10.04.2020 — COVID-19: Key Implications for Business

The COVID-19 pandemic is the greatest challenge the world has faced during the last years, which affects all spheres of our life. It is also having a growing impact on the economy and requires the national governments to take emergency measures. Below we provide our findings on the legal fallout of the COVID-19 pandemic and possible implications for business entities.

The regulations adopted due to the COVID-19 pandemic are being updated quickly, therefore some of the findings listed below may fall rapidly out of date. We will update the information regularly and keep you informed on the new measures implemented in Russia to the extent possible.

Please be advised that the information presented in our information alerts does not constitute legal advice and is provided for informational purposes only. Should you have any further questions, please do not hesitate to contact us.

The available information alerts are listed below:

COVID-19 and Contract Performance: please see our findings on the question if COVID-19 can be qualified as force major or hardship and how it can affect performance of contractual obligations here.

COVID-19 and Bankruptcy Moratorium: please find our alert on the bankruptcy moratorium imposed by the Russian Government due to the COVID-19 pandemic here.

- COVID-19 and Commercial Lease: our information alert on the impact of the COVID-19 pandemic on the tenant’s obligation to pay rent under commercial lease agreements is available here.

06.03.2020 — Russian Central Bank Reduced Key Rate to 6%

On 10 February 2020 the Board of Directors of the Central Bank decided to reduce the key rate from 6,25% to 6% per annum, which is a record low for the last five years. According to the bank, annual inflation is continuing to slow down and the economic growth has been lower than it expected.

Russia’s Central Bank cut its key interest rate to 6% from 6.25% (see the Central Bank’s notice as of 10 February 2020). The decision to lower the key rate was influenced by several factors, such as the fact that inflation levels have been dropping more rapidly than forecasted and the fact that Russia is experiencing a sharp economic slowdown.

It is expected that under such circumstances, taking into account the monetary policy, the annual rate of inflation for 2020 will be 3,5-4% and will be limited to 4% in the future.

05.03.2020 — Private Bailiffs Are to Be Introduced in Russia

The Ministry of Finance with the assistance of the Russian Union of Industrialists and Entrepreneurs is considering the option to introduce private bailiffs (enforcement officers) in Russia. Private bailiffs may conduct enforcement proceedings in disputes between the legal entities in order to increase effectiveness and the speed of enforcement of court rulings. At the same time, to avoid abuses, enforcement of court rulings in favor of the state and individuals (but not legal entities) will remain within the exclusive competence of the existing state Federal Bailiff Service.

According to the Russian Ministry of Finance, the introduction of private bailiffs will allow to reduce the workload of state bailiffs, increase their financing and distribute some of the work to the private sector.

With regard to payment for the services of private bailiffs, the authorities plan to introduce a success fee (contingent fee) in addition to the regular enforcement fee. It is necessary to note that in the current system of state bailiffs the debtor who did not repay the debt in due time is obliged to pay enforcement fee of 7%. With regard to private bailiffs the maximum percentage of this enforcement fee will be additionally established by the state.

04.03.2020 — Supreme Court Issued Clarifications on Subordination of Claims of Controlling Persons and Affiliated Creditors in Bankruptcy

The Supreme Court in its Digest of case law gave a number of major clarifications about the subordination of affiliated creditors’ claims in bankruptcy. In particular, the Supreme Court clarified that in case of reasonable doubt as to whether the claims of affiliated creditors are real, the burden of proof is shifted to the affiliated creditor. The Supreme Court also clarified the conditions under which the claims of the controlling person and the affiliated creditors should be excluded from the register or subordinated.

The Supreme Court issued the Digest of case law on the inclusion of the claims of controlling persons and affiliated creditors into the debtor’s bankruptcy register (see the Digest of case law issued by the Presidium of the Supreme Court of the Russian Federation dated 29.01.2020).

In this Digest the Supreme Court emphasized that the mere fact that the creditor is affiliated with the debtor or is a person controlling the debtor does not mean that its claims should be subordinated to other creditors’ claims. However, if the controlling person’s claim is based on the contract that was performed when the debtor already showed signs of insolvency (i.e. not long before initiating bankruptcy proceedings), such a claim is subordinated to the claims of all other creditors. The court may also lower the priority of the affiliated creditor’s claim if this creditor provided compensatory financing to the debtor under the influence of the controlling person. Similarly, the controlling person’s claims are to be subordinated if it purchased its claims from an independent creditor through assignment not long before the bankruptcy.

Moreover, the Supreme Court clarified that the claims of an affiliated creditor may be fully excluded from the bankruptcy register if the claims are based on the creditor’s repayment of the debtor’s debt before third parties. This is possible if the court finds that the affiliated creditor had already received reimbursement for the same amount (for example, via intra-group financing).

The Supreme Court also emphasized the need for the proper allocation of the burden of proof in this category of disputes. Taking into account the independent creditors’ limited abilities to receive information on the affiliated persons and their relationship with the debtor, it is sufficient for an independent creditor to prove reasonable doubts as to the reality and economic appropriateness of the behavior of the controlling persons and affiliated creditors prior to the bankruptcy and during the bankruptcy proceedings. If this is done, the court has to shift the burden of disproving these reasonable doubts to the persons affiliated with the debtor.

03.03.2020 — Parties to Court Disputes Will Be Able to Settle Disputes via Judicial Reconciliation

In the end of 2019, Russia adopted legislative amendments aimed at expanding the options of out-of-court dispute settlement. Before these amendments, the parties could only refer disputes to mediation to peacefully settle disputes outside the court system. After the reform, the parties may use the option of judicial reconciliation and engage a judicial reconciliator for dispute settlement. Judicial reconciliation will be carried out with the assistance of the court, and the retired judges of the highest-level courts will be reconciliators.

It is possible to request reconciliation at any stage of litigation subject to the consent of both parties. In that case the court will give the parties a period of time for judicial reconciliation which may be prolonged upon the parties’ motion. The parties may choose retired judges of the Supreme Court and Supreme Commercial Court as reconciliators. The list of such judges is issued by the Supreme Court.

As a general rule, information exchanged by the parties during judicial reconciliation will be considered confidential, and the parties will be prohibited to refer to it during litigation proceedings if the judicial reconciliation fails and the proceedings are resumed.

If the parties are able to settle the dispute by judicial reconciliation, the conciliation documents signed by them will be binding and will have an effect of a court-issued enforcement order
(see Ruling of the Plenum of the Supreme Court of the Russian Federation dated 31.10.2019 No. 41 “On adoption of the Judicial Reconciliation Regulations”).