The number of corporate bankruptcies in the Russian Federation began to grow for the first time since 2021
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The number of corporate bankruptcies in the Russian Federation began to grow for the first time since 2021. Kommersant calculated that in the first two months of 2024, the number of legal entities declared bankrupt increased by almost 60% year on year. Lawyers confirm that the effect of last year’s moratorium on bankruptcies has been exhausted, and expect a steady, although not explosive, increase in the number of insolvent companies. It could be restrained by raising the debt limit to start the procedure from 300 thousand rubles. up to 2 million rubles, as proposed by the Supreme Court of the Russian Federation (SC). However, both the authorities and the legal community consider this idea controversial.
In January, 571 companies were declared bankrupt in the Russian Federation, and 771 in February, Kommersant calculated based on reports of judicial acts in the EFRSB. In 2023 there were 364 and 478, respectively. Thus, the increase in January 2024 was about 57%, in February – 61%.
The last time the number of bankrupt legal entities increased significantly was in the first half of 2021 (by 9.2%) – these were echoes of the surge that occurred before the introduction of the first “pandemic” moratorium in 2020. But at the end of 2021, the number of bankrupts increased by only 3.8% (to 10,306 companies), and in 2022-2023 corporate insolvency procedures were on the decline. According to the EFRSB, in 2022, 9,047 legal entities were declared bankrupt (cases started before the second “sanctions” moratorium), and in 2023 their number decreased to 7,400.
“Of course, the 2022 moratorium was a deterrent,” admits Alina Khammatova, advisor at the S&K Vertical law office. “Despite discussions about the advisability of introducing a moratorium in 2022, after the fact it can be argued that a number of companies managed to adapt to new economic realities and overcome difficulties,” adds Orchards advisor Vadim Borodkin.
In addition, Mr. Borodkin clarifies, in 2023, large creditors, even “having legal opportunities to seek forced collection and file bankruptcy petitions for large debtors, often took a different path, agreeing on restructuring” – before 2020, they “were less likely to show an inclination to search compromises.” The lawyer admits that big business, both on the side of creditors and on the side of debtors, has begun to “take social responsibility more seriously.”
But in 2024, the increase in the number of bankruptcies may be sustainable – this is indicated by statistics on observation procedures. Supervision is the first procedure that is introduced by the court after the declaration of insolvency of a legal entity from the debtor or its creditor has been recognized as justified, and lasts from five months or more. It shows the number of launches of new bankruptcy processes in the corporate sphere.
According to Fedresurs, in 2023, surveillance was introduced in 7,532 companies – this is 44.1% higher than in 2022 (5,225 legal entities), when the moratorium was in effect. In the first two months of 2024, according to Kommersant’s calculations, the number of observation procedures continued to grow – by 3% in January and by 3.2% in February. In the vast majority of cases, upon completion of the monitoring procedure, the company is declared bankrupt and bankruptcy proceedings are opened.
First Deputy Head of the Ministry of Economy Ilya Torosov told Kommersant that the current statistics “are important to consider in the context and taking into account” the moratoriums on bankruptcy that were introduced in 2020 and 2022: “Of course, if we compare the number of bankruptcy procedures in 2024 in relation to 2023 , then we will see some growth. However, if we take comparable data from 2019 and even 2021, there has been no increase in the number of monitoring procedures and bankruptcy proceedings.”
Anton Krasnikov, a partner at Sotheby’s law firm, also associates the growth of surveillance procedures in Russia with the “low base effect due to the moratorium,” but admits that the number of bankruptcies of legal entities will return to “pre-pandemic indicators.” Mr. Krasnikov explains that the moratorium is an effective measure, but “not in the long term.” The experience of foreign jurisdictions, he clarifies, shows that after the “cooling period” the number of bankruptcies increases rapidly: “So, in 2023, the number of corporate bankruptcies in the USA increased by 30%, in Germany – by 25%; in France, the Netherlands and Japan – by 30%.”
Other lawyers are more optimistic. “I don’t expect an explosive increase in bankruptcies of legal entities in 2024,” says Ivan Gulin, partner of the RKT consulting group. In his opinion, business “will retain the desire to reach an agreement, often these will be non-public agreements, that is, without bringing the dispute to court.” Alina Khammatova also does not expect a sharp increase in the number of corporate bankruptcies, recognizing, however, an upward trend: “The dynamics will largely depend on the stability of the economic situation in the country and the ability of businesses to overcome the increasing sanctions pressure.”
In her opinion, debtors can also be helped by the Debt Restructuring Assistance Fund, created with the participation of the Federal Tax Service and allowing one to find “a comprehensive solution for settling debts and preventing bankruptcy.” In addition, Mr. Gulin notes, “recently, courts have become more willing to grant a two- to three-year delay in the execution of a court decision on debt collection, if we are talking about serious large enterprises, especially if their activities are related to the country’s defense capability.”
The number of corporate bankruptcies could be significantly reduced by raising the debt limit for initiating bankruptcy proceedings for a legal entity from today’s 300 thousand rubles. up to 2 million rubles adds Mr. Borodkin. The Supreme Court introduced a bill on this to the State Duma in December (see “Kommersant” dated December 20, 2023). If the proposal is supported, then the number of bankruptcy cases, according to Vadim Borodkin, could be reduced by 40%.
However, Mr. Borodkin himself does not consider this trend to be positive, since “unscrupulous debtors will be able to repay the debt partially in order to prevent the creditor from initiating their bankruptcy.” “The Armed Forces proposal will hit small and even medium-sized businesses quite painfully,” Ms. Khammatova agrees.
Ivan Gulin notes that increasing the minimum debt amount will prevent creditors with small debts from using the tools available under bankruptcy, including challenging the debtor’s transactions and bringing to subsidiary liability. “Then several creditors will have to combine efforts and demands to initiate bankruptcy proceedings,” believes Mr. Borodkin. According to Alina Khammatova, a more rational approach would be one that allows one to “focus not on a fixed amount, but on a percentage that takes into account the company’s turnover and the amount of its assets.”
The prospects for the bill are still unclear: on February 26, Interfax, citing a source, reported that the government is against increasing the minimum debt amount. When considering this issue, Ilya Torosov explained to Kommersant, “one should take into account the risks of a significant violation of the rights and legitimate interests of the debtor’s employees, as well as creditors belonging to the categories of small and medium-sized businesses,” who will not be able to initiate bankruptcy of the debtor “if there is a significant for them by the amount of debt and a significant period of arrears.”
Foreigners will add bankruptcies to Russia
The number of bankruptcy proceedings in Russian courts may expand due to foreign companies, lawyers say. In February, the Supreme Court of the Russian Federation (SC) in the Westwalk Projects Ltd case directly allowed cross-border bankruptcy in the Russian Federation, that is, the recognition of a foreign company as insolvent (see “Kommersant” dated February 10). “The court proceeds from the fact that current legislation allows a Russian court to initiate bankruptcy proceedings with the participation of a foreign entity on both the creditor and debtor’s side, provided that the debtor’s business is closely connected with the territory of the Russian Federation,” explains a partner at the Kamenskaya & Partners law firm » Anna Akifeva. It follows from the decision of the Supreme Court that this could be, for example, a focus on the Russian market, the location of the debtor’s assets and management bodies in the Russian Federation.
Partner in the litigation and arbitration practice of AB EPAM, Vera Richterman, expects in 2024 “an increase in bankruptcy applications for foreign companies filed in Russian courts.” Orchards partner Alexey Stankevich even admits the possibility of a “boom in foreign bankruptcies,” given that the Supreme Court is “as broad as possible” in interpreting the concept of “close connection” with the country and “in fact allows you to go to the Russian arbitration court if the dispute has at least some relation to Russia.”
Ms. Richterman emphasizes the risks for beneficiaries and top management of foreign debtors: “There is a high probability of application of rules on their personal liability as part of the main cross-border bankruptcy procedures, and therefore it is worth being prepared in advance for protection from subsidiary liability and recovery of losses.”
At the same time, the courts have begun to take a broader approach to recognizing a citizen as the ultimate owner of an asset formally owned by a legal entity. There is a trend towards a more serious “piercing of the corporate veil,” Mr. Stankevich emphasizes: “For example, in the bankruptcy case of Georgy Bedzhamov, the courts recognized his ownership of a piece of real estate, the owner of which he was never legally listed as. The courts found that the foreign person who was the owner of this property was under the control of the debtor, and recognized that he was the actual owner.”
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