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Amendments to Article 9.1 of the Insolvency Law1 ("Law 149-FZ") came into effect on 24 April 2020. The amendments provide that the benefit of the insolvency filing moratorium can be waived (the "moratorium waiver"). In addition, on 21 April 2020, the Supreme Court of the Russian Federation ("Russian SC") adopted clarifications (the "Clarifications"),2 which, in particular, explain that the moratorium will apply if the debtor meets the formal criterion of being included in the list of persons covered by the moratorium ("protected debtors").
A large number of companies are protected debtors on the basis of the formal criterion and are therefore affected by the moratorium. As a result, these companies should consider whether it is in fact necessary for them to make use of the benefit of the moratorium. Conversely, they should seek to understand the risks to which they and persons with significant control over them may be exposed if they decide, instead, to waive the benefit of the moratorium.
In this review, we analyse the legal nature of the moratorium waiver, its consequences, as well as other important changes that may affect protected debtors and their counterparties if a decision is taken to waive the benefit of the moratorium.
I. Definition of a person covered by the moratorium
In our previous review,3 we considered whether application of the moratorium should be determined not only by the formal criterion, but also by the essential criteria. In its Clarifications, the Russian SC adopted the approach4 that the moratorium should be applied only on the basis of the formal criterion of being included in one of the relevant lists.5 That said, the Russian SC concluded that the moratorium would only apply if the protected debtor has debts and meets the criteria set out in the Insolvency Law.
This approach appears to open the door to abuses of the moratorium regime, as considered in our previous review.6 A formal interpretation may also raise the question of whether such a broad application of the moratorium is constitutional,7 since those who are formally included in the lists of persons covered by the moratorium and meet the insolvency criteria may obtain unjustified advantages over other parties. Such an application may also result in unfair and disproportionate limitations being placed on creditor rights. In our view, in the future, the courts may opt for a restrictive interpretation of the Clarifications in order to preclude such abuses in situations in which a debtor has shown signs of insolvency because of circumstances unconnected with the pandemic.
Another consequence of the Clarifications may be a more extensive use of the waiver mechanism by those who meet the formal protected debtor criterion but do not want to be affected by the limitations imposed by the moratorium.
II. Legal nature of the moratorium waiver
The moratorium waiver is a new legal concept affecting both substantive legal relations and procedural law.
Law 149-FZ does not regulate every aspect of the moratorium waiver. This, therefore, does not exclude the possibility that the rules on unilateral transactions might be applied to a moratorium waiver on the basis of either (i) the application of the provisions of the RF Civil Code ("Russian CC")8 as general rules which apply in the absence of any special regulation; or (ii) by analogy to similar legal concepts. The courts have previously recognized that the rules on unilateral transactions could be applied, by analogy, where a person's actions have both substantive and procedural consequences, such as in the event of the waiver of a claim or entry into a settlement agreement. This may, therefore, be used to justify the application of the rules on unilateral transactions to the moratorium waiver.
This approach appears to be well-grounded, as it allows one to resolve issues regarding the temporal scope of the moratorium waiver,9 as well as regarding the power to effect the moratorium waiver and the ability others may have to challenge it.10
III. Moratorium waiver effected without publication in the Unified Federal Register of Bankruptcy Information or prior to adoption of Law 149-FZ
Law 149-FZ provides for only one method of waiving the benefit of the moratorium – by publication in the Unified Federal Register of Bankruptcy Information. A waiver in any other form will have no legal effect for the debtor or any of its creditors.11
At the same time, the principal provisions of Law 149-FZ do not have retroactive effect. This Law does not resolve the issue of the validity of a moratorium waiver, with respect to any specific or all creditors, made before the Law came into effect. This issue would arise, for instance, if a protected debtor's contract provided for such moratorium waiver, or if a protected debtor unilaterally waived the benefit of the moratorium in order to avoid an event of default under the loan agreement.
In our view, a waiver of the benefit of the moratorium should not be held invalid if it is made in favour of a specific creditor with regard to the possible accrual of penalties, set-off of claims, or the out-of-court enforcement of a pledge.12 However, third parties would be able to challenge such a waiver on general civil law or insolvency grounds. A protected debtor's waiver of restrictions that affect third party rights, such as the prohibition on the filing of insolvency petitions by creditors, will not be valid.
IV. Temporal scope of the moratorium waiver
Law 149-FZ does not answer two important questions regarding the temporal scope of moratorium waivers:
- Does a moratorium waiver have only prospective effect, or will it also apply to relations that arose before the moratorium waiver was published in the Unified Federal Register of Bankruptcy Information (retroactive effect); and
- If the moratorium waiver has a retroactive effect, does it apply only up to the date when Law 149-FZ came into effect (24 April 2020), or to the date when the moratorium was introduced (6 April 2020)?
In our view, in the absence of a specific provision to the contrary, as a general rule, the moratorium waiver should have only prospective effect. This also follows indirectly from subclause (a) of clause 1 of Article 3 of Law 149-FZ, pursuant to which the effect of the moratorium in respect of a protected debtor and its creditors ceases upon publication of the moratorium waiver. Consequently, financial sanctions for the non-performance or improper performance of obligations accrue on the protected debtor's obligations starting from the date on which the moratorium waiver was published.13
Nevertheless, in order to ensure commercial certainty, the courts may find that a moratorium waiver has retroactive effect, for example, where it is necessary to restore the positon to that which existed prior to a transaction being declared void for having been made in violation of moratorium restrictions.14 In this example, it would appear that the retroactive effect of the moratorium waiver should apply only up to the date when Law 149-FZ came into effect (24 April 2020), due to the fact that this Law generally does not apply retroactively (with a few exceptions).
Such limited retroactive effect of the moratorium waiver may be justified if its purpose is to avoid the invalidation of transactions or dividend payments solely on formal grounds, provided they cause no harm to the protected debtor or its creditors.
V. Application of the transaction rules to the moratorium waiver
A moratorium waiver has some similarities, in terms of its consequences, to a transaction. As a result, the transaction rules may apply, to the extent that they do not conflict with the specific legal nature of the moratorium waiver. The application of the transaction rules to the moratorium waiver makes it possible to solve issues regarding the power to effect the moratorium waiver and the ability others may have to challenge it.
Given the authority of the management bodies of a company expressed in corporate law, any waiver on behalf of the debtor should be made by the debtor's sole executive body.
The moratorium waiver is not connected with disposal of property, and, therefore, it appears that it should not be subject to the rules that regulate the approval of major transactions, interested-party transactions, or transactions for the disposal of assets, which require consent in accordance with the internal regulations of the company.15
If the company charter envisages any special grounds for challenging a transaction, we believe that they may also apply to the moratorium waiver to the extent relevant. Thus, if the initiation of insolvency proceedings is a matter reserved by the charter for the board of directors (supervisory board), it is our view that decision-making with regard to the moratorium waiver should also be within the competence of the board of directors (supervisory board).
In light of the above, in our view a moratorium waiver can be challenged under the transaction rules, in particular, as a transaction made in violation of the authority of the debtor's management body or representative body, or in violation of the interests of the legal entity, e.g. when the moratorium waiver clearly prejudices the protected debtor.16
VI. Corporate liability
Directors may incur corporate liability, as for any other action, if the moratorium waiver causes the protected debtor to suffer a loss.17 Likewise, those who control the protected debtor may also be held liable, if they caused the adoption of a moratorium waiver, which resulted in the company suffering loss.18
In particular, such corporate liability may arise where the decision to waive the benefit of the moratorium is deemed unreasonable in light of current market conditions or the state of the company, or if it is taken in bad-faith (for example, if the intent of the waiver was to pay illegitimate dividends).19 Approval of a moratorium waiver by the collective management bodies of the protected debtor cannot serve as grounds for a director to be released from liability for damage caused to such debtor.20
Similarly, if a debtor is declared insolvent as a result of the moratorium waiver, persons with significant control over the debtor who made the decision to effect the moratorium waiver may bear subsidiary liability pursuant to the rules of the Insolvency Law.21 In such a case, the court must establish a causal link between the moratorium waiver and the insolvency of the protected debtor. Directors and persons with significant control over the protected debtor may escape liability if they can prove that the moratorium waiver played no role in the protected debtor's insolvency, which would have been inevitable in any event.
VII. Impact of the moratorium waiver on time limits for challenging transactions following the insolvency of a protected debtor
Law 149-FZ does not define how time limits for challenging a protected debtor's suspicious or preferential transactions should be calculated where insolvency proceedings are initiated against the debtor within three months after the termination of the moratorium.22 Clause 4 of Article 9.1 of the Insolvency Law, which describes the specifics of the calculation of such time limits, does not provide for any special regulation in the event that a debtor waives the benefit of the moratorium.23 However, since the moratorium ceases to apply after a moratorium waiver, it follows that this provision should be interpreted to mean that the time limits for such a challenge are extended only by the actual period during which the moratorium was in effect in respect of the relevant protected debtor rather than by the general six-month moratorium period.
VIII. Cancellation of transaction invalidity provisions
The amendments have excluded subclause 4 of clause 4 of Article 9.1 of the Insolvency Law,24 which provided for the invalidity of a number of transactions made during the moratorium period. Article 4 of Law 149-FZ expressly states that such amendments apply to relations arising out of contracts concluded prior to the Law coming into effect. As a result, transactions made prior to the date on which the amendments came into force are not null and void.25
Please note that these amendments do not exclude the possibility that transactions aimed at the disposal of a debtor's property may still be held null and void. This is because the rules regarding the invalidity of transactions made in violation of bans imposed during a supervision procedure may still apply to transactions made during the moratorium period, pursuant to subclause 2 of clause 3 of Article 9.1 of the Insolvency Law.26
IX. Other changes
Of practical importance is the clarification by the Russian SC,27 which expressly states that creditors can file claims, and courts can issue enforcement orders (and, therefore, initiate new enforcement proceedings), in respect of protected debtors during the moratorium period. As set out in our earlier review,28 law enforcement officers can seize a protected debtor's property in new enforcement proceedings. However, new enforcement proceedings, as well as existing ones, will be stayed after the seizure by virtue of the restriction imposed by Article 9.1 of the Insolvency Law.29
The Russian SC has also clarified30 that, in light of the pandemic, courts may extend procedural time limits in insolvency cases and/or deem them to be complied with, taking into account the circumstances of the case. This clarification does not confirm how it correlates with the general approach in relation to missed deadlines for inclusion in the register of creditors' claims, which normally cannot be extended (with the exception of some special cases during receivership).31 It appears that such deadlines should be extended in line with the general trend of the Clarifications that, if it is proven that a person was actually unable to file an application because of the current restrictions, both substantive and procedural time limits should be extended in respect of their claims.32
X. General conclusions
When deciding whether to waive the benefit of the moratorium, companies that meet the formal criterion for being considered as protected debtors should analyse and assess the following:
- whether their intention is to waive the benefit of the moratorium not only for the future but also in respect of the preceding period;
- what corporate procedures would apply in order to take the decision to wave the moratorium;
- the commercial feasibility of the moratorium waiver; and
- the risks of corporate and subsidiary liability of persons with significant control over the debtor.
1 The amendments were made by Federal Law No. 149-FZ dated 24 April 2020 in Federal Law No. 127-FZ dated 26 October 2002 (the "Insolvency Law"). Our previous review (published on the website https://www.whitecase.com/publications/alert/covid-19-insolvency-filing-moratorium-russia) contains an analysis of the legal consequences and the scope of application of the insolvency filing moratorium. This moratorium was introduced by Decree No. 428 of the Russian Government dated 3 April 2020 ("Decree No. 428") on the basis of Article 9.1 of the Insolvency Law from 6 April through 6 October 2020.
2 "Review of certain matters of court practice related to application of the law and of measures to resist the spread of a new coronavirus infection (COVID-19) in the Russian Federation No. 1", adopted by the Presidium of the RF Supreme Court on 21 April 2020 ("Russian SC Review").
3 See Section I of our earlier review at https://www.whitecase.com/publications/alert/covid-19-insolvency-filing-moratorium-russia.
4 Answer to Question 9 of the Russian SC Review.
5 These are the following lists: 1) the list of industries most affected by the consequences of the pandemic (pursuant to Decree No. 428, the Government Commission for Sustainable Development of the Russian Economy has approved this list (see here), however the Federal Tax Service in its service (see here) also takes into account the amendments of the list approved by Decree No. 434 of the Russian Government dated 3 April 2020); 2) the industry lists of companies systemically important for the national economy approved by the Government Commission for Sustainable Development of the Russian Economy on the basis of certain criteria (see here) - these lists are published on the websites of the relevant ministries; 3) the lists of strategic enterprises (Decree No. 1009 of the Russian President dated 4 August 2004, Directive No. 1226-r of the Russian Government dated 20 August 2009).
6 See Section I of our earlier review at https://www.whitecase.com/publications/alert/covid-19-insolvency-filing-moratorium-russia.
7 Russian Constitution, part 3 of Article 55, Resolution No. 10-П of the RF Constitutional Court dated 3 July 2001, paragraph 5.
8 Insolvency Law, clause 1 of Article 1.
9 See Section IV of this review.
10 See Section V of this review
11 Resolution No. 25 of the Russian SC Plenum dated 23 June 2015, paragraph 51.
12 Nor does the Insolvency Law expressly forbid a debtor who has not waived the benefit of the moratorium from entering at present into an agreement, for example, in order to obtain additional financing or to restructure debt, providing for the counterparty's right to accrue penalties. We believe that if the aim of such an agreement is to protect or restore the solvency of the protected debtor, the invalidation of such an agreement would not align with the rehabilitative intent of the moratorium.
13 At the same time, Law 149-FZ does not eliminate the uncertainty as to the possibility of the payment of compensation by the protected debtor instead of financial sanctions from the date of the introduction of the moratorium to the date of the waiver by the debtor of the benefit of the moratorium. See Section IV.4 of our earlier review at https://www.whitecase.com/publications/alert/covid-19-insolvency-filing-moratorium-russia
14 Pursuant to paragraph 2 of clause 1 of Article 66 of the Insolvency Law, Information Letter No. 129 of the Russian Supreme Commercial Court ("SCC") Presidium dated 14 April 2009, transactions aimed at the disposal of the debtor's assets should be held null and void. See Section IV.1 of our earlier review at https://www.whitecase.com/publications/alert/covid-19-insolvency-filing-moratorium-russia
15 Federal Law No. 208-FZ dated 26 December 1995, clause 2 of Article 69; Federal Law No. 14-FZ dated 8 February 1998, clause 3.1 of Article 40.
16 Russian CC, Article 174.
17 ibid, clauses 1 and 2 of Article 53.1.
18 ibid, clause 3 of Article 53.1.
19 Resolution No. 62 of the Russian SCC Plenum dated 30 July 2013, paragraph 1.
20 ibid, paragraph 7.
21 Insolvency Law, Article 61.11.
22 See Section IV.3 of our earlier review at https://www.whitecase.com/publications/alert/covid-19-insolvency-filing-moratorium-russia.
23 Pursuant to paragraph 3 of clause 1 of Article 9.1 of the Insolvency Law, the waiver of the benefit of the moratorium entails only cessation of the limitations set out in clauses 2 and 3 of Article 9.1 of the Insolvency Law.
24 Subclause 4 of clause 4 of Article 9.1 of the Insolvency Law provided that transactions for the transfer of property and assumption of obligations or liabilities by the debtor made during the moratorium period, if the price of the property transferred under one transaction or a series of interrelated transactions, or the amount of the assumed obligations or liabilities, exceeded one percent of the debtor's assets, and the transaction itself was outside the normal course of the debtor's business, shall be held null and void, provided that insolvency proceedings are initiated against the debtor within three months after the termination of the moratorium.
25 Russian CC, clause 2 of Article 422.
26 Ibid, clause 1 of Article 174.1. See Section IV.1 of our earlier review at https://www.whitecase.com/publications/alert/covid-19-insolvency-filing-moratorium-russia
27 Answer to Question 10 of the Russian SC Review.
28 See also Section III of our earlier review at https://www.whitecase.com/publications/alert/covid-19-insolvency-filing-moratorium-russia.
29 Federal Law No. 229-FZ "On Enforcement Proceedings" dated 2 October 2007, subclause 5 of clause 1 of Article 40.
30 Answer to Question 11 of the Russian SC Review.
31 Information Letter No. 93 of the Russian SCC Presidium dated 26 July 2005, paragraph 3; Resolution No. 59 of the Russian SCC Plenum dated 23 July 2009, paragraph 15.
32 Answer to Question 6 of the Russian SC Review.
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