Russia's COVID-19 Response: Moratorium on Bankruptcy and Freeze on Transactions

In response to the coronavirus (COVID-19) pandemic, Russia has changed its bankruptcy laws to provide for a moratorium on bankruptcies and a freeze on certain transactions. While the situation is dynamic, these amendments are relevant for ongoing or potential transactions in Russia, as well as a party’s ability to enforce pledges and other types of security interests or to seek other remedies against Russian companies.

In April, Russia amended its legislation on bankruptcy to allow the Russian government to introduce temporary freezes on the initiation of bankruptcy proceedings in extraordinary situations including natural disasters, technical emergencies, substantial fluctuations of the ruble exchange rate, and other similar circumstances.

The government used its newly vested powers to introduce a six-month moratorium in respect of eligible companies by Resolution of the Government No. 428, On Introduction of Moratorium in Respect of Initiation of Bankruptcy at the Request of Creditors in Relation to Certain Debtors, dated 3 April 2020 (the Moratorium). The Moratorium also applies to individual entrepreneurs who operate in the industries most affected by COVID-19, but we do not address individual entrepreneurs in this LawFlash.

The key rules on the Moratorium are in a new Article 9.1 of the Federal Law on Insolvency (Bankruptcy) (the Bankruptcy Law). They were initially introduced on 1 April 2020 among other amendments related to emergency prevention and response to COVID-19 made into several laws (Federal Law No. 98-FZ on 1 April 2020). The Moratorium rules were then amended on 24 April 2020 (Federal Law No. 149-FZ dated 24 April 2020) (the 24 April amendments).

Eligible Companies

Government Lists

The Moratorium applies to the following companies:

• Companies from industries most affected by COVID-19. The government adopted the list of industries most affected by COVID-19. At present, the list includes transportation, culture, entertainment, sport, tourism, hotels, certain healthcare services, education, and retail (Resolution of the Government No. 434, dated 3 April 2020). The companies from these industries also enjoy other measures of state support introduced to overcome the pandemic, primarily in respect of taxes.
• Systemically important companies. Sometimes referred to as companies that are “too big to fail,” these currently include more than 1,000 companies from various industries, including both state and private. In addition to the Moratorium, the targeted state support to such key companies may also include state subsidies, debt restructuring, and other measures to be determined on a case-by-case basis. The up-to-date list is available on the Ministry of Economic Development website. As of 6 May 2020, the list had 1,151 names.
• Companies deemed strategic. The Moratorium applies to companies included in two other lists, adopted prior to the pandemic, of companies that are deemed strategic for various other purposes: (1) a list of strategic companies for privatization purposes, approved by Order of the President No. 1009, dated 4 August 2004; and (2) a list of strategic companies involved in the realization of state policy in certain spheres of the economy, approved by Resolution of the Government No. 1226-r, dated 20 August 2009. These lists are amended from time to time.

Obtaining Information

The Russia Federal Tax Service has a tool where one can search whether a particular company is eligible, using the company’s individual taxpayer number or principal state registration number. The Federal Tax Service also aims to keep a list of eligible companies, but as of this writing the list is not complete.

The situation is exceptionally dynamic, and obtaining information on eligible companies often requires consulting more than one resource as well as double-checking against the latest legislative requirements.

Debtor vs. Eligible Company

The Moratorium is a part of the Bankruptcy Law. In general, the Bankruptcy Law applies to so-called “debtors.” The Bankruptcy Law defines a legal entity as a “debtor” when it meets the insolvency criteria: It has been unable to satisfy creditors' claims for monetary obligations or claims for severance or remuneration in respect of its present or past employees, or to make mandatory payments, in the amounts and within the periods established by the Bankruptcy Law.

The basic threshold that allows initiation of bankruptcy proceedings is a debt of 300,000 rubles that remains outstanding for three months. For the companies deemed strategic (included in the two pre-pandemic lists mentioned above), the threshold is higher: 1 million rubles in outstanding debt for six months.

There is no express requirement that an eligible company must be a debtor for the Moratorium to apply. Most likely, the intent is for any eligible company to qualify for the Moratorium regardless of whether it actually meets the insolvency criteria.

As clarified by the Russia Supreme Court, a court must not accept bankruptcy petitions filed against an eligible company, and the inclusion of the company in the list of eligible companies is sufficient grounds for this. Circumstances that lead to a company’s indebtedness are irrelevant, including whether the indebtedness resulted from the pandemic or the time period when it arose (item 9 of the Supreme Court's first overview in respect of COVID-19, adopted by the Presidium of the Supreme Court on 21 April 2020 (the Supreme Court First Overview on COVID-19)).

The Supreme Court, however, expressly excludes from the Moratorium the eligible companies that initiate liquidation proceedings. The Supreme Court reasons that the primary goals of the Moratorium are to protect an eligible company from negative effects of COVID-19 and to support its subsequent financial recovery. Therefore, companies that decide to liquidate do not qualify for the Moratorium (item 9 of the Supreme Court's second overview in respect of COVID-19, adopted by the Presidium of the Supreme Court on 30 April 2020 (the Supreme Court Second Overview on COVID-19)).

Moratorium Opt-out

The 24 April amendments allow an eligible company to opt out from the Moratorium. To do so, it must submit a notice into the Unified Federal Register of Information About Bankruptcy. Upon publication of the notice, the Moratorium (including other applicable restrictions) ceases to apply to the company and its creditors.

As of 6 May 2020, a list of companies that have opted out contained only 28 names.

If the government extends the Moratorium beyond the initial six months, an eligible company that wishes to continue opting out will need to submit a notice again; otherwise it will qualify for the extended Moratorium by default.

Moratorium Key Terms and Other Restrictions

Currently, the Moratorium is for six months, from 3 April until 3 October 2020. The government has powers to extend it.

During the term of the Moratorium, the following conditions apply:

• Courts do not accept bankruptcy petitions (claims) filed by a creditor in respect of any eligible company.
• Courts must return bankruptcy claims filed in respect of an eligible company before the introduction of the Moratorium (before 3 April 2020), provided the court has not yet taken a decision on the initiation of bankruptcy proceedings. The Supreme Court clarified that upon termination of the Moratorium, a creditor needs to file a claim in respect of the eligible company again (item 8 of the Supreme Court Second Overview on COVID-19).
• Eligible companies are exempt from the obligation to file for their own bankruptcy where they would otherwise be required by law (but there is no prohibition for an eligible company to file for bankruptcy if it wishes to, and the court is to accept such petition in a regular procedure).

The Moratorium implies a number of other restrictions, as follows:

• Penalties (charges, fines) and other financial sanctions for nonperformance or improper performance of monetary obligations and obligatory payments (e.g., taxes and similar payments), other than in respect of the current payments, do not accrue (the freeze on financial sanctions).
• The freeze on financial sanctions applies to statutory penalties as well as penalties established by an agreement. Under item 10 of the Supreme Court Second Overview on COVID-19, this freeze also applies to a default interest under Article 395 of the Russian Civil Code, which states that if a payment obligation is not performed or delayed, a statutory default interest on the amount of debt must be paid unless a law or an agreement between the parties contains other rules. For example, in an agreement the parties can waive this statutory default interest or provide for a higher interest rate (for example, the statutory interest on ruble debts is currently 5.5% per annum). In such case, this rule would apply to a rate established by agreement as well.
• Eligible companies cannot set off monetary claims if this would violate the statutory order of creditors' priority.
• Eligible companies cannot pay dividends or distribute profits to participants.
• Creditors cannot enforce pledges and mortgages (whether through a court or without recourse to the courts) in respect of eligible companies.
• Enforcement proceedings for claims arising before the introduction of the Moratorium (before 3 April 2020) are suspended. However, any attachment on the property of an eligible company and other restrictions on the disposal of its property imposed during the enforcement proceedings remain. As clarified by the Supreme Court, courts can issue writs of execution during the Moratorium and creditors can take actions to limit (prohibit) the disposal of a debtor's property envisaged by the enforcement proceedings legislation (item 10 of the Supreme Court Overview on COVID-19).

The Bankruptcy Law used to contain another more generic freeze on transactions. It provided that any transaction on the transfer of property or the assumption of obligations (duties) committed outside the ordinary business during the period of the Moratorium, and which value exceeded 1% of the value of the debtor's assets, is null and void in respect of those companies where bankruptcy proceedings commenced within three months after the termination of the Moratorium. This provision faced much criticism from the business community, and it was abolished by the 24 April amendments.

Further Considerations

The Moratorium is a new feature for the Russian legislation. It is yet to be seen how eligible companies will benefit from it and whether there will be further laws addressing it, including in respect of its discontinuation post-pandemic.

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