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New Rules on Vicarious Liability, Bankruptcy Filing Requirements, Interested Parties and Preferences are Adopted
by Paul de Drée
This information is reprinted with permission of Paul de Dree and Salans, an international legal firm with offices in Eastern and Western Europe, Asia, former Soviet states and Moscow and St. Petersburg in Russia. (Initially printed in a Salans Russian Practice Banking and Finance Alert, May 25, 2009.)
On April 28, 2009 Russia further amended its Bankruptcy Law. The changes introduce, inter alia, more detailed rules on:
- third-party (vicarious) liability in a bankruptcy (i.e. persons who may, by the virtue of their control of the debtor, be held liable for its debts);
- voluntary bankruptcy filing requirements lowering the bar on CEOs’ and liquidation commissions’ obligations to the file;
- interested parties, expanding this class of persons for purposes of bankruptcy proceedings; and
- preferences (i.e. certain types of transactions preceding or following bankruptcy which may be avoided by the administrator).
The New Law came into full force and effect on June 5, 2009 (30 days following its publication on May 5, 2009).
On December 30, 2008, the RF Duma had substantially amended the Bankruptcy Law, introducing comprehensive changes including on administrators, taxation issues, enforcement of security and distribution of proceeds, priority of claims and other matters. Although the present changes are far narrower, they touch on critical issues and should provide lenders with greater remedies against abusive debtor management practices.
Below we provide a summary of the principal changes to the [Russian] Bankruptcy Law, including a comparison with the rules as currently in force. [Note from Editor: due to the length of the original article, we are reprinting only the Comparison of the Law as Existing and as Modified. If you are interested in fuller details, please review the original document.]
Comparison of the [Russian Bankruptcy] Law as Existing and as Modified by Law No. 73-FZ
The following summary is for illustration purposes only. It is not intended to be exhaustive. For a complete understanding of the changes, readers should refer to the full text of this Alert.
||Existing [Russian] Law
||New [Russian] Law
||Vague and general concept of vicarious liability arising as a result of exercising “right to give binding instructions or otherwise control the debtor’s activities”. No specific mention of shared liability between persons found to have this level of control.
||The New Law introduces the concept of a “controlling person”. However, the main criteria as before (i.e. the “right to give binding instructions or otherwise control the debtor’s activities”) have been retained. The new law gives examples as to who may be deemed a controlling person. It also envisages joint and several liability of all controlling persons.
||No indication of the time period over which the control had to be exercised in order for someone to be held liable.
||Control creating vicarious liability may have been exercised at any time within up to 2 years preceding the bankruptcy filing.
||An element of fault was previously required in order for a controlling person to be held vicariously liable.
||The element of fault is not eliminated. Arguably, a controlling person may be held liable in the absence of fault. Actual exercise of control, coupled with actual harm to creditors’ interests therefrom, now comprise the main test for liability.
||No provisions prohibiting termination of bankruptcy proceedings before vicarious liability claims have been considered.
||There is now a prohibition on termination of bankruptcy proceedings before vicarious liability claims have been considered by the court in full.
||Vague definition of “interested parties”.
The new law clarifies and expands the concept of an “interested party”, which now includes inter alia persons falling within the debtor’s group, the debtor’s affiliates and those deemed interested under JSC Law and LLC Law.
[Editor: This is interesting because “interested parties” can include relatives -- not just a debtor’s direct relatives, but even the sibling of a spouse! Employees by default are not interested parties.]
[Editor: According to Bob Bernstein, Esq., In the U.S., we have "parties-in-interest" which is more a general concept of who is entitled to notice and who can be heard. The fact that one may be a "party-in-interest" under the US Code, in no way connotes liability, just "interest" in the broad sense of having some connection with the outcome of the case or this issue.]
||The law listed five (5) grounds when the debtor’s CEO was obliged to file for bankruptcy.
In addition to the existing five (5) grounds, the new law introduces the concepts of “insolvency” and “insufficiency of assets” of a debtor. In each case, the CEO and/or liquidation commission (in the event of a voluntary liquidation of a debtor outside bankruptcy) must file for bankruptcy.
This significantly broadens the list of cases when a CEO / liquidation commission must file for bankruptcy.
||Vague grounds for challenging transactions. No procedural details. As a general rule, transactions concluded within the six-month period preceding bankruptcy filing could be challenged. However, no time limitations were stipulated for challenging transactions with interested parties. Such transactions could generally be challenged by the administrator (and in respect of preferential transactions).
The New Law introduces more clearly now the two (2) basic categories of “suspect transactions” and “preferential transactions”.
Generally, these categories can now be challenged as follows:
1. Suspect transactions include (a) “undervalue” transactions, which can be challenged if concluded within one (1) year preceding bankruptcy; and (b) transactions “aimed at causing harm to creditors’ proprietary rights”, which can be challenged if concluded during a period of up to three (3) years preceding bankruptcy.
2. Preferential transactions include those where creditors take security for old loans, prepayments (whilst other creditors are not being paid) or a change in priority of a creditor. These can generally be challenged if concluded during a period of one (1) month up to six (6) months preceding bankruptcy, depending on the circumstances.
The New Law also stipulates the time period for challenging interested transactions (which may be either suspect or preferential). As a general rule, these can now be challenged if concluded within three (3) years preceding bankruptcy. For interested transactions, this is the main change in the law (as it now presumes both aim to harm creditors’ proprietary interests and knowledge by the counterparty, where the counterparty is interested.
Only administrators may challenge suspect or preferential transactions now (and impliedly must do so upon a decision of the creditors’ meeting). Previously, an individual creditor could file a claim under Article 103(3) to avoid a preferences concluded in a 6-month suspect period.
||No express provisions detailing what happens following a successfully-challenged transaction.
||The New Law contains detailed procedures on avoiding transactions, the return of assets/funds to the bankruptcy estate and the subsequent status of the debtor’s counter-party to such transactions in the bankruptcy proceedings.
If you have any questions regarding this article or bankruptcy law in Russia, please contact Paul de Drée at email@example.com.
Other Sources of Information on Russian Bankruptcy Law
Editor: The following are other Internet resources (in English) on Russian bankruptcy law:
Overview of Russian Bankruptcy Law and Practice: What Can Creditors Expect in the Current Crisis? by Tim Stubbs, Partner, Salans for US-Russia Business Council (February 26, 2009) -- 32-pg PDF speaking to the Law prior to the May 5, 2009 changes.
Time to try the grounds, by S. Alekseev in Russian Law Online (April 10, 2009) – This web page includes links to other commentaries about Russian bankruptcy law. The web site includes an Encyclopedia of Russian Law along with articles by a number of columnists.
Paul de Drée is a partner in Salans' Paris office. He specialises in bankruptcy law, litigation, debt collections, creditors' rights and international commercial law. He advises a wide range of French and international clients (including investors, distressed companies, trustees in bankruptcy, liquidators, directors and creditors) in insolvency and reorganisation matters.
Salans is a full service international law firm built on a pioneering spirit with over 750 lawyers globally operating from 21 offices. Salans attorneys are uniquely located in a combination of emerging market hubs and key financial centres, providing clients with comprehensive cross-border legal services.
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