WHAT WILL THE BANKRUPTCY MORATORIUM LEAD TO?

WHAT WILL THE BANKRUPTCY MORATORIUM LEAD TO?

WHAT WILL THE BANKRUPTCY MORATORIUM LEAD TO?
What the legal community had been waiting for the whole last month has finally happened - the "Government Decree on the introduction of a moratorium on the initiation of bankruptcy cases on applications filed by creditors" has been published. The moratorium on bankruptcy has returned to Russia for six months, same as in the first days of the pandemic. Dmitry Bokholdin, a lawyer at the “Legal Enclave” law firm, spoke about its possible consequences.


Since March 9, 2022, the Federal Tax Service has suspended the initiation of new bankruptcies due to the extraordinary economic conditions that many Russian enterprises have experienced since the introduction of foreign sanctions.
During the pandemic, this measure justified itself in many aspects. According to numerous estimates, the moratorium helped about two million companies to get rid of bankruptcy.
However, this obviously has certain downsides. The amendments to the "Bankruptcy Law" and the measures introduced by the Government are nothing more than a compromise to maintain the "status quo" between enterprises or citizens with debts and creditors. And for creditors, the moratorium, for obvious reasons, is nothing but a negative measure that will not allow to adequately respond to the inability debtors to fulfill their obligations in the nearest future.

It is worth looking into whether a moratorium on bankruptcy is really necessary now? And does the moratorium mean that the bankruptcy procedures will be terminated?

The Russian economy is facing an unprecedented level of sanctions from numerous states. Moreover, many foreign companies that do not directly support the sanctions policy were forced to suspend their activities or completely leave the Russian market under the threat of falling under “secondary” sanctions.
If during the pandemic, the moratorium was introduced only for a few particularly affected sectors of the Russian economy, then based on the literal interpretation of the new Government Decree new moratorium will be extended to absolutely all applications of creditors. With one small exception, which concerns the initiation of bankruptcy proceedings against debtors who, as of the date of entry into force of the Government Decree, are developers of apartment buildings included in the unified register of problem facilities.
For the next six months, each application in relation to a legal entity or citizen, including individual entrepreneurs, will be returned to the applicant in accordance with paragraph 2 of Art. 9 of the Bankruptcy Law.
Let us analyze the pros and cons of the introduced moratorium.

Benefits of a bankruptcy moratorium

It is obvious that all debtors under their existing obligations have received a benefit from the Government, which will help either improve their financial state, or approach the bankruptcy procedure in the most structured and cautious way after the period of moratorium is over.

An extremely important consequence of the moratorium for debtors is that not only courts, but also bailiffs will be required to comply with a number of requirements.
From the moment the moratorium is introduced, bailiffs are required to suspend all enforcement proceedings initiated before the date of the moratorium.
Of course, there are exceptions to this rule that are related to the initiated enforcement proceedings for compensation for harm to life or health, enforcement proceedings for the recovery of wages and severance pay, as well as enforcement proceedings for the recovery of alimony.
At the moment, bailiffs have the right to impose arrests and bans in order to enforce the claims of court decisions, as well as to carry out other executive actions.
But at the same time, the most important restriction on the work of bailiffs, which will significantly reduce the burden on debtors remains - during the period of the moratorium, they are not entitled to foreclose on the property of debtors, and are also not entitled to foreclose on the pledged property of debtors.

Such a measure will certainly help thousands of debtors, especially individuals.

Disadvantages of a bankruptcy moratorium

However, every solution has a downside.

First, as noted, creditors will face an insurmountable barrier that will block the enforcement of debt by declaring the debtors bankrupt.
It should be expected that dishonest debtors will withdraw their money, hide assets and prepare for bankruptcy as a way to avoid financial liability, significantly complicating the future work of bankruptcy trustees in finding property and challenging transactions.
Speaking of professional market participants, the apparent decrease in the number of bankruptcy cases will raise the question of terminating their own status for many trustees.
At the moment, one of their biggest problems is payment for insurance of professional risks of their own activities.

Without the sources of income and funding which comes from supporting bankruptcy cases, bankruptcy trustees will be forced to significantly reduce their expenses, which, in an uncertain economic environment, will contribute to the disintegration of trustees' professional teams. Many lawyers are at risk of being left without work, and the trustees themselves - without professional status.

Is bankruptcy possible during the moratorium?

There will still be new bankruptcy cases. Thus, the moratorium does not completely suspend the initiation of bankruptcy cases, debtors have the right to independently declare themselves bankrupt. The above mentioned, in my opinion, will be used by the Russians due to the fact that the amount of debt of an individual is statistically significantly less than the debt of enterprises. Debt cancellation for individuals in most cases is faster than a multi-level and long-term bankruptcy proceedings for companies.

To sum up, it should be noted that the moratorium is an ambiguous, but coercive measure. Lenders and procedural facilitators will face challenges that will be difficult to overcome.

For debtors, the moratorium is obviously a significant measure of support provided by the state. Six months is quite a decent period, during which it is possible to either prepare for the procedure, accumulate all sources of income, find a reliable lawyer, or completely solve all financial problems.

bankruptcy, bankruptcy of legal entities, bankruptcy of individuals, bankruptcy moratorium 2022, experts, columnists, state support

12.04.2022