Russian Insolvency Procedure Types

Sources of Insolvency Law

Russian insolvency law is codified in the Federal Law on Insolvency (Bankruptcy) (No. 127-FZ of 26 October 2002, as amended), which applies to legal entities, individual entrepreneurs, and citizens. The Law establishes five distinct insolvency procedures applicable to legal entities: observation (nablyudenie), financial rehabilitation (finansovoe ozdorovlenie), external management (vneshnee upravlenie), bankruptcy proceedings (konkursnoe proizvodstvo), and settlement agreement (mirovoe soglashenie). The Law is administered by the Federal Tax Service (FNS) as the authorised body for state claims, the Central Bank of Russia for financial institution insolvencies, and the Self-Regulatory Organisations of Arbitration Administrators (SRO AU) which oversee the appointment and conduct of insolvency practitioners. The Supreme Court of the Russian Federation issues guiding interpretations through its Plenum Resolutions, which are binding on lower courts.

Observation (Nablyudenie)

Observation (nablyudenie) is the first stage in the insolvency process for legal entities, commencing upon the acceptance of a bankruptcy application by the arbitration court (arbitrazhny sud). The procedure is governed by Articles 62–75 of 127-FZ. The court appoints an interim administrator (vremenny upravlyayushchy) from a self-regulatory organisation nominated by the applicant. The effects of observation include: (1) the debtor’s management continues to operate but with restricted powers — major transactions (exceeding 5% of asset value) and transactions relating to real estate require the interim administrator’s consent; (2) property claims against the debtor may only be pursued through the insolvency proceedings; (3) enforcement proceedings against the debtor are stayed; (4) dividend distributions, share redemptions, and payments of statutory penalties are prohibited; and (5) interest and financial sanctions on claims cease to accrue.

The interim administrator’s responsibilities include conducting an analysis of the debtor’s financial condition (analiz finansovogo sostoyaniya dolzhnika), preparing a register of creditors’ claims (reestr trebovaniy kreditorov), holding the first creditors’ meeting (pervoe sobranie kreditorov), and submitting a report to the court on the feasibility of financial rehabilitation or external management. Observation lasts up to seven months. The first creditors’ meeting decides whether to recommend financial rehabilitation, external management, bankruptcy proceedings, or a settlement agreement, and if none is proposed, the court declares the debtor bankrupt and opens bankruptcy proceedings.

Financial Rehabilitation (Finansovoe Ozdorovlenie)

Financial rehabilitation (finansovoe ozdorovlenie) is a restructuring procedure designed to restore the debtor’s solvency through a schedule of debt repayment. Governed by Articles 76–92 of 127-FZ, this procedure is available where the creditors’ meeting or the debtor proposes a plan for financial rehabilitation with a guarantee of repayment. The debtor’s management retains control but must comply with the approved repayment schedule. An administrative administrator (administrativny upravlyayushchy) monitors compliance.

The financial rehabilitation plan (plan finansovogo ozdorovleniya) must provide for full satisfaction of creditors’ claims within the statutory period, which is normally no more than two years. The plan must be supported by security (zalog, bank guarantee, or state or municipal guarantee) from third parties who agree to guarantee the debtor’s obligations. If the debtor complies with the repayment schedule, the insolvency proceedings are terminated. If the debtor fails to comply or the plan becomes impracticable, the administrative administrator notifies the creditors’ meeting and the court, which may declare the debtor bankrupt and proceed to bankruptcy proceedings. In practice, financial rehabilitation is rarely used for corporate debtors due to the difficulty of obtaining third-party guarantees — it accounts for less than 2% of concluded insolvency cases.

External Management (Vneshnee Upravlenie)

External management (vneshnee upravlenie) is a more intensive restructuring procedure in which the debtor’s management is replaced by an external administrator (vneshny upravlyayushchy). Governed by Articles 93–119 of 127-FZ, external management may be introduced by the court for up to 18 months, extendable to a maximum of 24 months. The external administrator takes over all management functions and is entitled to: (1) dispose of the debtor’s property in accordance with an approved plan; (2) challenge suspect transactions (podozritelnye sdelki) entered into before the insolvency; (3) initiate recovery actions against the debtor’s directors and officers for wrongful trading; and (4) implement measures to restore solvency, including business restructuring, asset sales, and renegotiation of contracts.

The external management plan (plan vneshnego upravleniya) must be approved by the creditors’ meeting and must specify the measures for restoring solvency, the expected timeframe, and the projected satisfaction of creditors’ claims. Unlike financial rehabilitation, external management may involve the sale of the debtor’s business as a going concern (prodazha predpriyatiya dolzhnika). Where solvency is restored within the external management period, the court terminates proceedings. Where it is not, the court declares the debtor bankrupt.

Bankruptcy Proceedings (Konkursnoe Proizvodstvo)

Bankruptcy proceedings (konkursnoe proizvodstvo) are the liquidation stage of the insolvency process, governed by Articles 124–149 of 127-FZ. The court appoints a bankruptcy administrator (konkursny upravlyayushchy) who takes control of the debtor’s assets, liquidates them, and distributes the proceeds to creditors in the statutory priority order. The proceedings are opened for a period of six months, renewable by the court.

The bankruptcy administrator must: (1) take inventory of the debtor’s property; (2) conduct an independent valuation of assets; (3) organise competitive bidding (torgi) for the sale of assets; (4) maintain the register of creditors’ claims; (5) challenge preferential transactions and transactions at undervalue (Articles 61.2 and 61.3 of 127-FZ); and (6) distribute proceeds to creditors. The priority order (Article 134 of 127-FZ) is: first priority — individuals to whom the debtor is liable for personal injury or moral harm; second priority — severance pay and wages (limited to the period before the insolvency filing); third priority — other creditors, including secured creditors (preferential within the secured assets), state claims (taxes, customs duties), and unsecured trade creditors. If a creditor challenges the bankruptcy administrator’s actions, they may apply to the arbitration court for review.

Settlement Agreement (Mirovoe Soglashenie)

A settlement agreement (mirovoe soglashenie) may be concluded between the debtor and creditors at any stage of the insolvency proceedings. Governed by Articles 150–156 of 127-FZ, the settlement must be approved by the creditors’ meeting and confirmed by the arbitration court. The agreement may provide for: (1) deferred payment or instalment plans; (2) debt forgiveness (proshchenie dolga); (3) exchange of debt for equity; (4) assignment of claims to third parties; or (5) any other lawful terms. Once confirmed, the court terminates the insolvency proceedings. If the debtor fails to perform the settlement agreement, the court may terminate the settlement on the application of a creditor and resume bankruptcy proceedings.

Special Rules for Citizens’ Insolvency

The consumer insolvency regime for natural persons, introduced by Federal Law No. 476-FZ of 29 December 2014 and effective from 1 October 2015, provides a simplified procedure for citizens with debts exceeding 500,000 RUB and three months’ arrears. The procedures available are: restructuring of debts (restrukturizatsiya dolgov) with a plan of up to three years; and sale of property (realizatsiya imushchestva), which is the equivalent of bankruptcy proceedings for individuals. The financial manager (finansovy upravlyayushchy) supervises the process. Upon completion of asset sale, the debtor is released from remaining debts, subject to exceptions for fraud, criminal liability, and failure to cooperate with the financial manager.