Covid-19 coronavirus: Judicial rescheduling during the Insolvency Moratorium in Russia

On 8 June 2020 a new set of amendments^[1] to Article 9.1 of the Russian Federal Law "On Insolvency (Bankruptcy)" governing the insolvency moratorium regime (the Insolvency Moratorium) came into effect. The Insolvency Moratorium, which aimed to protect the business sector during Covid-19 pandemic, was introduced on 6 April 2020 by the Russian Government in respect of companies operating in the hardest-hit industries, as well as systemically important and strategic enterprises, other than those specifically opting out of the Insolvency Moratorium regime (the Moratorium Debtors)^[2].

As discussed in our Alert "Insolvency Moratorium in Russia" of 10 April 2020, the Insolvency Moratorium prohibits bankruptcy filings with regard to the Moratorium Debtors initiated by creditors only. It does not prevent a Moratorium Debtor initiating its own bankruptcy.     

Going forwards, a Moratorium Debtor is also entitled to file an application with an arbitrazh court seeking a judicial rescheduling of its debts if, following its bankruptcy petition, supervision has been imposed by the relevant court. Such an application may be filed not earlier than the date of the first creditors’ meeting and is subject to a number of conditions including: 1) there must be more than 20 per cent decline in the Moratorium Debtor’s income as compared to the same period in the previous year; 2) there must not be any wage or other claims by individuals; 3) no amicable settlement is adopted by a creditors’ meeting; 4) the bankruptcy petition was filed by the Moratorium Debtor after 6 May 2020.

The judicial rescheduling may be granted for one or, in certain cases, two or three years. The judicial rescheduling will be granted for two years if the Moratorium Debtor’s income has dropped by more than 50 per cent as compared to the same period in the previous year. If the Moratorium Debtor is also a strategic enterprise, the judicial rescheduling will be granted for three years. If the judicial rescheduling period exceeds one year, the Moratorium Debtor has to provide security to its unsecured creditors in the form of a bank guarantee or pledge of property.

The judicial rescheduling should contain the following key conditions: 

• rescheduling of the terms of the liabilities that were overdue as of the bankruptcy initiation date, as well as the liabilities which are to be included into the creditors’ claims register and which become due within one year (or, in the abovementioned certain cases, two or three years) from the date of the judicial rescheduling;
• the above liabilities are to be discharged by equal monthly instalments within one year (or, in the abovementioned cases, two or three years);   
• restrictions on payment of dividends, buyback of shares, set-off of similar mutual counterclaims, charging any penalties and enforcement of pledges, as generally provided for by the Insolvency Moratorium regime, will apply during the term of the judicial rescheduling;
• contractual interest (or by reference to the Russian Central Bank key rate) shall accrue in respect of any judicial rescheduling period exceeding one year;
• enforcement proceedings initiated in respect of claims arising before the judicial rescheduling will be terminated; and
• the Moratorium Debtor will be bound by certain information undertakings towards its creditors.

The judicial rescheduling applies to the claims of all creditors, including those not included into the creditors’ claims register (regardless of any provisions in the underlying agreement whereby the relevant liabilities may be accelerated). Consequently, any customary for credit documentation provisions regarding events of default, acceleration and mandatory prepayment are not applicable while the judicial rescheduling is in force.

The bankruptcy proceeding initiated by the Moratorium Debtor is terminated while the judicial rescheduling is in force. If the Moratorium Debtor fails to comply with all applicable conditions of the judicial rescheduling, an arbitrazh court may revoke the judicial rescheduling in respect of all creditors and resume the relevant bankruptcy proceeding at the same stage as when it was terminated.

By introducing these amendments the legislator has offered to the Moratorium Debtors most affected by the pandemic an opportunity to try and solve their financial difficulties otherwise than through bankruptcy. However, the creditors of such Moratorium Debtors should bear in mind that if a judicial rescheduling is granted in relation to that debtor, their liabilities may be rescheduled for a term of one to three years. If that happens, contractual interest will accrue only if the rescheduling term exceeds one year, no default interest will be charged throughout the relevant rescheduling period, no enforcement of any pledge is allowed and no prepayment provisions will apply.

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

^{[1] Federal Law No. 166-FZ dated 8 June 2020 "On Introduction of Amendments to Certain Legislative Acts of the Russian Federation for the purposes of Taking Urgent Measures for Sustainable Economic Development and Prevention of the Consequences of New Coronavirus Infection Outbreak".}
_{[2] 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".}