Finance: Russian Federation

Finance: Russian Federation Resource type: Articles: know-how Status: Law stated as at 01-Nov-2010 Jurisdiction: Russian Federation A Q&A guide to Finance in the Russian Federation. The Q&A gives a high level overview of the lending market, taking security over assets, special purpose vehicles in secured lending, quasisecurity, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring of debt agreements; enforcement of security interests and borrower insolvency; crossborder issues on loans; taxes; and proposals for reform. This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/financehandbook. Karen Young and Konstantin Baranov, CMS, Russia Contents Overview of the lending market Security: real estate Security: tangible movable property Security: shares and financial instruments Security: claims and receivables Security: intellectual property Security: problem assets Special purpose vehicles (SPVs) in secured lending Quasi-security Guarantees Risk areas for lenders Structuring of debt agreements Enforcement of security interests and borrower insolvency Cross-border issues on loans Tax and fees on loans, guarantees or security interests Reform Contributor details Karen Young Konstantin Baranov

Overview of the lending market 1. Please give a brief overview of the main trends and important developments in the lending market in your jurisdiction in the last 12 months. The majority of the restructuring projects which resulted from the 2008/2009 global financial crisis have now been completed. There is an increasing volume of new lending transactions in the market, but financiers are now much more aware of security and risk management issues. During the crisis, access to western credit markets became substantially more difficult, and at the same time the Russian state controlled banks (VEB, Sberbank and VTB) were capitalised to support Russian borrowers. This has resulted in the Russian state controlled banks increasing their market share in the lending markets with a corresponding decrease for the western financial institutions. Security: real estate 2. Please briefly state what is considered real estate in your jurisdiction. What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)? Real estate Russian civil legislation and the mortgage law classify real estate as: Buildings. Land plots. Ships. Aircraft. Common forms of security Security over land plots and buildings is taken by a pledge over immovable property (that is, a mortgage). A mortgage can be taken over: Lease rights to real estate, as well as ownership rights. Part of a building. The unfinished construction of a building, if the building is registered as an unfinished construction with the Unified State Register of Rights to Immovable Property and Transactions of the Russian Federation (Land Registry).

Title rights to a building cannot be pledged without pledging the rights to the land plot underneath the building. Formalities A mortgage must be signed by the parties and then filed with the Land Registry. The mortgage is valid and binding once it is registered in the Land Registry. The law applicable to the mortgage must be Russian law and the document must be in Russian (although in practice the mortgage can be executed as a bilingual document with the Russian version taking precedence) (see Question 29). Notarisation and registration fees apply (see Question 30). Security: tangible movable property 3. Please briefly state what is considered tangible movable property in your jurisdiction, for example, machinery, trading stock (inventory), aircraft and ships? What are the most common forms of security granted over it? How are they created and perfected? Tangible movable property There is no legal classification of tangible movable property. The general approach is that movable assets comprise property which does not qualify as immovable property, such as: Equipment. Machinery. Inventory. Shares and other forms of securities are also considered to be movable property (see Question 4). Common forms of security The most common form of security is a pledge over movable assets. Formalities The pledge is deemed to be created at the moment of signing of the pledge agreement. It is not necessary to physically deliver the pledged property to the pledgee. There is no public register in Russia where a pledge over movable assets can be registered. A pledging Russian entity must

record the pledge in an internal pledge book (kniga zapisey zalogov) which it must maintain and make available for inspection by third parties. Security: shares and financial instruments 4. What are the most common forms of security granted over financial instruments, such as shares and other securities (both in certificated and dematerialised form)? How are they created and perfected? Common forms of security The most common form of security is a pledge over shares or other financial instruments (bonds, promissory notes, and so on). Russian shares are generally issued in dematerialised (noncertificated) form, and their pledge registration depends on how they are held by its owner, that is, directly in the shareholders' register or through a custodian (see below, Formalities). Formalities Registration of the pledge (that is, entering the record of the pledge) is made either: In the shareholders' register which, depending on the requirements of the law and type of entity, can be maintained by: o o the company itself; or an independent licensed registrar company. In the books of a licensed custodian which is the holder of the shares. The pledge is deemed to be created once registration is effected. The language and the governing law of a pledge can vary (if one of the counterparties to the pledge is a foreign entity). From an enforcement perspective, it is highly advisable to make the pledge subject to Russian law with jurisdiction given to Russian arbitration (that is, state) courts. Pledges of participatory interests in Russian limited liability companies must be signed before a notary (in the Russian language or with a Russian translation) and registered at the Unified State Register of Legal Entities. Notary fees are payable (see Question 30).

Security: claims and receivables 5. What are the most common forms of security granted over claims and receivables (such as debts or rights under contracts)? How are they created and perfected? Common forms of security The most common forms of security which can be taken over contractual rights (claims and receivables) are: A pledge over rights. A conditional assignment of rights (if an assignment is not expressly prohibited by law or by the relevant contract). A conditional assignment is made, for example, on the occurrence of an event of default. The main advantage of the pledge (versus assignment) is that the pledgee obtains the status of a secured creditor. In addition, an assignment which is conditional on an event of default is vulnerable to being set aside if the assignment is made immediately prior, or after the onset of, the insolvency of the assignor (see Question 23). A pledge taken over amounts in a bank account is not enforceable; a quasi-security structure known as an account withdrawal agreement can be used (see Question 9, Other structures). Generally, pledges and conditional assignments of rights cannot be used in relation to insurance policies (see Question 9, Other structures). Formalities Under a conditional assignment, either the assignor or the assignee must give notice of assignment to the counterparty to the contract (that is, the party obliged to pay the claims or receivables). Similarly, a pledge over rights must be notified to the counterparty. In addition, if the pledgor is a Russian entity it must enter a relevant record of pledge in its pledge book (see Question 2, Formalities). Security: intellectual property 6. What are the most common forms of security granted over registered and unregistered intellectual property (such as patents, trade marks, copyright and designs)? How are they created and perfected?

Common forms of security The most common form of security which can be taken over intellectual property rights is a pledge over rights. Formalities If the pledge is created over registered intellectual property rights (for example, trade marks), it must be: Executed by the parties in writing. Registered with the authority that handles the register of intellectual property (this registration is subject to registration fees (see Question 30)). If the pledgor is a Russian entity, then it must enter a relevant record of pledge into its pledge book (see Question 3, Formalities). A pledge over non-registered intellectual property rights (for example, copyright) is not a commonly used instrument in financing transactions. If it is entered into, however, it would be subject to the requirements applicable to a pledge over registered intellectual property rights, except for registration. Security: problem assets 7. Are there types of assets over which security cannot be granted or is difficult to grant? Consider the following and give brief details of any additional requirements: Future assets. Fungible assets. Other assets. Future assets A pledge over future assets (property or rights which may be acquired in the future) is not prohibited under Russian law. However, the Russian Civil Code and Pledge Law specifically require that every pledged asset should be properly identified in some detail in the pledge agreement. The pledge cannot be deemed to be created, therefore, unless or until the property is properly identified.

Fungible assets Fungible assets are not defined in Russian law, although there is a similar concept of "mixed goods" (for example, oil in tanks, grain in storage, and so on). The main problem with a pledge over these assets is their mixed nature and non-identifiable character. The pledge cannot be deemed to be created, therefore, unless or until the property is properly identified. Other assets Another asset that is considered to be immovable property is an enterprise as a property complex (predpriyatiye kak imushestvenniy complex). This includes all types of property designated for the enterprise's activity, including: Land plots. Buildings. Installations. Equipment. Tools. Raw materials. Rights of demand. Debts. Trade marks. A mortgage over an enterprise covers each type of property held and relating to the respective enterprise (as described above), unless otherwise set out in the mortgage agreement. That means that there is a single security over different types of assets. Any transactions (such as sales and mortgages) with an enterprise are subject to state registration and notarisation. Although an enterprise is considered to be a single asset, each land plot and other immovable asset must be registered separately. Rights over the enterprise must be registered with the Land Registry in respect of each immovable asset that the enterprise holds. In practice, mortgages over enterprises are almost never taken as security, and it is usual to take specific security over each type of asset held by an entity.

Special purpose vehicles (SPVs) in secured lending 8. Is it common in your jurisdiction to take security over the shares of an SPV set up to hold certain of the debtor's assets, rather than to take direct security over those assets? If so, please give brief details of the practice and risks associated with it. It is common (at least for cross-border transactions) to take security over both the shares of an SPV entity as well as over the assets themselves. (SPVs often hold real estate assets, because there are tax advantages when the asset is sold by a sale of shares in the SPV (or its holding company), rather than by a sale of the real estate asset itself.) For cross-border transactions, it is common for a foreign SPV to hold shares in the Russian SPV, and for security to be taken over the shares in the foreign SPV. This is because enforcement of offshore security can be quicker and easier than enforcing Russian law security over the shares in the Russian SPV or security over the asset itself in Russia. In this case, however, the lender will still often take additional security over the shares in the Russian SPV and over the relevant asset itself. This will prevent the shares or assets from being pledged to third parties without notice or otherwise being disposed of. Taking a pledge from a Russian borrower will allow a creditor to participate in the Russian company's insolvency as a secured creditor. Quasi-security 9. What types of quasi-security structures (that is, legal structures used instead of taking security but which have a similar effect to security) are common in your jurisdiction? Is there a risk of such structures being recharacterised as a security interest? Consider the following and give brief details of the structure and risks associated with it: Sale and leaseback. Factoring. Hire purchase. Retention of title. Negative pledge. Other structures.

Sale and leaseback Sale and leaseback arrangements are not common in Russia. This is probably because of the negative tax consequences of these types of transactions. There is a risk that these arrangements are recharacterised as security interests, although it is not clear whether this happens in practice. Factoring Factoring is quite popular though it is most often used in cross-border transactions. In most cases the factors are banks (though under recent changes to the law most companies can carry out these activities as there is no longer any licensing requirement in place). There is little risk that a factoring transaction would be recharacterised as a security interest. Hire purchase Hire purchase is very common in Russia, and the law automatically creates a security interest over the goods subject to the hire purchase arrangements (until the goods are paid in full, those goods are deemed to be pledged to the seller). Retention of title A sale and purchase agreement can provide that the seller will retain title to the goods sold until he receives payment for the goods in full (Civil Code). However, retention of title provisions are not commonly used as quasi-security in Russia. There is little risk that a retention of title provision would be recharacterised as a security interest. Negative pledge Russian law is not familiar with the concept of a negative pledge in which a borrower agrees not to create further security over a secured asset. However, certain contractual arrangements, similar to those under an English law contract, are usually possible in practice. There is a concern that these negative covenants can be construed as a waiver of rights under Russian law, and therefore be unenforceable against the borrower. However, there is no substantial court practice to date supporting either view. Other structures The following types of quasi-security structure are also common: Account withdrawal agreement. This is the most common type of quasi-security. Under this agreement, a bank account holder can grant creditors direct debit rights in respect of moneys held in a bank account. This is usually done by the creditor, account bank and

account holder signing a tri-partite agreement, which amends the terms of the bank account agreement between the account bank and the account holder. This agreement is used because a pledge of moneys in a bank account is not enforceable under Russian law (see Question 5, Common forms of security). The basic requirement for these direct debit rights is that the creditor has a direct monetary claim against the account holder. This direct monetary claim can be under a loan arrangement (if the account holder is the borrower), a payment guarantee, suretyship (where the account holder acts as a guarantor or a surety) or similar obligation (see Question 8). Conditional assignment of contractual rights. The conditional assignment's disadvantage in comparison to the pledge over rights is that the creditor, as assignee, does not have the status of a secured creditor in any insolvency procedures (see Question 24). In addition, an assignment of rights that is conditional upon default (rather than an immediate unconditional assignment) can be set aside where the actual assignment takes place shortly prior to, or after, the onset of insolvency (see Question 23). Amendment to an insurance policy. This is used to make a creditor a co-insured or loss payee under the policy (a loss payee is a provision where payment is made under the insurance party to a third-party beneficiary). Generally, pledges and assignments do not work under Russian law in respect of insurance policies (see Question 5). There are no registration or other perfection requirements for any of the above agreements to become effective. Guarantees 10. Are guarantees commonly used in your jurisdiction? How are they created? Two types of arrangement are possible: Suretyships. It is a secondary obligation to the primary obligation that it secures and therefore terminates automatically once the primary obligation is terminated. It is created by agreement. There are no perfection, registration or other requirements. Bank guarantee. An ordinary company cannot enter into a guarantee. A bank guarantee survives the termination of a primary obligation, but it can only be issued by a credit institution or, although this is rare, a licensed insurance company. It is created by agreement. There are no perfection requirements. Both instruments are commonly used.

Risk areas for lenders 11. Do any laws affect the validity of a loan, security or guarantee (or the terms on which a loan, security or guarantee are made)? For example, rules on: Financial assistance. Corporate benefit. Loans to directors. Usury. Financial assistance Financial assistance rules do not apply. Corporate benefit There is currently a lack of a corporate governance culture and shareholder protection in Russia. Corporate benefit has not, therefore, generally been an issue to address on Russian transactions, although there have been some high profile court cases against directors of companies. However, among the most important recent developments in Russian law were changes to the procedural rules introducing the possibility of bringing a shareholder class action (for example, under the Law on Limited Liability Companies). Other changes are expected relating to corporate governance. Draft laws are being discussed that attempt to better define the duty of care, good faith and caution that directors must perform in relation to the company they work for. Loans to directors There are no restrictions on the grant of a loan to a director of a company. However, such a loan is likely to qualify as an interested party transaction for the company granting the loan and can therefore require the approval of disinterested directors or shareholders (depending on the loan amount). Usury Usury rules do not apply. Others

Currency control restrictions generally provide that any payments between Russian companies can be effected in roubles only (except for operations with Russian licensed banks holding foreign currency licences issued by the Russian Central Bank) (see Question 28). 12. Can a lender, merely by making a loan or holding or enforcing a security or guarantee, be liable under environmental laws for the actions of the borrower, security provider or guarantor? If a lender is just making a loan or holding or enforcing security, there are no grounds to make it liable under environmental laws for a third party's actions. Liabilities under environmental laws are personal. Structuring of debt agreements 13. Is contractual subordination of debt possible and common? If so, how can it be achieved, for example by an inter-creditor agreement between senior, mezzanine and junior creditors? Is structural subordination possible? Generally, it is thought that debts cannot be contractually subordinated because: A party is not bound by a contractual agreement that prohibits or restricts the exercise of their legal rights (Civil Code). Mandatory legal requirements override any contractual arrangements. This means that contractual subordination concerning corporate loans is ineffective during bankruptcy proceedings (see Question 24). A creditor would be ranked pari passu with other creditors of the same priority and a Russian court would not uphold contractual subordination. A structural subordination where mezzanine and/or junior creditors lend to a holding company of the borrower, rather than the borrower itself, is possible. 14. Is debt traded in your jurisdiction? If so, what transfer mechanisms are used? How do buyers ensure that they obtain the benefit of the security and guarantees associated with the transferred debt? The main method for trading debts is to use an assignment (to the extent that assignment is not prohibited by law or by the relevant contract) (see Question 5, Common forms of security). On secured transactions novation is not normally used to ensure the continuing nature of existing securities. Any Russian law security would automatically terminate on a new agreement being created on transfer by way of novation. In the case of assignment, the security and guarantees are normally transferred (assigned) simultaneously with the transfer of debt. If foreign law

security or guarantees are held by an agent or trustee for all lenders, an assignment of its participation in the debt by one lender will not require any assignment of the security or guarantees. 15. Is the agent concept (such as a facility agent under a syndicated loan) recognised in your jurisdiction? If not: Is an agency arrangement created under the law of another country recognised in your jurisdiction? Can a facility agent enforce rights on behalf of the other syndicate lenders in the courts in your jurisdiction? The agency concept is generally recognised although the concept is different to that of a facility agent under English law. The duties of an agent under Russian law are more limited, and generally of an administrative nature. However, enforcement by an agent on behalf of other creditors of record (that is, lenders with a direct claim against the borrower) is possible. It cannot be established within the agency arrangements but on legally binding instructions structured through an agency agreement (dogovor porucheniya), supported by a power of attorney. In practice, concepts such as parallel debt and joint and several creditorship are more commonly used to allow an agent to act on behalf of other members of a loan syndicate (see Question 16). Another alternative would be for a loan to be syndicated by way of sub-participation with a fronting bank acting as lender and security holder. 16. Is the trust concept (such as a security trustee holding security on behalf of two or more creditors) recognised in your jurisdiction? If not: Is a trust created under the law of another country recognised in your jurisdiction? Can a security trustee enforce its rights in the courts in your jurisdiction? The concept of a common law trust is not recognised in Russia. There is a concept of trust management, although this has a different purpose and works differently to a common law trust (under Russian law the title to the asset never passes to the trust manager, but rather the manager has certain rights to manage the asset). There are three alternative ways to initially structure the grant of security for a syndicate in the absence of a trust mechanism: Agency (where the security agent acts by a power of attorney) (see Question 15).

Parallel debt. Generally speaking, a parallel debt is an abstract, independent pecuniary claim by one party (usually the party which is appointed to act as security agent in a syndicated lending) against a debtor, for an amount corresponding to the claims of all the finance parties in a syndicated lending against that debtor. The independent and parallel debt can be created by a separate clause in the credit facility agreement itself, or by a separate document. The Russian security may then be taken by the single holder of the parallel debt and the amount secured will be equal to the sum owing to all lenders. Joint and several creditorship. Under this, one of the original lenders in a syndicated loan (again, usually in the capacity as a "security agent") is declared and deemed to be a creditor for the full amount of the loan jointly and severally with the other lenders. Security in Russia can then be held by the joint and several creditor (alone rather than all lenders) and the amount secured will be an amount equal to the sum owing to all lenders. Each method produces a different result as to who should be registered as a secured creditor. 17. Do the different types of security in your jurisdiction need to be documented separately or does your jurisdiction allow a single security document? The most common practice is for security documents to be separated, although Russian law provides for the concept of a "mixed" contract. Only in rare and specific cases are two or three securities created by one single document. 18. Are there any rules on how loans (including syndicated loans) should be documented for the loan to be enforceable? The Russian Central Bank has issued certain regulations on how Russian banks can document syndicated loans. These regulations only consider three types of syndication (jointly initiated syndication, individually initiated syndication and syndication without participations being set out). These rules do not directly apply, however, to international syndicate lenders. Enforcement of security interests and borrower insolvency 19. Please briefly state the circumstances in which a creditor can enforce its loan, guarantees or security (for example, when an event of default occurs). What requirements must the creditor comply with? Generally, a creditor can only enforce a loan, suretyship, guarantee and security on the occurrence of an event of default. In addition, a Russian court can refuse to enforce a creditor's claims if the

default was not significant (for example, the default only concerned breach of financial covenants). Therefore, the magnitude and frequency of breach events are important. 20. How are the main types of security interest usually enforced? What requirements must a creditor comply with (for example, a mandatory public sale of the secured asset through the courts)? Security can usually only be enforced together with enforcement of the relevant underlying obligation (that is, the loan). There is one exception: claims for enforcement of a mortgage can be filed separately (see Question 2). Before 2009, pledges could be enforced only by a court-supervised public auction or, as a noncourt procedure, a public auction arranged by the pledgee (creditor). The pledge agreement can now provide for the following additional non-court procedures: Commission sale, that is, the sale of assets through a third-party independent commissioner (which can be appointed by the pledgee). Transfer of the pledged asset to the creditor, or direct sale to a third party (including by commission sale) if the debtor is a legal entity or individual entrepreneur entering into a pledge in the course of its business activities. It is now possible to enforce a mortgage through a public auction arranged by the mortgagee (creditor), rather than a court-supervised public auction, if the notarised consent of the mortgagor to this non-court enforcement is obtained. 21. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? If yes, please give brief details, including voting requirements to approve such procedures. How do they affect a creditor's rights to enforce its loan, guarantees or security? A company can restructure its debts in an effort to restore solvency. This is regulated by the Russian insolvency laws, but takes place outside the bankruptcy proceedings. The restructuring of debts can be carried out with the assistance of the debtor's shareholders, either with the shareholders' financial aid, or provision of a loan or a guarantee. A restructuring can be carried out by agreement between creditors or other parties and the debtor. The restructuring does not affect the right of the creditors to enforce their loans and security. 22. How does the start of insolvency procedures affect a creditor's rights to enforce its loan, guarantees or security?

Before bankruptcy proceedings start There are no restrictions or limitations on enforcement of loans, guarantees or pledges before the start of bankruptcy proceedings. If bankruptcy proceedings start, however, enforcement that occurred within the six-month period before the acceptance of a bankruptcy petition can be invalidated as a preferential transaction (see Question 23). After bankruptcy proceedings start Once the initial bankruptcy procedure (the supervision procedure) is started: There is a prescribed procedure for presentation of creditors' claims. The enforcement of proceedings against the debtor's property is suspended. Creditors can only file their claims under loans, guarantees or security instruments through an arbitration manager. The arbitration manager will then consider including the claims into the register of claims. If a claim is presented during the first month of the supervision procedure and is accepted, the creditor will be able to vote at the first creditors' meeting. The first creditors' meeting will decide, among other things, what the next stage of proceedings will be. There are four forms the next stage can take: financial rehabilitation, external administration, liquidation and voluntary arrangement (see Question 24). Generally, secured creditors' claims are satisfied out of the secured property. However, if the company goes into financial rehabilitation or external administration, a secured creditor can choose to either: Enforce its security at this stage with the consent of the court. The court will only grant consent where the enforcement does not have the consequence of making restoration of the debtor's solvency impossible, for example, if the security being enforced is over the company's sole or major asset. Wait for the enforcement of the security during liquidation (see Question 24). Otherwise, claims can only be satisfied during the liquidation procedure (unless the company's solvency has been restored). 23. What transactions involving loans, guarantees, or security interests can be made void if the entity that received the loan or granted the guarantee or security becomes insolvent? Please briefly state the time limits that apply and the conditions that must be met for the transaction to be made void. There are two types of transactions that can be challenged under the insolvency laws: Suspicious transactions. These can take the form of:

o undervalue transactions (that is, transactions completed within one year before, or any time after, bankruptcy proceedings were initiated); and o transactions prejudicing creditor's property rights (that is, transactions completed within three years before, or any time after, bankruptcy proceedings were initiated). Preferential transactions. These are transactions which result in one creditor's claims being prioritised over another's. Generally, these transactions can be challenged if completed within one month before, or any time after, bankruptcy proceedings were initiated. However, the one-month period is extended to six months if these transactions lead to certain consequences set out in the insolvency law, such as damages (or losses) caused to the debtor. Once successfully challenged, all consideration received from the debtor under the relevant transaction will be transferred to the debtor's bankruptcy estate. The other party to an invalidated transaction will acquire a claim against the debtor and this claim will be satisfied either (depending on the type of invalidated transaction) with claims of other creditors or after satisfaction of third priority claims (see Question 24). 24. Please list the order in which creditors are paid on the borrower's insolvency, assuming the security interests have been validly perfected. Consider: The secured creditors considered in Questions 2 to 6. Statutory claims. Unsecured creditors. Subordinated creditors. Secured creditors are able to enforce their security during insolvency procedures before liquidation (see below, Financial rehabilitation and external administration). In addition, they are entitled to preferential treatment on liquidation in relation to the proceeds of the secured assets (see below, During liquidation). During financial rehabilitation and external administration There are two insolvency procedures: Financial rehabilitation. This procedure endeavours to restore the debtor's solvency. It is started by a court ruling. The court will appoint an administrative manager to: o supervise the debtor's management;

o specify the timescale for rehabilitation. This procedure requires the preparation of a financial rehabilitation plan if there is no security securing the debtor's liabilities, and (in all cases) a debt repayment schedule detailing the timetabled satisfaction of creditors' claims. External administration. Under this procedure, the powers of the debtor s management are terminated and the duty to manage the affairs of the debtor is vested in an external administrator. The external manager will produce an external administration plan outlining measures to restore the debtor's solvency and a feasibility study relating to its implementation. During these stages, secured creditors can either enforce their security or refrain from enforcing their security to be able to vote at creditors' meetings. An application to enforce must be made to an arbitration court, which can prevent enforcement if, as a result, it would not be possible to restore the debtor's solvency. A secured creditor may be able to realise all of the enforcement proceeds of the secured assets, subject to the payment of current claims (see below, During liquidation). During liquidation A secured creditor would be entitled to benefit from the proceeds of the secured assets as follows: 80% (for creditors under secured loan agreements) or 70% (for other secured creditors) of the proceeds from sale of the pledged property. This, however, cannot amount to a value greater than the sum of the original principal amount secured and the interest accrued on that amount. 15% or 20% respectively to creditors of the first and second priority (see below). This distribution only applies where there are insufficient funds to otherwise discharge these claims. The balance covers expenses incurred due to insolvency proceedings (for example, judicial fees, and so on). In relation to the general proceeds of the bankruptcy estate, the following payments are made ahead of the other creditors of the first, second and third priority: Judicial expenses and remuneration to persons involved in administering the insolvency process. Remuneration to employees engaged during the insolvency process.

Costs towards operational expenses (for example utilities) necessary for the debtor to carry out normal activities. Claims for all other current payments (that is, creditor claims made after the court's acceptance of an application to commence insolvency proceedings). Statutory claims (such as tax claims) that appeared before insolvency was initiated, must be satisfied along with the creditors' claims. After current claims mentioned above, come first priority claims (such as personal injury claims), and second priority claims (severance benefits, wages for the debtor's employees, and copyright royalties). Finally, the claims of unsecured creditors are ranked as third priority and are satisfied from the remainder of the estate. Subordination arrangements are not effective on insolvency (see Question 13). 25. If more than one creditor holds the same security interest over the same asset, how is priority between them determined? Please briefly set out any specific ranking rules that apply. Secured creditors holding a first ranking pledge over the property will have priority over creditors holding any subsequent pledge over the same property. The priority will depend on the date of the relevant security instrument's creation or registration. It is unlikely that it can be contractually agreed for two or more securities to have equal ranking. 26. If a security interest has not been validly perfected, where does the security holder rank on the borrower's insolvency? If the security has not been validly perfected, a creditor can only join insolvency proceedings as a third priority unsecured creditor (see Question 24). Cross-border issues on loans 27. Are there restrictions on the making of loans by foreign lenders or granting security (over all forms of property) or guarantees to foreign lenders? If yes, please give brief details, for example registration requirements. Generally, the proceeds of a loan from a foreign lender must be credited to a Russian borrower's account with a Russian account bank. The proceeds of a foreign currency loan can be credited to an offshore bank account of the Russian borrower which is located in a jurisdiction that is a member of the Organisation for Economic Co-

operation and Development (OECD) or the Financial Action Task Force (FATF). This can only be done if the lender is either: An agent of the foreign government. A bank from an OECD or FATF jurisdiction and the loan term exceeds two years. A licence or registration is not required in Russia for a foreign lender who makes a loan to a Russian company. 28. Are there exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement? Generally, no restrictions for payments to a foreign lender exist, subject to certain reporting requirements under the currency control law. For example, a Russian borrower must open a deal passport (passport sdelki) with its Russian account bank (or, if the payments are made offshore, with the relevant subdivision of the Russian Central Bank). The deal passport is usually completed to reflect the details of the loan and must be formalised before the first draw down under the loan agreement. Each payment under a loan agreement, guarantee or security instrument requires the submission to the Russian account bank of a currency operation certificate (spravka o valyutnikh operatsyakh) without which the payment will not be effected. 29. Is a foreign choice of law clause in a security, guarantee or loan document recognised and applied by the courts in your jurisdiction? Does local law always apply in certain circumstances? The Russia courts generally recognise and apply a choice of foreign law in a security instrument, guarantee or loan agreement. Russian law, however, must exclusively govern security documents which are notarised and/or registered (for example, mortgages, pledges of participation interests and pledges over registered intellectual property rights). Tax and fees on loans, guarantees or security interests 30. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security? Consider the following and state the tax rates and fee amounts, if they are more than a nominal amount: Documentary taxes (for example, stamp duty). Registration fees. Notaries' fees.

Stamp duty does not exist, although registration and/or notarisation fees apply on the creation of security instruments which must be registered and/or notarised (for example, mortgages and pledges of participation interests). Court duties apply to the enforcement of loans and/or securities (including guarantees). 31. Are there strategies to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security? To minimise withholding taxes on loan payments, foreign lenders can be requested to act through a lending office located in a jurisdiction which has a double tax treaty with the Russian Federation, providing for a withholding tax exemption on interest payments. Any intra-group loan, guarantee and security arrangements should be carefully analysed from the tax point of view to avoid any "thin capitalisation" concerns (that is, where "controlled debt" (as defined in the relevant legislation) exceeds own capital by a ratio of three to one). Reform 32. Please summarise any proposals for reform and state whether they are likely to come into force and, if so, when. There are amendments being considered to amend a number of provisions of the Civil Code to, among others: Introduce the concepts of a pledge of a bank account and independent guarantee. Further develop the regulation of share and participation interest pledges. However, it is difficult to predict when these changes to the Civil Code will be passed, or in what form. Contributor details Karen Young CMS, Russia

T +7 495 786 4000 F +7 495 786 4001 E karen.young@cmslegal.ru W www.cmslegal.ru Qualified. England and Wales, 1995; Western Australia, 1988 Areas of practice. Banking and finance; insolvency and restructuring Recent transactions Representing Aareal Bank on a US$635 million structured syndicated loan to a Russianbased group to refinance existing debt, and finance new projects in Russia, secured over 16 real estate properties. Representing Eurohypo AG on the US$450 million secured property financing of five Marriott and Holiday Inn hotels in Moscow. Advising Raiffeisen Bank on a finance facility to an oil trading company. Representing EBRD on various secured loans to Russian borrowers to finance projects in Russia. Konstantin Baranov CMS, Russia T +7 495 786 4000 F +7 495 786 4001 E konstantin.baranov@cmslegal.ru W www.cmslegal.ru

Qualified. Russia, 1996 Areas of practice. Banking and finance; regulatory and insolvency Recent transactions Representing EBRD on a number of Rouble financings to Russian leasing and transportation companies secured by pledges of leases and railcars. Advising a major Russian bank on several multi-million dollar acquisition finance transactions in relation to Russian assets. Representing various financial institutions and export credit agencies on numerous ECAbacked secured and unsecured financing transactions. Advising on a secured Russian railcar leasing facility from a European bank.