LAW ON ADMINISTRATION OF ASSETS OF “ABANDONED” BUSINESSES IN RUSSIA
On 09.03.2022 the Government of Russia officially communicated that it is considering the draft of the Federal Law On External Administration for the Management of the Organization.
Linnikov & Partners team has reviewed the draft and would like to share its provisions with all colleagues and clients, as it is very likely that the law will be adopted in the very near future.
In the recent days over a 100 of major foreign companies have effectively shut down their operations or announced closure of their business in Russia. The Russian Government views such decisions as de facto abandonment of enterprises and personnel, which can lead to mass unemployment and other severe economic consequences.
The media has already labeled the bill “the nationalization of business law”, but it is not fully correct to call it that, as the law is really aimed at preventing bankruptcy of Russian-based companies, assuring sustainable activity of businesses, preventing unemployment and, if necessary, transferring enterprises under management of Russian investors.
INFORMATION BELOW IS A BRIEF SUMMARY OF A DRAFT LAW – THE BILL IS LIKELY TO BE AMENDED OR OTHERWISE MODIFIED!
WE WILL KEEP YOU POSTED ON ALL DEVELOPMENTS.
Here are the highlights of the bill:
APPLICABILITY
Thus, the legislator proclaims that in order to protect the economic security of Russia, as well as to protect the rights of creditors, employees, contractors and other persons, an external administration may be introduced when the company meets the following criteria:
- a foreign person (or a group of persons from countries that commit unfriendly actions against the Russian Federation) are persons that effectively control an organization or own in aggregate, directly or indirectly, at least twenty-five percent of the voting shares of the organization or shares in the authorized capital of the organization. The list if the so-called “unfriendly states” is defined by the Government`s Decree 430-p and includes, inter alia, the US and all EU member-states;
- the book value of the organization’s assets according to the accounting statements as of the last reporting date preceding the date of filing an application for the appointment of an external administration is more than one billion rubles and (or) the average number of employees of the organization for the month preceding the filing of an application for the appointment of an external administration exceeds one hundred people.
Following companies may be subject to external administration:
- Companies that suddenly and without reason terminate their business (are abandoned) in violation of the law. For example, if controlling persons of such a legal entity fled Russia after 24.02.2022, effectively leaving the entity without management;
- Companies that continues their business, but their controlling persons carry out a set of actions indicating the imminent termination of the enterprise. For example, a public statement about termination of business without legal or economic grounds may fall under this paragraph.
In cases that fall under the category described in p. 1 above, the external administration is introduced for 3 months without the possibility of early revocation of its powers.
In p. 2, the external administration operates for 6 months with the right to early resignation in the event that the shareholders of the company with over 50% of shares adresses the competent court with a petition for termination of powers of the external administration.
PROCEDURE
The application for the appointment of an external administration is submitted to the State Arbitration Court in accordance with the standard rules of jurisdiction. The following persons may apply:
- Any member of the company’s Board of Directors;
- State Prosecutor;
- The highest official of the executive authority where the company operates (based on the decision of the interdepartmental commission, which will be created in the future).
EXTERNAL ADMINISTRATORS
Functions of external administrators will be performed by:
- State Corporation VEB.RF (for non-financial organizations);
- State Corporation “Deposit Insurance Agency” (DIA) (for financial organizations).
Former CEO of the company will be required to hand over all documents, seals and material values to the external administration within three days after the appointment.
FUNCTIONS OF EXTERNAL ADMINISTRATORS
All management powers will be transferred to state managers – they will have the full right to dispose of the organization’s property, including funds in bank accounts, involve third parties for management, refuse to execute contracts if such execution may pose a threat of bankruptcy.
Prior to the appointment of an external administration, the court may impose interim measures against the entity in the form of a ban on the disposal of property, dismissal of employees at the initiative of the employer, termination of contracts and disposal of shares in the authorized capital.
The external administration will be able to investigate all information (including banking and commercial secrets), as well as, in case of detection of deficiencies in management, file petitions to bring previous management to subsidiary liability for losses.
GOALS OF THE EXTERNAL ADMINISTRATION
- Formation of a register of creditors’ claims and inventory of existing property;
- After resolving the all issues with creditors and debts, a new company is created on the basis of the property complex of the old company;
- The new company is subject to sale. The preferential right to purchase will be held by persons whose core business corresponds to the business of the organization on sale. The buyer of the shares is required to keep two-thirds of the jobs and continue the company’s activities in Russia for at least a year;
- If the financial situation of the company is hopeless and there are signs of bankruptcy, the interim administration is obliged to conduct the bankruptcy procedure of the company.
If the company is sold, the external administration is required to monitor its business within a year after the sale.
