The new personal bankruptcy law enters into force on 1 October 2015

The new personal bankruptcy law enters into force on 1 October 2015. Individuals will now be allowed to go bankrupt while creditors are left to struggle. The rules have caused much apprehension and it remains to be seen how business will operate in the new environment.

The changes introduced by the Personal Bankruptcy Law have raised much talk among Russian banks. Many banks fear that local businessmen will now be able squeeze their claims out of their partners’ assets (those partners who are not proprietors) and that the most prudent creditors will die in painful struggles.

The new institution of personal bankruptcy introduced by Federal Law No. 476-FZ On Amendments to the Federal Law on Insolvency (Bankruptcy) enables individual debtors to discharge their debts in an orderly manner through bankruptcy under one of three basic procedures: restructuring, sale of assets and amicable settlement. The function of insolvency manager will be taken on by a financial manager who will receive a fee for managing the individual’s assets during the insolvency proceedings. Generally, an individual may be declared bankrupt if his/her debt in excess of RUB 500,000 remains overdue for more than three (3) months.

There are several immediate consequences of initiating a personal bankruptcy. One of the most notable outcomes is that all transactions on behalf of an individual must be made by a financial manager. Transactions made in breach of this rule can be challenged within the bankruptcy proceedings. In certain cases creditors may incur liability. However, the banks should not lose hope: the financial manager is required to notify banks about an initiated insolvency, and the banks may avoid liability if the financial manager fails to notify them. It is still unclear whether this rule will work for foreign banks. In the meantime, foreign creditors should remain cautious and require their clients (in legally binding documentation) to inform them of any signs of bankruptcy.

In addition, a new register of bankrupt individuals will help bona fide creditors to minimize these risks.

How the state commercial (arbitrazh) courts (which will handle personal bankruptcies) will cope with the new rules is still the subject of wide speculation. Creditors should also be aware of the risks of political bias.

Certain claims (e.g., claims to an individual as a shareholder or member of a board of directors) which have not been settled in the bankruptcy proceedings will survive and creditors with such claims will keep their hopes alive.