On April 28, 2009, the president of the Russian Federation
signed into law amendments to the Russian Law on Insolvency
(Bankruptcy) of October 26, 2002 (Federal Law No. 127-FZ) (the
"Insolvency Law") that should be considered by all
creditors doing business with financially troubled Russian
companies, directors and other controlling persons of Russian
companies, and participants in the market for distressed Russian
Many of the changes reflect pro-creditor concepts that were
introduced in another series of amendments adopted just before the
end of 2008, but other aspects of the new amendments are likely to
make it more difficult and time-consuming for creditors to obtain
payment on their claims.
The 2009 amendments introduce two new concepts governing the
obligation of the directors of a Russian company to file a petition
with the Arbitrazh court (state commercial court) for
insolvency: "insufficiency of assets" and "inability
to pay." "Insufficiency of assets" means that the
aggregate value of a debtor's monetary obligations under
"civil" transactions and mandatory payments (taxes and
duties) exceeds the value of the debtor's assets. This is
similar to the "balance sheet test" of solvency in U.S.
and English law. "Inability to pay" refers to a
debtor's inability to satisfy monetary obligations due to
capital inadequacy—a rough equivalent of the "cash
flow test" in U.S. and English law.
Under the amended Insolvency Law, a company's general
director is obligated to file an insolvency petition within one
month of learning that the company meets either of these
criteria—a requirement that, according to some
commentators, creates disturbing restrictions on the scope of
potential alternatives for dealing with financial problems to avoid
insolvency, such as debt or corporate restructuring.
The amended law also implements secondary liability of any
"controlling person" as well as directors for a
debtor's obligations, by providing that, upon a finding of
liability, such parties must compensate the debtor-company for
"damages inflicted on creditors' assets," a concept
defined as any decrease in value of a debtor's assets and/or
any increase in the value of claims against a debtor's assets,
as well as other consequences of transactions or legally
significant acts performed by the debtor that make it impossible
for creditors to satisfy their claims out of the debtor's
assets. A "controlling person" is not liable for damages
if he can prove that he acted in good faith and reasonably in the
debtor's interests. Directors are also liable for a
debtor-company's obligations if the debtor's books and
records are inaccurate or incomplete.
The new provisions provide additional grounds for challenging
transfers by a debtor that can be voided by an insolvency officer
(i.e., an external administrator or bankruptcy receiver)
on his own initiative or in accordance with any directive issued
after a duly constituted creditors' meeting. Under the amended
Insolvency Law, "suspicious transactions" and
"transactions with a preference" entered into by a debtor
are subject to challenge in court. Any action by a debtor to
perform obligations arising from civil, labor, family, tax,
customs, or procedural law may also be challenged in court.
"Suspicious transactions" include: (i) any transaction
entered into by a debtor within one year prior to becoming the
subject of an insolvency petition, or afterward, involving
inadequate consideration; and (ii) any transaction entered into by
a debtor "for the purpose" of inflicting damage on
creditors' proprietary interests in a debtor's assets, so
long as damage actually results and the other party to the
transaction was aware of the debtor's intent.
A "transaction with a preference" is defined in the
amended Insolvency Law as a transaction entered into by a debtor
for the preference of a creditor, subject to certain exceptions,
including transactions entered into by the debtor in the ordinary
course of business. If a suspicious transaction or a transaction
with a preference is invalidated by the court, the transferred
assets must be returned to the bankruptcy estate for distribution
According to commentators, the new amendments to the Insolvency
Law are intended to prevent asset stripping in a company on the
verge of insolvency and to expand bankruptcy assets through the
filing of claims against third parties. Moreover, the provisions
relating to challenging transactions could constitute an extremely
powerful tool in the hands of an insolvency officer. At this
juncture, it remains to be seen how effective the amended law will
be in achieving those goals.
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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