Russian Insolvency Law: the mechanism for creditors’

protection or the opportunity to raid the company?

Olga Lvova

The Lomonosov Moscow State UniversitySchool of Public Administration

Insolvency law should provide protection of interests of …

• … creditors from unfair debtor’s actions• … one creditors from unfair actions of other

creditors• … the debtor from creditors’ unfair actions

Mechanisms for creditors’ protection under Russian legal framework

1. Transactions voidance 2. Subsidiary liability of the debtor’s director and

“control persons of the debtor” when the assets are not enough

3. Early filing for debtor’s bankruptcy to have an opportunity to choose Insolvency Administrator

What transactions can be voided?1. Suspicious transactions:

With unequal counter-performance

Made for causing harm to creditors’ interests

1 year – before bankruptcy – 3 years

• contract price was < or > than market

level• in reality debtor had

no assets and the deal was impossible

• presumption: interested party knew that the debtor whether wanted to cause harm to creditors’ rights OR had insolvency features

… only by Insolvency

Administrator

What transactions can be voided?2. Transactions giving preference to one creditor

prior to other creditors• if creditor wants to get additional security of existing debt in advance to debtor’s bankruptcy such creditor should take into account the opportunity of its voidance

• if transaction has been invalidated the assets is included in bankrupt’s estate to be distributed among all creditors

• if creditor has participated in such deal – some kind of penalty

But in Russia creditors get only 6-8% of their claims

in the end of bankruptcy procedure.

Why?

1. Distressed assets are sold at low prices

• Short terms for purchasing and legal due diligence of such assets

• Risky for buyers who are sustainable companies majorly financed from equity

Liquidity crisis made Russian companies sell assets almost for free:

2. The same debtor’s asset can be pledged for many times

• many opposite creditors secured by the same estate

• claims of the next collateral holder will be satisfied from the proceeds of pledged property sale only after satisfaction of former collateral holder claims

3. Barriers for fair auction Manipulations with prices and nominee participants

? Who win from this? - Creditors, but absolutely definite creditors

90,14%

3,99% 5,87% Auctions with 0 partic-ipants

Auctions with 1 partic-ipant

Auctions with more than 1 participant

4. Other reasons• Absence of the united criteria for conversion of

claims expressed in foreign currency into national one

• Debtor can substantially slow down the proceeding by producing various opposing demands

• Before filing for debtor’s bankruptcy the creditor should apply to enforcement proceeding

Asset stripping as a specific problem can be …

• … realized by the debtor through contributions to the equity capital of other legal entities

• … made even by banks as unfair creditors who sponsored their management’s and other projects and progressively transferred from being creditor to being debtor

• … a part of fictitious or deliberate bankruptcy

Bankruptcy of assetless debtors is for creditors who…

• know that it is a way to acknowledge large debt as a part of tax expenses (to write debt off legally)

• are affiliated with debtor and pursue other goals but getting money back

• just don’t think about this feature of debtor (e.g. “Gazprom” filed for bankruptcy of about 1500 debtors during one week)

Sometimes the debtor should defend from creditors

• Creditor acquires a significant part of debt becoming the main creditor. Than under the threat of bankruptcy or during bankruptcy proceedings he grabs most expensive firm’s asset (real estate, land, etc.)

• Criminal code does not contain special offence “corporate raiding” which is anyway hard to be proved

Conclusions • Current Russian Insolvency law is more

oriented to creditors’ rights protection than before: modern basis for transaction avoidance and other ways to influence the process increase chances to charge debt.

• Bankruptcy can still be both a mean of hostile takeover of debtor’s assets and waste of time by creditors trying to get money back.

Thank you!

Olga LvovaLvova.oa@gmail.com

Lomonosov Moscow State UniversitySchool of Public Administration

RUSSIA