Vol 6 (2009) - Issue 5

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Enhanced Protection of Creditors’ Rights: Recent Changes in Russian Insolvency Law

1. Introduction

The increasing number of company liquidations in Russia caused by the global economic downturn has highlighted inadequacies in the protection afforded to creditors under Russian insolvency law (specifically, Federal Law No. 127–FZ ‘On Insolvency (Bankruptcy)’ (‘The RF Law on Insolvency’)). The lack of proper safeguards against asset-stripping has been an issue of particular concern.

Federal Law No. 73-FZ ‘On Amendment of Certain Legislative Acts of the Russian Federation’ (which was adopted on 28 April 2009 and came into force on 5 June 2009) (‘the Amendments’) adds new provisions to the RF Law on Insolvency that are designed to address this issue.

In summary the Amendments:

(a) allow a new species of suspicious transactions to be set aside (Article 61.2);
(b) widen the circumstances in which preferential transactions (‘preferences’) may be set aside (Article 61.3); and
(c) expand the situations in which the management of an insolvent company (‘the Company’) may be liable for its losses and extend the scope of such liability to a new category of controlling persons (Article 10).

2. Suspicious transactions (Article 61.2)

The Amendments introduce a new category of suspicious transactions (подозрительных сделок – podozritelnikh sdelok) which may be set aside in the course of bankruptcy proceedings. Two types of suspicious transactions are identified:

(a) transactions at an undervalue; and
(b) transactions that prejudice the rights of proprietary creditors.

Transactions at an undervalue (Article 61.2(1))

A transaction at an undervalue is defined as one under which the obligations of the other party to the transaction (‘the counterparty’) are not commensurate to those of the Company in relation to price or other terms that are detrimental to the interests of the Company and substantially different to those normally found in similar transactions.

Any such transaction may be declared invalid by the Russian Arbitrazh Court if it was entered into by the Company not more than one year prior to (or any time after) the commencement of bankruptcy proceedings.

Transactions that prejudice the proprietary rights of creditors (Article 61.2(2))

A transaction that prejudices the proprietary rights of creditors is defined as one contains the following features:

(a) it was entered into with the intention of prejudicing the proprietary rights of creditors by depriving the Company of the means by which (some or all of) their claims could have been discharged;
(b) that was the actual consequence of the transaction; and
(c) the counterparty knew (or should have known) of this intention.