Starting from July 1, 2015, after almost a ten-year discussion, the amendments to Federal Law No.127-FZ “On insolvency (bankruptcy)” dated October 26, 2002 (hereinafter the “Law”), supplementing the legislation with the institute of bankruptcy for individuals who are not sole entrepreneurs, become effective.

Three procedures are to be applied within the framework of bankruptcy proceedings in relation to individuals: restructuring of a person’s debts, sale of his property and an amicable agreement. The provisions of the Law apply equally to entrepreneurs with some particular features.

Initiating a bankruptcy case

Bankruptcy cases of individuals are examined by courts of general jurisdiction upon application of the individual himself, a creditor or an authorized body (cases of entrepreneurs are examined by commercial arbitration courts). The amount of claims against an individual must constitute no less than 500,000 rubles, and the period of delay in their performance must be no less than 3 months. The individual applicant is also entitled to apply to a court in anticipation of the bankruptcy in the event of features showing that he will be unable to perform obligations in due time.

A financial manager from among members of a self-regulating organization, whose functions are similar to the functions of an administrator, must participate in the bankruptcy case. The manager is given, in particular, all rights of management and disposition of the bankrupt person’s property.

Information about procedures applied in the bankruptcy case is published in the Unified Federal Register of Bankruptcy Information, and in the event the application is acknowledged as substantiated, acknowledging bankruptcy and sale of property, the information is also to be given in a printed publication. At the same time, the expenses on paying the financial manager’s fees, as well as on publishing the information about the bankruptcy proceedings, are imposed on the individual.

In the event the application is acknowledged as substantiated, the court proceeds to restructuring the debts.

Restructuring of the individual’s debts

The plan for restructuring debts of an individual, containing the procedure and timeframes for redemption of creditor claims, is to be developed within this procedure, agreed with the creditors and approved by the court. The total timeframe of the plan for restructuring cannot in any event exceed 3 years.

It is expressly stated in the Law that the procedure for restructuring debts does not apply if a person was acknowledged bankrupt within the last 5 years or if a plan for restructuring of debts had been approved in relation to him within the last 8 years, which presumes good faith of the applicant for restructuring.

A moratorium on satisfying creditor claims related to liabilities is established due to introduction of this procedure: creditors are allowed to submit claims only within the framework of a bankruptcy case, enforcement of court orders is suspended and penalties are no longer charged.

In the event the restructuring plan and debt redemption are implemented successfully, the court adopts a decision on completion of the restructuring. Otherwise, a decision on acknowledging the person bankrupt and on sale of his property is adopted.

Acknowledging a person bankrupt and sale of property

This procedure is initiated in the event it is impossible to restructure debt, in particular, where the restructuring plan is not provided, not approved by the creditors or cancelled by the court, or the case proceedings are renewed on grounds provided by the Law (discovery of facts of concealment or unlawful transfer of property, violation of the terms and conditions of an amicable agreement).

All property of the individual existing as of the date of the decision on acknowledging the person bankrupt is adopted, constitutes the bankruptcy assets and is subject to sale. The list of property which cannot be foreclosed on is determined by the Civil Procedural Code of the Russian Federation and, in particular, includes a sole residential premise of the person, the land parcel under it, etc.

On completion of the sale of the property and settlements with the creditors, the claims not satisfied due to shortage of property shall be deemed discharged. The person acknowledged bankrupt is also discharged from liabilities not claimed under the procedures for restructuring or sale of the property, with some exceptions related to unlawful actions on the debtor’s part.

The bankrupt status is retained by the person for a period of 5 years. In the course of this period, he cannot undertake obligations under credit and loan agreements without specifying the fact of his bankruptcy, or initiate proceedings on his bankruptcy. Furthermore, the person cannot hold management positions in a company for 3 years. Additionally, the court can temporarily restrict the person’s right to leave the country.

Amicable agreement

An amicable agreement can be entered into between the parties at any stage of the bankruptcy case. The case proceeding are to be terminated starting from the date the amicable agreement is concluded and the person starts to perform its provisions. In the event of violating the amicable agreement, the case proceedings can be renewed, the individual shall be acknowledged bankrupt and his property is foreclosed on.

It appears that introducing the institute of “consumer bankruptcy” is an important step under the conditions of increased volume of consumer loans and growth of loan arrears, especially in view of the ruble weakening. The amendments introduced, while sounding scary, nevertheless bring a positive effect for both creditors and debtors. The borrowers will have an opportunity to apply lawful restructuring of debts and thereby avoid the enslaving interest for late payments. And the creditors now have a new instrument for recovering debts in a civilized manner.

Additional notes

Should any questions arise in connection with the above or if you need any additional materials, please contact Anna Silinskaya or Nikita Petrov, St. Petersburg Office of Capital Legal Services.

This Information letter keeps the clients of Capital Legal Services and other interested parties abreast of information that may, to any extent, affect their activity or cater to their particular interests. The opinions and commentaries expressed in this information letter shall not be deemed as legal opinions and do not cancel the need to obtain legal advice or legal opinion on separate issues.