Russian Insolvency Law

Overview of Russian Insolvency Law

Russian insolvency law is governed primarily by Federal Law No. 127-FZ “On Insolvency (Bankruptcy)” of 26 October 2002 (the Bankruptcy Law), which has been amended extensively — over seventy times — since its enactment. The law applies to legal entities, individual entrepreneurs, and — since 2015 — to individuals not registered as entrepreneurs. The Bankruptcy Law is supplemented by the Arbitrazh Procedure Code of the Russian Federation (Chapter 28) and various resolutions of the Plenum of the Supreme Court of the Russian Federation, which provide authoritative interpretive guidance. Bankruptcy cases fall within the exclusive jurisdiction of the arbitrazh courts — a specialized court system for economic disputes — with the Verkhovny Sud (Supreme Court) serving as the highest appellate instance.

The Four Rehabilitation and Liquidation Procedures

The Bankruptcy Law establishes four successive procedures applicable to legal entities, each with distinct objectives and legal effects.

Observation (Nablyudenie)

Observation (nablyudenie) is the first-stage procedure imposed automatically upon the acceptance of a bankruptcy application. The court appoints an interim administrator (vremenny upravlyayushchy), whose role is to analyze the debtor’s financial condition, identify creditors and their claims, and convene the first creditors’ meeting. During observation, the debtor’s management remains in place but major transactions — those exceeding 5% of asset book value or involving the disposal of immovable property — require the interim administrator’s consent. An automatic moratorium on satisfaction of monetary claims takes effect, though current operating payments (e.g., wages, utility costs) remain due. The interim administrator submits a financial analysis report, and the creditors’ meeting votes on the next procedure.

Financial Rehabilitation (Finansovoe Ozdorovlenie)

Financial rehabilitation — introduced by the 2002 Law — is a rarely used procedure under which the debtor repays its debts according to a repayment schedule approved by creditors and guaranteed by a third-party surety (often the founders or shareholders). The debtor’s management continues to operate under the supervision of an administrative administrator (administrativny upravlyayushchy). The procedure may last up to two years; if the schedule is not fulfilled, the court may terminate financial rehabilitation and open external administration or bankruptcy proceedings.

External Administration (Vneshnee Upravlenie)

External administration (vneshnee upravlenie) introduces a more radical change: the debtor’s management is removed and a external administrator (vneshny upravlyayushchy) takes full control of the business for a period of up to eighteen months (extendable to two years). The external administrator develops a external administration plan, which the creditors’ meeting must approve by a majority vote. The plan may include debt rescheduling, asset sales, closure of unprofitable divisions, and other restructuring measures. A moratorium on creditor claims is in effect throughout external administration, and interest ceases to accrue on all monetary obligations. Despite its theoretical appeal, external administration has produced successful reorganizations in only a small minority of cases.

Bankruptcy Proceedings (Konkursnoe Proizvodstvo)

Bankruptcy proceedings (konkursnoe proizvodstvo) is the liquidation phase. The court appoints a bankruptcy trustee (konkursny upravlyayushchy), who takes possession of all debtor assets, conducts an inventory and valuation, and proceeds with realization. The trustee distributes the proceeds to creditors in the statutory order of priority:

1. First priority — claims for harm to life or health and moral damages;
2. Second priority — severance pay and wages;
3. Third priority — claims of secured creditors (from the sale of encumbered assets);
4. Fourth priority — taxes and other obligatory payments to the budget;
5. Fifth priority — all other unsecured creditors.

The priority of secured creditors was modified in 2009 to ensure that at least 70% of proceeds from encumbered assets go to the secured creditor, up to 20% to first- and second-priority claims if unencumbered assets are insufficient, and the remainder to court costs and the trustee’s remuneration. A distinctive feature of Russian law is the subsidiarity principle (preimuschestvennoe udovletvorenie), under which the state’s claims for taxes and other obligatory payments rank ahead of ordinary unsecured creditors.

The Moratorium and Its Effects

The moratorium in Russian insolvency law operates differently depending on the procedure. During observation and external administration, the moratorium precludes the enforcement of monetary claims and property sanctions, suspends interest accrual (save for contractual penalties that continue to accrue but are not enforced), and stays execution proceedings. The moratorium does not extend to current operating expenses or to claims arising after the commencement of proceedings (tekuishchie platezhi), which are satisfied in the ordinary course.

Powers of the Bankruptcy Trustee

The bankruptcy trustee (and the interim, administrative, and external administrators) is a licensed professional — typically a member of a self-regulatory organization (SRO) of arbitration administrators. The trustee’s powers include: challenging suspicious transactions under Articles 61.2 and 61.3 of the Bankruptcy Law (analogous to US avoidance actions); demanding the return of property from third parties; convening creditors’ meetings; and reporting to the court. The trustee acts as an officer of the court and owes duties to both creditors and the debtor.

Subsidiary Liability of Controlling Persons

A distinctive and increasingly important feature of Russian insolvency law is subsidiary liability (subsidiarnaya otvetstvennost) of controlling persons (kontroliruyushchie litsa). Under Article 61.11 of the Bankruptcy Law, a person who controls the debtor — including beneficial owners, directors, and shadow directors — may be held personally liable for the debtor’s obligations if their actions (or inaction) caused the debtor’s insolvency or if corporate records were not properly maintained. The presumption shifts the burden: where the debtor’s assets are insufficient to satisfy creditors by more than 50%, controlling persons are presumed to have caused the deficiency unless they prove otherwise. Subsidiary liability claims have become the primary tool for Russian creditors seeking recovery from recalcitrant directors and shareholders.

Creditors’ Meetings and Voting

The creditors’ meeting is the principal governance organ in Russian insolvency proceedings. Voting power is proportional to claim amount, with certain categories — secured creditors, employees — voting only on specific matters. The court retains supervisory authority over the meeting and may invalidate decisions that violate the law or creditors’ legitimate expectations. The creditors’ committee, elected by the meeting, exercises ongoing oversight between meetings.

The 2020 Amendments and the Pandemic-Related Moratorium

In 2020, in response to the COVID-19 pandemic, the Russian government introduced a universally known moratorium (vseobshchiy izvestny moratoriy) on bankruptcy applications. Under this measure — enacted via a government resolution rather than legislative amendment — creditors could not file bankruptcy applications against debtors in affected sectors, and debtors were temporarily relieved from the obligation to file for insolvency. The moratorium also suspended the accrual of financial sanctions and the enforcement of security. This extraordinary intervention, while temporary, demonstrated the potential for insolvency law to function as a macroeconomic stabilization tool.

Cross-Border Insolvency

Russian bankruptcy law has limited provisions for cross-border insolvency. The Bankruptcy Law (Article 1) recognizes foreign court judgments on insolvency matters subject to reciprocity and public policy exceptions. Russia has not adopted the UNCITRAL Model Law on Cross-Border Insolvency, and cross-border cooperation remains underdeveloped. Recognition of foreign insolvency proceedings is granted on a case-by-case basis under general principles of private international law.

Conclusion

Russian insolvency law presents a complex and frequently amended regime that combines elements of civil-law codification with American-style debtor-in-possession concepts (limited in practice) and a robust regime of controlling-person liability. The four-procedure architecture — observation, financial rehabilitation, external administration, and bankruptcy proceedings — is conceptually sophisticated, but in practice liquidation dominates. The expanding use of subsidiary liability claims reflects the system’s emphasis on creditor protection, while the temporary pandemic moratorium illustrates insolvency law’s capacity for macroeconomic policy purposes. Recurring amendments continue to shape a regime that remains in active development.