In December 2014 Russia’s Federal Law “On Insolvency (Bankruptcy)” was significantly amended to introduce bankruptcy of individuals and modify the rules for bankruptcy of legal entities. The amendments related to bankruptcy of legal entities came into effect on 29 January 2015. The amendments related to bankruptcy of individuals will come into effect on 1 July 2015. Important changes to the bankruptcy of legal entities Simplification of Initiating a Debtor’s Bankruptcy for Banks Banks and other lending institutions and governmental authorities are entitled to initiate a debtor’s bankruptcy without obtaining prior court judgments confirming the debtor's debt. Rights of Secured Creditors Secured creditors have obtained additional rights to vote at the general creditors’ meeting on the appointment or dismissal of bankruptcy administrators, closure of bankruptcy liquidation and transition to external management. Previously secured creditors did not have such rights if they elected to sell the pledged property during the initial stages of bankruptcy. Furthermore, secured creditors are now entitled to set the starting sale price of a pledged asset, determine the procedure and conditions for its preservation and retain the pledged asset during the course of an auction. Protection against Bad Faith Self-Bankruptcies Debtors may now only initiate self-bankruptcy subject to prior notification to creditors of their intention to file for bankruptcy. Moreover, debtors may no longer nominate bankruptcy administrators. The bankruptcy administrators will be nominated by self-regulatory organizations of administrators and determined automatically after the debtor's filing for bankruptcy. Bankruptcy of individuals Initiation of Bankruptcy The bankruptcy of an individual may be initiated by a creditor or by a governmental authority if: 1. the debt exceeds RUB500,000 (approx. USD7,500); 2. the debt is more than three months overdue; www.bakermckenzie.com For further information please contact Edward Bekeschenko +7 495 787 27 00 email@example.com Vladimir Dragunov +7 495 787 27 00 firstname.lastname@example.org Anton Maltsev +7 495 787 27 00 email@example.com Simon H.P. Morgan +7 495 787 27 00 firstname.lastname@example.org Pavel Novikov +7 495 787 27 00 email@example.com Maxim Kalinin +7 812 303 90 00 firstname.lastname@example.org Baker & McKenzie — CIS, Limited White Gardens, 10th Floor 9 Lesnaya Street Moscow 125047, Russia Tel.: +7 495 787 27 00 Fax: +7 495 787 27 01 BolloevCenter, 2nd Floor 4a Grivtsova Lane St. Petersburg 190000, Russia Tel.: +7 812 303 90 00 Fax: +7 812 325 60 13 Restructuring & Insolvency 2 Legal Alert March 2015 3. the debt is confirmed by an enforceable court decision (not required for debt under loan agreements, debt under a notarized agreement or in certain other cases). A debtor may initiate self-bankruptcy if he/she proves (i) his/her financial insolvency, (ii) property insufficiency and (iii) inability to satisfy creditors' claims in due time. A debtor must initiate self-bankruptcy if performance of his/her obligations would lead to inability to satisfy the claims of other creditors, which exceed RUB500,000. The bankruptcy of individuals who are entrepreneurs or were entrepreneurs at the time of default is administered by state commercial courts. In other cases civil courts will have jurisdiction, although the Supreme Court has recently suggested that all bankruptcies should be administered by commercial courts. Available Bankruptcy Procedures An individual may be subject to the following bankruptcy procedures: debt restructuring; sale of debtor’s property; amicable settlement. Debt Restructuring. The creditors and governmental authorities may approve a restructuring plan under which the debt is restructured (i.e. postponed, discounted, or otherwise modified) for up to three years. The restructuring option is not available if the debtor has no valid source of income and in certain other cases. If a restructuring plan is successfully performed, the individual is not declared bankrupt. Sale of Debtor’s Property. If debt restructuring is not available or a restructuring plan is not performed by the debtor, the court will declare him/her bankrupt and order the sale of his/her property. Property is normally sold at auction, and certain items (luxury goods, real estate) may be sold only by way of public auction. Certain items, e.g. the debtor's only residential property, cannot be sold at all. Once the debtor is declared bankrupt and his/her property sold, creditors' claims are terminated. Amicable Settlement. The creditors / governmental authorities and debtor may enter into a settlement any time, which can be approved by a majority vote. Smaller creditors are crammed down. Nuances Related to Secured Creditors A secured creditor may propose including the sale of pledged property into the restructuring plan. In cases where a secured creditor did not vote for a restructuring plan but the plan was subsequently approved, pledged assets can be sold at auction at an application of the secured creditor. In these cases the secured creditor is entitled to 100% of the proceeds received from the sale of the pledged asset under the restructuring procedure, provided that proceeds do not exceed the amount of debt to the secured creditor. The court however may refuse the sale of the pledged property if such sale would prevent the performance of the proposed restructuring plan. Restructuring & Insolvency 3 Legal Alert March 2015 Under the procedure for sale of property, a secured creditor is entitled to 80% of the proceeds received from the sale of the pledged asset. The rest can be claimed similarly to unsecured creditors. This LEGAL ALERT is issued to inform Baker & McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.