Foreign companies were allowed to go bankrupt in the Russian Federation, a decision on this was made by the Supreme Court (SC), officially recognizing the difficulties of Russian creditors participating in courts abroad, including due to sanctions and high costs. The Supreme Court allowed bankruptcy of a foreign legal entity not only within the limits of Russian assets, but also full-fledged cross-border bankruptcy, covering all property and all creditors, including those abroad. Lawyers call the Supreme Court’s clarifications essentially “a new chapter of insolvency law.” On the one hand, the decision will simplify the bankruptcy of nominally foreign companies with Russian beneficiaries and assets. But on the other hand, “excesses are possible” in practice, up to and including attempts to declare large international enterprises bankrupt in Russia.
The Supreme Court made a decision that is key to arbitration practice, in which attempts by Russian creditors to bankrupt foreign debtors in Russian courts have become more frequent. For the first time, the Supreme Court directly recognized the possibility of such bankruptcy and clarified the conditions for considering such disputes in Russian courts.
The decision was made on the application of the Cypriot AMN Commercial Property Advisors Ltd to declare the parent Cyprus Westwalk Projects Ltd bankrupt. The law firm Level Legal, which represents the interests of AMN, explained to Kommersant that Westwalk previously belonged to citizens of the Russian Federation – brothers Alexei and Konstantin Mauergauz, who in 2020 decided to divide the business, but could not disperse peacefully (see Kommersant on January 17) . AMN sued for 6 million rubles, the money was not paid, and the company filed for Westwalk bankruptcy in the Moscow Arbitration Court. The court refused, since the debtor does not currently operate in the Russian Federation, there is no property or open accounts here, and the owner and director are a citizen of Uzbekistan. The appeal and cassation agreed with this. Based on AMN’s complaint, the dispute was transferred to the Economic Collegium of the Supreme Court. The applicant indicated that Westwalk previously operated in the Russian Federation and at that time its shareholder and director was a citizen of the Russian Federation, all its assets were located here, which it sold shortly before the trial, and registration in Cyprus was “formal.”
The Supreme Court panel noted that a change of director and transfer of assets to another person “does not exclude the consideration of a bankruptcy case by a Russian court,” otherwise “unscrupulous debtors” could “artificially change the competence of the court.” As a result, the Supreme Court sent the case for a new trial.
But this was not the key part of the decision. The Supreme Court determined the conditions for consideration of all similar disputes, separating them into two separate blocks – on the competence of the courts and on the bankruptcy proceedings of a foreign entity.
According to the Supreme Court, the legislation does not exclude the possibility of bankruptcy of a foreign organization in Russia if it has a close connection with the Russian Federation. Various criteria can confirm such a relationship. Firstly, related to the foreign company itself, if its management body or branch is located in the Russian Federation, or its activities are focused on Russian persons or are conducted in Russia, or its property or a significant part of the creditors are located in the Russian Federation. Secondly, the connection can be through the persons controlling this company if they have citizenship or residence permit in the Russian Federation or the center of their main interests is in the Russian Federation, or they own Russian legal entities. The list of criteria is non-exhaustive, the Supreme Court emphasized.
“It is enough for the creditor to confirm the materiality of the circumstances indicating that the debtor has a close connection with the Russian Federation,” and the burden of refuting it rests with the debtor, the Supreme Court said. Depending on the strength of the connection with the country, the court may enter “main proceedings” in the bankruptcy case or “local (secondary) proceedings”. If a legal entity is only nominally registered abroad, but the center of its main interests is in the Russian Federation, it can be completely bankrupt in Russia. This “will create an effect for all jurisdictions,” the Supreme Court explained, and will apply to all assets of the debtor, regardless of their location, and to all creditors, including foreign ones.
If the center of the main interests of the debtor is abroad, but there is a permanent establishment or property in the Russian Federation, the court may introduce “secondary proceedings in a cross-border bankruptcy case.” It will affect only those creditors and property of the debtor who are located or associated with the Russian Federation. The purpose of secondary proceedings, the Supreme Court explained, is to “protect the interests of Russian creditors in the absence of effective access” to foreign jurisdiction, including due to “international sanctions,” too high costs and other factors limiting their “access to justice.”
The decision is written very well and “undoubtedly has a precedent-setting nature,” emphasizes BGP Litigation lawyer Mikhail Osipov. Leading lawyer of Lemchik, Krupsky and Partners Kambulat Karashev states that the sections on the competence of the court and proceedings in the case in the decision of the Supreme Court “are in fact a new chapter of bankruptcy law”: “The court’s conclusions create completely new norms for Russian law, formulated in a number of full-fledged articles. Such large-scale law-making on the part of the highest courts is rare and is usually due to a sharp public need coupled with gaps in the legislation.”
According to Orchards advisor Azat Akhmetov, “the criteria for the competence of the Russian court and determining the center of the main interests of the debtor are excellent,” and “it is important that their list is open and the courts will be able to decide this independently in each case.” Kambulat Karashev sees in the position of the Supreme Court another “step towards the process of deoffshorization”: “Assets nominally registered with foreign entities, but located on the territory of the Russian Federation or within its interests, are now even more susceptible to influence from the Russian judicial system.”
Meanwhile, some formulations seem to lawyers to be “too broad.” Thus, the debtor’s activities should not just be focused on Russian persons, but “primarily on them, otherwise any foreign company with a Russian sales market may be declared bankrupt in the Russian Federation,” explains Mr. Osipov. “They essentially introduced the American concept of long arms. Everything that we think is within our jurisdiction is within our jurisdiction; whoever we want, we will bankrupt him,” points out the head of Bartolius Bank, Yuliy Tai. In his opinion, this is acceptable for certain cases, but “not for the bankruptcy of the world’s largest banks and foreign industrial enterprises.” “It is very difficult to predict what this position may lead to in practice,” fears Yuliy Tai. Mikhail Osipov also “does not exclude excesses in terms of attempts to declare bankrupt foreign companies that really have little connection with the Russian Federation.” Lawyers expect that the courts will clarify the criteria in the future.