1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgment of the related proceedings?

(a) What if the members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceeding where its affiliate is located if the affiliate has already commenced its bankruptcy proceeding?

(b) To the extent your country has different types of insolvency proceedings (such as chapter 11, reorganisation, and chapter 7, liquidation, in the US) do the members of the corporate family all have to proceed under the same type of proceeding?

Bankruptcy proceedings are governed by the Federal Law number 127-FZ dated 26.10.2002 on insolvency (bankruptcy) (the Law). The specific point about the Russian legislation regulating bankruptcy relations is that it does not consider a group or a family of companies to be an independent subject in insolvency relations. The Law is applicable autonomously to separate legal entities within a family of companies. In order to commence bankruptcy proceedings certain requirements should be met, ie, the aggregate amount of claim against a legal entity should be not less than RUR 100 thousand and the debtor should be able to fulfil its obligations within not less than three months from the date when such obligations should have been fulfilled. No single court file, a single judge, a single list of creditors or single notice list are provided under the Russian bankruptcy legislation with respect to legal entities, regardless of whether or not they are incorporated within one corporate family.

Article 33 of the Law directly provides that bankruptcy cases fall within the jurisdiction of the state Arbitrazh courts and that claims against the debtor should be filed at the debtor’s place of location.

Taking the above into consideration and notwithstanding any affiliation of companies if they are located in different districts of the Russian Federation and fall within the competence of Arbitrazh courts of different areas, their bankruptcy cases will be heard separately at separate places.

Russian bankruptcy legislation provides for a number of proceedings against a corporate debtor, such as:

• observation, which is a bankruptcy procedure imposed on the debtor to secure the debtor’s assets, review its financial standing, draft the register of liabilities to creditors and hold the first creditors’ meeting;
• financial rehabilitation, which is a bankruptcy procedure imposed on the debtor to restore its solvency and repay its debts in accordance with the schedule of payments (this procedure effectively results in some restrictions for debtor’s bodies to exercise their powers);
• external management, which is a bankruptcy procedure imposed on the debtor to restore its solvency (this procedure effectively results in termination of the debtor’s CEO and takeover of control of the debtor’s business by a receiver);
• liquidation proceeding, which is a bankruptcy procedure imposed on a debtor declared to be bankrupt to fairly satisfy the liabilities to the creditors (this procedure effectively results in selling out the debtor’s property to satisfy the liabilities to the creditors);
• settlement agreement, which is a bankruptcy procedure that may be used at any stage of the bankruptcy proceedings to stop them by an agreement between the debtor and the creditors.

Pursuant to the general rule, the first bankruptcy procedure is observation that is imposed by the court upon consideration of all claim’s propriety. It is within this bankruptcy proceeding that the creditor’s first meeting takes place and it is pursuant to the decision of the creditor’s first meeting that the Arbitrazh court takes a decision on whether or not to commence a bankruptcy proceeding.

Keeping in mind the approach of the Russian bankruptcy legislation to different legal entities as separate business units, in each particular case a separate creditor’s meeting is called and individual decisions are taken that are applicable only to a certain entity, but not its affiliates, being the same family of companies.

2. Does your law permit, or prohibit a single administrator/trustee/receiver to administer the assets and the liabilities of the entire corporate family?

(a) If the law permits it, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?

(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?

(c) If the law does not permit a single administrator/trustee/receiver, are there provisions allowing the different administrators to coordinate with each other so that values of assets may be maximised?

Russian legislation provides for certain requirements to be met by arbitration manager (ie, an interim manager, administrative manager, external manager or a tender manager, depending upon the particular bankruptcy proceeding).

With regard to observation, the name of the nominee interim manager, or a self-regulated organisation whose member should be elected to be the interim manager, is usually stated in the application for declaring a person to be a bankrupt. With regard to further proceedings, the determination of a nominee arbitration manager, or self-regulated organisation whose member should be elected to be the arbitration manager, falls within the competence of the creditors’ first meeting. Therefore, except for the initial stage, the nominee is never proposed by a single party.

Russian legislation does not provide for any representation by other professionals such as law firms or accounting or auditing firms, although they could be engaged by the administrator. The nominee arbitration manager should also be approved by the Arbitrazh court.

Although the Law does not provide for the direct prohibition for the appointment of one and the same arbitration managers in bankruptcy proceedings of different companies within one corporate family, certain concerns arise in cases where, for one of the group companies, an external manager has been approved. The question at issue is the fact that the Law provides that in external management the powers of the debtor’s CEO are transferred to the external manager. The Competition Law stipulates that a company and a person effecting the powers of CEO form a group of persons and, as a consequence, the external manager forms the same group with the entity that forms a group with the entity where the external manager exercises powers of CEO. Taking into consideration a literal interpretation of the Law’s provision, pursuant to which a person being an interested party with respect to the debtor or it’s creditors may not be approved as an arbitration manager, it may be concluded that there may be difficulties in proposing a nominee arbitration manager who also acts as an external manager for another member of a corporate family. Unfortunately this provision appeared late in 2009 and as yet has not been settled in practice.

Russian legislation does not provide for any provisions allowing different administrators to coordinate with each other so that values of assets may be maximised. Unlike other legislations, Russian bankruptcy legislation does not consider a group of entities to be a single unit for the purposes of bankruptcy proceedings. Bankruptcy proceedings are imposed separately and the administrators act independently.

3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?

(a) If the directors of a parent company are not directors of the subsidiary, but they manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or shadow directors of the subsidiary? What are the resulting consequences?

(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? What if only one of the companies is insolvent?

Corporate management liability

The main legal acts regulating Russian corporate relations are the civil code and federal law number 208-FZ, 26 December 1995, on Joint Stock Companies and federal law number 14-FZ, 8 February 1998 on Limited Liability Companies.

As already mentioned above, pursuant to Russian legislation, each particular legal entity acts as a separate business unit and has its own founding documents and management bodies with general meeting of participants in limited liability companies or general meeting of shareholders on joint stock companies, and a board and CEO as a sole executive body or a collective executive body. Existence of the board is not obligatory and it is usually used for the purposes of achieving certain aims of corporate governance.

Russian corporate legislation does not give special attention to overlapping boards or management teams (to the extent it meets the requirements of labour legislation). Generally, in practice, overlapping boards or management teams is quite a wide spread practice in the context of huge enterprises of companies.

Russian corporate legislation stipulates that managing a company should be effected reasonably, in bona fide, and in the company’s interests. Non-observance of this principle is subject to liability, although in each particular case it is a matter of proof of guilt. In general, these are the subsidiary’s management bodies that are liable for its business decisions rather than the management bodies of a parent company.

Recently there has been an attempt to settle a corporate dispute taking into consideration actual circumstances.

A shareholder of a company nominated its directors to a board of directors and allegedly was conducting its own business strategy by way of blocking decisions of the company on the level of the board of directors. One such blocked decision resulted in postponing a transaction of a company for approximately one year, resulting in losses for the company due to the fact that the company missed the opportunity to earn profit for one more year.

The courts of the first and the appeal instances partially upheld the claims, although the case did not achieve the highest level of appeal as the parties came to an agreement and settled the issue extra-judicially.

In this case, the logic stated above concerning liability of the company’s management bodies has been obeyed. However, such cases should be taken into consideration, although they may not be deemed to be wide-spread practice.

With respect to bankruptcy, Russian corporate legislation provides for special liability provisions. In case of bankruptcy, if it resulted from guilty actions of the company’s participants or shareholders, persons that are entitled to give binding instructions to the company, or otherwise control the company’s activities or the activities of its participants or shareholders or such other persons in case of insufficiency of the company’s property, a subsidiary liability may be imposed on such person.

With respect to joint stock companies, the law provides for a clarification. The insolvency (bankruptcy) is deemed to be caused by actions (omissions) of its shareholders or other persons that are entitled to give binding instructions to the company or otherwise determine the way of its activities only in case of its knowing that bankruptcy will be a result thereof.
In general, bankruptcy proceedings against one of the companies within the family of companies do not affect the course of business and management functions in other companies. For example, if a person is a CEO in more than one company within a family of companies and is found guilty in bankruptcy of one of them, it will not affect their being a CEO in other companies by virtue of law.

In case bankruptcy proceedings are initiated with respect to any company within a corporate family, the Law provides for certain restrictions of powers of management bodies of this particular legal entity, although implementation of bankruptcy proceedings does not affect the volume of powers of management bodies of other members of the same corporate family.

In the course of any bankruptcy proceeding, the respective bankruptcy manager shall be appointed by the court. The bankruptcy manager acts with widely varying powers depending on the specific insolvency procedure. In all insolvency proceedings the bankruptcy manager is entitled to call the meetings of the creditors; meetings of the creditors’ committee; to file applications and petitions to the court in cases provided by law; to employ the services of other persons necessary to perform the duties of the administrator at debtor’s expense and to inquire about necessary information from state agencies, legal entities and physical persons.

In the course of observation and financial rehabilitation, governing bodies of the debtor continue to exercise their powers. However, such powers are limited and the respective bankruptcy manager in both cases exercises external control over management of the debtor.

In the course of observation following main limitations imposed over the debtor:

• deals that: (i) can entail acquisition or alienation of assets in excess of five per cent of the total book value of debtor’s assets; (ii) are connected with obtainment and drawdown of loans, for provision of sureties and guarantees, for assignment of rights and debts and establishment of trusts are subject to written permission of the bankruptcy administrator;
• the governing bodies of the debtor are not allowed to make decisions concerning reorganisation, the set up of new legal entities and participation in other legal entities, the placement of bonds and other securities except for shares.

In the course of financial rehabilitation related-party transactions as this term is described below or deals that: (i) can entail acquisition or alienation of assets in excess of five per cent of the total book value of debtor’s assets, and; (ii) are connected with drawdown of loans and establishment of trusts are subject to the consent of the creditors’ meeting (or committee). The debtor is also not entitled to take decisions on reorganisation as such decisions are subject to both the consent of creditors’ meeting (committee) and of persons who provided security for the performance of repayment such schedule. Moreover, deals that result in: (i) increase of debt for more than five per cent of the aggregate sum of the creditors’ claims as of the date of financial rehabilitation imposition; or (ii) acquisition or alienation of the debtor’s assets except for goods/works/services produced by the debtor in the usual course of business; or (iii) may entail assignment of rights; or (iv) receipt of a loan, are subject to the consent of the administrative manager.

In the course of external management proceedings, control of the debtor’s business is transferred to the external manager. The external manager may fire the company’s CEO or propose another job pursuant to the labour legislation. The powers of other governing bodies of the debtor are limited to matters of the number and par value of declared shares, the increase of the charter capital, application to the creditors’ meeting with a proposal to include additional emission of shares into the external management plan, rules of the general shareholders’ meeting, proposal to sell the debtor’s enterprise, replacement of the debtor’s assets, election of the shareholders’ (participants’) representative and other powers necessary for placement of additional shares decisions.

In the course of liquidation proceedings, the powers of the company’s management bodies cease, except for the general participants’ meeting to take decisions on entrance into agreement, such as providing the debtor with funds by third parties in order to fulfill the debtor’s obligations (in course of liquidation proceedings).

4. Are the rules regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) different when the members are insolvent?

In the case where bankruptcy proceedings are initiated against a company, notwithstanding any interrelationship between the persons, special restrictions are imposed on its right to determine the way of conducting business. These restrictions are mentioned above.

With regard to transactions between affiliated companies, Russian corporate legislation regards such transactions as named interested-party transactions and provides for a special procedure for approving such transactions.

Pursuant to general rule board members, a person effecting the powers of CEO, or a member of a collective executive body or the company’s participant/shareholder, that, together with its affiliates, own 20 or more per cent of the share in the company, are admitted to be interested if they are a party to a transaction or act in the interests of third parties in their relations with the company, own (separately or all together) 20 or more per cent share in the company being a party to the transaction or act in the interests of third parties in their relations with the company or hold the position in management bodies of the company being a party to the transaction or act in the interests of third parties in their relations with the company or hold the positions in the management bodies of the management company. Additional cases when a transaction is admitted to be an interested party may be provided by the company’s charter.

Generally, in limited liability companies, interested party transactions should be approved by a majority vote of the company’s participants not interested in the transaction, although by virtue of the company’s charter, this matter may be transferred to the competence of the company’s board of directors.

In cases with joint stock companies having one thousand or less voting shares, interested party transactions should be approved by the majority vote of board members not interested in the transaction. Should the number of voting shares exceed one thousand, such interested party transaction should be approved by the majority vote of independent directors (the directors that meet certain requirements) not interested in the transaction.

In case where it is not possible to approve the transaction by the board of directors (no quorum or all the directors are interested and are not independent), the approval may be transferred for the consideration of the shareholders’ general meeting. In such case, the transaction should be approved by the majority of shareholders who are not interested in the transaction.

For the joint stock companies some additional transactions are defined that are to be approved by the majority of shareholders being not interested in the transaction.

In addition, the tax code of the Russian Federation operates such a concept as mutually dependent persons.

Generally, for the purpose of taxation, it is presumed that the price fixed by the parties in the agreement is calculated on the basis of market prices, although with respect to mutually dependent companies (companies that meet certain requirements), the tax authorities are empowered to check the propriety of the price calculation and to accrue tax and penalty calculated as if the parties have initially fixed a marketable price.

In addition, the tax code provides the opportunity for the court to declare persons to be mutually dependent pursuant to other grounds should the relations between such persons affect the results of the transactions on selling goods, works or services.

These are the general rules that are applicable to the activities between inter-related persons.

5. How does your law treat claims of one member of a corporate family against other members of the corporate family?

Bringing claims against the debtor

The Russian legislation does not provide for any differences for bringing claims by members of a corporate family and those brought by third parties. To the extent that the claims comply with the Russian legislation requirements, claims brought by corporate family members are valid and enforceable. Generally such claims are on equal footing with those of third parties.

The order of bringing claims against a company with respect to which bankruptcy proceedings have already been initiated depends upon a certain proceeding.

Upon the date of the court’s order on imposing observation, monetary claims and claims on settlement of mandatory payments (except for the payments named current) may be brought against the debtor only pursuant to the Law.

In addition, the Law contains a direct prohibition of satisfaction of claims of a founder (participant) connected with parcelling out a share in connection with withdrawal from the company, buying out its distributed shares by the debtor or payment of a real value of the share. Payment of dividends and other profit accrued on shareholding is also prohibited.

For the purposes of bankruptcy proceedings, obligations that arose prior to acceptance by court of application to declare the debtor to be a bankrupt are deemed to become due.

For the purposes of taking part in the first creditors’ meeting the creditors are entitled to bring claims against the debtor within 30 days upon the date of such publication, otherwise a person loses the opportunity to take part in the first creditors’ meeting. A court’s act or other documents evidencing the reasonability of such claims should be attached thereto.

If a person fails to bring its claim within the above mentioned 30 day period its claims may be considered by court only upon initiation of the proceeding that follows observation.

The Law provides for certain order of satisfaction of claims against the debtor for the purposes of liquidation proceeding.

Claims that arose upon the acceptance by court of application on declaring a person to be bankrupt (current payments) are satisfied predominantly.

Such pre-emptive claims are satisfied in a certain order, as follows:

• claims connected with costs to bankruptcy proceedings, payment of remuneration to the arbitration manager etc.;
• claims that are connected with remuneration under labour agreements and remuneration to persons that were engaged by the arbitration manager for the purposes of fulfilling of its obligations;
• claims connected with payment of the debtor’s maintenance fees and other operational fees;
• other current payments are satisfied in the last turn.

Other creditors’ claims are repaid as follows:

• liabilities to individuals arising out of death personal injury are settled by capitalisation of the respective installments and those associated with moral plain suffering;
• severance payments and wages due subject to labour agreements and royalties payable to the authors of the results of intellectual activities;
• liabilities to other creditors.

Should funds be insufficient to satisfy the claims of the creditors of one turn, the funds shall be distributed pro rata their claims included into the creditors’ claims register.

6. Does your law allow for the pooling of assets and liabilities of some or all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members? This is sometimes referred to as ‘substantive consolidation’.

Consolidation of liabilities

Russian legislation does not provide for any mechanism of pooling of assets and liabilities of some or all members of the corporate family so that a creditor of one member becomes a creditor of all members.

Due to the fact that Russian legislation does not consider a family of companies to be a separate subject of bankruptcy legislation, the courts do not weigh the overall benefit to creditors of one family member (which has few assets) against the detriment to creditors of another family member (which has more assets) as all members of the family of companies are considered to be separate and independent legal entities and, as a consequence, bankruptcy proceedings are also initiated autonomously.

7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family or are they collapsed into one claim?

Satisfaction of claims of secured creditors

It is obvious that bankruptcy proceedings do not distinguish between cases where corporate family companies participate. For example, if a creditor has a security interest in the assets of one member of the family and a guarantee from another member of the family, to the extent they meet the requirements of legislation, both such claims will be valid though within separate bankruptcy proceedings if both members of the family are insolvent or as a single claim in a single bankruptcy proceeding in case only one family member is insolvent. Though in no case these claims will be collapsed into one claim within one bankruptcy case.

A special treatment is applied to secured creditors in bankruptcy proceedings.

The Law stipulates that, upon the date of imposition of observation, levying execution upon the pledged property including, but not limited to, an extra-judicial order is prohibited.

To the extent that the claims of creditors in bankruptcy are secured by pledge, these creditors have no voting rights at the creditors’ meetings, although they are entitled to participate in such meetings without such voting right and to hold speech on the meeting’s agenda.

During the term of financial rehabilitation or external management, the creditor whose claims are secured by the debtor’s property is entitled to levy execution upon the pledged property, unless the debtor proves that such levying execution upon the pledged property will lead to impossibility for the debtor to restore its solvency. This question concerning the possibility to levy execution upon the pledged property is transferred to the Arbitrazh court for consideration at the application of the secured creditor.

In addition, during financial rehabilitation and external management, the creditor whose claims are secured by pledge is entitled to send to the arbitration manager and to the Arbitrazh court hearing the bankruptcy case its refusal from selling the pledged property and, in this case, as of the date of acceptance of such refusal by the arbitration manager, the secured creditor acquires voting right until termination of the relevant bankruptcy proceeding.

During bankruptcy proceedings the debtor is not entitled to alienate the pledged property, to lease it or transfer for gratis use, as well as encumber it by other means without the creditor’s consent, unless otherwise is provided under the pledge agreement or comes out of the pledge nature.

Should a secured creditor decide to levy execution upon the pledged property, the claims of this secured creditor are satisfied as follows. From out of the sum earned as a result of selling the pledged property, 70 per cent (and 80 per cent for banks) is used for settling the claims of creditors that are secured by pledge, although this sum should not exceed the principal amount of the main outstanding liability and percent accrues thereon.

The rest of the sum is placed with the debtor’s special account as follows. Twenty per cent of sum earned as a result of selling the pledged property is designated to settling claims of the first two priorities creditors in case other property appears to be insufficient. The rest of the sum is used for the purposes of repaying the costs connected with the proceedings, payment of remuneration to the arbitration manager and those persons engaged by it for the purposes of fulfilling its obligations.

The terms and conditions of selling the pledged property are determined by the secured creditor. In case of any discrepancies of such secured creditor and the tender manager on such terms and conditions, the dispute may be transferred to the Arbitrazh court for consideration upon which the court takes the relevant decision.

The secured creditor is also entitled to keep the hold of the pledged property in case second tender fail, although the valuation thereof will be 10 per cent less than the initial sale price. In consideration for such right, the creditor is obliged to transfer 70 per cent (80 per cent for the banks) of the pledged property value to the debtor’s special account.

In general, the claims of a secured creditor are satisfied out of sum earned upon sale of pledged property. In case claims of a secured creditor remain to be unsatisfied, such claims are settled within the third turn.

B. INTERNATIONAL FAMILY OF COMPANIES

1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?

The Russian corporate legislation does not use the concept of a family of companies as an independent business unit with its rights and liabilities.

In case of trans-border corporations, the main regulations of bankruptcy regulations will not change.

2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries: What controls as to where the case must be filed (eg, centre of main interests, principal place of business, location of parent, etc)?

(a) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where the assets are located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?

(b) Would your courts enforce a court order from a foreign country that attempted to exercise jurisdiction over assets located in your country but owned by the company that is subject to the foreign insolvency proceedings?

(c) Has your country adopted any procedures (such as the Model Law on Cross-Border Insolvency) to address the various issues that arise in dealing with cases of cross-border insolvency?

(d) Under what conditions, if any, are your courts allowed to communicate and coordinate with courts of a foreign jurisdiction in an effort to coordinate the administration of assets of family members? In this regard, has your jurisdiction adopted or informally utilised the Guidelines Applicable to Court-To-Court Communications in Cross-Border Cases, as adopted and promulgated by The American Law Institute and The International Insolvency Institute?

In the absence of any law regulating cross-border insolvency, notwithstanding any internal relations between the companies that may be incorporated in different jurisdictions, the Russian courts hear those cases where legal entities incorporated under the laws of the Russian Federation are considered to be insolvent.

Generally, the provisions of international agreements prevail over the nation legislation provisions. The Law repeats this postulate.

Foreign courts’ orders regarding insolvency cases are recognised within the territory of the Russian Federation pursuant to international agreements. In the absence of such international agreements such orders of international courts are recognised, subject to principles of reciprocity, although the practice of cross border cases is still quite poor for making any practical conclusions.

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Multinational Enterprise Liability in Insolvency Proceedings

In today’s tough economic climate many businesses struggle to survive and laws governing their dissolution are diverse. This book provides a comparative guide to insolvency proceedings in countries around the world.

With commentary from leading lawyers addressing complex issues such as domestic and international families of companies, cross-border concerns and rescue provisions, this first edition of Multinational Enterprise Liability in Insolvency Proceedings gives law firms and corporate counsel a first look at key issues.