Bankruptcy proceedings in Russia

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In February 2018, Euler Hermes, the world’s largest company specializing in export credit insurance, prepared a rating[1] of countries in terms of the difficulty of debt collection by foreign creditors from national companies. A total of 50 countries were represented in the rating, the difficulties in which were assessed, inter alia, from the standpoint of problems associated with bankruptcy. Russia took the 5th place in this ranking with 72 points out of 100 with a general rating of “severe” difficulty and very high associated costs. Despite the fact that compared to the result from 2014, Russia’s rating improved by 5 points, the situation is still complicated.

Generally, according to Russian law, foreign and Russian creditors participating in bankruptcy proceedings have equal rights. However, foreign creditors face the fact that the entry into, and the continued participation in, the bankruptcy proceedings of a Russian debtor are burdened by a significant number of procedural difficulties. Not only do foreign creditors encounter the same problems as national ones, in addition, there are also quite specific features where “foreign” claims are concerned.

In this article, I would like to highlight the main problems and features of the participation of foreign creditors in the process of inclusion into the creditors’ register of a Russian debtor.

Format of documents for courts
Generally, all official documents (including those certified by a notary), outgoing from a foreign country must be apostilled. However, there are a number of countries for which an apostille is not required in accordance with international conventions, for example, the Czech Republic, Slovakia, Bulgaria, Romania, Cyprus, China, etc. However, all documents submitted to court in a foreign language must be accompanied by a notarized translation into Russian. As the process of translation may take time, it is advisable to begin the preparation of the documents at the earliest convenience.

Simplified commencement of insolvency by foreign banks
Generally, for the purposes of commencement of insolvency proceedings the unpaid debt shall be no less than RUB 300,000 (approx. EUR 3,980) and be overdue by at least three months. Under Russian insolvency law, a creditor may file a petition for a company’s insolvency from the date when a court judgment recovering the debt enters into force.

However, a special simplified procedure is set for banking institutions. Thus, a bank may initiate insolvency proceedings without a court judgment if there is an unpaid debt of RUB 300,000 (approx. EUR 3,980) for three months, provided that there has been published a notification in a public state register 15 days prior to the initiating of such proceedings. The unpaid debt in this case must be of a credit facility nature. However, the majority of foreign creditors have no idea that such a simplified procedure also covers foreign banks.

Law of the claim
It is important to bear in mind potential conflict between the laws applicable to the contract and Russian insolvency law. In the case of the bankruptcy of a legal entity incorporated in Russia, the norms of the procedural law and legislation on bankruptcy of Russia are subject to apply, including additional evidence about the need for notarization of the translation, apostilization (if necessary), etc.

The laws applicable to the contract shall be considered within the process of establishing the creditor’s claim; the court must determine the law applicable to specific legal relations. However, in relation to one of the cases, the Supreme Arbitrazh Court of Russia[2] notes that the choice by the parties of a specific court of a foreign country to consider their dispute does not in itself mean that the substantive law of the country in whose court the dispute is to be considered is applicable to the disputed legal relations[3]. Therefore, the choice of foreign law has to be specific and explicit.

If a Russian court decides that the parties agreed on the applicable foreign law, the parties had to establish the content of the legal regulations of the state in accordance with their official interpretation, practice and doctrine.

The court may consider the content of a foreign law established if the legal opinion on the content of a foreign law submitted by one of the parties contains the necessary and sufficient information and is not refuted by the other party by submitting information indicating a different content of the foreign law.

Therefore, we recommend at the earliest convenience to use the services of a lawyer, duly admitted to practice in the country in question, for the preparation of a legal opinion on the content of a foreign law in order to minimize the risk of the application of Russian law on the relations of the parties. Moreover, documents confirming the status and qualifications of the foreign lawyer shall be submitted to the court together with the legal opinion. If the legal opinion is prepared in Russian, the relevant certificates and confirmations on proficiency in the Russian language need to be submitted to the court, otherwise, a notarized translation of the legal opinion has to be prepared.

Monitoring and periods for filing claims
If the Russian counterparty is not fulfilling its payment obligations, it is very important to monitor the material facts in respect of the debtor’s potential bankruptcy. This can be done online either with the Unified Federal Register of Bankruptcy Information[4] or in the Arbitrazh Case File[5].

This is critical as the law strictly provides for a period in different bankruptcy procedures, when the creditors may file their claims to the court in order to be included into the debtor’s register of creditors. For example, after the introduction of a supervision stage in respect of the debtor, creditors may submit their claims to the debtor within 30 calendar days from the date of publication of the message on the introduction of supervision. When a procedure of insolvent liquidation is introduced, creditors may submit their claims to the debtor within two months from the date of publication of the message on the introduction of insolvent liquidation. The creditors’ claims filed after the deadline, will be accounted as “out of the register”. In other words, the term for filing the claim to be included into the register of creditors cannot be restored and if the deadline set by the law is missed the chances to get back at least part of the debt is very low.

Reciprocity principle
Very frequently, the claim of a foreign creditor to the Russian debtor is based on the decision of a foreign court.

In general, foreign court judgments recognized and enforced in the Russian Federation in regards to recognition and enforcement is provided by international treaty with the Russian Federation and federal law.

Unfortunately, there are many countries, with which a bilateral treaty providing for recognition and enforcement of foreign state court judgments is absent. Examples of such states are the United Kingdom, France, Germany and the United States. In turn, the absence of such international treaty in itself is not an obstacle for recognition and enforcement, however it complicates the procedure.

Judicial practice has a number of mechanisms for recognition and enforcement of foreign court judgments in the absence of an interstate treaty directly providing for such procedure. The reasoning for enforcement and recognition includes:

Reference to bilateral agreements between countries.
For example, the United Nations Convention against Corruption, and the Partnership and Cooperation Agreement between EU countries and Russia. Nevertheless, neither of these agreements directly provides for the recognition and enforcement of foreign judgments: they in general terms relate to the cooperation of countries in a variety of public spheres. In other words, the courts interpret the concept of “international treaty” broadly.

Application of the principles of comity and reciprocity.
The Supreme Arbitrazh Court of Russia stated that the recognition of a foreign judgment should be carried out on the basis of comity and reciprocity[6], which are an integral part of the legal system of Russia, taking into account its approach to the interpretation of comity and reciprocity: the comity principle requires states to treat the foreign legal order courteously and politely, while the principle of reciprocity implies mutual respect for the courts of different countries regarding the results of each other’s activities.

Considering the interpretation of the principles of comity and reciprocity, the courts recognize the principle of reciprocity as the basis for the recognition and enforcement of foreign judgments in Russia in the absence of a relevant international agreement (or federal law) only if the applicant has provided information on the recognition and enforcement of Russian judgments on the territory of the respective foreign country. If the applicant failed to present such evidence, the court may rule on the refusal of recognition and enforcement of a foreign judgment.

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Currently, some foreign creditors prefer to assign their claims to Russian companies, and do not enter into the process of recognizing the debtor bankrupt and demanding the satisfaction of their claims. This attests to the fact that foreign creditors consider the existing bankruptcy law regime in the Russian Federation as incapable of allowing them to properly exercise the protection of their rights and interests, and therefore reducing the level of their financial interest in participating in the business activities of Russian companies.

Nevertheless, the majority of foreign creditors, through the assistance of legal consultants, are successfully able to participate in bankruptcy proceedings in Russia, notwithstanding the difficulties mentioned above.

Alla Geyfman, Associate | geyfman@peterkapartners.ru |+7.499.754.0101
Vlad Rudnitskiy, Partner | rudnitskiy@peterkapartners.ru |+7.499.754.0101

[1] http://www.eulerhermes.fr/mediacenter/actualites/Lists/NewsDocuments/debt-collection-report-feb2018.pdf

[2] The Supreme Arbitrazh Court of Russia was discontinued, however, all court acts rendered are in force unless revoked by the Supreme Court of Russia.

[3]Information letter of the Presidium of the Supreme Arbitrazh Court of the Russian Federation of 07.09.2013 N 158 “Review of the practice of Arbitrazh cases involving foreign persons”.

[4] Informational public Internet resource https://bankrot.fedresurs.ru/, which contains information about bankruptcy procedures in the territory of the Russian Federation.

[5] Information public Internet resource http: //kad.arbitr.ru, which contains information on all cases considered by Arbitrazh courts of the Russian Federation. It provides users with information on both completed court cases and cases in progress.

[6] Resolution of the Supreme Court of the Russian Federation of 07.06.2002 N 5-G02-64.