Covid-19 coronavirus: Insolvency Moratorium in Russia

For an update to this article, please see Covid-19 coronavirus: Insolvency Moratorium is now optional in Russia

The Russian Government had previously been given such authority under the new Article 9.1 of the Russian Federal Law "On Insolvency (Bankruptcy)" enacted as part of the federal legislation package intended to prevent the spread of the new Covid-19 coronavirus disease in Russia.^[2]

This Insolvency Moratorium regime (among other things):

• applies only to certain types of debtors determined by the Russian Government, including strategic and systemically important enterprises and companies as well as companies operating in the industries that have suffered most from Covid-19 (the Qualifying Debtors)
• prohibits enforcement against pledged assets of Qualifying Debtors during the term of the Insolvency Moratorium
• restricts any set-off, occurrence of penalties on any monetary obligations of the Qualifying Debtors, any share buyouts or payment of dividends by the Qualifying Debtors
• where a Qualifying Debtor goes bankrupt within the first three months after the Insolvency Moratorium is terminated, declares void any transactions made by such Qualifying Debtor during the Insolvency Moratorium (other than any transactions made in the ordinary course of business and with a value not exceeding 1% of its assets)

The measures listed above are primarily intended to mitigate the adverse economic effect of the Covid-19 pandemic and the corresponding response measures taken by the Russian authorities as well as to prevent mass bankruptcies of businesses. However, some of those measures are more likely to restrict the business of the companies that are subject to the Insolvency Moratorium rather than to contribute to their development.

We have briefly summarised below the effects of the Insolvency Moratorium which we consider to be the most relevant for our clients' business.^[3]

1. Insolvency moratorium in relation to qualifying debtors

Firstly, the Insolvency Moratorium applies only to certain types of debtors. The Russian Government has determined that the Qualifying Debtors include:

1. entities that have suffered most from the spread of Covid-19 (to be determined by the Russian Government in the form of a list of economic activities in accordance with the Russia's National Classifier);
2. systemically important entities included in a special list adopted by the Governmental Commission;
3. strategic enterprises and strategic joint stock companies included in a special list adopted by the Russian President; and
4. strategic entities and federal executive authorities that are in charge of implementing the unified public policy in the relevant economic industries and are included in a special list adopted by the Russian Government.

The categories referred to above are subject to adjustment from time to time. It is therefore very important, before any transaction is made with a counterparty, to go to the Russian Federal Tax Service's website at https://service.nalog.ru/covid/ and check whether the counterparty is a Qualifying Debtor, whether it is subject to the Insolvency Moratorium and whether any of the new measures are  applicable to the transactions with the counterparty.

2. Only creditors are prohibited from initiating bankruptcy proceedings

3. Prohibition on enforcement against pledged assets

During the period of the Insolvency Moratorium, enforcement against the pledged assets of a Qualifying Debtor (whether via court or out-of-court enforcement procedures) is prohibited.

4. Restrictions on set-off, penalties and dividend payments

Similarly to a supervision regime, a number of restrictions apply to the Qualifying Debtors' usual operations while the Insolvency Moratorium is in effect, particularly:

1. no discharge of the Qualifying Debtor's monetary liabilities by way of set-off of a similar mutual counterclaim in violation of the creditors' claims priority is permitted;
2. no penalties, fines or other financial sanctions occur in the case of nonperformance or improper performance of any monetary obligations or mandatory payments by the Qualifying Debtors (excluding current payments if the bankruptcy proceedings are initiated against the relevant Qualifying Debtor prior to the introduction of the Insolvency Moratorium);
3. no payment of dividends or distribution of profit among the participants of a Qualifying Debtor is permitted;
4. no demand by a withdrawing participant of a Qualifying Debtor for apportionment in its favour of a share in the property of such Qualifying Debtor is to be satisfied and no buyback or purchase by the debtor of any issued shares or payment of the actual value of a participation interest is permitted.

Even if the Qualifying Debtors do not have any signs of insolvency, the above restrictions would also apply to solvent companies that have been included on the list of Qualifying Debtors. This may cause difficulties for the Qualifying Debtors in running their usual business and negotiating transactions.

5. Invalidity of transactions entered into during the moratorium

• In bankruptcy proceedings initiated against a Qualifying Debtor within 3 months after the Insolvency Moratorium is terminated, all transactions entered into by such Qualifying Debtor during the Insolvency Moratorium that envisage the transfer of property or assumption of liabilities or obligations will be declared void.
• The only exception is made for transactions made by a Qualifying Debtor in the ordinary course of its business, provided that the value of the property to be transferred under a single transaction or a series of related transactions or the amount of the liabilities or obligations to be assumed does not exceed 1% of the assets value of the relevant Qualifying Debtor as of the date of the Insolvency Moratorium introduction.
• This is the most burdensome restriction for the Qualifying Debtors. It is understood that this measure primarily aims to preserve the assets of the Qualifying Debtors and protecting the interests of their creditors. However, it jeopardises any potential transactions the Qualifying Debtors may enter into during the Insolvency Moratorium and creates obstacles for their creditors and investors. Facing the risk of having their transactions declared void in the future, during the period of the Insolvency Moratorium creditors and investors will be very cautious of entering into any restructurings of debt with Qualifying Debtors or concluding any new fair market transactions essential for their business development.

6. Suspension of court enforcement proceedings

All court enforcement proceedings (ispolnitel'noye proizvodstvo) in respect of the claims against Qualifying Debtors which occurred prior to the introduction of the Insolvency Moratorium are suspended. However, any seizure of Qualifying Debtors' property or other restrictions on the disposal of such property imposed as part of the relevant court enforcement proceedings remain unaffected.

7. Extension of the moratorium

The Insolvency Moratorium is initially in effect for six months, i.e. from 6 April 2020 until 6 October 2020. However, its term may be extended by the Russian Government if the circumstances giving rise to its introduction continue to persist.

Clearly, the legislator has attempted to support businesses suffering as a result of the Covid-19 pandemic. However, the restrictions that come into force as part of the Insolvency Moratorium regime make it much harder for companies that are struggling financially to restructure their debt or try to develop their business during the Insolvency Moratorium period. This may lead to an even greater number of bankruptcies when the Insolvency Moratorium is lifted. Furthermore, aside from businesses that have been seriously damaged and may be teetering on the brink of bankruptcy, the Insolvency Moratorium also applies to reasonably solvent strategic and systemically important companies. During the Insolvency Moratorium period such companies will also be restricted by the new measures. Among other things, they will not be able to pay dividends to their shareholders and all the transactions they enter into while the Insolvency Moratorium is in force face the risk of being declared void within the first 3 months after the Insolvency Moratorium is terminated.

In this alert, we have sought to highlight the most important legal developments that will have a material impact on how the transactions with Qualifying Debtors are structured during the Insolvency Moratorium and for some time after it is terminated, and how the relevant Russian law legal opinions are drafted.

We would welcome opportunities to discuss the consequences of the Insolvency Moratorium with our clients in in more detail. Please do not hesitate to contact us.

_Footnotes

1. _{See the Resolution of the Russian Government No. 428 dated 3 April 2020 "On Introduction of Moratorium on Initiation
   of Insolvency Proceedings upon Application of Creditors with regard to Certain Debtors".}
2. _{See Federal Law No. 98-FZ dated 1 April 2020 "On Making Amendments to Certain Russian Legislation Governing the
   Prevention and Management of Emergencies".}
3. _{Please note that it is not the purpose of this alert to comprehensively summarise or analyse all the effects of the
   Insolvency Moratorium.}