Update: Russia Reintroduces Insolvency Moratorium

An insolvency moratorium first introduced during the COVID-19 pandemic applies to nearly all Russian legal entities, individuals, and sole entrepreneurs, and bans the commencement of insolvency proceedings against Russian obligors.

On April 1, 2022, the Russian Federation reintroduced the insolvency moratorium with effect until October 1, 2022. The moratorium not only bans the commencement of insolvency proceedings against Russian obligors, but also affects their day-to-day activities (such as payment of dividends, set-off, contractual penalties, and enforcement of judgments). However, the application of the moratorium may be renounced at the discretion of each affected person at any time.

The regime was originally introduced in 2020 in response to the COVID-19 pandemic. At the time it applied only to certain businesses that had been most affected by the global pandemic, but it has now been extended to virtually all Russian residents.

Scope of Application

The insolvency moratorium applies to all Russian legal entities, individuals, and sole entrepreneurs except for those real estate developers listed on the unified register of distressed objects.

Each Russian obligor is entitled to renounce the application of the moratorium. To do so, it must publish a notice to this effect with the special register. If the government extends the moratorium beyond October 1, 2022, the relevant notice shall be published again; otherwise, the extended moratorium will apply to the Russian obligor by default.

Restrictions Related to Insolvency Proceedings

During the term of the moratorium, the following insolvency law restrictions apply:

• Courts will not accept new insolvency petitions against the affected persons.
• Insolvency petitions submitted before the introduction of the moratorium shall be returned, provided that the court has not yet accepted such petition. This does not prevent creditors from submitting such petition again once the moratorium is lifted or renounced.
• Russian obligors are exempt from the obligation to file for their own insolvency where they would otherwise be required to do so by law (but there is no prohibition for a Russian obligor to file for bankruptcy if it so wishes).

Further, if a Russian obligor has filed for bankruptcy during the term of the moratorium, it is entitled to petition the court for compulsory debt restructuring for a period of one year. Such debt restructuring is available if certain statutory conditions are met (one of such conditions being the creditors voting against voluntary arrangement).

Restrictions Affecting Day-to-Day Operations and Dealings with Russian Obligors

The moratorium further affects the day-to-day activities of Russian obligors:

• All penalties and default interest for failure to perform contractual obligations cease to accrue.
• Any set-off that “violates the statutory order of creditors' priority” is prohibited. While it is unclear how this provision applies to solvent entities, in practice any set-off is essentially blocked.
• No dividends can be distributed.
• Creditors are restricted from enforcing pledges and mortgages granted by Russian obligors.
• Enforcement proceedings for claims arising before the introduction of the moratorium are suspended.

Effect on Loan Agreements

Many loan agreements include provisions that may be breached by the introduction of the moratorium and result in a technical default. In order to protect the rights of lenders, it is usually advisable to push the Russian obligor to renounce the application of the moratorium.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Ukraine Conflict Task Force
Giovanna M. Cinelli
Alexey Chertov
Bruce Johnston
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Christina Renner
Vasilisa Strizh
Carl A. Valenstein
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Christian Kozlowski
Eli Rymland-Kelly
Yaroslav Smorodin