Bankruptcy law has caught up with foreign companies and their assets

20 February 2024
Law Messenger
Russia’s Supreme Court has issued a ruling[1] in which it clarifies with reference to a particular dispute[2] its position on the matter of whether Russian arbitration courts can institute bankruptcy proceedings against foreign entities.

Close connection criteria

In the Ruling the Supreme Court presents a model list of indications that a disputed relationship is closely connected with Russia[3], including the following:

  • the entity carries on economic activities of a non-temporary nature in the territory of the Russian Federation;
  • commercial activities are directed at persons in the jurisdiction of the Russian Federation;
  • the centre of main interests of controlling persons is situated in the territory of the Russian Federation;
  • the management body, branch or representative office of the foreign entity is located in the territory of the Russian Federation;
  • controlling persons of the entity have Russian citizenship or a temporary or permanent residence permit for the Russian Federation or are linked by corporate relationships to Russian legal entities;
  • controlling persons have had subsidiary liability imposed on them by a Russian court;
  • the entity has property assets in the territory of the Russian Federation, including immovable property and leasehold rights in land;
  • a significant proportion of creditors are comprised of Russian legal entities, citizens of the Russian Federation or persons whose activities are closely connected with the territory of the Russian Federation;
  • the entity has concluded a significant number of transactions for which the place of performance is in the Russian Federation;
  • the principal evidence for the case is situated in the territory of the Russian Federation, and other circumstances.
The Supreme Court observes in the Ruling that, in the consideration of whether a Russian arbitration court has competence, a creditor would be obliged only to prove the materiality of circumstances indicating the existence of a close connection, after which the burden of disproving those circumstance will rest with the respondent disputing the competence of the Russian arbitration court to hear the legal dispute.

The legal position set out by the Supreme Court is designed in part to prevent bad-faith debtors from taking artificial steps to change the jurisdiction in which bankruptcy cases are heard, such as by formally registering companies in foreign jurisdictions, alienating assets to duplicate companies, changing directors, and so on.

The "centre of main interests" criterion

After establishing that there is a close connection or some other ground for asserting the competence of a Russian arbitration court, the court’s next step, according to the Supreme Court, is to determine whether the debtor’s centre of main interests is in Russia or outside Russia. In determining a debtor’s centre of main interests, courts may, in particular, take into consideration the following circumstances which existed before the bankruptcy petition was filed (the list is not exhaustive):

  • the location of the debtor’s main property;
  • the location of the majority of the debtor’s creditors;
  • the location of the debtor’s production resources;
  • the place where the debtor carries on business activities;
  • the place where the debtor derives most of its profit / receives its main income;
  • the place where the re-organisation of the debtor is carried out;
  • the nature of the debtor’s main obligations, including where they arose and fulfilled;
  • the location and centre of main interests of controlling persons of the debtor;
  • other circumstances indicating the existence of a material connection of the debtor’s activities with the territory of a state.
"Main" and "secondary" bankruptcy proceedings

Depending on whether the centre of main interests is or is not in the territory of Russia, the Supreme Court instructs that "main" or "secondary" bankruptcy proceedings should be instituted (the Ruling marks the first time these terms have been used).

A Russian arbitration court must open "main" proceedings if the debtor’s centre of main interests is in Russia, and "secondary" proceedings if that centre of main interests is elsewhere but the debtor has some of its property and local creditors in Russia. "Main" proceedings are opened in relation to the whole of a debtor’s property (located both in Russia and in other jurisdictions) and, according to the Ruling, will have effect for all other jurisdictions.

"Secondary" proceedings, meanwhile, are to be conducted only in relation to that part of the debtor’s property which is located in Russia (regardless of whether bankruptcy proceedings have been opened in the jurisdiction constituting the centre of main interests). "Secondary" bankruptcy proceedings are viewed by the Supreme Court as a mechanism for protecting Russian creditors where they do not have effective access to the jurisdiction in which "main" bankruptcy proceedings would be conducted.

Authors:
  • Natalia Aristova
    Partner
    B1 Legal
  • Anton Sidnin
    Senior Associate
    B1 Legal
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