Bankruptcy Law Changes

March 2009

The principal law governing bankruptcy in Russia is the Law "On Insolvency (Bankruptcy)" (the "Bankruptcy Law").[1] At the end of 2008, this law was amended by two separate decisions of the State Duma on the same day[2] (collectively, the "Amendments"). Generally, the Amendments seek to enhance the protection of creditors' interests and strengthen creditor rights vis-à-vis bankrupt debtors. These changes are timely, as the number of bankruptcies is expected to rise in 2009.

General Overview

The Amendments have not changed the principal features of the Bankruptcy Law. Instead, they focus on certain key aspects of bankruptcy proceedings. In particular, the Amendments elaborate the rules governing the activities of bankruptcy managers, who are licensed professionals appointed to oversee the process (similar to receivers or trustees in other jurisdictions). Such managers are technically called "arbitration managers" under Russian law (perhaps because the state commercial courts are called arbitration courts), and may have other specific titles (e.g., "interim manager," "external manager," etc.) during various stages of the bankruptcy. The managers are in turn subject to the rules of their own associations, called "self regulating organizations" in Russia, and such organizations are also affected by the Amendments.

Key Points

The key provisions introduced by the Amendments include the following:

• A creditor may now file a bankruptcy application immediately upon entry into force of a court judgment against the debtor (provided that the claim meets certain criteria); previously, such an application could only be filed within 30 days after the creditor first sought to enforce the judgement, allowing bad-faith debtors more time to strip assets).
• Creditors may request the appointment of a specific bankruptcy manager subject to certain qualification requirements.
• The decision of a "creditors' meeting," which is a key body in the bankruptcy proceeding, may not be appealed more than six months after it was taken.
• Stricter tests apply to determine those persons considered to be related parties vis-à-vis the debtor. Generally, the bankruptcy manager should be independent and may not be related to the debtor or to creditors.
• Creditors' claims become due and payable (i.e. are accelerated) at an earlier stage of the proceedings than previously (the "observation" stage (rather than the "liquidation" stage).
• Private persons, legal entities and government bodies are required to respond to inquiries from the bankruptcy manager regarding the debtor's assets and liabilities.
• Shareholders of the debtor or third parties may volunteer to pay tax debts, and in such cases the paying party will be deemed an unsecured creditor for the same amount.
• Generally, the debtor's assets are to be sold through a public auction (as under the previous version of the Bankruptcy Law), except that historically-valuable, "socially-sensitive" and similar assets (such as buildings of historical or cultural significance or fulfilling an important public function must be sold in tender process (konkurs), which has somewhat different rules (for example, access to the tender may be restricted, and criteria other than the highest price may be imposed).
• Creditors may now decide to shut down the debtor's business immediately, unless this would risk harm to human life or the environment or disrupt the provision of socially important services.

Entry into Force/Transition

The Amendments have generally come into force from the date when they were published (December 31, 2008). However, the amended Bankruptcy Law does not apply to bankruptcy proceedings that had already commenced on that date. Certain transition provisions imposing other timing apply to various sections of the Amendments.