This legal update gives an overview of the key amendments to Federal Law No 127 - FZ "On insolvency (bankruptcy)" dated 26 October 2002 (the Insolvency Law) and Federal Law No 40 - FZ "On insolvency (bankruptcy) of credit organisations" dated 25 February 1999 (the Insolvency Law of Credit Organisations).

On 17 April 2009 the Russian State Duma adopted Federal Law No 73 - FZ - "On amendments to certain legislative acts of the Russian Federation" (the 73-FZ Law).

The amendments introduced by the 73-FZ Law are mostly intended to ensure that creditors' interests are adequately protected in bankruptcy proceedings. The amendments provide new straightforward legal mechanisms which make it more probable that creditors will be able to satisfy their claims.

The 73-FZ Law will be effective from 5 June 2009 and does not apply to bankruptcy proceedings commenced before 5 June 2009. However, the provisions of the 73- FZ Law in relation to challenging transactions apply to transactions conducted after 5 June 2009, irrespective of the commencement date of the bankruptcy proceedings.

The amendments to the Insolvency Law

Debtor's petition

The 73-FZ Law provides additional grounds which put an obligation on the debtor's director to file a petition to the Arbitrazh court (state commercial court) for insolvency. These grounds are: (i) "inability to pay" and/or (ii) "insufficiency of assets".

"Insufficiency of assets" means that the amount of debtor's outstanding monetary obligations exceeds amount of the debtor's assets.

"Inability to pay" means that the debtor ceases to perform its monetary obligations due to insufficient funds. This is assumed unless otherwise established by the Arbitrazh court.

Secondary liability

The proposed amendments implement the secondary liability of a "controlling person" and a debtor's director for debtor's obligations.

The 73-FZ Law stipulates that the "controlling person" and the debtor's director must compensate for the damages to the debtor-company if they are found guilty. The "controlling person" is defined as any person who can, or could within 2 years prior to filing a petition for insolvency, give binding instructions to the debtor or otherwise affect the debtor's activities (e.g., the person authorised to enter into transactions on behalf of the debtor, including the person acting through a power of attorney, as well as the person having control of 50 per cent or more of voting shares of the debtor).

The "controlling person" is responsible for damages inflicted on the creditor's assets as a result of the fulfilment of the controlling person's instructions, or the debtor's performance of the current obligations if there is insufficient funds in the bankruptcy estate. Under the 73-FZ Law, "damages inflicted on the creditor's assets" are defined as being any decrease of value of the debtor's assets and/or any increase in value of claims to the debtor, as well as other consequences of transactions or legally significant acts performed by the debtor which make it impossible for the creditor to satisfy its claims out of the debtor's assets.

However, the "controlling person" is not liable for damages inflicted on creditor's assets if he/she can prove that he/she acted in good faith, and reasonably in the debtor's interests.

Further, the debtor's director is liable for the debtor's obligations if the accounting books are inaccurate or incomplete.

Challenging transactions

Under the 73-FZ Law "suspicious transactions" and "transactions with a preference" made by the debtor can be challenged in court.

It is worth noting that in accordance with the proposed amendments, the "debtor's action" to perform obligations arising from civil, labour, family, tax, customs or procedural law, may also be challenged in court (e.g., providing the employee with material benefits).

The following transactions constitute "suspicious transactions":

• a transaction entered into by the debtor within 1 year prior to receiving the petition for insolvency or after receiving that petition, provided that there is unequal consideration;  

• a transaction entered into by the debtor for the purpose of inflicting damages on creditor's assets, provided that as a result of the transaction damages are inflicted on creditor's assets, and the counterparty to the transaction is aware of that purpose.  

In this regard, the 73-FZ Law sets out criteria for the "awareness" of a counterparty to a suspicious transaction, (e.g., the counterparty to the suspicious transaction qualifies for the interested party), and criteria for the presence of the "purpose",(e.g., the debtor changes its location or hides its assets). The "transaction with a preference" is defined as a transaction made by the debtor for the preference of one of the creditors, subject to circumstances described in the 73-FZ Law.

The proposed amendments provide a list of transactions which may qualify for a "transaction with a preference" (e.g., accord and satisfaction agreement), and grounds for a restriction on challenging those transactions (e.g., transactions made in the normal course of business).

In the case that a "suspicious transaction", "transaction a with preference" or debtor's action is held to be invalid, all the transferred assets must be returned to the bankruptcy estate for further distribution among the creditors.

The amendments to the Insolvency Law of Credit Organisations

The most significant changes introduced by the 73-FZ Law to the Insolvency Law of the Credit Organisations concerns the secondary liability of the shareholders/participants of the credit organisation and officials, i.e. its members of the board of directors/managing board and its chairman.

The above mentioned persons shall be liable for the insolvent credit organisation's obligations if they did not act in good faith and reasonably, and did not take appropriate measures to prevent the insolvency of such credit organisation.

Under the 73-FZ Law the above mentioned persons who are found guilty for the debtor's insolvency are not permitted to acquire more than 5 per cent of the shares of other credit organisations, nor can they hold the position of an official of other credit organisations within 3 years.

The new grounds for challenging transactions (as described above) provided for in the 73-FZ and the Insolvency Law, shall apply to the transactions of credit organisations mutatis mutadis to the provisions of the Insolvency Law of Credit Organisations.