Bankruptcy law reform: amendments and prospects

Concerning the text of the Bill are currently ongoing public discussion and anti-corruption expertise.

Published the amendments are aimed at reduction in the percentage of managed bankruptcies by imposing rules on the appointment of arbitration managers by random sampling from a special list, increasing the efficiency of trading, creating tools for a real opportunity to restore solvency and, consequently, an increase in the percentage returned to the lenders of funds.

The most interesting provisions of the Bill supersede the procedures of observation, financial rehabilitation and external administration, which replaced the compromise procedure of debt restructuring, aimed to become a kind of “panacea” in terms of non-performing rehabilitation procedures.

Implications of the above-mentioned procedure for debtors essentially the same procedure of follow-up (borrowed from this procedure, the legal regulation relating to restrictions on the debtor in the restructuring procedure (article 64 of the law), some provisions copied from the existing wording of article 63 and 64 of the bankruptcy Law.

For example, a rule on the not charge of penalties, the suspension of the enforcement proceedings under the registered payments, a ban on the satisfaction of claims of shareholders about the share allotment (share) in property of the debtor in connection with the release from the composition of its founders (participants), etc.

There are, however, significant differences which, in our opinion are atypical to the existing legal regulation, the provisions of PP. 4 clause 1 of article 64 of the draft law on the possibility of imposing arrests and restrictions on the debtor’s property only through the arbitration process on the bankruptcy case.

Proposed by the Ministry of economic development the procedure of debt restructuring as follows:
1. Statement on the introduction of the restructuring procedure may be filed by both the debtor and creditors in bankruptcy.
2. Upon application by the debtor, it must be accompanied by the so-called statement of financial condition of the debtor, the content of which is disclosed in article 38.1 of the draft law.
3. In the case of an application by the creditor, the latter should be provided information about possible measures to restore the solvency of the debtor and the creditor taken measures to settle the debt to prevent the bankruptcy of the debtor to restore its solvency.
4. The duration of the restructuring procedure should not exceed 4 years from the date of approval of the restructuring plan (with the possibility of renewal for 4 years by the decision of meeting of creditors).
5. With the introduction of the restructuring procedure, the court randomly appoints a crisis Manager.
6. The debtor must propose a debt restructuring plan within four months from the date of debt restructuring. While bankruptcy creditors or the authorised bodies, the crisis Manager, founder (participant) of the debtor, the representative of debtor’s employees and third parties, including public authorities and bodies of local self-government within the specified period shall also have the right to propose a debt restructuring plan.
7. The debt restructuring plan is subject to review (approval) meeting of creditors. Participation of third parties (similar to the settlement agreement).
8. In subsequent debt restructuring plan must be considered by the arbitration court, who upon review shall make one of the following judicial acts:
A. determination of the approval of the restructuring plan, i.e. triggers a restructuring;
B. the decision on refusal in approval of the restructuring plan (in the presence of violations of the law) and termination of the proceedings if the restructuring was entered by filing an application for introduction of restructuring;
C. the Decision to open bankruptcy proceedings, if the procedure of debt restructuring have been introduced on the basis of the application for declaring the debtor bankrupt or, if the bankruptcy court determines that the statement on the introduction of restructuring was filed with the purpose of unfair deferment of recognition of the debtor bankrupt.

9. Prior to the approval of the debt restructuring plan after its approval (provided that otherwise is not included in this plan) debtor may not engage, without the consent of a crisis Manager to the transaction:
A. Resulting in increase of accounts payable by more than 5% of total claims of the creditors included in the register.
B. assignment of rights-requirements, debt, loans.
C. Associated with the manufacture or acquisition of any property, except for sales of property made by the debtor in the normal course of business.

10. In addition, prior to the approval of the debt restructuring plan and after its approval, unless otherwise provided in the restructuring plan, the debtor may not, without the consent of the creditors ‘ meeting to make:
A. related-party Transactions;
B. trades of more than five percent of the book value of the assets of the debtor for last reporting date;
C. Transactions entailing the issuance of loans (credits), issuing sureties and guarantees and the establishment of trust management of property of the debtor.
D. Transactions entailing the emergence of new liabilities of the debtor, if the amount of monetary obligations and mandatory payments of the debtor that arose after the debt restructuring, is more than twenty percent of the sum of requirements of creditors included in the register of creditors.

11. The debt restructuring plan must contain:
1) study the possibility of restoring the solvency of the debtor, preserve a debtor’s business and the satisfaction of creditors ‘ claims in accordance with the terms of a debt restructuring plan;
2) the provisions relating to the implementation of one or more of the following events:
• reorganization of the debtor;
• increasing the Charter capital of the debtor;
• sale of the debtor’s business or part of the property of the debtor;
• replacement of assets of the debtor;
• novation of the obligations of the debtor;
• the termination of debtor’s obligations by providing compensation;
• conversion requirements of the shares in the authorized (share) capital of the debtor, common or preferred stocks, bonds convertible into shares, or other securities of the debtor;
• change the timing, manner and volume of performance of obligations of the debtor;
• termination of the pledge, changing the terms of the pledge agreement, including in terms of content and ensure its safety, use and disposition of collateral, substitutions of collateral, transfer of rights and obligations under the pledge agreement, the transfer of debt under an obligation secured by pledge;
• debt forgiveness and other means of modification or termination of the obligations stipulated by the Federal law;
• other measures to restore solvency of the debtor;
3) information about the obligations of the debtor:
• current liabilities, claims 1 and 2 stage, mortgage, and other.
• provisions on the conditions (time, mode and volume) satisfaction of requirements of all creditors of the debtor (including those not included in the register of requirements of creditors), including the schedule of debt repayment;
4) calculate the amount that the creditors of the third stage of the requirements, unsecured could obtain in the sale of property of the debtor’s liquidation value in case of declaring the debtor bankrupt;
5) information on the liquidation value of the collateral.

12. The debt restructuring plan should contain data on the management of the debtor in the procedure of restructuring according to which there are several options:
1) preservation of powers, election and termination of powers of the head and other management bodies of the debtor for the founders (participants) of the debtor;
2) assignment of powers of the head and other management bodies of the debtor to the crisis Manager;
3) transfer of authority for the election and termination of powers of the head and other management bodies of the debtor to the creditors ‘meeting or creditors’ Committee;
4) the formation of two of the sole Executive bodies of the debtor, one of whom shall be elected by the founders (participants) of the debtor and the other the meeting of creditors, with the distribution of powers between them in accordance with the debt restructuring plan.

13. The restructuring procedure involves the broad powers of the creditors ‘meeting (creditors’ Committee) with the approval of the transactions and key business decisions of the debtor. Moreover, information concerning the debtor and significant creditors must be disclosed by the debtor crisis Manager, go to the court and published in ERSB.

14. As a result of restructuring activities the following scenarios:
A. Early termination of the restructuring procedure (if the debtor was able to advance to fulfill the debt restructuring plan and repay the claims of creditors in the amount envisaged by debt restructuring plan) result in termination of proceedings or refusal to the termination of the proceedings with further restructuring, if there are outstanding requirements;
B. the End (in case a restructuring plan) will result in the opening of bankruptcy proceedings or termination of proceedings on the bankruptcy case. In the case of repayment of requirements of creditors and restore solvency, the proceedings will also be terminated.
C. Early termination of debt restructuring (in the case of significant violations of the restructuring plan, the crisis Manager shall convene a meeting of creditors, which takes the decision to apply to court). In the case of adoption of decision on early termination of debt restructuring, the arbitration court passes the decision on opening of bankruptcy proceedings or a decision on termination of the proceedings.

15. You should also pay attention to the fact that in the same way as observation in the procedure of restructuring of debts subject to dispute transactions made in violation of the prohibitions set out in this procedure. The possibility of challenging transactions for special reasons remains only in bankruptcy proceedings.
The transactions associated with the execution of obligations in accordance with the debt restructuring plan approved by the arbitration court, cannot be declared invalid pursuant to articles 61.2 and 61.3 of the bankruptcy Law, unless proven that the other party to the transaction when the transaction knew or should have known about the impossibility of restoration of solvency of the debtor as a result of implementation of debt restructuring plan and the infringement of interests of creditors of the debtor of such transaction.

Obviously, the Bill introduces a wide range of tools for recovery of nonperforming debt, which is primarily aimed at restoring solvency.

The bill gives to the persons participating in business about bankruptcy, a greater degree of discretion in terms of the contents of the restructuring plan and measures to restore solvency, as a number of rules relating to the plan, is dispositive, i.e. allow to deviate from established law restrictions.

However, given the scale of the proposed amendments, to predict the effectiveness of the restructuring procedure at the moment is not possible. The effectiveness of certain measures in the restructuring can only be confirmed by practice, as many stories not previously used in the Russian environment and current rehabilitation procedure (financial rehabilitation, external management) do not work properly.