Amendments to Bankruptcy Legislation in the Russian Federation

Practical Law UK Articles 3-386-3777 (Approx. 6 pages)

Amendments to Bankruptcy Legislation in the Russian Federation

by Igor Ostapets and Maya Melnikas, White & Case LLP

Federal Law No. 73-FZ

On 28 April 2009, the President signed Federal Law No. 73-FZ amending Federal Law No. 127-FZ "On Insolvency (Bankruptcy)," dated 26 October 2002 (Bankruptcy Law) and Federal Law No. 40-FZ "On Insolvency (Bankruptcy) of Credit Organisations," dated 25 February 1999 (Credit Organisations Bankruptcy Law).

Amendments to the Bankruptcy Law

Challenging debtor's transactions

The amendments further develop and supplement current rules on challenging a debtor's

Transactions with interested persons (suspicious transactions).
Transactions entailing preferential treatment of certain creditors.

They are intended to better protect creditors' rights by improving the legal basis for invalidating transactions which result in an outflow of the debtor's assets close to the debtor's bankruptcy.

The amendments, therefore, introduce the above two categories of debtor transactions that may be challenged in court. The hardening periods vary from one month to three years prior to the court accepting the bankruptcy petition. Notably, the performance of obligations (such as payment under an agreement) may be also challenged on the grounds discussed below.

Suspicious transactions

These include:

Transactions made after or within one year prior to the court accepting the bankruptcy petition, provided they contemplate unequal consideration, and in particular, transactions made under the terms which substantially deviate from those normally used for similar transactions.
Transactions made after or within three years prior to the court accepting the bankruptcy petition, provided they were concluded with the intent to impair creditors' interests (that is, to deprive them of a possibility to have their claims fully satisfied with the debtor's assets) and actually resulted in such impairment, and the other party had knowledge of such intent of the debtor.
The amendments specify how to establish such knowledge (for example, the knowledge is assumed if the other party is deemed an interested person), as well as how to establish such intent (for example, the intent is assumed if the transaction was made on a gratuitous basis at the time when there were signs of the debtor's insolvency).
Notably, the list of interested persons has been amended, in particular:
- to include persons belonging to the same group of persons as the debtor, the debtor's affiliated persons and persons deemed interested under the laws on joint-stock companies and limited liability companies, as well as the debtor's managers and chief accountant (including those dismissed within one year, as opposed to three years currently, prior to commencement of the bankruptcy proceedings); and
- to exclude the debtor's employees.

Transactions entailing preferential treatment of certain creditors

These include transactions which entail or may entail preferential treatment of one creditor against the other creditors made after or within one month prior to the court accepting the bankruptcy petition.

In certain cases, such transactions may be challenged if they were made within six months prior to the court accepting the bankruptcy petition. Examples of such cases include if a transaction:

Is intended to secure previously existing obligations of a debtor or a third party and changes priority for the satisfaction of the creditor's claims.
Provides benefits to a creditor who was aware of the debtor's insolvency (such knowledge is assumed with respect to an interested person).

The procedure for challenging debtor transactions and the consequences of their invalidity

The amendments specify the procedure for challenging the above transactions and the consequences of their invalidity.

Procedure. Suspicious transactions and transactions entailing preferential treatment of certain creditors may be challenged by a bankruptcy manager (an external manager or a receiver), either on the bankruptcy manager's own initiative or pursuant to a decision of a creditors' meeting or a creditors' committee.

The limitation period should be calculated from the date when the bankruptcy manager became aware (or should have become aware) of the grounds for the transaction's invalidity. Such claims shall be considered during the bankruptcy proceedings.

Consequences of invalidity. If a transaction is found invalid, everything that was transferred under it by the debtor must be returned to the bankruptcy estate (for further distribution among the creditors).

The priority for satisfaction of the creditor's claim arising as a result of the transaction's invalidity will depend on the basis for its invalidity.

For example, claims under the transactions found invalid due to an intention to impair creditors' interests or that entail preferential treatment of a creditor who was aware of the debtor's insolvency will be satisfied after the third priority claims included in the register of creditors' claims.

With respect to transactions entailing preferential treatment, it is not clear how these rules correlate with the rules described further as to the nature of the creditors' claims and the priority for their satisfaction.

The amendments specifically provide that if a transaction which was found invalid (on the basis that it entails preferential treatment of a certain creditor) is a transaction aimed at discharging the debtor's obligation (such as set-off or compensation (otstupnoe)), that obligation is deemed restored. This is also true for cases when the debtor's actions aimed at performance of an obligation (such as payment or transfer of property) are found invalid on the same basis.

The creditor's claims under the restored obligation will be included in the register of creditors' claims and satisfied along with the claims of the third priority (or after them, if settlements with the creditors of third priority have been completed by the time when the creditor's claim is included in this register).

Subsidiary liability of the debtor's controlling persons

The amendments broaden the scope of persons that may be held liable for a debtor's debts and revise the grounds for making them liable. Currently the law provides for the subsidiary liability of a debtor's shareholders and other persons, including its manager, who are entitled to give mandatory instructions to the debtor or define the debtor's activities in other ways, arising in cases of the debtor's bankruptcy for which they are at fault.

The amendments introduce the concept of debtor's controlling persons. These are defined as persons who have, or within two years prior to the court accepting the bankruptcy petition, had, the right to give mandatory instructions to the debtor or define the debtor's activities in other ways (for example, its manager, persons entitled to make transactions on behalf of the debtor based on a power of attorney, and shareholders holding more than 50% of its shares).

The debtor's controlling persons will jointly and severally bear subsidiary liability for the debtor's debts in case of insufficiency of the debtor's assets included in the bankruptcy estate, unless they prove that they acted reasonably and in good faith to the benefit of the debtor. In general, the amount of the subsidiary liability will be determined based on the difference between the amount of the creditors' claims included in the register of creditors' claims and those actually satisfied with the debtor's assets. However, the amount of the liability and its grounds are described rather ambiguously and need to be further clarified in practice.

The court may decrease the amount of subsidiary liability if the loss caused by the actions or inaction of the debtor's controlling persons found liable was substantially less.

In addition, the amendments provide that the debtor's manager will bear subsidiary liability for the debtor's debts if the debtor's accounting documents are missing, incomplete or incorrect.

A claim to make the debtor's controlling persons liable will be considered in the bankruptcy proceedings. It may be filed by a receiver, either on his or her own initiative or pursuant to a decision of a creditors' meeting or a creditors' committee. Creditors may also file such a claim before the receivership procedure is completed if their claims have not been satisfied from the bankruptcy estate.

Amendments to the Credit Organisations Bankruptcy Law

Challenging credit organisation's transactions

The amendments further develop current rules on challenging credit organisations':

Transactions made under the terms which substantially deviate from those normally used for similar transactions.
Transactions that may be invalidated on the grounds set by the Bankruptcy Law (that is, those made with interested persons or those entailing preferential treatment of certain creditors).

Under the amendments, transactions made by credit organisations may be challenged on the same grounds and following the same procedure as are set out by the Bankruptcy Law for non-credit organisations. However, the hardening periods should be calculated from the date of appointment of a temporary administration by the Central Bank, rather than the date of the court accepting the bankruptcy petition (for example, transactions contemplating unequal consideration may be challenged if they were made after or within one year prior to the Central Bank appointing a temporary administration).

The credit organisation's transactions may be challenged either by a temporary administrator or a receiver.

Subsidiary liability of the credit organisation's controlling persons

The amendments broaden the scope of persons that may be held liable for the debtor's debts and amend the list of grounds for making them liable for the credit organisation's debts.

Currently the law provides for the subsidiary liability of the credit organisation's managers, members of the board of directors and shareholders (founders) arising if the credit organisation's bankruptcy is attributable to their faulty actions or, for managers, also by their inaction.

The amendments therefore introduce the concept of controlling persons (which differs from that introduced to the Bankruptcy Law), that include the credit organisation's managers, members of the board of directors, shareholders (founders) and other persons, entitled to give mandatory instructions to the credit organisation or define its activities in other ways. The credit organisations' managers, as previously, include those indicated in the Law on Banks and Banking Activities (that is, its sole executive body, its deputies and members of the collegiate management body).

The controlling persons may be held liable in case of insufficiency of the credit organisation's assets, if their actions or inaction caused the bankruptcy of the credit organisation. This means that:

Their actions or decisions did not comply with the principles of reasonableness and good faith.
They failed to take the required measures to prevent the bankruptcy.

The credit organisation's shareholders (founders) may be held liable for the above inaction only if they were aware of the grounds requiring application of the bankruptcy prevention measures. The amount of the subsidiary liability shall be determined based on the difference between the amount of the credit organisation's creditors' claims and the market value of its assets (less the current claims). However, the court may decrease the amount of liability if the loss caused by the actions or inaction of the persons found liable was substantially less.

In addition, under the amendments, the credit organisation’s manager may become liable for the credit organisation's debts if the accounting documents have not been transferred to the temporary administration or a receiver, or are missing.

The claim for making the creditor's controlling persons liable will be considered in the bankruptcy proceedings. The amendments do not specify the persons entitled to file such a claim. It appears that, as previously, it may be filed by a temporary administrator or a receiver.

Other amendments: managers' and shareholders' duties on liquidation

The amendments establish a number of duties for credit organisations' managers, members of the board of directors and shareholders (founders). These arise if there are signs of the credit organisation's bankruptcy as specified by the law (for example, its assets are insufficient to satisfy all the creditors' claims). In particular, the managers must request the board of directors to convene a general shareholders' meeting to decide on the credit organisation's liquidation and applying to the Central Bank for revocation of a banking licence; the board of directors must convene the meeting, and the shareholders must adopt a respective decision (all these actions must be done within the terms specified by the amendments).

Persons failing to comply with the statutory duties will bear subsidiary liability for the credit organisation's debts arising after the occurrence of the signs of bankruptcy if the credit organisation's assets are insufficient (this rule is somewhat similar to the current Bankruptcy Law rule on making the debtor's manager liable for failure to apply to court with an application for initiation of bankruptcy proceedings). However, shareholders (founders) will be exempt from liability on this ground if they hold less than 10% of the shares, voted for the liquidation of the credit organisation or were not properly notified of the general shareholders' meeting.

Application of the new law

The amendments entered into force on 5 June 2009.

The amended rules will apply in bankruptcy proceedings initiated after the amendments entered into force.

The amended rules on challenging the debtor's transactions will also apply in bankruptcy proceedings initiated before the amendments entered into force provided the transactions are made after their entry into force.

Amendments to Bankruptcy Legislation in the Russian Federation | Practical Law