i Liquidity and state of the financial markets

The Russian financial market is in a similar condition to markets in other emerging economies. Its main features are the prevalence of banks over non-credit financial institutions, high-interest rates (as well as the absence of negative interest rates) and a lower-than-average level of payment discipline of debtors. Other features include a fairly high level of concentration in certain sectors, primarily in the banking sector where two to three state-owned banks, around two private banking groups and approximately three subsidiaries of certain major US/EU banks effectively dominate the market.

Weak development of the Russian capital market and the lack of permanent institutional investors represented by insurance companies and pension funds limits the ability of the economy to transform people's savings and business capital into long-term investments necessary for sustainable economic growth and welfare. The in-flow of foreign investments in recent years has fallen drastically due to US/EU sanctions, the drop in oil prices being one of the core economic drivers, and higher-than-average legal risks for doing business in Russia.

ii Impact of specific regional or global events

During 2018 and 2019, in the context of rising US interest rates and the strengthening of the US dollar as well as the US–China trade conflict, market conditions in emerging market economies (EMEs), including Russia, have deteriorated. EMEs faced capital out-flows, a noticeable increase in bond yields, increase in credit spreads and a significant weakening of national currencies.

Foreign 'appetite' for Russian risks by investors has also decreased as a result of the general growth of market volatility in EMEs and against the background of the publication by the US authorities of a series of legislative drafts of anti-Russian sanctions. Non-residents in Russia noticeably reduced the volume of their investments in federal loan bonds (FLBs): the ratio of FLBs on the accounts of foreign depositories in National Settlement Depository in the total volume of the FLBs market decreased from 33.7 per cent on 1 April 2018 to 24.4 per cent on 1 November 2018. The greatest exit intensity was observed in response to the April 2018 sanctions and roll-back of the foreign investors' carry-trade strategy in June 2018.

iii Number of formal procedures entered into or exited during this period

According to the report of the Judicial Department at the Supreme Court of the Russian Federation, in 2018 Russian commercial courts received about 100,000 bankruptcy petitions. Almost 40 per cent of these concerned legal entities, whereas the rest had been filed in respect of individuals and individual entrepreneurs (respectively, 55 per cent and 5 per cent). Furthermore, the number of unfinished bankruptcy cases in 2018 increased by about 20 per cent compared to 2017. This suggests a decrease in efficiency of commercial courts and a slowdown of the bankruptcy proceedings.


The legal framework for bankruptcy of individuals and legal persons is set out in the Civil Code of the Russian Federation (the Civil Code) but mostly in the Federal Law No. 127-FZ dated 26 October 2002 on Insolvency (Bankruptcy) (the Bankruptcy Law).

The Bankruptcy Law provides for the following stages of insolvency proceedings:

  1. supervision: applied in order to ensure the safety of a company's property, investigate a company's financial standing and assets, register creditors' claims and hold the first meeting of creditors;
  2. financial rehabilitation: (optional stage) financial recovery of a company by way of approval by courts of a debt repayment schedule;
  3. external administration: (optional stage) financial recovery of a company through implementation by a court-appointed administrator of a plan of action approved by the court;
  4. liquidation: the final stage of insolvency proceedings involving realisation of a company's assets and its liquidation; and
  5. settlement agreement: could be entered into at any stage of the proceedings in order to terminate the insolvency and agree on a debt repayment schedule.

i The taking and enforcement of security

Pledge, also referred to as 'mortgage' in the context of immovable property, is one of the most often used types of security in insolvency proceedings. Another common type of security in bankruptcy is suretyship provided by a third party to secure the obligations of the debtor. However, as suretyship seldom provides a robust guarantee to the creditor in the bankruptcy proceedings the latter is not considered a secured creditor under the Bankruptcy Law.

Russian law provides for two ways of enforcing the pledge: out-of-court enforcement and enforcement upon a court judgment. The former must be directly envisaged in a pledge agreement and is effected by way of applying to a notary for a notarial writ of execution. After the bankruptcy proceedings have been instituted out-of-court enforcement of the pledge is no longer possible.

The pledge is typically enforced via the sale of the pledged property by tender (or public tender in case of court enforcement). A secured creditor is entitled to retain the pledged asset if the tender organiser fails to sell it in the course of the second round of a public tender when the price of the asset is reduced by 10 per cent. A similar right of retention of a secured creditor arises at the stage of the public offering subject to absence of a proper bid at every step of the price decrease.

The secured claim is repaid fully out of the funds recovered from the sale of the pledge in priority to non-secured creditors' claims. At the very least secured creditors are entitled to 70 per cent of the funds (80 per cent in case of commercial banks).

On the other hand, the rights of the secured creditor are subject to certain limitations, and in particular their voting powers are restricted in the course of financial rehabilitation, external administration, and liquidation procedures. While such proceedings are pending, secured creditors are entitled to vote on only the following points:

  1. election of an insolvency administrator or a self-regulatory organisation of insolvency administrators;
  2. recourse to a court for removal of an insolvency administrator; and

recourse to a court for termination of the liquidation proceedings and returning to external administration.

Notably, at the stage of financial rehabilitation or external administration the secured creditor may elect to forego enforcing the pledge in return for the same voting rights as are given to non-secured creditors. Similarly, should a court refuse enforcement of a pledge at the financial rehabilitation or external administration stage, secured creditor's voting rights become equal to those of a non-secured one.

There is, however, no limitation on the voting rights of the secured creditors in the bankruptcy proceedings concerning natural persons.

ii Duties of directors of companies in financial difficulties

Under Russian law, the CEO, as well as members of the management bodies of a company, has a general duty to act reasonably and in the company's interests. Although the Civil Code does not set out particular duties of a company's directors towards its creditors, these could be derived from the Bankruptcy Law.

In particular, the CEO is obliged to file for bankruptcy petition within one month at least one of the following criteria becomes satisfied:

  1. the satisfaction of the claims of one or more creditors will make it impossible for a company to perform its payment obligations to other creditors;
  2. the enforcement of claims against a company's assets will significantly affect a company's operations;
  3. a company displays the signs of insolvency or insufficiency of assets; and
  4. a company is in default for payment of salaries, retirement benefits or making other payments of a similar kind for more than three months.

Should the CEO fail to file an insolvency petition, he or she risks being subject to secondary liability for the new debts of a company arising after the date when the petition should have been filed. Importantly, the obligation to file for insolvency then shifts to other management bodies of a company, and the Bankruptcy Law sets a 20-day deadline for compliance.

Moreover, under the Bankruptcy Law, the CEO is obliged to provide to a court-appointed insolvency administrator all documents and information in relation to the activity of a company over the last three years. All of the transactions and corporate actions that can be entered into or taken by a company's directors are subject to the administrator's approval.

The scope of secondary liability of a company's directors has recently been substantially expanded. The Bankruptcy Law currently provides that a company's controlling persons – those who are or were in the three years preceding the loss of solvency entitled to issue mandatory instructions to a company or otherwise determine its course of actions – could be held jointly and severally liable for a company's obligations if its assets are insufficient to satisfy all creditors' claims and if the insolvency was caused by their acts or omissions. In particular, the Bankruptcy Law lists a number of scenarios when there is a presumption of the insolvency of a company due to actions of its controlling persons:

  1. a transaction entered into by a company for the benefit of a controlling person resulted in a loss;
  2. accounting or other reporting documents of a company are missing or misleading, which substantially complicates the insolvency proceedings;
  3. claims arising out of criminal, administrative or tax offences committed by the company or its management exceed 50 per cent of the total amount of the claims;
  4. corporate documents that a company was obliged to store are unavailable or have been impaired as of the date of a court decision commencing supervision or declaring a company bankrupt; and
  5. publicly available registers (those containing the information on legal entities and on insolvency proceedings) do not contain the required information on the company or that information is misleading as of the date of commencing the insolvency proceedings.

It is important that the Bankruptcy Law provides for the mechanism of countering the nominal directorship as a means to protect a controlling person from liability. In particular, the nominal director of a company may be absolved from liability if he or she assists in establishing the real director. Moreover, insolvency administrators, previously often unwilling to trace real directors of a company, are now financially motivated by a kind of 'success fee' to do so as well as take any further actions to hold controlling persons liable. The claim for secondary liability may be brought even after the termination of insolvency proceedings, subject to the provisions of the Bankruptcy Law.

Furthermore, a court may find the CEO of a company or its shareholders criminally liable and impose a fine or even a prison sentence of up to six years in cases of deliberate insolvency, fraudulent insolvency or unlawful actions in the course of insolvency proceedings that include the transfer or destruction of a company's assets, forgery of accounting documents and concealing information about a company's assets and obligations.

The CEO of a company, its shareholders or an insolvency administrator may also be subject to administrative liability under the Code of Administrative Offences of the Russian Federation to the extent that the relevant administrative offences do not qualify as crimes. The Code of Administrative Offences provides for fines and disqualification of up to three years for directors and insolvency administrators.

iii Claw-back actions

The Bankruptcy Law provides that the following persons could challenge transactions of the debtor:

  1. the insolvency administrator – at their own initiative or upon a resolution of the creditors' meeting;
  2. a creditor or an authorised body (tax authority) holding more than 10 per cent of the listed claims;
  3. a group of creditors holding, together, more than 10 per cent of the listed claims; and
  4. an interim administration of the financial institution.

Claw-back actions could be brought on general grounds for setting aside or annulling the transactions of a debtor set out in the Civil Code or provisions of the Bankruptcy Law, which provides that the following transactions may be challenged:

  1. suspicious transactions:
    • transactions with unequal consideration; and
    • malicious transactions; or
  2. preferential transactions.

First, a transaction with unequal consideration is a transaction that had been performed during a year preceding the acceptance of a bankruptcy petition by the court or at any time after such acceptance. Its main element is that the consideration that the debtor receives as a result of such transaction is unequal – meaning that its value is at least 20 per cent less than the average market value – to the consideration received by the creditor.

Second, a malicious transaction is a transaction that had been performed during the three years prior to the acceptance of a bankruptcy petition by the court or at any time after such acceptance, that meets the following conjunctive criteria:

  1. the transaction caused actual damage to creditors;
  2. the aim of the transaction was to cause damage to the debtor or its creditors; and
  3. the other party to the transaction was aware of the detrimental aim of the transaction.

There are several statutory presumptions that are applicable in cases involving malicious transactions.

Presumption of the detrimental aim of the transaction applies if:

  1. at the moment of performance of the transaction the debtor met the criteria of insolvency (insufficiency of assets); and
  2. one of the following is true:
    • the transaction is gratuitous;
    • the transaction is an interested party transaction;
    • the transaction is aimed at repayment of a participatory interest to a participant of a debtor, exiting the company;
    • the total value of a property transferred to the other party to the transaction amounts to or exceeds 20 per cent of the book value the debtor's assets;
    • the debtor had changed his or her registered address without notifying the creditors before the transaction took place or had taken other measures to conceal the details of the transaction; or
    • the debtor continues to control the transferred property after the disposal thereof.

Presumption of the other party to a transaction being aware of its detrimental aim applies if:

  1. the other party to the transaction is an interested party in relation to the debtor;
  2. the other party to the transaction knew or ought to have known of the impairment of the interests of creditors; and
  3. the other party to the transaction knew or ought to have known of insolvency of insufficiency of assets of the debtor.

Third, a preferential transaction can be challenged if it had been performed within one month before the acceptance of an insolvency petition by the court or at any time after such acceptance. Should a preferential transaction be aimed at securing the debtor's obligations before a certain creditor or result in a change of priority of satisfaction of creditors' claims and should the creditor know about the debtor's insolvency or insufficiency of its assets, a look back period for such transaction is six months. There is a statutory presumption that an interested party ought to have been aware of insolvency or insufficiency of assets of the debtor unless proven otherwise.

Transactions that may be challenged upon these grounds are voidable and are not null and void by default; they remain in force until the judgment of a court declaring such a transaction as invalid enters into force. However, an invalid transaction is invalid from the very moment of its conclusion and incurs no consequences save for those connected with its invalidity (e.g., an obligation of the creditor to return the funds or assets received from the debtor to the bankruptcy estate).

The limitation period for filing an application to challenge a suspicious or a preferential transaction is one year. As a general rule, this starts running from the moment when an applicant became aware or ought to have become aware of the transaction at issue.


For the past 10 years, Russian insolvency legislation was subject to constant reform and intense discussion. Many legislation amendments came into force after serious problems in the Russian economy in 2008 and 2014. For example, 37 amendments to the Bankruptcy Law were enacted during the period of 2015–2018. Moreover, the practice of the Supreme Court of the Russian Federation has significantly contributed to new developments of Russian insolvency law alongside legislative amendments.

i Subsidiary liability of controlling persons

In spite of the fact the provisions on subsidiary liability of controlling persons existed in Russian law for a number of years,2 they were rarely applied within bankruptcy proceedings until recent developments in this field. As of today, the regulation of insolvency proceedings is much more comprehensive and protective of the rights of good faith creditors. After amendments to Russian legislation3 and developments made by the Plenum of Supreme Court4 supported by extensive case law of the lower courts5 the procedure for subsidiary liability of controlling persons is as follows.

If a company's insolvency was caused by the acts or omissions of its controlling persons and company's assets are not insufficient to satisfy all creditors' claims, such persons may be held liable for company's debts. The term 'controlling person' is defined as a person who is or was entitled to give mandatory instructions to a company or otherwise determine company's actions. The Bankruptcy Law provides for an open-ended list of indicators of such control, and even a person that has no formal affiliation with a company or its CEO could potentially be recognised as a controlling person in respect of that company. The courts have discretion to determine the existence of such control indicators on a case-by-case basis.

A controlling person against whom a claim for secondary liability has been brought joins the bankruptcy proceedings as defendant. It is important to note that the court at the early stage of the insolvency proceedings may impose an obligation upon such defendant to provide security to cover the likely amount of his or her subsidiary liability.

ii Measures against the influence of affiliated persons on bankruptcy procedure

Affiliates of the debtor may create significant difficulties for good faith creditors. For example, they may initiate bankruptcy proceedings with the purpose of appointing a friendly insolvency administrator or influence the bankruptcy procedure by voting in bad faith at creditor meetings. In recent years the Supreme Court has begun to pay close attention to the claims of creditors affiliated with the debtor and in 2018 there were significant developments in this field.

Although the Bankruptcy Law provides for the priority of creditors' claims on the debtors' obligations over the corporate claims of company's participants,6 abusive practices were used to avoid these regulations. To bypass this legislative provision, the debtor's affiliates concealed corporate relations as civil obligations and brought their claims against the debtor along with good faith creditors. Generally, for these purposes the debtor's affiliates used a loan contract, but the case law on recognition of sales, lease7 and credit8 contracts as fictitious transactions has played towards suppression of this practice.

Furthermore, in 2018 the Supreme Court formulated the positions on the issue of subordination of claims of the debtor's affiliates in bankruptcy:

  1. the Supreme Court ruled that the company shall not be included in the register of creditor claims of its participant referring to the fact that the debtor made a profit as a result of that transaction;9 and
  2. the claims of the debtor's participant who performed obligations to a good faith creditor under the suretyship agreement instead of the debtor shall be subordinated. In that case, the Supreme Court ruled that claim of a debtor's affiliate obtained by subrogation shall be subordinated.10

Rules of random selection of insolvency administrator shall be applied in cases when a bankruptcy petition was filed by an affiliated creditor or a person who in fact can give binding instructions to the debtor or otherwise determine its actions.11

Moreover, the Supreme Court set the tendency to protect good faith creditors by broad interpretation of the restitution mechanism for security obligations. In its decision dated 27 April 2018, the Supreme Court ruled that a suretyship shall be restored after the declaring voidable the preferential transaction, made before the bankruptcy.12


One of the novels of restructuring regulation is the implementation in 2017 of a kind of 'bail out' mechanism of preventing major banks' (considered 'too big to fail') insolvency. It is worth mentioning that the banking sector has been one of the hottest in terms of insolvency since the Central Bank of Russia (the Central Bank) has been gradually and consistently improving the quality of the Russian banking market for the latest approximately five years by revoking the banking licence of the banks that it had reasonably viewed to be unstable and lacking liquidity. However, in order to save certain systemically important banks from liquidation and at the same time improve the quality of their assets and their reliability in relation to their depositors and other clients, starting from 2017 the Central Bank has been applying a new mechanism of financial recovery by means of the Fund of Consolidation of the Banking Sector (the Consolidation Fund). The Consolidation Fund's assets are accumulated through the Central Bank's infusions. The principal mechanics thereof is that upon the reasonable and well-founded decision of the Central Bank preceded by the detailed inspection of the bank, powers of all its managerial bodies (CEO, boards, general shareholders' meeting) terminate and such bodies become in fact superseded by the Consolidation Fund's management company (controlled by the Central Bank). The next step is the reduction of the nominal value of the bank's issued share capital to one rouble and performance of additional share issuance so that the Central Bank becomes the 99.99 per cent shareholder in such a bank and other shareholders' stakes are diluted. Further, the Central Bank performs set of actions aimed at restoration of the bank's liquidity, disposal of its low-quality assets, restructuring of its relations with certain borrowers, depositors, investors and other parties. Other measures may include writing down bank's subordinated loans, debt securities, and deposits. Finally, upon a bank's full financial rehabilitation, its shares held by the Central Bank are sold to private investors, or other banks through public trades organised and administered by the Central Bank. One of the major examples of the application of that mechanism is the bailing out of Otrkitie Financial Corporation, Promsvyazbank and Asian-Pacific Bank. The aggregate amount of funds utilised by the Central Bank in that mechanism during 2017–2019 is approximately 2 trillion roubles.

Another prominent recent matter was application of the piercing of the corporate veil doctrine in the bankruptcy of Dalniaya Step LLC, a subsidiary of Hermitage Capital private equity fund, which in turn was controlled by HSBC bank at all times material to the case. The case is notable since the bankruptcy proceedings that had been terminated due to Dalniaya Step's bankruptcy in mid-2000s have been reopened at the application of one of the creditors almost 10 years later due to newly discovered facts. The main reason behind that was that the Dalniaya Step's insolvency administrator did not employ its best efforts to discover and recover all of the Dalniaya Step's assets for the benefit of its creditors and was not sufficiently diligent in the course thereof. After investigating Dalniaya Step's complicated corporate structure the court came to the conclusion in those 'new' bankruptcy proceedings that the ultimate control over Dalniaya Step belonged to the HSBC group. The judgment for payment to Dalniaya Step's creditors of approximately 1.4 billion roubles was rendered by the lower courts against HSBC and upheld by the Supreme Court in 2017–2018.


Although the Bankruptcy law emphasises the priority of international treaties before the national sources of law, Russia is not a party to any international treaty regulating bankruptcy, such as the European Convention on Certain International Aspects of Bankruptcy.

According to the Bankruptcy Law and the practice of Russian courts, recognition and enforcement a final and binding foreign court judgment declaring a debtor insolvent and appointing an insolvency administrator could be sought on the basis of an international treaty or reciprocity. In particular, a declaratory judgment is recognised without the need to bring special proceedings, although the interested party is entitled to object against such recognition before Russian courts within one month after learning of the judgment. Non-final decisions and orders (such as those granting interim measures) are not subject to recognition and enforcement.

As long as a foreign court judgment declaring a debtor insolvent and appointing an insolvency administrator is recognised in Russia, the foreign insolvency administrator is entitled to seize the debtor's Russian assets or request interim measures in support of foreign insolvency proceedings, seek invalidation of the debtor's transactions.

Foreign nationals with their COMI in Russia may file for bankruptcy before the Russian courts. However, foreign legal entities are not subject to Russian bankruptcy proceedings.

At the same time, under Russian law Russian courts have exclusive jurisdiction over the bankruptcy of Russian nationals and, therefore, would refuse recognition and enforcement of respective foreign court judgments.


After serious developments in the bankruptcy legislation in Russia in the past 10 years, it is unlikely that the current legal regime will be overhauled in the foreseeable future. However, several new amendments have recently been suggested.

The Plenum of the Supreme Court introduced a draft law, according to which claims for the inclusion in the register of creditors will be handled by an insolvency administrator or registrar as opposed to a court. Moreover, this bill provides for the possibility of restoring the term for inclusion in the register of creditor claims if there are valid reasons for doing so.13

Another bill that is currently in the State Duma seeks to introduce a restructuring procedure in Bankruptcy Law. As stated in the document, the essence of the restructuring procedure is that it could partially replace the procedure of supervision, financial recovery and external administration. Furthermore, it provides for the possibility of the debtor to apply for the commencement of this procedure and adoption of a restructuring plan.14


1 Alexander Vaneev is a partner and Ilya Sorokin is a counsel at BGP Litigation. They acknowledge and appreciate the substantial work and assistance provided by associates Dimitriy Mednikov and Anton Patkin, and junior associates Anatoly Panin and Mark Politiko in preparing this chapter.

2 Article 56 of Civil Code of the Russian Federation; Articles 9–10 of Federal Law No. 6-FZ on Insolvency (Bankruptcy) dated 8 January 1998.

3 Federal Law No. 266-FZ on amendments in the Federal Law on Insolvency (Bankruptcy) and Administrative Offences Code of the Russian Federation dated 29 July 2017.

4 Decree of the Plenum of the Supreme Court of the Russian Federation No. 53 on issues, connected to the liability of controlling persons in bankruptcy dated 21 December 2017.

5 Decree of the Commercial Court of Ural District No. F09-10493/15 dated 29 December 2018. Decree of the Commercial Court of Moscow District No. F05-4838/2019 dated 24 April 2019.

6 Article 148 of Federal Law No. 127-FZ on Insolvency (Bankruptcy) dated 8 January 1998.

7 Ruling of the Supreme Court of the Russian Federation No. 306-ES16-20056(6) dated 26 May 2017.

8 Ruling of the Supreme Court of the Russian Federation No. 310-ES17-20671 dated 23 July 2018.

9 Ruling of the Supreme Court of the Russian Federation No. 305-ES16-20992(3) dated 7 June 2018.

10 Ruling of the Supreme Court of the Russian Federation No. 310-ES17-20671 dated 23 July 2018.

11 Digest of case law approved by the Presidium of the Supreme Court of the Russian Federation dated 26 December 2018.

12 Ruling of the Supreme Court of the Russian Federation No. 305-ЭС17-2344(13) dated 27 April 2018.

13 Decree of the Supreme Court of the Russian Federation No. 37 dated 27 November 2018.

14 Draft law No. 239932-7 on amendments in the Federal Law on Insolvency (Bankruptcy) and certain legislative acts regarding the procedure of restructuring debts in cases of legal entities' bankruptcy.