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Moratorium on bankruptcy in Russia until 1 October 2022 already impacting current business processes

The Russian Government has introduced* a moratorium on creditors filing bankruptcy cases from 1 April 2022 and until 1 October 2022. The new moratorium (unlike the COVID-related moratorium of 2020) applies by default to all individuals, individual entrepreneurs and legal entities (except for certain real estate developers who are debtors that have already been included on the Register of Problematic Properties).

How does the moratorium affect creditors’ rights?

Creditors cannot file a new bankruptcy petition against any debtor until 1 October 2022 unless such a debtor has declared a waiver of the moratorium. Creditors’ applications filed during the moratorium period with a commercial court will be returned. A creditor’s notice of intention to apply for bankruptcy of a debtor is also not subject to publication in the public register until the end of the moratorium.

The moratorium does not apply to bankruptcy cases that have already been initiated. Thus, courts will hear as usual cases in which the courts have ruled on the acceptance of a bankruptcy petition before 1 April.

Debtors will have the discretion to waive application of the moratorium, which will mean that bankruptcy proceedings can be initiated against them and other envisaged restrictions can be lifted (see section below). To waive the moratorium, the relevant information must be entered in the Unified Federal Register of Bankruptcy Information.

Having said that, the moratorium does not prevent debtors from filing for their own bankruptcy on their own initiative. However, as a general rule, during the moratorium period, the failure of management to file a bankruptcy petition – if there are signs of bankruptcy or insolvency – does not result in management being held subsidiarily liable for the debtor’s obligations (unless signs had already occurred before the moratorium was introduced).

How does a moratorium affect ongoing business operations?

The moratorium already affects businesses by imposing certain restrictions not related to bankruptcy proceedings, such as:

  • Participants and shareholders are not allowed to exit the company, and debtors cannot buy back outstanding shares or participatory interests.
  • It is not permitted to terminate the debtor’s obligations by set-off if this would violate the order of priority of creditors’ claims.
  • It is not permitted to pay dividends or income on participatory interests or to distribute profits among the debtor’s participants.
  • No forfeits, fines, penalties and other financial sanctions will be applied for failure to fulfil monetary obligations and obligatory payments.
  • No foreclosure of pledged property, whether through court or out-of-court proceedings, is allowed.
  • Enforcement proceedings on property claims arising prior to the moratorium are suspended (in this case, seizures on the debtor’s property and other restrictions on the disposal of the debtor’s property are not lifted).

What can creditors do before the moratorium expires?

The moratorium significantly affects the creditor’s means for enforcing the debtor’s obligations. During the moratorium period, we recommend that creditors:

  • file a lawsuit to collect the existing debt from the debtor in order to be able to collect the debt through enforcement proceedings or to initiate bankruptcy proceedings after the end of the moratorium;
  • obtain writs of execution and apply to bailiffs or a bank to collect the debt in the future. Although enforcement proceedings are suspended for the duration of the moratorium, this does not deprive the creditor of the right to obtain a writ of execution. Courts continue to issue writs of execution and enforcement proceedings may be initiated on their basis. No enforcement is carried out by bailiffs during the moratorium period. If the creditor applies to a bank (or credit organisation), the bank will accept the writ of execution, but will leave it unexecuted until the end of the moratorium. However, during the suspended enforcement proceedings, the bailiff is still entitled to seize or prohibit the disposal of the debtor’s property in order to preserve the possibility of foreclosure after the moratorium has been cancelled;
  • monitor the debtor’s financial situation and the preservation of its property. The moratorium does not impose a ban on creditor challenging the debtor’s divestment transactions or the application of interim measures in court disputes and enforcement proceedings in relation to the debtor’s assets (prohibitions on the disposal of property or seizure);
  • take great care in gathering and preparing evidence of losses to successfully prove these losses. Since no penalties for the debtor’s failure to fulfil its monetary obligations are payable from the beginning of the moratorium, the creditor is entitled to recover damages from the debtor without having to wait until the end of the moratorium to compensate for its losses.

* In Russian

Authors

Sergey Yuryev
Sergey Yuryev
Partner
Head of Dispute Resolution
Moscow