Pepeliaev Group advises that draft law No. 953580-7 is pending its first reading in the Russian State Duma (the lower house of the Federal Assembly of Russia). Article 9 of the draft law contains provisions concerning the granting to debtors to which the moratorium applies of a court instalment plan in bankruptcy cases for the purpose of settlements with creditors.

What is a court instalment plan and how to use it?

A court instalment plan means the suspension for a certain period of a bankruptcy case at the request of a company or an individual entrepreneur to which moratorium applies (the “debtor”) that meets the parameters established by the draft law, with obligations to the creditors being paid by instalments.

The conditions on which a court instalment plan is granted

Within the scope of a bankruptcy case, a debtor may apply for a court instalment plan provided that the following conditions are met:

• the bankruptcy case has been initiated by the debtor itself;
• the monitoring/debt restructuring with respect to the debtor has been introduced after the moratorium period has been launched;
• the drop in the debtor's revenues (income) is over 20% (1) in the reporting period in which a bankruptcy case was initiated as compared with the similar period of a previous calendar year, or (2) on a year-to-year basis, if, at the moment when an application for an instalment plan is filed with the court, no reporting period has expired, the indicators of debtors’ revenues (income) are compared for two years preceding the year in which the application has been filed;
• the absence of debts to individuals for causing harm to life or health, or salary arrears;
• at the meeting of creditors, debtors spoke out against or refrained from entering into a settlement agreement;
• there are no applications from creditors, including those returned by a state commercial court under article 9.1(2) of the Bankruptcy Law.

Since a prerequisite for granting a court instalment plan is that this matter should be considered by the meeting of creditors, it is possible to obtain such an instalment plan five or six months after supervision/debt restructuring procedures have been introduced with respect to the debtor, which significantly reduces the efficiency of the mechanism of an instalment plan in a situation when the debtor’s financial position continues to deteriorate. In view of the above, debtors are advised, if there are prospects of overcoming the crisis, to initiate negotiations with a temporary manager to initiate the first meeting of creditors under the supervision procedure immediately after the procedure is completed when creditors’ claims are determined under article 71 of the Bankruptcy Law.

To which obligations does a court instalment plan apply?

The draft law provides for the possible payment by instalment of obligations outstanding at the date when the bankruptcy case has been initiated and of obligations to be included in the register of creditors’ claims which mature within a year after the date when the court instalment plan has been granted.

A court instalment plan applies to the claims of all creditors including those which were not included in the register of creditors’ claims.

The procedure for obtaining a court instalment plan

The debtor’s application for a court instalment plan can be filed with a court under a bankruptcy case not earlier than a month after the moratorium has been introduced.

Once it reviews the application, a state commercial court issues a ruling containing the conditions on which a court instalment plan is granted, and the bankruptcy proceedings are terminated. The ruling granting the court instalment plan can be challenged.

The period of a court instalment plan, procedure and conditions on which obligations are discharged

The general rule is that a court instalment plan is granted for one year. The period of the instalment plan can be extended by up to two years if the debtor’s revenues have contracted by more than 50%. For strategic enterprises, the above period can be extended by three years.

The debtor must discharge the obligations covered by the court instalment plan every month in equal instalments during the period of the instalment plan.

If an instalment plan is granted for more than a year, the debtor must provide to its unsecured creditors security in the form of a bank guarantee or a pledge. Interest accrues on an instalment as established in the agreement between the debtor and its contracting party, or if no such interest has been set, at the key rate of the Bank of Russia.

If there are preconditions for getting out of the crisis, including with the help of a court instalment plan, we advise that you prepare an economically feasible plan that would help to assess not only the feasibility of anti-crisis measures under consideration and their effectiveness, but also reduce the risks of secondary liability being imposed on controlling persons if a bankruptcy case is resumed or another bankruptcy case is initiated.

Creditors’ right during the period of a court instalment plan

Creditors whose claims exceed 10% of the total amount of the register of creditors’ claims (except for those persons who are interested parties with respect to the debtor) are entitled to access information regarding the assets and liabilities of the debtor and to receive a quarterly report on how the court instalment plan is executed.

Consequences of the failure to comply with the conditions of a court instalment plan

If a debtor does not fulfil the conditions of such an instalment plan, such as failing to discharge its obligations on time, the court, further to a petition of creditors, revokes the instalment plan and resumes the bankruptcy proceedings, except for cases when procedures have been initiated against the debtor that are applied under a new bankruptcy case.

When a court instalment plan is revoked, it is terminated with respect to all creditors.

If bankruptcy proceedings are resumed or another bankruptcy case is initiated against the debtor, the periods for which articles 61² and 61³ of the Bankruptcy Law for challenging transactions will be calculated from the date when the moratorium was put into effect and will include (i) the relevant period before the starting date of the moratorium, (ii) the period of the moratorium itself, and (iii) the period before the court instalment plan was revoked or a new bankruptcy case was initiated if the court instalment plan was not fulfilled.

Creditors should actively use the rights granted to exercise control over the debtor’s activity in order to avoid assets being siphoned off and should apply in good time to the court for the revocation of the court instalment plan. For those purposes, we advise that if the amount of claims is insufficient you should enter into an alliance with other creditors to jointly protect your rights.

Pepeliaev Group’s lawyers have extensive experience in providing integrated support in bankruptcy cases and are ready to provide such legal support to effectively protect the interests of any parties involved in the procedures that are used in such cases.