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Bankruptcy procedure for a foreign legal entity introduced

19 мая 2022

The Russian Arbitration Court for the first time introduced bankruptcy proceedings against a foreign legal entity.

On April 22, 2022, the Arbitration Court of the Chelyabinsk Region declared the foreign debtor bankrupt and opened bankruptcy proceedings against him.

An application was filed with the Arbitration Court of the Chelyabinsk Region to declare insolvent (bankrupt) a foreign legal entity Pandora consulting LC (registered in the Federation of Saint Kitts and Nevis). The basis of the stated requirement was the presence of signs of bankruptcy of the debtor, established by the Russian Bankruptcy Law.

The debtor did not agree with the stated requirements. He pointed out that the activities of the legal entity were terminated in January 2019, the foreign company was excluded from the trade register, and the debtor was deregistered from the tax records in the Russian Federation in December 2021, which is the basis for terminating bankruptcy proceedings. In addition, according to the debtor, he is subject to the moratorium on initiating bankruptcy proceedings at the request of creditors, introduced on April 1, 2022.

The court did not agree with the debtor's arguments, declared him insolvent (bankrupt) and introduced bankruptcy proceedings against him.

The Court drew attention to the fact that from the literal content of the norms of the substantive law, the norms of the Arbitration Procedure Code of the Russian Federation and Article 1 of the Bankruptcy Law, it does not follow that the Russian court is competent to conduct bankruptcy proceedings for a foreign company as a legal entity, that is, to launch rehabilitation or liquidation mechanisms of bankruptcy of an economic entity subject to foreign personal law.

However, taking into account the fact that during the disputed period the debtor had a current account with a Russian credit institution, the sole participant and head of which is a citizen of the Russian Federation, and at the moment he has unfulfilled monetary obligations to the creditor, the amount and nature of which, in relation to a Russian legal entity, would form the legal composition that is minimally necessary for the application of the institution of bankruptcy, the refusal to the creditor to apply the mechanisms provided for by the Russian Bankruptcy Law aimed at the most complete and proportionate claim of creditors in relation to the property mass of a foreign legal entity located in the Russian Federation, would limit the right of the creditor to obtain effective judicial protection from the Russian court. Rejecting the debtor's argument that the activity of the legal entity was previously terminated and the legal entity was excluded from the commercial register, the court indicated that under the legislation of the Federation of Saint Christopher and Nevis (the personal law of the debtor), the liquidation of the debtor cannot be considered completed.

In connection with the foregoing, the court considered it possible to apply, by analogy, the rules establishing the conditions for the introduction of bankruptcy proceedings in relation to Russian legal entities, and to introduce bankruptcy proceedings in relation to the debtor's property mass. According to the court, this will ensure the confluence of creditors, a significant part of which are likely to be under Russian jurisdiction, identify assets and satisfy creditors' claims at their expense. In the case under consideration, in accordance with Russian legislation, bankruptcy proceedings should be carried out in relation to the debtor’s property mass located or closely related to the Russian Federation, similarly to the institutions of bankruptcy of non-legal entities (inheritance estate, peasant farming), as well as the institution of distribution of property of a liquidated legal entity .

The debtor's argument about the extension of the moratorium in relation to him was rejected by the court due to the fact that the norms on the moratorium on bankruptcy relate to the personal law of a legal entity and do not apply to the bankruptcy of the property mass of foreign legal entities.

In such circumstances, given that the debtor is in a position similar to the liquidation procedure of a legal entity in the territory of the Russian Federation, and also taking into account the absence of grounds for introducing a monitoring procedure, the arbitration court considered it possible to apply the provisions of paragraph 1 of Article 225 of the Law on bankruptcy.

Nadmitov, Ivanov and Partners Law Firm advises on the bankruptcy of a foreign legal entity.

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