which is issued by a court as soon as the relevant ruling comes into force. The enforcement order (writ of execution) is the basic document which confirms the judgment creditor s right to enforce the court judgment. According with the general rule, the enforcement order can be presented within 3 years from the entry of a judicial act into legal force. However this term might be restored by the court and additional 3 months for presentation of the enforcement order can be granted. Enforcement orders containing requirements for periodic payments can be presented within the whole term for which payments are awarded, as well as within 3 years after the end of this term.

There are basically two options for enforcement: (1) filing the enforcement order with court bailiffs, and (2) filing it directly to the debtor s bank, provided that the creditor is aware of the bank details and the availability of funds in the bank account. There are no private enforcement agencies in Russia and thus the ability of the creditor to collect the debt on his own is rather limited. The enforcement through a bank usually appears to be the fastest way to getting paid. The bank is obliged to write-off the funds within three days of the receipt of the writ of execution, or inform the creditor on the non-availability of funds in the account. If the bank fails to execute the enforcement order, it will be subject to a fine equal to 50% of the amount claimed. If the decision to start the procedure via bailiffs is made, the enforcement order is presented for enforcement at the place of execution of the judgment. According to the general rule, the place of execution is the debtor s place of residence or the place where the debtor s property is located. Within 6 days from the receipt of the enforcement order, the bailiff starts the enforcement procedure and establishes a time period for the voluntarily execution of the court decision (up to five days). Upon the expiration of this period, execution is performed by enforcement. In this case, the debtor bears the following expenses for execution of the judgment: In case of failure to execute the writ of execution within the established time period without reasonable cause an enforcement fee (7% of the amount claimed, and for disputes related to non-property rights: 500 rubles (about EUR 12) charged to individuals, and 5,000 rubles (about EUR 110) charged to legal entities). Expenses for enforcement actions (i.e. expenses associated with searching for the debtor, appraising and selling property, conducting bank transfers of claimed amounts, etc.); Fines imposed by court bailiffs during the enforcement process. Then the bailiff sends inquiries to the Federal Tax Service, the police, and other agencies regarding the debtor s assets. These agencies take time to comply with the inquiries, which can significantly delay actual collection. The law provides for a general 2-month deadline for executing the enforcement procedure. However, the law does not provide for penal sanctions for violations of this deadline. In practice, the enforcement procedure lasts much longer. As soon as debtor s assets are identified the bailiff will start the collection process. The legislation provides for the following enforcement measures: seizure of the debtor s certain assets specified in the writ of execution and transfer of the same from the plaintiff to the creditor, completing certain actions on behalf of and at the expense of the debtor, compulsory moving in of the plaintiff (or eviction of the debtor) to/from residential premises, removal of non-residential premises or storage facilities of the debtor and its property, as well as other actions provided for by federal law or writs of execution. If the enforcement order provides for monetary relief, at first the collection is effected in relation to funds kept in bank accounts or in cash. However if the debtor lacks any funds the enforcement may be imposed on: Debtor s other assets, by means of its seizure and sale (including stock assets),

Debtor s income (received in the frame of labor, civil law or other legal relations), Debtor s ownership interest (including the IP rights). Enforcement will be imposed on the debtor s property only in the event of non availability (or insufficiency) of funds in his/her account. Enforcement is imposed on the debtor s property by means of: Imposing arrest upon the debtor s property. This includes taking inventory of assets, imposing an injunction on the rights of disposal thereof, and, if required, restricting the right to use the property; Seizure of the debtor s property; Sale of the property through a specialized institution. For a debtor, which is a legal entity, enforcement is imposed on assets in the following order: assets, which are not directly involved in production (including stocks, finished products, and precious metals and stones); ownership interest, which is not directly used in production; real estate objects, which are not directly involved in production; ownership rights and assets which are involved in producing goods and used directly in producing goods, performing works or providing services (real estate assets, equipment, raw materials, other materials etc.). If the location of the debtor or his/her property is unknown, the bailiff, with the creditor s consent, arranges for a search. In such case, the judgment creditor bears the expenses incurred in connection with the search for the debtor (or the debtor s property). Firstly, out of the amount enforced by the court bailiff from the debtor, the enforcement fee is paid, as well as the penalties charged to the debtor in the course of the enforcement procedure. Subsequently, the main amount is transferred for satisfying the creditors claims in the following order of priority: claims regarding alimony and compensation for accidental and death-causing injuries; employees claims arising out of contractual relations, attorneys claims regarding legal aid rendered, and claims related to copyright payments; claims regarding payments to state non-budget funds; all other claims, in the order of their receipt. Claims are satisfied in the order of their priority, i.e. each claim is satisfied only after full satisfaction of the claims with a superior level of priority. If funds are insufficient for fully satisfying all claims of the same level of priority, the funds are distributed among all creditors on pro rata basis. Despite a comprehensive and detailed regulation in practice the enforcement system works ineffectively, slowly and does not meet the needs of litigants. According to the available statistics in 2012 about 1.5 million of over 5 million total execution proceedings against legal entities have ended with no result, while the overall collectability rate was less than 20% of the actual amount sought. A full explanation of the reasons why it is so is beyond the subject of this article; however,

lack of respect for the courts power with no doubt is partially responsible. Apart from that bailiffs often suffer from a lack of proper facilities and information technology. They have limited access to administrative databases, directories, and other informational resources necessary for the efficient performance of their duties. Moreover, in some cases, efforts to enforce a valid court judgment can encounter insurmountable obstacles when dealing with other administrative agencies and bureaucracies. Nevertheless, sometimes qualitative legal services, constant close interaction, control and negotiations with bailiffs can increase the effectiveness of judgment enforcement by using legal means to supervise law enforcement officials in their activities. September 2013