Against the background of the COVID-19 pandemic national governments of Germany and Russia have introduced protective measures for the business worst-hit by the unfolding crisis. In particular, legislative limitations of insolvency proceedings with regard to the businesses having become factually insolvent due to the spread of the virus were adopted in both countries. We have compared their approaches and provide you with a brief overview.
What business are affected by the suspension of insolvency proceedings?
Russia
The following businesses are covered by the protective measures:
- Companies
and entrepreneurs of the sectors worst affected by the COVID-19 pandemic. The list
of such sectors is published by the Russian federal government as of 20.03.2020. - The
companies included in the following lists: - the
list
of companies of crucial national importance adopted by the governmental commission
as of 20.03.2020 - the
list
of strategic companies adopted by the Order of the President of Russian Federation
of 04.08.2004 No. 1009 - the
list of strategic
organisations adopted by the Resolution of the Government of Russian Federation
of 20.08.2009 No. 1226-p
The complete name list of all companies and entrepreneurs enjoying the implemented restrictive measures is published on the web site of the Federal Tax Service of Russia where a search by a company’s registration number is available. Thus, every interested person can check whether his or her own business as well as his or her business partners are covered by the introduced limitations.
Germany
Germany has opted for an approach according to which the suspension of insolvency proceedings is extended to all businesses meeting the insolvency criteria, excluding the companies whose bankruptcy has not been caused by the corona crisis. Given that, the criteria indicating the link between the pandemic and insolvency vary according to the person initiating the insolvency proceedings.
- Self-application
The suspension is not applicable to the situations where the insolvency is not due to the consequences of the spread of the COVID-19 pandemic or there is no prospect of recovery from the illiquidity. Provided that, there is a rebuttable presumption that the insolvency is due to the COVID-19 pandemic and that there is a prospect of successful recovery from illiquidity if the debtor was not illiquid on 31 December 2019. This presumption can be rebutted by the person claiming the existence of an obligation to apply for insolvency proceedings. However, according to the draft bill’s explanation the presumption should only be considered rebutted if there can be no doubt that the COVID-19 pandemic was not the cause of the insolvency and that the elimination of an occurred insolvency could not be successful. In this respect, “the highest requirements must be met”.
- Third
party applications
The suspension of the insolvency proceedings initiated by a third party applies to all businesses, safe the companies having suffered illiquidity or over-indebtedness prior 01 March 2020.
How long is the time suspension period?
Russia
The suspension is in effect from 6 April 2020 to 30 October 2020. However, the federal government is entitled to prolong this term without limitations.
Germany
The time period of the restrictive measures varies according to the initiator of the insolvency proceedings.
Self-application: from 1 March 2020 to 30 September 2020 with the option of its prolongation up to 31 March 2021.
Third party applications: from 1 March to 30 Mai 2020.
What restrictions are applied within the period of suspension?
Russia
- Creditors’
rights limitations: - creditors
are not entitled to apply for the insolvency of debtors - suspension
of the debtors’ obligation (not the right) to file for insolvency - no
penalties or other financial sanctions to be accrued for any delay in the
discharge of monetary obligations or any delay in making mandatory payments - enforcement
proceedings in respect of pecuniary sanctions are suspended (however, no asset freeze
or other restrictions as regards disposal of debtors’ assets are lifted) - ban
on the enforcement of pledges and mortgages - no
set-off is permitted if it results in a breach of priorities in the payment of
creditors’ claims - Simplified
procedures for conclusion of composition agreements if bankruptcy proceedings
are commenced within three months after suspension is over. - The
measures impeding the ill-conscientious asset-striping - in
case insolvency proceedings are commenced within three months after the suspension
is over, any transactions made during the suspension period are declared void
except for the transactions that are made in the ordinary course of business with
the value not exceeding 1% of assets’ book value - otherwise,
creditors may challenge any transactions made one year prior to the
introduction of the suspension, during its operation and within one year after
it is over on the special grounds provided for by the insolvency legislation - a
ban on the withdrawal of shareholders from limited liability companies with the
compensation for their shares - a
ban on dividend payment and distribution of profits.
Germany
- suspension
of the debtors’ obligation (not the right) to file for insolvency - creditors
are not entitled to apply for the insolvency of debtors - debtors
bearing the signs insolvency may continue to effect payments during the
suspension period as long as such payments are made to maintain or resume business
operations or to implement a restructuring plan - most
of restrictions related to financing the insolvent debtors by third parties as
well as by the shareholders are lifted.
Final remarks
The approaches adopted in Germany and Russia for the support of businesses during the crisis caused by the COVID-19 pandemic differ to a significant degree. The main difference is that the German approach has more universal and flexible character. Thus, the German legislator, unlike the Russian one, assumes that the crisis is of systematic nature and can impact companies operating in any industry. Furthermore, the Russian government extended protective measures to big strategic and nationally important companies, while the crisis affects small and medium business at first instance.
As for the measures being introduced for the suspension period, the limitation adopted in Germany are addressed first of all to the debtors facing financial problems due to the crisis and affects their rights and duties in frames of insolvency proceedings. Notably, these measures hardly touch upon creditors’ rights. There is a reverse approach in Russia where undertaking measures are limiting at first instance rights of creditors what can cause a chain reaction when non-payments of the debtors protected by the suspension result in insolvency of businesses from the industries not covered by the protective measures.
Basic recommendations
If you are doing business from Germany in Russia
- Check
here whether your
Russian partners or your Russian subsidiary are covered by the suspension of
insolvency proceedings. - In
case your Russian partner or your Russian subsidiary are included in the list, act
with prudence when concluding deals with them during the suspension period to mitigate
risks of them being challenged in the future. - In
case insolvency proceedings are launched against your Russian debtor within 3
months after the suspension period is elapsed, exercise vigilance to avoid the
situation when a composition agreement is entered into under the simplified
procedure without your attendance.
If you are doing business from Russia in Germany
- In
case you are up to provide financial aid to your German partner or your German
subsidiary facing financial difficulties verify whether your situation is
covered by the exemptions applied during the suspension period. - Act
with prudence when your German subsidiary effects payments, or when you receive
moneys from your German partner during the suspension period. Verify whether such
payments meet the criteria provided for by the law for the businesses being
facially insolvent during the operation of the restrictive measures.
