Review of Recent, but Last Year Amendments in the Law on Bankruptcy

Last year, yet another amendments to the Federal Law on Insolvency (Bankruptcy) were enacted. It was quite anticipated for many reasons. First of all, distinct increase of the number of bankruptcies, it is unknown whether we have hit the bottom of the crisis, but bankruptcy became a quite popular affair. For some it is inevitable end of business, for others it is a tool for getting rid of debts.

Secondly, bankruptcy procedure is rather complicated and multidimensional, whereby it is quite hard to provide at once efficient control for this process. The law was initially doomed to multiple revision, additions, fight against errors and inefficient solutions.

New version contains a number of significant amendments in the area of legislative control of bankruptcy procedures, which, in our opinion, should be emphasized.

Procedure for the assessment of creditors’ claims has changed

The procedure for the assessment of contents and size of financial obligations and mandatory payments has changed. Previously, they were documented as of the date the petition on bankruptcy was filed to court. New revision stipulates assessment of financial obligations and mandatory payments as of the date the first bankruptcy procedure is implemented, if such obligations emerged prior the arbitration court ruling on acknowledging the debtor a bankrupt, but was declared after such arbitration court ruling.

The new development seems reasonable: quite a lot of time passes from the moment petition on bankruptcy is filed to court and until the debtor is declared a bankrupt, and at the same time the first bankruptcy procedure is implemented. During this period of time, the size of financial obligations may increase significantly, and it would be unfair to ignore such increase.

Critical amount for the commencement of bankruptcy has increased up to 300 000 Rubles

According to the previous version of the law on insolvency, proceedings on bankruptcy case could be initiated by the arbitration court provided the claims against the debtor being a legal entity constitute in total not less than 100 000 Rubles. New version increases this amount to 300 000 Rubles.

Important amendment lies in the fact that prior referring to the arbitration court the applicant (whether a creditor or a debtor) should publish notification on the intent to file application on the acknowledgement of the debtor as insolvent by incorporating it on the Unified Federal Register of Information on the Activity of Legal Entities 15 days prior referring to court.

Banks and tax authorities have been permitted to initiate bankruptcy procedure in respect of their debtors without court ruling

For initiating insolvency, banks no longer need to confirm indebtedness in court as all other creditors. Banks are entitled to refer to court with petition on bankruptcy from the date features of insolvency emerge in debtors.

Bodies authorized to receive mandatory payments (Federal Tax Service, customs and etc.) have been granted similar right to refer to court with petition on bankruptcy, if the debtor has indebtedness unconfirmed by court ruling. Yet, unlike banks, they cannot do this at once, but only in a month after the decision on indebtedness recovery is made by tax or customs authority.

This innovation will significantly simplify bankruptcy procedure in respect of their debtors for banks and tax authorities because previously they had to first pass, at least, two instances of court proceedings only to confirm the fact of indebtedness. Debtors, in their turn, are deprived of opportunity to overextend the process and delay the bankruptcy date.

Procedures for documenting voting results at meetings of creditors have been supplemented

Minutes of meeting of the committee of lenders should be drawn up in two counterparts, one is sent to the arbitration court not later than in five days from the date when the meeting of the committee of creditors was held, and the second is maintained by the party carrying out the meeting of the committee of lenders.

The following copies should be enclosed to the minutes:

Voting ballots (unless regulations stipulate other form of decision-making);
Materials given to members of the committee of creditors for information and (or) approval;
Documents proving due notification of members of the committee of creditors on date and place of the meeting of creditors;
Other documents at the discretion of the party carrying out the meeting of the committee creditors, or based on the decision of the committee of creditors.

Information on decisions made at meetings of the committee of creditors should be incorporated by the administrator into the Unified Federal Register of Information on Insolvency within three business days from the date such administrator receives minutes of the meeting of the committee of creditors.

Rights of receivers have been extended

Under the revised law, receivers will be able to request information not only about the debtor, but also about parties, which are part of the debtor’s governing bodies, and also about the debtor’s controlling parties. Also, the receiver will be able to request information on debtor’s liabilities to state non-budget funds of the Russian Federation. These bodies should submit required information to the receiver within 7 days from the request date free of charge.

Receivers will also have the right to request information constituting business, trade and bank secret.

Under the decision of the governing body, alongside with the additional agreement on compulsory insurance of his/her liability the receiver should enter into the additional agreement on the insurance of the receiver’s liability.

The debtor will be unable to choose the receiver

For those debtors who thought of using the bankruptcy procedure for getting rid of inconvenient creditors by way of different manipulations, this is the most unpleasant innovation in the law. Previously, the struggle between the debtor and creditors began prior the implementation of the first bankruptcy procedure. It was essential, who would be the first to refer to court with the petition on bankruptcy. The first to refer specified in the petition the nominee for the receiver, which, as a rule, the court approved. Thus, the struggle often came down to the situation, when both creditors and debtors sought to put in the helm “their” receiver and control through him/her the bankruptcy procedure for their benefit. Now debtors are deprived of opportunity to put in the helm “their” receiver, they have no right to specify in the petition on bankruptcy the last name of the receiver, they can only specify the self-regulatory organization (SRO), from which members the receiver should be approved (its title and address).

The receiver is defined by random selection and the SRO is selected the same way, when it is not specified in the debtor’s petition. By introducing such selection procedure, the legislator seeks to remove impact of the debtor on the selection of the receiver and to approve independent receivers.

Grounds for refusal to approve the receiver have been defined

Ground for refusal will be deemed information that the receiver has no sufficient competence, good faith and independence for carrying out such procedure. Out of this definition it is not quite clear whether such information is provided only by the SRO or may be provided by other parties. However, even if there is such information, the receiver may be approved by court, but additional insurance (for the insurance amount not less than the size of the compensation fund of the SRO as of the last reporting date) will be required for this. In such case the size of possible payment out of the fund of the SRO will decrease from 5 to 1 mln Rubles.

The size of the compensation fund will equal 20 mln Rubles

The provision that the minimum size of the compensation fund should equal 28 000 000 Rubles has been removed.

Also, amendments concerned the size of compensation payments. Previously, the size of compensation payment could not exceed 25% of the size of the compensation fund of the SRO per one case of infliction of damage.

Now, the size of compensation payment cannot exceed 5 000 000 Rubles per one case of infliction of damage. If the nominated receiver was approved by the arbitration court, the size of the compensation payment cannot exceed 1 000 000 Rubles.

Rights of the debtor’s employees at bankruptcy

Indebted organizations have new concerns. If previously at bankruptcy the most active enemies of the debtor were major creditors and tax authorities, now debtor’s employees joined them. Earlier people, against who the debtor had salary indebtedness, had no right to refer to court with petition on bankruptcy, now they have been granted such opportunity, moreover, not only the current employees, but former, it means those who are not employed by the debtor as of the moment of referring to court with petition on bankruptcy. Moreover, the legislator has granted to employees opportunity to unify their claims and file joint petition on the acknowledgement of the debtor a bankrupt.

It may create serious difficulties for debtors, taking into the account that unfriendly creditors may easily use employees to initiate bankruptcy.

What rights have now been granted to employees (former employees)?

Debtor’s employees have acquired the right to claim in the arbitration court to acknowledge their employer a bankrupt.¹ Yet, employees can do that only having enacted court ruling. But taking into the account that in most labor disputes courts take the side of the employee and reduced period for court proceedings on such categories of cases, it would be no trouble to get such ruling.
Moreover, simplified procedures (i.e. without court ruling) for the inclusion of claims on payment of severance packages or salary to people, who work or previously worked under the labor contract, remain in respect of already initiated case on bankruptcy.
Indebtedness against employees should now be taken into the account by the debtor’s management at defining bankruptcy features of the company².
If case on bankruptcy is initiated following the petition of an employee and afterwards it is revealed that the debtor has insufficient property to cover court and other mandatory expenses for the conduct of case on bankruptcy (for example, remuneration of the receiver), employee will be released of liability to cover them (expenses)³.
The revised law specifies the seniority of current debt recovery to debtor’s employees, who remained employed (or remain employed) as of the moment petition on the acknowledgement of the debtor a bankrupt was accepted. Such claims should be settled on a second-priority basis, and any other claims in this seniority should be excluded to prevent frauds on behalf of the management, receivers and other parties.
The representative of debtor’s employees, the employee or former employee are now entitled to file application for pursuing joint liability on the debtor’s controlling party, which includes head of the debtor. Grounds for pursuing joint liability are the same as for the cases of reference of other creditors with such applications⁴.
Procedures for convening and carrying out general meeting of employees and election of representative of employees have been determined. Meeting of debtor’s employees, former employees should be carried out not later than five business days prior the date, when the meeting of creditors is carried out. Obligation to convene a meeting of employees is placed on the receiver. However, if the receiver fails to perform such obligation, meeting of employees, former employees may be carried out by the person or people demanding such meeting, for example, employees themselves.
Services of the representative of employees may now be paid and covered at the cost of the debtor. Such amendments should promote emergence of professional category of representatives of employees⁵.

By the said amendments, the legislator based on the aim to protect the weakest category of creditors has granted employees quite effective mechanism of influence on the employer both within the bankruptcy procedure and beyond it.

Bankruptcy of citizens

Surely, the most anticipated amendments introduced last year to the Law On Bankruptcy, which we should mention, were provisions defining procedures for the bankruptcy of citizens. Bankruptcy procedure for citizens was anticipated for a long time and the urgent need for such procedure was obvious and had serious economic background. The main goal of the introduction of such procedure is to give opportunity to citizens to be released from credit dependence. It is common knowledge that banks struggle to dictate to citizens such credit terms, which with average existing balance of income and consumption of citizens simply prevent the latter from repaying loans. In essence, it is credit slavery. On the other hand, bankruptcy of citizens will allow releasing citizens from the pressure of various collection agencies, which activity is often unlawful. Thirdly, bankruptcy of a citizen will allow banks writing off credit debt as uncollectable.

Issues devoted to the implementation of bankruptcy procedures for citizens were frequently covered on the pages of our publication, and even this edition has their short review in page 12. That is why we will not dwell on them in details. Though one detail should be mentioned, it is somehow rarely seen in comments, articles and recommendations. It is widely discussed that in order to file to court application on bankruptcy of a citizen his/her total indebtedness should exceed 500 000 Rubles. But, luckily, most citizens have smaller debts. It turns out that they cannot be released of such debt, but taking into the account the average income around the country the amount of 200-300 000 Rubles is overwhelming to repay.

But in fact this is not quite true. Debt above 500 000 Rubles is a required term only for citizen’s creditors. If a citizen voluntarily wishes to be acknowledged a bankrupt, he/she is entitled to refer to court with any size of indebtedness, even if it is 1 Ruble, it is them, who cannot refer to court with application on the acknowledgement of the citizen a bankrupt, if his/her indebtedness is below the said amount. Such limit is designed to avoid mass bankruptcy of citizens, whose debts can still be repaid by them independently. Also, the limit of 500 000 Rubles is determined to create liability of a citizen to file to court independently petition on bankruptcy.

If a citizen voluntarily wishes to be acknowledged a bankrupt, he/she is entitled to refer to court with any size of indebtedness, even if it is 1 Ruble. It is important only to have circumstances, which obviously prove that he/she is unable to perform financial obligations and (or) obligations for making mandatory payments within specified time limit, and also to have features of insolvency or insufficiency of property.

Today, it is fair to say that there is a legal regulator of bankruptcy of citizens, but it is still unclear how it will work in practice. Today courts have a great number of petitions on the bankruptcy of citizens, but initiated proceedings on bankruptcy of citizens are isolated, and yet there are no completed proceedings at all. That is why amendments, which we discussed in our review, are obviously not the last alterations in the Law On Bankruptcy, but we will keep track of them.

Paragrapf 1 Article 7 of Law on Bankruptcy.
Paragrapf 1 Article 4 of Law on Bankruptcy.
Paragrapf 3 Article 59 of Law on Bankruptcy.
Paragrapf 5 Article 10 of Law on Bankruptcy.
Paragrapf 11 Article12.1 of Law on Bankruptcy.

Leonid Kunin

Ex-Senior Lawyer

Tax and Legal Practice

Korpus Prava (Russia)