WHAT CHANGES WILL TAKE PLACE WITH THE INTRODUCTION OF A NEW BANKRUPTCY LAW?

Konstantin Zautrennikov, the leading lawyer of Prospectacy company, spoke about the dramatic changes that the new bankruptcy law is going to bring. How will this affect the current situation and does the document coincide with the position of the Supreme Court?

A bill No. 1172553, which envisages the introduction of the large-scale and radical changes to the Federal Law ‘On Insolvency (Bankruptcy)’ and to certain legislative acts of the Russian Federation, has been submitted to the State Duma.

As follows from the explanatory note to the bill, it is primarily aimed at comprehensive reform of the institution of bankruptcy itself, including increasing the practice of using rehabilitation procedures in relation to debtors, and also involves the introduction of a fundamentally new rehabilitation procedure - debt restructuring.

The introduction of the bill is necessary due to the low efficiency of the existing bankruptcy (insolvency) practice.

At the same time, in international practice, the share of rehabilitation procedures is much higher and, for example, in the USA in 2020, it was about 35%, and the average duration of a bankruptcy procedure is 1 year (for comparison, in Russia, the average duration of a procedure is 2.5 years).

The bill provides for the abandonment of such bankruptcy procedures as supervision, financial rehabilitation and external management.

Instead of them, it is proposed to have one rehabilitation (debt restructuring) procedure and one liquidation bankruptcy procedure (bankruptcy proceedings).

In addition to these innovations, the bill also proposes to consolidate a new legal institution - the institution of subordination at the legislative level.

In particular, the bill provides that the claims of business owners, as well as other persons controlling the debtor, are considered subordinated in relation to the claims of other creditors and will be repaid on a fifth priority basis of the register of creditors' claims. After them, only debts to creditors on transactions recognized as invalid will be repaid, as well as to persons brought to subsidiary liability.

The category of subordinated claims is proposed to include the claims of the persons controlling the debtor arising from the provision of financing to the debtor in the following situations:

• - capitalization in a crisis, i.e. claims that have arisen after the debtor was obliged to file an application for declaring himself bankrupt;
• - initial undercapitalization, i.e. if the authorized capital formed during the creation of the debt is deliberately insufficient to carry out the activity for which it was created.

Under the provision of financing, the draft law means ‘the provision of a loan or credit, the sale of goods, the performance of work or the provision of services on credit, including deferral, installment plans or failure to submit a pending property obligation, the issuance of a surety or an independent guarantee, as well as the acquisition by a controlling debtor from a third party his claims against the debtor’.

The subordination regime will also apply to claims that have passed to a person who is not the controlling person of the debtor, as well as if the debtor and the person who financed him belong to the same group or are controlled by the same person.

The claims of banks that were able to determine the actions of the debtor for security purposes on the basis of a corporate agreement, an agreement on pledge of participation interests (shares) in the authorized capital of the debtor, a loan agreement, participation in the authorized capital of the debtor, if this opportunity was used exclusively for the purpose of repayment of loans issued by this credit institution and was not aimed at participating in the distribution of the debtor's profit, will not be classified as subordinated claims..

The introduction of the norms on the subordination of creditors' claims into the bill No. 1172553 is a further development of the approaches previously developed by judicial practice.

In particular, similar positions are enshrined by the Supreme Court of the Russian Federation in the ‘Review of judicial practice for resolving disputes related to the establishment of claims in bankruptcy procedures that control the debtor and persons affiliated with him’, approved by the Presidium of the Supreme Court of the Russian Federation on January 29, 2020.

Namely, the Supreme Court pointed out the inadmissibility of opposing the claims of independent creditors and claims for the return of compensatory financing by persons controlling the debtor.

As examples, the representatives of the Supreme Court cited the situation of a beneficiary issuing a loan to a debtor to bring the business out of the crisis and a loan provided to the company shortly after the start of its activities. However, later in the period of the pandemic, the position of the Supreme Court regarding subordination changed towards softening for the period of the ‘anti-covid’ moratorium on bankruptcy.

It seems that the consolidation of the institution of subordination at the level of the rule of law will clarify this issue and eliminate gaps and contradictions in the interpretation of approaches developed by judicial practice.