Russian Federation: Legislation To Increase The Protection Of Creditors In The Case Of Decreases To The Charter Capital Of A Company

Last Updated: 22 February 2012
Article by Andrey Dukhin

The procedure for decreasing the charter capital of a limited liability company (LLC) and certain regulations regarding monitoring and calculating net assets of LLCs and joint stock companies (JSC) were recently significantly modified. As amended, the LLC procedure for decreasing charter capital aligns with the procedure established for JSCs. The regulations regarding net assets of LLCs have also been revised similar to the relevant provisions applicable to JSCs, however, certain issues remain unclear. In particular, it is not clear whether the tax inspectorate or creditors will have the right to initiate the liquidation of an LLC.

The amendments were introduced by the Federal Law "On Amending Several Legislative Acts of the Russian Federation in Part Regarding Revision of the Means of Creditors' Protection During Decrease of a Charter Capital, Change of Requirements to Commercial Entities in Case of Inconsistency of Charter Capital with the Value of Net Assets" No. 228-FZ (the Amending Law). Most amendments entered into force on January 1, 2012; however, a few will be delayed from entering into force until January 1, 2013. The amendments affect the Law on Joint Stock Companies (JSC Law), the Law on Limited Liability Companies (LLC Law), the Law on Registration of Legal Entities and Individual Entrepreneurs (Registration Law) and other acts.

Procedure for Decreasing the Charter Capital of an LLC

As amended by the Amending Law, the LLC Law provides for a new procedure to decrease the charter capital of an LLC. Within three (3) working days from the date of a decision to decrease the charter capital of an LLC, the Unified State Register of Legal Entities (USRLE) should be notified by the LLC about such decision and two announcements should be published in the press (one per month in the course of two months). The Amending Law removes the requirement of notifying creditors of an LLC in writing, in case of a decrease in the charter capital and providing confirmation of such notification to USRLE in order to register the decrease of the charter capital. This provision always has been inconvenient for LLCs decreasing their charter capital, since a single company could have hundreds of creditors. However, the benefit of this change to creditors appears questionable since now they will need to monitor the press in order not to miss information on a decrease of charter capital of their obligors instead of simply being notified of the same.

The notification filed with USRLE to decrease the charter capital should, inter alia, contain information on the procedure and conditions for creditors to file claims for early fulfillment of obligations by the LLC or if such fulfillment is not possible, termination of the obligation and recovery of the resulting damages. It should also contain the addresses where relevant claims can be filed and the means of contacting the LLC.

Creditors' claims for early fulfillment or early termination and compensation of losses can be satisfied only in cases where obligations became known before information was published on the decrease of the charter capital, such claim should be submitted not later than 30 (thirty) days after the date the notification was last published, in accordance with the procedure described in the paragraph above. The court has the right to deny a creditor's claim if the LLC proves that: (i) the rights of the creditor are not affected by the decreases in the charter capital; and (ii) the provided security covers the due performance of the relevant obligation of the LLC. The statute of limitations for filing such claims by creditors is six (6) months after the date when the last notification on decreasing the charter capital was published.

Monitoring and Calculating Net Assets

The procedure for calculating net assets applicable both to LLCs and JSCs (except for credit institutions) is established in "The Order of Estimation of Net Assets of JSCs" approved by Order of Ministry of Finance of RF No. 10n, Federal Commission for the Securities Market of RF No. 03-6/pz, dated January 29, 2003. As for credit institutions, their capital is taken into account instead of their net assets. The procedure for calculating capital is set forth by the RF Central Bank in the Decree of the Central Bank of the Russian Federation No. 2332-Y "On the List, Forms and Order of Drafting and Submitting of Records of the Credit Institutions in the Central Bank of the Russian Federation," dated November 12, 2009.

The Amending Law introduces a new provision regarding monitoring net assets of an LLC. According to the Amending Law, an annual report of an LLC will now need to contain a clause on the condition of its net assets.

Another important change concerns the term when an LLC is allowed to have the amount of its net assets fall below its charter capital. Within six (6) months after the end of a fiscal year, following the second fiscal year, or each consecutive fiscal year at the end of which the company's net assets were less than its charter capital, the company is required to: (i) declare a decrease in its charter capital to an amount not exceeding the value of its net assets; or (ii) liquidate the LLC. Currently, such actions should be undertaken if the amount of net assets of the company has been below its charter capital for at least two (2) fiscal years and every subsequent fiscal year, i.e. the term when the company can have its net assets below its charter capital has been extended for one (1) year.

The Amending Law does not allow a creditor or relevant governmental bodies to initiate liquidation of a company as previously was the case. Thus it is unclear how this provision will be enforced under Russian law.

Amendments to the Registration Law (effective as of January 1, 2013)

The Amending Law provides for establishing a Unified Federal Register of Information About the Activity of Legal Entities (Register). The purpose of the Register is to maintain information about legal entities and their activity. Information contained in the Register will be subject to publication on the Internet.

The Amending Law provides for a list of information that should be included in the Register. Among other things, it includes information on: (i) decreasing or increasing the charter capital; (ii) the value of the net assets of a JSC, as of the latest reporting date; and (iii) the value of net assets of an LLC in cases provided by the LLC Law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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