Russian Federation: Foreign Credit Institutions Entitled To Bankrupt Russian Companies Under A Simplified Procedure

Last Updated: 15 April 2016
Article by Mikhail Ivanov

In early 2015, credit institutions gained the right to initiate the bankruptcy of their debtors according to a simplified procedure – i.e., without a court decision ordering the recovery of debt.

Thanks to the new procedure, banks-creditors can now bypass the lengthy stage of court proceedings on debt recovery and, provided the debtor indicates the signs of insolvency (overdue debt by more than three months in an amount of at least RUB 300,000), immediately apply for the bankruptcy of that debtor-borrower. The issue of whether or not the rule would be applicable to foreign credit institutions had long remained an open question.

The position of the court as to the equal right of foreign and Russian credit institutions to initiate bankruptcy proceedings under the simplified procedure first arose in the case of the Bank of Cyprus. In March 2015, the Bank of Cyprus filed two applications seeking the bankruptcy of its Russian debtor-companies with the Arbitrazh (State Commercial) Court of Moscow Region (Cases №№ А41- 15150/2015 and А41-14262/2015). However, even at the stage of application acceptance for consideration, the Bank of Cyprus ran into difficulties. Following consideration of the Bank's applications, the Arbitrazh Court left them without action, pointing to the lack of documents evidencing the claimant's special authorization (license) from the Central Bank of the Russian Federation (Bank of Russia) to perform bank operations. Thereafter, the Bank of Cyprus filed a statement from the Central Bank of Cyprus confirming the authority of the Bank of Cyprus to engage in banking and the applications were accepted for consideration by the court.

However, the court of appellate instance took completely different positions with respect to both of the two aforementioned cases. In its resolution dated 02.06.2015 in Case № А41-14262/2015, the Tenth Arbitrazh Appellate Court confirmed the lack of grounds for refusing to consider the application of the Bank of Cyprus, while in its other resolution dated 11.08.2015 in Case № А41-15150/2015 – noted the absence in the case file of evidence proving the availability on the part of the Bank of Cyprus of a special authorization (license) from the Central Bank of the Russian Federation conferring the right to perform bank operations, overturned the ruling of the court of first instance on the institution of the supervision procedure with respect to the debtor, and dismissed the application seeking declaration of the debtor's insolvency (bankruptcy).

A certain clarity on the issue first appeared in October 2015, when the court of cassation instance (Arbitrazh Court of the Moscow District) rendered decision dated 13.10.2015 in Case 41-15150/2015, which overturned the judicial acts of the lower courts that had been unfavorable to the Bank of Cyprus and referred the matter for new consideration. That said, the court of cassation instance noted that Clause 2, Article 7 of the RF Federal Law on Bankruptcy (Insolvency) contains no special rule indicating its applicability solely to Russian credit institutions - creditors, and that indeed, by virtue of Clause 5, Article 1 of the Law on Bankruptcy, it is applicable in cases in which the creditor is a foreign credit institution1.

Unsettled court practice notwithstanding, in June 2015 another foreign credit institution—the Czech Export Bank (Česká exportní banka)—filed an application with the court seeking declaration of the bankruptcy of its Russian debtor under the simplified procedure. Under the ruling of the Arbitrazh Court of Moscow dated 02.02.2016 in Case № А40-125301/2015 (upheld by resolution of the appellate court dated 07.04.2016), the application of the Czech Export Bank was found to be with merit – the court instituted the supervision procedure with respect to the debtor, and also included bank's claims in the amount of more than €44.5 million in the register of the debtor's creditors' claims.

It is important to note the position of the court that finally laid an end to the dispute. The Arbitrazh Court of Moscow found full agreement with the position of the claimant, the Czech Export Bank, indicating that Paragraph 2, Clause 2, Article 7 of the RF Federal Law "On Bankruptcy "Insolvency)" does not envision that its provisions extend solely to credit institutions licensed by the RF Central Bank to engage in banking operations, or indeed make a distinction between Russian (Bank of Russian license-holding) and foreign credit institutions. That said, in bankruptcy cases considered by the arbitrazh courts, foreign creditors, as legal entities, enjoy the same procedural rights as their Russian-creditor counterparts2.

The court also noted the following: "Clause 5, Article 1 of the RF Federal Law "On Bankruptcy (Insolvency)" contains norms determining the legal framework for the creditors of Russian debtors, be they foreign legal entities or private individuals. The essence of the legal treatment of such parties to the bankruptcy procedure boils down to the fact that they are subject to the application of a national legal framework that cannot be less favorable than the treatment of Russian legal entities and private individuals." Thus, the Arbitrazh Court of Moscow in the case of the Czech Export Bank affirmed the right of foreign credit institutions to initiate bankruptcy proceedings against their debtor-borrowers under simplified procedures, i.e. without court-ordered debt recovery, which could last for several years. Given the significant amount of loans provided by the foreign banks to the Russian companies, we hope that developing court practice will be helpful to such credit institutions in their initiation of the bankruptcy proceedings against debtors in the Russian courts.

In case you might have any questions, regarding the issues covered in this alert, we would be happy to answer them.


1 It should be noted that during the course of bankruptcy proceedings, the Bank of Cyprus, within the scope of a secondary dispute, won a decision ordering the recovery of the amount of debt owed thereto by its debtors, which allowed it to reinforce its claims and initiate regular monitoring procedures with respect to its debtors.

2 Later, a similar conclusion was made in a resolution of the Arbitrazh Court of Moscow District dated 08.02.2016 in Case № А40-131845/2015 (a bankruptcy case also initiated by the Czech Export Bank).

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