The Ministry of Economic Development of Russia has developed a draft law (RBC) on amending Art. 31  of Federal Law No. 127-ФЗ dated October 26, 2002 “On Insolvency (Bankruptcy)”, which provides for the introduction of a new bankruptcy prevention mechanism – an agreement on out-of-court recovery. The conclusion of such an agreement is aimed at restructuring the debtor’s obligations without initiating bankruptcy proceedings, which will allow the debtor to avoid the use of lengthy and costly bankruptcy procedures, reputational risks, the risks of bringing the persons controlling the debtor to liability and challenging the debtor’s transactions.

It is assumed that during the term of the agreement on out-of-court recovery, the enforcement proceedings initiated against the debtor are subject to termination, and the initiation of new enforcement proceedings shall be dismissed. Corresponding changes are made by the draft law to Federal Law No. 229-ФЗ dated October 02, 2007 “On Enforcement Proceedings”. The draft law provides for the possibility of extending the agreement on out-of-court recovery to all (with some exceptions) creditors, including those who did not participate in its conclusion, which eliminates the need for the debtor to negotiate with each creditor separately. The introduction of the mechanism of out-of-court recovery is becoming more relevant at the present time, when there is a moratorium on initiating bankruptcy cases, introduced by Decree No. 497 of the Government of the Russian Federation dated March 28, 2022.

Terms of the agreement on out-of-court recovery

An agreement on out-of-court recovery may be concluded between a debtor (a citizen or a legal entity) and creditors or other persons. The terms of such agreement may include, inter alia, the following:

  • changing the procedure and terms for fulfilling the debtor’s obligations, including their termination by granting a compensation, converting claims into participatory interest in the authorized capital (shares) or securities of the debtor, novation of obligations or debt forgiveness;
  • provision by the debtor, its founders (members) or other persons of a pledge, guarantee and other security for the performance of the debtor’s obligations;
  • the obligation of creditors to refrain from filing an application for declaring a debtor bankrupt and from submitting enforcement documents within the prescribed period;
  • the obligation of the debtor to make certain transactions with the consent of the creditors;
  • the obligation of the debtor to disclose information to creditors about the occurrence of certain circumstances;
  • conditions for granting priority in repayment of creditors’ claims arising on the basis of financing provided under the agreement;
  • circumstances under which the agreement is terminated and creditors’ claims are restored on the terms that existed before its conclusion.

An agreement on out-of-court recovery may provide for its extension to creditors who did not participate in its conclusion, with the exception of secured creditors and creditors whose claims arose after the conclusion of the agreement. It is possible to include conditions in the agreement relating to the repayment of debts on mandatory payments collected in accordance with the legislation on taxes and fees. Such terms of the agreement shall not contradict the requirements of the legislation on taxes and fees. At the same time, the Ministry of Finance of Russia may establish the specifics of the procedure and conditions for concluding an agreement on out-of-court recovery in relation to mandatory payments.

Prohibition to invalidate the agreement on out-of-court recovery

The agreement on out-of-court recovery, as well as transactions made on its basis, may not be declared invalid in accordance with Articles 61.2 and 61.3 of Federal Law No. 127-ФЗ dated October 26, 2002 “On Insolvency (Bankruptcy)”, if at the time of their execution the party under the transaction, acting in good faith and reasonably, believed that such a transaction was aimed at restoring the solvency of the debtor.

Approval of the agreement on out-of-court recovery by the arbitration court

The agreement on out-of-court recovery may be approved by an arbitration court on the basis of an application by the debtor, if the agreement complies with the provisions of Article 31 of Federal Law No. 127-ФЗ dated October 26, 2002 “On Insolvency (Bankruptcy)” and at the same time the compliance with the following conditions was proved:

  • creditors (except for secured creditors) who own more than 3/4 of the total amount of the debtor’s obligations, excluding obligations to pay penalties, interest, and other financial sanctions, participated in the conclusion of the agreement;
  • the debtor has no unfulfilled obligations to pay wages, severance benefits, alimony, compensation for harm to life or health;
  • the agreement is aimed at restoring the debtor’s solvency and does not contradict the principles of good faith and reasonableness.

If the issue of approving the agreement on out-of-court recovery was not subject to consideration by the court and (or) was not previously considered by the court, then the court, when considering the validity of the application of the creditor, including the one who did not participate in its conclusion, to declare the debtor bankrupt shall refuse to introduce the procedure used in bankruptcy case if such agreement meets the above conditions.

Rules for consideration by an arbitration court of an application for out-of-court recovery

The application for out-of-court recovery shall be considered by an arbitration court according to the rules provided for by the Commercial Procedural Code of the Russian Federation for considering a statement of claim, taking into account the specifics established by Federal Law No. 127-ФЗ dated October 26, 2002 “On Insolvency (Bankruptcy)”. The application for out-of-court recovery shall be submitted to the arbitration court at the location of the legal entity debtor or at the place of residence of the citizen. Along with the documents provided for by the Commercial Procedural Code of the Russian Federation, the application for approval of the agreement on out-of-court recovery shall be accompanied by:

  • the text of the agreement on out-of-court recovery;
  • a list of all known creditors with their addresses and debt amounts;
  • documents confirming the repayment of arrears on claims for payment of wages, severance benefits, alimony, compensation for harm to life or health.

The following persons shall participate in the consideration of the case on such an application:

  • the debtor;
  • creditors who participated in the conclusion of the agreement;
  • creditors who did not participate in the conclusion of the agreement, to which the debtor asks to extend its effect.

Failure by the creditors to appear shall not prevent the consideration of the case. The arbitration court shall refuse to approve the agreement if it is proved that the creditors who did not participate in its conclusion will be put in a worse position than if the debtor were declared bankrupt and its property were immediately sold in the course of bankruptcy proceedings.

Based on the results of considering the application for out-of-court recovery, the arbitration court shall issue a ruling, which may be appealed in the manner prescribed by the Commercial Procedural Code of the Russian Federation.

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