Insolvency Moratorium as a Part of Business Rescue Programs in Russia and England

08 April 2020

Businesses around the world are currently being faced with the enormous funding and operational problems as the result of massive quarantines, which are being introduced by the national governments globally to slow down the spread of the Covid – 19 virus. Various measures are getting introduced to rescue the businesses, which are being hit the hardest now.

Here is a short overview of the key bankruptcy law related measures, which have been introduced very recently or which are still being considered in Russia and in England.

Insolvency Moratorium - England

Coming reforms

Temporary suspensions of the creditors led insolvency proceedings were introduced already in Spain, Australia and Germany. A similar kind of suspensions are likely to be introduced in England also.

The Secretary of State for Business, Energy and Industrial Strategy made the announcement concerning the rescue measures for the UK business, which included insolvency law related measures, on 28 March 2020 (further the "Announcement"). It follows from the Announcement that a new form of an insolvency moratorium and a temporary relief from a wrongful trading liability for the directors are likely to be introduced in the coming weeks to help the businesses, affected by the Covid-19 pandemic to restructure their debts and to try to stay afloat.

The relevant legislation has not been passed yet. While the legislation is being waited for, The Insolvency Committee of the City of London Law Society (CLLS) submitted a paper, called "Proposals for mitigating the short term effects on viable businesses of Covid-19" (further the "CLLS Paper") (*1). The measures in the said paper are said to be focused on the businesses, which are "viable, but which may suffer short term disruption to cash flow as a consequence of Covid-19. They are [the measures] not intended to provide a solution to the problem of businesses which cease to be viable as a consequence of Covid-19".

The CLLS Paper suggests that the "COVID-19 Declaration" (further the "Declaration") should be filed by the companies, experiencing operational and/or liquidity problems as the result of the COVID-19 related circumstances. The effect of the Declaration is intended to be as follows: (i) creditors will be unable to file a winding up petition for 90 days from the date of Declaration, (ii) it will be possible to file a Declaration even after a petition to wind up has already been filed; (iii) the creditors would still be allowed to apply to court to lodge a winding-up petition. The Declaration also suggests that a new moratorium regime could be introduced, which would be in addition to the currently existing administration moratorium regime under the IA 1986.

In contrast to the existing regime, the Declaration suggests that a new, temporary moratorium should be available without having to appoint an administrator, in cases, when the directors are trying to put in place the restructuring measures to overcome the COVID-19 related liquidity problems. Such moratorium should be available for 90 days, as opposed to the usual 10 days under the IA 1986. Having said this, the Court will have the power to annul this new type of a moratorium upon the creditors' request, if the Court is satisfied that the creditors are unlikely to be paid in full even after the COVID-19 pandemic related measures are removed. It is worth noting that the directors, who will attempt to use the Declaration in a bad faith, might face the criminal penalties.

To what extent and exactly how the mechanisms, provided for in the CLLS Paper, are going to be implemented remains to be seen.

Apart from the potential measures discussed above, the insolvency law part of the business rescue programme may well also include changes to the restructuring mechanisms, which were proposed back in August 2018 (*2). These changes will include binding the dissenting stakeholders to a new restructuring plan (so-called "cross-class cram-down") as well as another form of a 28 days moratorium with an appointed "monitor", which might be helpful to the businesses long term, once the immediate emergency measure, aimed at the current quarantines, are no longer in place.

Insolvency Moratorium – Russia

General Overview of the Measures Currently in Place

On 1 April 2020 the Russian government passed a new law "On making changes to the certain laws of the Russian Federation in connection with prevention and liquidation of the State emergencies", which allowed the government to introduce certain changes to the current law with an aim of implementing the business rescue package. As the result of this, a new section 9.1 was introduced to the Russian Insolvency Law Act, which made it possible to introduce an insolvency moratorium for certain businesses. Further, on 3 April 2020 the Russian government passed a new decree "On introduction of moratorium on a commencement of the insolvency proceedings following a petition by the creditors" No. 428 (further "the Decree 428"). 

The Decree 428 together with the said s.9(1) of the Insolvency Law Act (further the "Insolvency Law Rescue Programme") introduced an insolvency moratorium regime, which came into force on 6 April 2020 and which will be in place up until 6 October 2020, on the following conditions: 

(i) the creditors may not commence the insolvency proceedings against the debtor, provided that a debtor falls into one of the business categories, specified by the Insolvency Law Rescue Programme (further the "Debtor"). The said business categories include airlines, tourism, catering, entertainment and culture, fitness clubs and sports businesses, conferences and exhibition, educational and other services to name a few. One can check whether a company in question is covered by the Insolvency Law Rescue Programme via the tax authorities web site - https://service.nalog.ru/covid/

Please note that a Debtor must be a legal entity, which includes a sole trader, but not a private individual. 

(ii) the Debtor and its officials (the directors of a company) are exempt from an obligation to file an application for a voluntary liquidation, even if there are clear signs of insolvency (similar to the concept of a "wrongful trading" under the English insolvency law); 

(iii) the creditors may not enforce any securities against the Debtor's property; 

(iv) any pending enforcement proceedings against the Debtors are stayed; 

(v) if a creditor gave his written consent to a settlement agreement during the moratorium period, then during 3 months after the end of the moratorium such creditor will be regarded as having voted in favour of a settlement. This can be very helpful if the bankruptcy proceedings are commenced within 3 months after the end of the moratorium. 

(vi) during the first three months after the end of the moratorium, for a settlement agreement to be approved in the insolvency proceedings context, the majority vote will be enough, as opposed to unanimous approval, which would normally be required. 

Consequences and Limitations of the Insolvency Law Rescue Programme

One can see from the above that the moratorium effectively gives some extra time to the debtors to repay their debts, to restructure their businesses to find an amicable solution together with the creditors involved. This might prove quite helpful indeed. Having said this the Insolvency Law Rescue Programme comes with a number of important limitations.

So far we mentioned two key limitations: physical individuals are not covered by the Insolvency Law Rescue Programme AND not all the legal entities are covered, but only those, which fall into of the designated categories.

Apart from the two limitations above, there are more:

(i) set offs by the debtors are prohibited;

(ii) an interest rate for using the funds will still continue to accrue;

(iii) even though the enforcement proceedings against the debtors are stayed, the freezing orders remain in place;

(iv) the shareholders can't sell their shares and are restricted in their dealings with their own shares otherwise;

(v) no dividends can be paid out;

(vi) if the insolvency proceedings are commenced within three months from the end of moratorium, the debtor should bear in mind that the proceedings will take much longer AND any transactions entered into during the moratorium by the debtor may be declared void and unenforceable. The latter may render any individual rescue plans by individual business very difficult to implement, given that the third parties will be aware, that any agreement entered into with the Debtor today may turn out to be invalidated by the courts after the moratorium is over.

Another serious issue, which stems from the Insolvency Law Rescue Programme as it currently stands, is that the beneficiaries may find themselves personally liable to the creditors for the unpaid part of the debts of the their companies, particularly if the beneficiaries opt for a voluntary liquidation during the moratorium or take other actions, which might then be seen as inappropriate by the courts, if the company does end up insolvent after the moratorium is over.

Whilst the moratorium prohibits a commencement of the insolvency proceedings by the creditors, it does not prohibit a commencement of the same by the debtor itself. As stated above, the physical individuals are not covered by the Insolvency Law Rescue Programme, same as the companies, falling outside the designated categories. If it can be shown that the insolvency was caused by the actions or a lack of actions (i.e. for example, ignoring the opportunities under the Insolvency Law Rescue Programme) by a beneficiary, then a beneficiary may well be found at least partially liable for the debts of his or her company. This of course will be the case only if it can be shown that the decisions were in fact all taken by the beneficiary, which is often the case in the Russian business context.

International Dimension - Possible Conflicts of Law

It is not uncommon for the Russian businessmen to structure their businesses in such a way so that the operational company is owned by a holding company, registered in jurisdictions outside of Russia, for example Cyprus, Luxembourg, BVI or others. Such holdings companies are not going to be covered by the Insolvency Law Rescue Program, as they won't be falling into one of the designated categories, available only to the Russian companies. Given a possibility of a personal liability of a beneficiary, referred to above, this may well mean that a Russian liquidator will try to include into the insolvency estate of a debtor the shares of a foreign holding company. A reaction of the foreign courts remains to be seen, particularly, taking into account, that the other countries are also introducing their own insolvency moratoriums and wrongful trading reliefs of different kinds.

Marianna Rybynok, Senior Associate, "Khrenov&Partners"
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