Coronavirus – New Measures Affecting Business - Litigation, Contracts and Force Majeure

On 1 April 2020, the President of the Russian Federation signed Federal Law No. 98-FZ On Amendments to Certain Legislative Acts of the Russian Federation on Disaster Management and Emergency Response, which introduces a number of measures in different areas to support businesses during the COVID-19 pandemic (the "Law"). Furthermore, on 7 April 2020, the President of the Russian Federation signed Federal Law No. 115-FZ On Amending Certain Legislative Acts of the Russian Federation, which, among other things, introduces a number of changes to companies' corporate procedures. These measures and changes include:

deferral of rent payments and reduction of rent in the event a state of high alert or emergency is declared
collecting penalties for late and incomplete payment for services under contracts for the supply of gas, electricity, heat, water and water discharge
changes in the procedure for conducting public procurements
changes in the healthcare field
moratorium on initiating bankruptcy proceedings
changes to the deadlines for holding general annual meetings of shareholders (participants) in limited liability companies and joint stock companies and amendments to the requirements in the event of a decrease of the companies' net assets
clarifying the method for a share buy-back by public joint stock companies and the postponement of the implementation of the internal audit procedure in public joint-stock companies

The key measures affecting business are presented for your attention in the following review.

Deferral in rent payments and reduction of rent in the event a state of high alert or state of emergency is declared

The Law provides support measures for tenants under real estate lease agreements, which include the following:

the landlord's obligation to conclude an additional agreement regarding the deferral of rental payments
the tenant's right to demand a reduction in rent due to the inability to use the property

Deferral of rent payments

In order for the landlord to be required to grant a deferral of rent payments under a lease agreement, it is necessary that such lease agreement was concluded before the state of emergency or high alert was declared.

An additional agreement regarding the deferral of the rent payments must be concluded within 30 days from the date of the tenant's request. The tenant is entitled to request a deferral regardless of whether or not it can continue to use the leased property.

The term of such deferral and other conditions for its provision have been specified by the Russian Government.¹ The Government granted a deferral for tenants in the industries most affected by COVID-19. The list of such industries was approved by the Government².The Government established the following conditions for a deferral:

the period of the deferral will be from 1 April until 1 October 2020. During the state of high alert or state of emergency, 100% of the rental payment should be deferred. After the state of emergency or state of high alert is lifted and until 1 October 2020, 50% of the rental payments should be deferred
the amount of the deferred payments must be paid in stages beginning on 1 January 2021 through 1 January 2023, in addition to the rent payments due under the lease agreement. The amount of the monthly paid deferred payment should not exceed 50% of the monthly paid rent payments
the tenant cannot be held liable for violating the terms and conditions for making rent payments if the deferral is granted, even if remedies are stipulated in the lease agreement
the deferral cannot be granted for utility payments and the costs of maintaining the leased properties, unless the Landlord is exempt from paying such costs and expenses

The Government further recommends that landlords reduce the rent payments when granting a deferral to tenants.

If the landlord evades concluding an additional agreement, the tenant is entitled to force the landlord to conclude the additional agreement in court.

Landlords who have granted a deferral to tenants may be provided with additional governmental support related to the payment of corporate property tax, personal property tax, land tax and rent payments for the land.

Reduction in rent

If it is decided to implement a state of high alert or emergency, a tenant may demand a reduction in rent for the period of 2020 due to the inability to use the property.

The Law does not provide that additional criteria will be established by an order, which means that the requirement to reduce the rent can be requested by tenants from any industry.

The Law does not clearly define "inability to use the property". Therefore, such inability should be determined in each case separately, taking into account orders of the President and the head of the relevant entity.

The Law also does not detail the period during which the rent should be decreased and the amount of the reduction. These conditions must be agreed upon between the parties to the lease agreement.

Specifics of collecting penalties for late or incomplete payment for utility services, as well as for services under supply contracts for gas, electricity, heat, water and water discharge

Until 1 January 2021, the Government of the Russian Federation is empowered to establish a special procedure for:

calculating and paying interest in the event of a late and/or incomplete payment of dwellings and utility services, as well as contributions for major repairs
the recovery of a penalty (fine or interest) for a legal entity not timely and/or incompletely fulfilling an obligation to pay for services provided for in the contracts for the supply of gas, electricity, heat, water and water discharge

At present, the Government has established conditions for applying and deferring the payment of penalties to be collected for late or incomplete payment for the provision of utility services to owners and tenants in apartment buildings and residential real estate.³

Public procurements

A set of measures has been introduced to change the procedure for conducting public procurements as set out under Federal Law No. 44-FZ. The changes including the following:

the pre-selection of bidders has been cancelled for procurements that aim to provide humanitarian aid or disaster recovery
the list of grounds to procure from a single supplier has been expanded
the Government has been authorized to introduce additional grounds for procuring from a single supplier until 31 December 2020
the special rules regarding the accrual of penalties under government contracts will now cover the 2020 calendar year
the requirements for securing obligations under public procurement contracts have been lowered for small and medium businesses
a possibility to renegotiate the terms and conditions of public procurement contracts has been introduced for cases when the supplier faces challenges in performing the contracts due to force-majeure circumstances related to the pandemic

The key change is the expansion of the grounds to procure from a single supplier. This form of procurement is required in order to respond quickly to the spread of the coronavirus infection. The changes in the procurement rules at the legislative level consolidate the latest positions of the regulators in this area:

regarding the recognition of the spread of the coronavirus infection as a force majeure circumstance as the ground for procuring from a single supplier (Letter of the Ministry of Finance of Russia No. 24-06-06/21324 dated 19 March 2020)
regarding the possibility of procuring from a single supplier in order to prevent and eliminate the consequences of the spread of infection in the presence of a cause-and-effect relationship with the subject matter of the procurement (Letter of the Federal Antimonopoly Service of Russia No. IA/21684/20 dated 18 March 2020)
regarding the possibility of procuring any products from a single supplier if the public customer's need is determined by the current circumstances of the pandemic (Joint Letter of the Ministry of Finance of Russia, the Federal Antimonopoly Service of Russia and EMERCOM of Russia dated 3 April 2020)

Despite the fact that the new measures are primarily focused on mitigating and preventing further deterioration of the epidemiological situation, we believe that they will affect a wide range of areas from a business perspective (including areas not directly related to healthcare).

Healthcare

The healthcare sector will certainly be affected by the amendments, including in relation to the distribution of medicines and medical devices:

the Government simplified the registration of medicines that can be used in emergencies and for the prevention and control of major infectious diseases (among which COVID-19 has been listed). A specific procedure will be established by the Government
a similar rule will be introduced for medical devices that are intended to be used in current emergency situations. This procedure has already been launched for the registration of medical face masks, suits, gloves and a number of other products. The law clarifies that the Government may introduce additional rules related to the distribution of medical devices
the Government is entitled to limit the wholesale and retail trade of certain medical devices for a period of up to 90 days
changes are being made to the organization of statutory health insurance. For instance, it will be possible to reduce the time for medical organizations to be listed in the register of statutory medical insurance organizations. Moreover, some measures are related to the terms of financing within the statutory medical insurance framework

Bankruptcy law

In accordance with the Law, the Government of the Russian Federation introduced a moratorium on initiating bankruptcy proceedings under bankruptcy petitions submitted by creditors. The moratorium has been introduced from 3 April to 3 October 2020 in relation to companies that have suffered the most from restrictions related to the coronavirus, as well as in relation to strategic and systemically important organizations (the "Debtors"). A company falls under the moratorium if its main type of activity is included on the list available at https://www.nalog.ru/rn77/taxation/bankruptcy/.

There are a number of restrictions applied to the Debtors, including a ban on the payment of dividends, the suspension of penalties for not fulfilling the monetary obligations of such a company, and the suspension of enforcement proceedings for claims arising prior to the introduction of the moratorium.

In bankruptcy cases initiated within three months after the moratorium is cancelled, the terms for challenging "suspicious" transactions are extended if they were entered into during the moratorium period or within one year after the moratorium is lifted, and all transactions involving a transfer of property or the creation of liabilities entered into during the moratorium period will be null and void, if they are not in the ordinary course of business of the debtor.

During the term of the moratorium, meetings of creditors are held in the form of remote voting.

We recommend that our clients pay attention to the list of activities of the Debtors indicated on the above website of the Federal Tax Service. As these Debtors may be potentially considered bankrupt, they are obligated to comply with the above restrictions specified in part 3 of article 9.1 of the Federal Law On Insolvency (Bankruptcy).

Changes in corporate procedures

Consequences of a decrease in the value of a company's net assets below its authorized capital

The Law established that a decrease in the value of a company's net assets below its authorized capital at the end of 2020 shall not give rise to:

the inclusion of a section on the state of its net assets in the annual report in the event the company is a joint stock company
the onset of the obligation to reduce the authorized capital or liquidate the company

Holding an annual general meeting of shareholders and the next general meeting of company members

The term for holding the annual general meeting of shareholders and the next general meeting of company members regarding the results of the 2019 fiscal year was extended until 30 September 2020, inclusive.

The annual general meeting of shareholders can also be held in the form of absentee voting.

Implementation of internal audit in public joint stock companies

The implementation of an internal audit in public joint stock companies, as well as the respective duty of the board of directors (supervisory board) to form an audit committee, were postponed until 1 January 2021.

Acquisition by a public joint stock company of its own shares

Public joint stock companies were granted the right to acquire their own shares (excluding the acquisition of outstanding shares in order to reduce their total number), subject to several conditions, including:

the shares to be acquired are admitted for on-exchange trading
the weighted average price of the shares to be acquired determined for any three months starting from 1 March 2020 had decreased compared to the weighted average prices of such shares determined for three months from 1 October 2019 by 20 percent or more
the shares are acquired by a broker on behalf of a public joint stock company in on-exchange trading on the basis of offers addressed to an unlimited range of traders

The Bank of Russia must be informed of the acquisition of own shares in electronic form, with documents that confirm the fulfillment of the above conditions.

Conclusion

The Law contains fairly general formulations and gives the Government of the Russian Federation comprehensive power to clarify the measures that are necessary to minimize the negative consequences of the coronavirus pandemic. Inevitably, questions and conflicts will arise regarding the interpretation of both the Law itself and the decisions of the Government of the Russian Federation adopted in connection with it. We expect further clarifications from the relevant departments, and subsequently, the formation of court practice in disputes regarding the application of these anti-crisis standards.

Amendments to the corporate legislation meet the needs of many companies in Russia and eliminate potential issues that could arise in 2020.

Footnotes

1 Decree of the Government of the Russian Federation dated 3 April 2020 No. 439 On Establishing the Requirements for the Conditions and Terms of a Rent Payment Deferral Under Real Estate Lease Agreements.

2 Decree of the Government of the Russian Federation dated 3 April 2020 No. 434 On Approving the List of Industries of the Russian Economy Affected by the Spread of the New Coronavirus Infection.

3 Decree No. 424 of the Government of the Russian Federation dated 2 April 2020 "On Specificities for the Provision of Utility Services to Owners and Tenants in Apartment Buildings and Residential Real Estate"

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.

Russian Federation: Coronavirus – New Measures Affecting Business