If your Russian contractor fails to settle its debt for quite a long period of time or does not make efforts to pay off its debt, it is highly probable that its financial situation has gone bad, and the debtor may be declared bankrupt at any time.

In Russia, Federal Law "On Insolvency (Bankruptcy)" No. 127-FZ dated October 26, 2002 has been passed and successfully applied, which governs the procedure of recognition of the debtor to be insolvent (bankrupt) and the satisfaction of creditors' claims on account of the property of such a debtor.

Bankruptcy Petition

Any creditor with money claims amounting to not less than 300,000 rubles and confirmed by an enforceable court ruling has the right to file a bankruptcy petition with an arbitration court at the debtor's location.

During proceedings in the application, the arbitration court may introduce one of the following bankruptcy procedures: observation, financial restructuring, bankruptcy administration, or competition management.

In most cases of insolvency (bankruptcy) in Russia, supervision is initially introduced when an insolvency official appointed by the court inspects and determines availability of the debtor's assets, including proprietary interests and debt liabilities, and holds the first meeting of creditors. Upon the results of the inspection and in accordance with the decision made by bankruptcy creditors, an insolvency official petitions the court either for financial restructuring of the debtor or introduction of bankruptcy administration if the debtor may restore solvency (financial or business activity) or initiating bankruptcy proceedings if it is impossible to restore solvency.

The expenses connected with payment for the bankruptcy procedures (for example, remuneration of the insolvency administrator, postal charges, remuneration of valuers, auditors, etc.) are to be paid on account of the debtor's property.

However, if during proceedings in the bankruptcy petition it has been discovered that the debtor has no funds to cover expenses, the bankruptcy procedure may be continued only if the insolvency administrator agrees to cover all expenses on its own account.

Otherwise, the arbitration court will close the case due to lack of funding.

How to Have Your Claims Included in the Creditor's Register

If a creditor becomes aware of the initiation of a bankruptcy procedure in relation to the debtor (usually, supervision is introduced first), this creditor must file a petition to an arbitration court for the inclusion of its claims into the creditors' register within the framework of the initiated proceedings no later than 30 calendar days from the date of publication of bankruptcy information in a special media, which is currently Kommersant newspaper.

Upon consideration of the creditor's petition, the arbitration court makes a decision either to include the creditor's claims into the creditors' register (hereafter, the "register") or to refuse to include such claims to the register.

If the creditor's claims have been included in the register, the creditor has the right to participate in meetings of bankruptcy creditors, vote on agenda matters, familiarize himself with case materials, take exception to other creditors' claims, and exercise other rights provided by the bankruptcy law.

Bankruptcy Administration: Priority of Creditors

In case of an initiation of bankruptcy proceedings, an insolvency official takes measures to sell the debtor's property: its assets, proprietary rights, and debt liabilities. From the funds received as a result of such property disposition, the debtor's bankruptcy assets are formed into an account from which creditors' claims are satisfied.

If the debtor's property is insufficient to satisfy claims of all creditors, the bankruptcy assets are to be distributed between the bankruptcy creditors on a pro rata basis in accordance with the priority established by law. The creditors' claims of each priority are satisfied when the claims of creditors of previous priority have been fully satisfied except for the claims secured by mortgage of the debtor's property. The bankruptcy law establishes the following priority of discharge of creditors' claims:

  1. Claims of individuals resulting from death or personal injury
  2. Claims resulting from calculation on payment of dismissal compensation and (or) payment for labor of persons working or having worked under a labor contract and payment of remuneration to the authors of intellectual property
  3. Claims of other creditors

Current Claims

It is important to note that creditors' claims on payment for the goods delivered or works performed which occurred after initiation of bankruptcy proceeding are considered to be "current claims."

Recognition of creditors' claims to be "current" provides many advantages. Though, in this case a creditor is not recognized to be a participant of the bankruptcy case, his claims will not be included into the register and he may not vote on the agenda matters at the meetings of bankruptcy creditors, but his claims are satisfied on the first priority basis, provided that in the process of satisfaction of creditors' claims, a certain priority exists:

  1. Claims on current payments connected with court expenses with regard to the bankruptcy case, and payment of remuneration to the bankruptcy administrator
  2. Requests for payment for labor from persons working or having worked (after the date of acceptance of the bankruptcy petition) under a labor contract, requests to pay dismissal compensation
  3. Requests for remuneration to persons engaged by the insolvency official
  4. Claims on maintenance payments (utility charges, payments under energy supply agreements, and other similar payments)
  5. Claims on other current payments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.