31 March 2020
Bankruptcy moratorium

Against the backdrop of COVID-19 pandemic, Federal Law No. 127-FZ “On Insolvency (Bankruptcy)” dated 26 October 2002 was amended to include rules governing the introduction of a moratorium on bankruptcy proceedings in respect of certain categories of enterprises and (or) specific companies. On 31 March 2020 both the State Duma and the Federation Council passed such amendments; they are expected to be shortly signed by the President of the Russian Federation.

The amendments primarily aim at preventing avalanche-like bankruptcies of companies in the current situation. In general, the law strikes a reasonable balance between the debtors that have found themselves in a difficult economic situation and their creditors.

Important to know:

  1. Now the Russian government is authorised to pass a moratorium act and determine specific industries / companies entitled to protection:
    • creditors will not be able to file bankruptcy petitions against such companies: any petitions filed after the moratorium is introduced will be dismissed;
    • suspend debtors’ (their CEOs’) duty to file for bankruptcy, however, debtors will retain their right to file for bankruptcy.
  2. The list of grounds for a moratorium to be introduced is open; one of the reasons for this is said to be a significant change in the rouble exchange rate.
  3. A moratorium’s deadlines are determined by the Russian government and may be extended by it repeatedly.
  4. Once a moratorium is introduced in respect of debtors:
    • no penalties or other financial sanctions will accrue for any delay in the discharge of monetary obligations or any delay in making mandatory payments;
    • enforcement proceedings in respect of pecuniary sanctions are suspended: no attachments or other restrictions as regards disposal of debtors’ assets will be lifted;
    • foreclosure of mortgaged property is prohibited;
    • no set-off is permitted if it results in a breach of priorities in the payment of creditors’ claims.
  5. In order to rule out asset-stripping by mala fide debtors:

    a) if bankruptcy proceedings are commenced within three months after the moratorium is over:

    • any transactions made while a moratorium is in effect are declared void except for the transactions that (1) are made in the ordinary course of business and (2) with the value not exceeding 1% of assets’ book value;
    • creditors may challenge any transactions made one month / six months / one year prior to the introduction of a moratorium, during a moratorium and within one year after it is lifted on special bankruptcy grounds.

    b) while a moratorium is in effect, no member may withdraw from a debtor company and the actual value of its equity interest will not be repaid; a ban on dividend payment and distribution of profits.

  6. Simplified procedures for executing settlement agreements are introduced if bankruptcy proceedings are commenced within three months after a moratorium is over:
    • the majority of votes cast by the creditors present at a meeting is sufficient rather than the total number of votes cast by all creditors;
    • a resolution is deemed adopted if it is voted for by all of the secured creditors who again are present at a creditors’ meeting.
  7. While a moratorium is in effect, the bankruptcy trustee of any creditor, even if it is not subject to the moratorium, may decide to hold meetings of creditors and committees of creditors in absentia.

What risks we see:

  1. A moratorium will not always help reinstate a debtor’s solvency and rule out its bankruptcy after it is lifted without further measures to support businesses. A reduction in the number of bankruptcies while a moratorium is in effect may result in their manifold increase after it is lifted.
  2. A moratorium may give rise to significant risks for creditors who will not be able to obtain performance from their debtors in the course of enforcement proceedings (even despite that a debtor has sufficient assets) and will find themselves in delay vis-a-vis their own creditors.
  3. Reinstatement of solvency during a moratorium may be difficult due to concerns of debtors’ counterparties that their transaction will be declared void. It could result in certain creditors abandoning their deals and, in particular, frustrate efforts to raise financing to reschedule their debts.

What to do:

  1. Keep track of the Russian government’s work to issue moratorium acts and check whether a moratorium applies to your company or your counterparties.
  2. When entering into each transaction, verify whether a moratorium has been introduced on your counterparty’s bankruptcy, whether such a transaction falls under ordinary course of business and whether the transaction’s value exceeds 1% of its assets’ value.
  3. If a moratorium applies to a debtor but it is clear that that it does not help reinstate its solvency, the following steps should be considered:
    • devise potential proposals for creditors to reschedule debts well in advance;
    • start negotiations with its creditors and obtain their written consents to a settlement agreement during bankruptcy proceedings commenced after the moratorium is lifted.
  4. Keep track of a moratorium’s deadlines in order to file a petition for the debtor’s self-bankruptcy (if grounds for this exist) and rule out the risk of secondary liability for controlling entities for the late filing of such a petition.

Authors: partner Denis Arkhipov, counsel Denis Golubev, counsel Evgeny Gurchenko, associates Dmitry Kukshinov and Denis Kazakov

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