II. Overview of the current russian bankruptcy law

The Russian Bankruptcy Law was signed by President Yeltsin on January 8, 1998; its substantive provisions became effective retroactively on January 1, 1998. It is the third bankruptcy law adopted by the Russian Federation.

The Russian Bankruptcy Law governs the bankruptcy of natural and legal persons. It contains special provisions for large employers, called “town-forming” organizations, agricultural organizations, insurance organizations, professionals engaged in the securities business, individual farmers, individual entrepreneurs, credit organizations and citizens. Credit organizations are also the subject of separate legislation providing detailed guidelines for the bankruptcy of these entities. Certain government-owned enterprises that are operated pursuant to statute and are scheduled to be privatized by 1999 are excluded from the provisions of the Russian Bankruptcy Law.

Translation Tips

(1) to become effective retroactively = иметь обратную силу;

(2) The Law governs the bankruptcy = Законом регулируется процедура банкротства;

(3) It contains special provisions for large employers = В нем содержатся специальные положения, регулирующие деятельность крупных работодателей;

(4) Certain government-owned enterprises that are operated pursuant to statute and are scheduled to be privatized by 1999 are excluded from the provisions of the Russian Bankruptcy Law = Деятельность предприятий, находящихся в государственной собственности, управление которыми осуществляется в соответствии с законодательством, и приватизацию которых планируется завершить к 1999 году, не регулируется положениями российского Закона о банкротстве. (Analyze the translation techniques applied to this sentence. Identify the translation patterns used).

This Article discusses bankruptcy proceedings with respect to the reorganization of enterprises, including town-forming enterprises. It does not address any of the other provisions governing specific types of entities or natural persons.

With respect to enterprises, the Russian Bankruptcy Law provides for three kinds of bankruptcy administration, during which the enterprise is to be declared solvent, restructured or liquidated. Prior to a formal declaration of bankruptcy, an enterprise is subject to “observation proceedings” for a period of three months, which can be extended for an additional two months. During observation proceedings, the arbitration court collects information about the management and the financial status of the debtor in order to determine the appropriateness of formal bankruptcy administration. The arbitration court appoints an interim manager to monitor the debtor’s management, preserve the assets of the debtor, analyze the debtors financial status, ascertain whether there are indicia of deliberate or fraudulent bankruptcy, and to convene the first creditors’ meeting. During this period, the Russian Bankruptcy Law envisions that the debtor’s management will continue to operate the enterprise, although the arbitration court is empowered to remove the management for cause, such as for hindering the interim manager.

Translation Tips

(1) the Law provides for three kinds of bankruptcy administration = Законом предусматривается три способа внешнего управления:

(2) an enterprise is subject to “observation proceedings” = в отношении преприятия вводится процедура наблюдения:

(3) During observation proceedings = В ходе процедуры наблюдения;

(4) The arbitration court appoints an interim manager to monitor the debtor’s management, preserve the assets of the debtor, analyze the debtors financial status, ascertain whether there are indicia of deliberate or fraudulent bankruptcy, and to convene the first creditors’ meeting = Арбитражный суд назначает временного управляющего для осуществления надзора за деятельностью руководства должника, обеспечения сохранности его активов; определения наличия признаков намеренного или фиктичного банкротства, и для созыва первого собрания кредиторов. (Analyze the translation techniques applied to this sentence. Identify the translation patterns used).

Following observation proceedings, the arbitration court, based on a decision of the creditors’ committee or the court’s own determination that the debtor can be restored to solvency, may declare the debtor subject to external administration, the method of reorganizing a debtor enterprise under the Russian Bankruptcy Law. At the commencement of external administration, the arbitration court appoints an external manager, selected by the creditors, who assumes the responsibilities of the debtor’s management, subject to supervision and control by the arbitration court and the creditors. The external manager is obligated to present a plan of external administration within one month after appointment.

Under the plan, the external manager must seek to restore the enterprise to solvency by selling assets, selling the enterprise, reaching agreement with the creditors to reschedule debts or otherwise satisfying their claims in full performance of the debtor’s obligations, including by means of the assumption of debts by new entrant third parties, or such other methods as may be accepted by a majority of creditors present at the creditors’ meeting. The period of external management may last no more than twelve months, with a six month extension by the court, subject to a possible further extension by the arbitration court based on the petition of the creditors after their review of the external managers’ report at the end of the year and a half period of external administration.

Translation Tips

(1) Following observation proceedings = после процедуры наблюдения;

(2) The external manager is obligated to present a plan = в обязанности внешнего управляющего входит представление плана;

(3) subject to a possible further extension by the arbitration court = при условии возможного дальнейшего продления по решению арбитражного суда.

If external management fails, or if the enterprise is deemed unsuitable for reorganization, the arbitration court may order the liquidation of the debtor’s assets under “competitive proceedings.” In such a case, the arbitration court appoints a competitive proceedings manager who temporarily manages the debtor, sells its assets, and makes distributions to creditors according to the priority scheme provided under the Russian Bankruptcy Law. Competitive proceedings last up to one year, with a possible extension of six months by the arbitration court.

During any of the proceedings described above, the debtor and its creditors may conclude an amicable agreement. The agreement must be approved by the creditors. Third parties may enter into an amicable agreement with the debtor and its creditors in order to acquire rights to, and assume obligations of, the debtor. The rights that third parties can acquire in a debtor enterprise include ownership of the debtor entity. Notably, there is no restriction against the State entering into an amicable agreement in order to gain ownership of a debtor. An amicable agreement is subject to the requirement that the claims of the creditors in the first and second order of priority must be satisfied.

The order of priority of creditors under the Russian Bankruptcy Law is as follows:

First, the claims of citizens to whom the debtor is liable for harm to life or health;

Second, claims for severance pay, wages, and royalty payments;

Third, claims of secured creditors. If pledged property is insufficient to satisfy the claim of a secured creditor, the remainder of the claim is an unsecured fifth priority claim;

Fourth, claims of government bodies for compulsory payments and payments to extra-budgetary funds (such as taxes and pension payments), except for fines and financial sanctions;

and

Fifth, unsecured claims, government imposed fines, and all other claims.

Other laws define significant rights affecting the bankruptcy process. These laws include the Civil Code, the laws on privatization, entrepreneurial activity, and ownership. Some of these laws appear to conflict with provisions in the Russian Bankruptcy Law. For instance, the Law of the Russian Federation on Enterprises and Entrepreneurial Activity appears to provide a workers’ collective with the power to veto an owner’s decision to liquidate or reorganize an enterprise.

Because there is little jurisprudence established by the arbitration courts, we have no indication as to how these kinds of disputes will be resolved. Therefore, this Article considers the Russian Bankruptcy Law in isolation. The reader should be aware that other provisions may be introduced into law that conflict with the outcomes under the Russian Bankruptcy Law as described herein.

Translation Tips

(1) If external management fails, or if the enterprise is deemed unsuitable for reorganization = в случае неэффективности внешнего управления, либо в случае признания предприятия непригодным для реорганизации;

(2) An amicable agreement is subject to the requirement = в отношении мирового соглашения действует требование о том, что…;