Understanding Bankruptcy Proceedings - International Law Office

Triggering Bankruptcy Proceedings
Filing a Claim
Timeframe for Creditor's Petition
Bankruptcy and Ongoing Litigation
Representing a Company
Cross-Border Bankruptcy Proceedings
Pursuing Foreign Shareholders or Management of a Russian Bankrupt

As a result of the financial crisis, Russia's courts are flooded with bankruptcy cases and the chairman of the Supreme Arbitrazh Court expects the number of such proceedings to rise. Some debtors are recognized as bankrupt on objective grounds, but certain companies are exploiting the economic climate to default on debt repayments.

Triggering Bankruptcy Proceedings

Bankruptcy proceedings are initiated by a debtor's voluntary application or pursuant to a petition from a creditor, provided that the monetary claim is corroborated by a court judgment that has entered into force.

Bankruptcy starts with the supervision stage. The threshold for recognizing a debtor as bankrupt is relatively low - Rb100,000 (approximately €2,300). Unlike many other jurisdictions, Russia has no specialist bankruptcy courts. Bankruptcy cases are administered by state commercial courts, which have exclusive jurisdiction over bankruptcy proceedings under Article 33 of the Code of Commercial Procedure.

Filing a Claim

If a court has confirmed a voluntary petition or a creditor's petition for bankruptcy and has established supervisory procedures with respect to the debtor, creditors must bring monetary claims within the scope of bankruptcy proceedings and in accordance with the Law on Insolvency (127-FZ). This means that all arbitration or jurisdiction clauses in contracts signed with a debtor become void. Article 63(1) of the law and Article 148(4) of the code provide that a state commercial court may not consider a statement of claim (ie, a monetary claim) if it discovers that the defendant has already filed for bankruptcy. Accordingly, the judgment of a foreign court or commercial arbitration tribunal will be unenforceable if the dispute was already subject to bankruptcy proceedings when the court or arbitration proceedings were initiated.(1)

Timeframe for Creditors' Petitions

Under Article 71 of the law, creditors may submit petitions within 30 days of the publication of an announcement that supervision has been established over the debtor. The interim administrator must publish the announcement on supervision (as well as other bankruptcy procedures) in the Kommersant newspaper. Failure to submit the petition within this time does not preclude the registration of a creditor's claims at the next stage of bankruptcy (eg, financial rehabilitation, external administration or receivership proceedings). The register of creditors' claims will be definitively closed two months after the public announcement of the receivership proceedings.

Bankruptcy and Ongoing Litigation

If a party is seeking to recover a debt through litigation and the defendant goes bankrupt, two options are available under Article 63 of the law. The creditor may proceed with litigation until a final judgment is obtained, then file an application to register its claim in the bankruptcy proceedings. Alternatively, the creditor may halt the litigation and file its claim in the bankruptcy proceedings. The correct course of action depends largely on the circumstances. In most cases a major creditor will wish to participate in the first creditors' meeting of creditors at all costs, so that it is eligible to participate in the nomination of the administrator and can influence decisions about further bankruptcy proceedings. However, a minor creditor that is unable to exert such influence may decide to complete the litigation proceedings, obtain the judgment and register its claim in due course at the next bankruptcy stage.

Representing a Company

A company in bankruptcy proceedings may be represented by its chief executive officer, provided that he or she does not require power of attorney to do so in accordance with the law of the country where the company was incorporated. However, it is advisable to appoint a professional with expertise in Russian bankruptcy legislation, as this area of law is constantly evolving. The power of attorney must explicitly confer the authority to represent the principal in bankruptcy proceedings.

Cross-Border Bankruptcy Proceedings

Unfortunately, Russia has not yet adopted the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency. Among other things, Russian courts may not provide legal assistance to a foreign court or attach a list of assets located in Russia.

However, foreign judgments on insolvency or bankruptcy - as opposed to mere orders - may be recognized in Russia on the basis of applicable international treaties, or under the principle of reciprocity if there is no such treaty. As a result, foreign bankruptcy judgments can have legal effect in Russia (eg, in respect of the Russian assets of a foreign bankrupt).

Pursuing Foreign Shareholders or Management of a Russian Bankrupt

Since June 5 2009 the law has given creditors an effective legal tool to enforce the liability of shareholders and chief executive officers, including foreign companies and citizens, for the bankruptcy of a Russian debtor. Creditors are entitled to recover their debts from the property of such parties if the debtor's property is insufficient to satisfy the creditors' debts. The parties are exempt from liability if they acted in good faith for the benefit of the company, but they bear the burden of demonstrating this.

For further information on this topic please contact Varvara Knutova at Pepeliaev Goltsblat & Partners by telephone (+7 495 967 0007) or by fax (+7 495 967 0008) or by email (v.knutova@pgplaw.ru).

Endnotes

(1) See Article 233(3) of the code and Article 26(2) of the Law on International Commercial Arbitration (5338-1).