New grounds and conditions have been introduced to allow creditors to bring the executives and/or members of the management bodies of bankrupt Russian companies to subsidiary liability. This is expected to increase debtors’ assets that can be used to satisfy creditors’ claims as fully as possible. Also, any person will be able to find out whether bankruptcy procedures have been initiated against a legal entity by searching the * (the “Company Register”).

These novelties are brought about by Federal Law No. 488-FZ dated 28 December 2016* (the “Law”) which is primarily aimed at combating abuses by dishonest individuals and corporate entities who use bankruptcy and liquidation proceedings to evade the performance of their obligations towards good faith counterparties.

The Law has supplemented the provisions of the Federal Law “On Limited Liability Companies”*, the Federal Law “On State Registration of Legal Entities and Self-Employed Entrepreneurs”* and the Federal Law “On Insolvency (Bankruptcy)” (the “Bankruptcy Law”).

Most amendments will come into force on 28 June 2017, except for some provisions that will take effect on 1 September 2017.

Amendments affecting all types of companies

Clarification of the procedure for imposing subsidiary liability on persons controlling a company

The main amendments under the Law regulate the issues of the subsidiary liability of persons controlling a company’s activities if their bad faith or unreasonable actions have led to the legal entity’s bankruptcy. This is, for instance, the case, when the persons controlling a debtor have caused the debtor’s failure to comply with its obligation to file an insolvency petition or the debtor is declared bankrupt as a result of its controlling persons’ actions (or omission to act).

‘Controlling persons’ mean individuals or entities that are authorised to act on behalf of a legal entity, as well as its participants/shareholders (founders) or members of its management bodies.

The Law gives creditors the right to file two types of petitions to subsequently restore their violated rights either in the course of bankruptcy proceedings against a debtor or within a certain period after such proceedings have been completed (or terminated by a court for some reason):

– a petition to impose subsidiary liability on the persons controlling the debtor; and

– a petition for compensation of the debtor’s losses caused by its founders (participants/shareholders) or management bodies.

These petitions will be considered by the commercial court that is reviewing the bankruptcy proceedings against the debtor or the commercial court that had tried the debtor’s bankruptcy case earlier and completed the related proceedings (or terminated the proceedings on grounds stipulated by law).

Depending on the grounds provided for in the Bankruptcy Law, such petitions may be filed by the bankruptcy manager on its own initiative, or could be based on the decision of the creditors’ meeting or the creditors’ committee. The petitions could also be filed by a bankruptcy creditor, a debtor’s employee (current or former), as well as a representative of the debtor’s employees or an authorised body.

If the persons controlling the debtor had caused the debtor’s failure to comply with its obligation to file an insolvency petition or if the debtor is declared bankrupt as a result of its controlling persons’ actions (or their inactions), a petition to impose subsidiary liability on such persons may be filed either in the course of bankruptcy or liquidation procedures or within three years from the date the debtor was declared bankrupt (in some cases within three years from the date the bankruptcy or liquidation was completed). If the limitation period has been missed for a valid reason, it may be restored judicially.

Writs of execution will be issued to enforce a court decision imposing subsidiary liability on the debtor’s controlling persons. Such writs will state the amount payable to each creditor and the priority of each creditor’s claim.

The obligation to report a company’s bankruptcy or initiated bankruptcy procedures in the Company Register

Under the new rules, the Company Register must include:

– information on any bankruptcy proceedings initiated against a legal entity;

– information on any ongoing bankruptcy procedures against a company (supervision, financial rehabilitation, external management, bankruptcy liquidation) and the dates of their initiation; and

– details of the debtor’s external or bankruptcy manager.

The operator of the Unified Federal Register of Bankruptcy Information* is responsible for e-filing the relevant information with the registration authority within three days after it is entered into the register. The information about the initiation of proceedings under a petition to declare a debtor bankrupt will be entered into the Company Register by the registration authority based on a relevant ruling of a commercial court.

The Law stipulates an important restriction on striking companies off the Company Register: the registration authority will not be allowed to strike a legal entity (including a dormant company) off the Company Register if it is aware that proceedings have been initiated to declare it insolvent (bankrupt) or any of the bankruptcy procedures has been instituted against it.

The amendments affecting LLCs

The extension of the scope of liability of an LLC’s management bodies

Pursuant to the Law, when a limited liability company (an “LLC”) is struck off the Company Register because it is dormant, this will trigger for such company the same consequences as those laid down by civil law for cases when a principal debtor refuses to perform its obligation.

If, in such case, the debtor’s failure to perform its obligations had resulted from its controlling persons’ bad faith or unreasonable actions, subsidiary liability for the debtor’s obligations may be imposed on such persons at the request of its creditors.

Maximum timeframe set for LLC’s voluntary liquidation

The Law also provides that an LLC’s voluntary liquidation may not last for more than one year. However, if the LLC’s liquidation cannot be completed within this timeframe, it may be judicially extended for another six months.

If this deadline has expired or a resolution on the liquidation has been cancelled by the LLC’s participants or management body, another resolution on voluntary liquidation may be adopted no sooner than six months after the information is entered into the Company Register regarding the expiration of the liquidation deadline or the cancellation of the initial resolution to liquidate the LLC.

Recommendations

From 28 June 2017, companies are advised to minimise their business risks by monitoring their counterparties’ good standing and solvency as reflected in the Company Register. This can be done on a regular basis or in relation to certain transactions (especially major ones) on the Federal Tax Service’s website*.

* In Russian