A new set of uniform rules for challenging transactions in insolvency and clarifying the circumstances in which debtors must file for insolvency has been introduced in Russia.
On 28 April 2009, a new law1 introducing certain modifications to the Russian insolvency legislation was signed by the Russian president following approval by the Russian legislative bodies. Most importantly, the law introduces a new set of uniform rules for challenging transactions in insolvency and clarifies the circumstances in which debtors must file for insolvency (the new rules). The new rules will take effect on 6 June 2009.
Broadly, transactions can still be challenged on the same insolvency-specific grounds as before, namely: preference, undervalue, interested party transaction and executory contract, in addition to the general civil law grounds for invalidating transactions. The new rules, however, have introduced specific criteria for determining preference and undervalue, clarified the concept of ‘interested parties’, set forth new statutory hardening periods for different types of transactions and clarified creditors’ rights if a particular transaction is declared invalid.
Furthermore, the new rules have finally harmonised the rules for challenging transactions applicable to Russian credit institutions (banks) and non-banking corporates.
Undervalue or ‘suspicious’ transactions
The new rules have introduced the new concept of ‘suspect’ transactions (podozritelnye sdelki), which can be:
- transaction concluded by a debtor where the consideration receivable by it from its counterparty is not of equal value (neravnotsennoe vstrechnoye ispolnenie: Type A Suspicious transaction). Type A Suspicious transactions include transactions where the fair value of the consideration payable and/ or liability incurred by the debtor materially exceeds that payable or incurred by the counterparty or the terms of which are materially worse for the debtor when compared with those of analogous transactions concluded in similar circumstances; and
- transaction concluded by the debtor with a view to causing harm to the interests of the creditors (prichinenie vreda imushenstvennym interesam kreditorov), as a result of which the debtor’s creditors may become unable to recover all or part of the debt due to them from the debtor’s property, provided that (i) harm was actually caused to the creditors and (ii) the counterparty to the transaction was aware of the true intent of the transaction (Type B Suspicious transactions). The (ii) above is presumed where the counterparty is an interested party2 or otherwise knew (or should have known) of the debtor’s insolvency3 or insufficiency of assets4.
Type B Suspicious transactions include, without limitation, the following transactions:
- transactions resulting generally –– in the decrease of the debtor’s asset base or asset value and/or increase of the volume of the claims towards the debtor;
- transactions concluded by the debtor with an interested party or without consideration at the time when the debtor was already insolvent or had insufficiency of assets;
- transactions (or a series of related transactions) where the aggregate value of consideration payable and/or liability incurred by the debtor exceeds 20 per cent (or, in the case of a bank, 10 per cent) of the debtor’s balance sheet asset value; and
- transactions where, after disposal of an asset, the debtor maintained possession and/or control over the relevant asset.
Suspicious transactions may be invalidated by the court, at the request of the insolvency administrator, if concluded within three years prior to the insolvency filing or any time after the filing. In cases of Type A Suspicious transactions, this is reduced to just one year.
This applies to transactions that lead, or may lead, to preferential treatment for a particular creditor. The new rules set out the following criteria for determining preference (Type A Preference transactions):
- transactions aimed at providing security for pre-existing debt;
- transactions that may alter the order in which the then existing creditors’ claims were discharged;
- transactions that may lead to a discharge of unmatured debt owed to a particular creditor; and
- transactions resulting in a discharge of a particular creditor’s claims in preference to the statutory priority.
Preference transactions may be invalidated by the court at the request of the insolvency administrator if concluded within one month prior to the insolvency filing or any time after the filing.
Preference transactions referred to in paragraphs (a) and (b) above or any preference transaction where the counterparty is an interested party or a party that should have otherwise known of the debtor’s insolvency or
insufficiency of assets (Type B Preference transactions) may be invalidated if concluded within six months prior to the insolvency filing or any time after the filing.
Transactions made by the debtor (a) on a stock exchange; (b) in the ordinary course of its business unless the value of a given transaction exceeds 1 per cent of the debtor’s aggregate asset value; or (c) against adequate consideration, unless intended to cause harm to the interests of the creditors (eg Type B Suspicious transactions) cannot be challenged.
Furthermore, the court may refuse to invalidate a particular transaction on insolvency grounds if (a) the value of the property received by the debtor exceeds the amount that, upon invalidation, would have to be returned to the debtor’s bankruptcy estate or (b) the counterparty has returned the consideration received from the debtor to the debtor’s bankruptcy estate.
Rights of creditors
Suspicious transactions and preference transactions are voidable rather than void ab initio: ie they remain valid and binding until set aside by a court. If successfully challenged, all consideration given by the debtor under the relevant transaction will be returned to the debtor’s bankruptcy estate, with the counterparty acquiring an unsecured claim against the debtor ranking (a) together with claims of all other unsecured creditors or, (b) in the case of Type B Suspicious or Type B Preference transactions, behind all other unsecured creditors.
Other significant changes
Apart from the above, the new rules also:
- impose an obligation on the debtor’s general director to file for insolvency as soon as it becomes aware of the debtor’s insolvency or insufficiency of assets, but no later than within one month of becoming aware of these circumstances; and
- introduce rules (with respect to both Russian banks and non-banking corporates) whereby a debtor’s controlling person (kontrolirueshee litso dolzhnika), founder (participant), director or other managing body may be held liable for the debts of the insolvent debtor.