Lending in Russia

Upon the bankruptcy of a debtor or a pledgor, a moratorium against enforcement of the security will be introduced whilst it is being determined if financial rehabilitation, external administration or bankruptcy liquidation should apply.

Repayments or arrangements in preference of other creditors are likely to be subject to anti-preference provisions set out in bankruptcy laws. For more information related to bankruptcy and insolvency in Russia generally, please see the Corporate bankruptcy chapter.

During bankruptcy procedures, Russian law applies mandatory priorities under which creditors of the same class would rank equally. In brief, these are: (i) “first priority claims” (personal injury); (ii) “second priority claims” (employee related, royalties); and (iii) “third priority claims” (all other claims, including tax liabilities). So-called “current claims” (e.g. insolvency costs, obligations incurred after the company was declared bankrupt by the relevant commercial court) are not included into the order of priorities and should be satisfied as they fall due.

Secured creditors fall within the category of “third priority claims”; however their claims are satisfied in accordance with a special procedure quite separate from unsecured creditors, i.e. out of the proceeds of the sale of the pledged or mortgaged assets, subject to the following statutory thresholds of recovery.

In connection with secured claims (other than under a credit agreement), a secured creditor is entitled to 70% of the proceeds from the enforcement of the relevant security, with the remaining 20% payable for first and second priority claims, and 10% payable to meet insolvency expenses. In connection with secured claims under a credit agreement, these percentages change to 80%, 15% and 5% respectively.

At the financial rehabilitation or external administration stage, to become entitled to enforce security, a secured creditor must waive its rights to vote at creditors’ meetings. In that case, Russian law allows this secured creditor, with the approval of the relevant commercial court and provided that the assets of the debtor are insufficient for the possible restoration of its solvency, to enforce its security and retain all the proceeds of such enforcement (ahead of the general liquidation of the debtor’s assets, which is usually undertaken during the last possible stage of the bankruptcy proceedings, namely bankruptcy liquidation).