Reform to Russia’s decades-old, over-regulated insolvency framework, has been anticipated since 2019, when President Putin announced changes would be implemented by 2021. Published last year, the new draft bill would make fundamental changes to current bankruptcy law. This article briefly describes the amendments to the policy, along with the insolvency profession’s reaction, the bill’s status and its future.
Changes to Bankruptcy Proceedings
Existing bankruptcy regime
There are currently five optional stages of bankruptcy in Russian law:
1. Supervision
Supervision aims to preserve the debtor’s assets, analyze finances, create a register of claims, and hold the first creditors’ meeting. The court then chooses the next stage – financial rehabilitation, external management, or liquidation.
2. Financial Rehabilitation
In financial rehabilitation, the debtor prepares and follows a financial rehabilitation plan and repayment schedule, under an administrative manager’s supervision. This stage is rarely employed, because all debt must be repaid within two years, and, in some cases, secured by third parties. If financial rehabilitation fails, the case enters external management, or goes directly to liquidation.
3. External Management
Like financial rehabilitation, external management aims to restore the debtor’s solvency. Replacing the debtor’s CEO, the external manager has far wider authority than the administrative manager and manages business, claims and litigation, implements a plan and reports on its progress to the creditors’ meeting. After two years, if the debtor remains insolvent, the only option is liquidation.
4. Bankruptcy Liquidation
Bankruptcy liquidation is both the lengthiest and most common outcome for Russia’s financially troubled companies. A bankruptcy administrator/trustee replaces the debtor’s management and auctions off its assets. Statistically, creditors will likely recover 4.7%, or less of their claims. With no legal time limits, liquidations can take years, and even decades.
5. Amicable Settlement Agreement
An amicable settlement agreement stage can be invoked at any time if all parties are in agreement.
The statistics below show how rarely financially troubled businesses in Russia restore their solvency as a result of the bankruptcy proceedings.
Bankruptcy Regime Under the Amendments
The Amendments aim to speed up the process, trimming it down to two stages:
- Debt restructuring
- Bankruptcy liquidation.
During debt restructuring, the debtor has four months to prepare a restructuring plan, and another four years (with the option to extend by another four) to implement it.
There is new flexibility in choosing debt restructuring management, which can now be:
- Bankruptcy administrators,
- Appointed by debtor shareholders,
- Appointed by the creditors’ meeting, or –
- Dual management, i.e. two CEOs; one appointed by creditors and one by debtor’s shareholders
The Amendments suggest several possible measures to include in the restructuring plan, including:
- business reorganization
- increasing debtor share capital
- selling all or part of the business
- converting debt into shares or other debtor-owned securities
In a seismic departure, bankruptcy liquidation must be completed within nine months of commencement.
With 90% of auctions currently failing because prices are too high, the Amendments propose switching to “Dutch auctions”, where prices fall, instead of rising, throughout.
Regulation of bankruptcy administrators/trustees, also known as arbitration managers (in Russian: arbitrazhniy upravlyayushchiy), would also change significantly, under the Amendments.
Bankruptcy Regime Under the Amendments
The Amendments aim to speed up the process, trimming it down to two stages:
- Debt restructuring
- Bankruptcy liquidation.
During debt restructuring, the debtor has four months to prepare a restructuring plan, and another four years (with the option to extend by another four) to implement it.
There is new flexibility in choosing debt restructuring management, which can now be:
- Bankruptcy administrators,
- Appointed by debtor shareholders,
- Appointed by the creditors’ meeting, or –
- Dual management, i.e. two CEOs; one appointed by creditors and one by debtor’s shareholders
The Amendments suggest several possible measures to include in the restructuring plan, including:
- business reorganization
- increasing debtor share capital
- selling all or part of the business
- converting debt into shares or other debtor-owned securities
In a seismic departure, bankruptcy liquidation must be completed within nine months of commencement.
With 90% of auctions currently failing because prices are too high, the Amendments propose switching to “Dutch auctions”, where prices fall, instead of rising, throughout.
Regulation of bankruptcy administrators/trustees, also known as arbitration managers (in Russian: arbitrazhniy upravlyayushchiy), would also change significantly, under the Amendments.
Reaction of the Professional Community
The Amendments prompted outcry from arbitration managers and the self-regulating organizations (SROs) they belong to. In a letter to the Russian Government, submitted in July 2020, The Russian National Society of SROs of Arbitration Managers detailed the negative impact the Amendments would have on the SRO “ecosystem”.
The Amendments’ Future
Despite hopes of enacting the Amendments by 2021, the bill remains in development; it is unclear whether COVID-19, professional reaction, or multiple factors, are to blame. Though the bill’s aims are positive, it needs more work, particularly in relation to insolvency professionals’ interests. With some fine tuning, however, the bill presents a real opportunity to change Russia’s bankruptcy system for the better.