Debt Collection in Russia

• Domestic companies payment performance is often bad and the businesses themselves often have complex legal systems. Payment terms are not fully regulated and Russian counterparties seek to renegotiate conditions, order delay payments or ignore contractual obligations.

• Courts may be fairly efficient if the debt is certain and unchallenged, but legal proceedings may otherwise be complicated (no default decisions, no fast-track prosecutions over EUR 4,000 even if the debt is certain and unchallenged) and can not be stopped by alternate dispute resolution mechanisms (which are not used) or by foreign courts (because Russian courts impose extremely strict jurisdictions)

• In regards with insolvency proceedings, there is indeed a debt-renegotiation system available, although in reality it is unused. Accordingly, liquidation is the default practice but unsecured creditors would have very limited chances of debt recovery.

1. Summary

1.1. General financial information

1.1.1. Due to a general lack of integrity and accurate records, it is often difficult to collect financial information on domestic companies.  

1.2. Key legal structures

1.2.1. Corporate debt liability is determined by legal structures, which are described as follows:

• Sole proprietorship is available for individually managed small businesses for which no commercial structure is required. The lender is held liable for all company obligations in this situation. For restricted partnerships, two to 50 members may also decide to share equity and liabilities as of 2012.

• Limited liability firms (Obshchestvo s ogranichennoi otvetstvennostyu, OOO) represent the vast majority of corporations in Russia as they are the most stable, providing minimum capital costs (RUB 10,000) while the responsibility of the investors is limited to their commitment. Non-Public Joint Stock Companies (Nepublichnoe aktsionernoe obshchestvo, NPAO) are used for larger structures that are able to split their money (at least RUB 10,000) into at least 50 investors, whereas Public Joint Stock Companies (Publichno aktsionernoe obshchestvo, PAO) will look at publicly selling the stock. The responsibility of the owners in those companies is generally restricted to the valuation of their stock.

• Foreign companies can preferably settle in Russia by branch offices providing foreign parent company with no liability limits. Representative offices may also be formed but cash can not be produced by these. Joint Ventures will take the form of any legal structure mentioned above, but incorporation is not necessary, so a contract drawn up for this reason would be appropriate.

‍

1.3. Regulatory framework

1.3.1. The Russian legal system is based on the principles of civil law, which means regulations tend to be codified rather than developed by the courts through the jurisprudence.

1.3.2. The legal system is complex as it branches into courts with general jurisdiction (mostly dealing with family cases), more than 80 Arbitrazh courts concentrating on contractual conflicts, some 20 Appellate Arbitrazh courts, ten Federal Arbitrazh courts (acting as cassation judges), a Supreme Court (acting as a supervisory court) and a Constitutional Court. Parallel to this multifaceted legal structure, the legislation is split between the Code of Civil Procedure (applicable to the courts in general jurisdiction) and the Code of Arbitrazh Procedure (applicable to the Courts of Arbitrazh).

1.3.3. A specialized court was also set up in 2012 to deal with matters relating to intellectual property, but it is not yet clear whether it is operational. The Supreme Court has been the court of supervisory appeal within Arbitrazh Courts system since 6 August 2014.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. Russian debtors' payment behavior is often poor and the law does not provide a general framework for the terms of payment. The food industry has a legislative payment rate of 10-to 45-day, but this is not practiced in reality. Generally, contractual terms on average provide a 30-to 60-day period, while 60 to 90 days is typical in some industries. Payment delays are fairly common but hard to measure.

2.2. Late interests

2.2.1. The law provides a basis for penalties on late payments. The late interest is equivalent, in compliance with the Civil Code (Article 395), to the main rate permitted by Russia's Central Bank for the corresponding period. This rate is applicable even if it is not provided for in the contract. Nevertheless, if the contract stipulates a cost and it is greater, then the contract amount would apply.

2.3. Costs of debt collection. The legislation does not control the collection costs accrued during the nice process. If recovery is made by court proceedings, the claimant is entitled to ask the judge to pay the costs. If the verdict is in favour of the claimant (Article 110 Civil Code) the court must grant the charges.

2.4. Protecting ownership. In fact, investors can only refund assets by arbitration. Retention of Title (RoT) passes to Defense in insolvency proceedings (secured creditor). Nevertheless, modified forms of RoT would not be admissible, so implementation remains extremely difficult in practice.

2.5. Payments

2.5.1. Bank transfers are among the most common means of payment for international transactions since they are quick, safe and supported internationally and domestically by an increasingly integrated banking network. Export sales are typically protected by Export Credit Coverage, which helps minimize the risk of immediate or accidental insolvency of consumers.

2.5.2. Furthermore, Standby Letters of Credit (a bank guarantees the creditworthiness and repayment ability of the debtor) are often used for export shipping transactions because they provide secure assurances that can be enabled as a' payment of last resort' if the buyer fails to fulfill a contractual obligation. In fact, irrevocable and verified Documentary Letters of Credit (a debtor assurances that a certain amount of money will be made available to a borrower through a bank once certain requirements clearly decided by the parties have been met) are gradually being dependent upon.

2.5.3. Negotiating down payments is absolutely necessary because in the case of an insolvency purchase it will help to avoid difficulties. This point is a major issue as it is necessary to prove that contracts are effective in making international transfers, which can become difficult if the corporate structure is not identifiable.

3. Collecting payments

3.1. Amicable action

3.1.1. In fact several debts are obtained by agreement. The courts generally resolve disputes relatively well when the liability is contested, with civil proceedings requiring little longer than six or seven months to complete. Therefore in certain situations it is not appropriate to move disputes to arbitration.

3.1.. Until launching legal proceedings against a debtor, asset appraisal is critical as it requires assurance of whether the business is still successful and whether chances of recovery are at best. Therefore, it is important to be mindful of the solvency position of the debtor: once insolvency proceedings have been started, prosecution of a loan will indeed become difficult.

3.2. Legal proceedings

3.2.1. Ordinary proceedings. Collection efforts will commence with a recorded Demand Letter reminding the debtor's obligation to pay the principal along with interest on the late payment.

If the debt is below RUB 500,000 (around EUR 8,000) and the debtor is a corporation, or RUB 250,000 (around EUR 4,000) if the debtor is an independent person, simpler court proceedings are possible such that this is certain and unquestioned. Once the court receives all the necessary documents, the debtor is duly informed, and the court tax duty is paid, these proceedings are settled fairly efficiently.

3.2.2. Nevertheless, when the debt becomes contested, it becomes appropriate to begin ordinary litigation which would be difficult to handle. The allegation needs to be brought before a judge, which would then call the claimant to a preliminary hearing. This is a Russian particularity, although the debtor's refusal to comply would not subject the borrower to a verdict of default. The courts may usually award relief in the form of compensatory damages or injunctions, however there are no punitive damages.

3.2.3. Necessary paperwork. For lawsuits, the following set of documentation is required:

• Agreement
• Invoice/proforma invoice
• Shipment notice with approved person's signature and debtor's stamp
• Dunning letter
• Abstract from the payment sheet
• Demand report with proof of delivery to respondent
• Transaction request
• Extract from the EGRUL (applies to applicants);
• Power of Attorney Time
• Failure to bring a case within the timeline required would not preclude entry to justice.

3.2.4. Provisional measures can help to protect the rights of the borrower awaiting a final judgment. On appeal, the courts will usually impose transitional steps aimed at protecting facts and/or preventing irreparable damage (attachment, warrant to do something or stop doing something, privileges security, bank account freezing, etc.), although this procedure is very structured and the borrower will show the absolute necessity of granting these initiatives. If the borrower may show that the debtor has been properly advised, the court may order ex parte precautionary measures (i.e., without all parties being present).

3.2.5. It is important to note that in fewer than 3 percent of cases, the court grants appeals on temporary steps. As only the State Arbitration Court can do so, arbitral tribunals can not give these directions. The arbitral proceedings group can, however, file a motion to the state court on temporary steps.

3.2.6. Appeal lodging. Mechanisms of appeal are multi-layered, so flexibility would be necessary for the proceedings. Decisions rendered in the first instance may be appealed to the Arbitrazh Court of Appeal within one month, which will re-examine the case in full, taking into account both factual and legal issues. Second-instance rulings may then be put before the Federal Arbitrazh Courts within two months since they serve as cassation courts and focus solely on legal and procedural claims. Their decisions can then be checked before the Supreme Court in third instance, serving as a supervisory court responsible for investigating infringements of due process.

3.2.7. Enforcing court decisions. A verdict remains enforceable for three years as long as it becomes definitive (i.e. when all the areas of appeal have been exhausted).

3.2.8. If the defendant fails to satisfy the judgment, it may become appropriate to order the bailiff services of the court to compulsorily impose the judgment. The borrower shall also have the ability to personally collect money through the bank.

3.2.9. Duration of a legal action. The court process will usually take three months and would involve a further three months to execute the court's decision. Nevertheless, if the loan is challenged and the debtor's funds are hard to locate, that fair timeline would not apply.

3.2.10. It would not take more time for domestic courts to comply with cases concerning international claimants, but there may be gaps when the papers have to be processed or when foreign witnesses have to be questioned. However, when the plaintiff or other party involved in the court case is a foreign company, notifying the parties about the litigation conflict requires approximately six months.

3.2.11. Costs of legal action. The losing party would usually be required to pay the court costs of the successful party, although legal costs would not be fully compensated, unless the hearings were unduly and unnecessarily postponed. Only court fees will occur, though they adopt an incremental rate. The maximum court fee is RUB 200,000 (about EUR 3,100) for filing a statement of claim. Contingent no-win-no-fee agreements are not allowed under which legal costs rely on results. Financing for third-party lawsuits is however required.

3.3. Alternatives to legal action

3.3.1. Alternative Dispute Resolution mechanisms such as mediation or arbitration are rare in Russia as regulatory initiatives on the issue are only emerging. The process remains more complex in practice than ordinary legal proceedings before domestic courts, which have treated arbitration agreements with a degree of uncertainty for a long time.

3.3.2. Moreover, coping with litigation by ADR does not require the debtor's properties to be frozen, which may make it impossible to impose an agreement. Nevertheless, in principle, commercial courts should provide the parties with grounds for conciliation during legal proceedings (Article 138 of the Arbitrazh Code of Procedure).

3.3.3. Having said that, given the complexity of holding legal proceedings in Russia, international arbitration judgments would be enforceable by domestic courts and thus represent a rare opportunity to avoid haphazard cases when complicated conflicts with an international aspect are at risk, although that involves clear provisions to be included in the contract of the parties for this reason.

3.3.4. Foreign forums. Official statements released in July 2013 appear to suggest that global jurisdiction provisions may be gradually accepted in Russia, but the parties and courts have long viewed them creatively. In fact, domestic courts have routinely asserted authority over cases recognized in international jurisdictions and made judgement on the facts, thus prohibiting the successful party to implement the legal ruling in Russia in the global proceedings.

3.3.5. Enforcing international awards. For a global decision to be applied in Russia a high dose of tolerance would take. As in all cases, the Arbitrazh Court must first accept international rulings by means of an exequatur process as a domestic ruling. This is difficult in practice, for several reasons. Next, Russia has only concluded a limited amount of arrangements with foreign countries on mutual acceptance and compliance.

3.3.6. Third, domestic courts have traditionally been hesitant to accept international jurisdiction agreements, and have therefore (based on the merits) undertaken several lawsuits to prohibit enforcement of foreign rulings. Nevertheless, arbitral awards given in foreign countries (or through international arbitration tribunals) will usually be accepted and upheld by Russian courts as Russia is a signatory of the 1958 New York Convention on the Recognition and Compliance of other Arbitral Awards.

‍

4. Managing insolvent debtors

4.1. Insolvency in Russia

4.1.1. A debtor in Russia is deemed insolvent when they can not settle debts totaling RUB 300,000 for more than three months. Specific laws regulate insolvency in Russia, the key of which are the 2002 Civil Code and Federal Law 127-FZ on Insolvency, while the cases would be dealt with before the Arbitrazh Tribunal. In addition to traditional liquidation proceedings, the law provides for a debt restructuring process.

4.1.2. Both can be started at debtors and creditors' request. An amicable resolution can disrupt the proceedings at all times. Renegotiation of obligations is uncommon in reality, so liquidation is the default method. As a consequence, unsecured creditors can be expected to recover about 3 percent of their loans by insolvency proceedings on average. Pre-judicial action remains the most efficient method of debt collection.

4.1.3. Russian commercial courts generally prefer recorded documentary evidence, rather than interviewing witnesses, listening professionals, or using audio or video records. Registered translators may interpret documentary evidence created in a foreign language, and a notary may validate the signature of the translator.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. Russian law does not provide for renegotiation of out-of-court debt.

4.2.2. Debt restructuring will take place in different phases. Supervision proceedings would be initiated first after the court has issued a declaration of bankruptcy. The debtor may stay in charge of their right to manage the company, but a provisional trustee must examine the financial standing of the business and decide whether it is profitable or not. A freeze to defend the organization against simultaneous compliance actions would also be put in place for a period of seven months.

4.2.3. If the temporary administrator decides that the company is sustainable and can be saved then a period of financial recovery can begin. The debtor may be exempt from paying their obligations at the behest of the issuer or on the grounds of the creditors ' conference (for a period of two years), but an agent shall be named to insure that the agreement agreed to by the parties is upheld. Nevertheless, the statute sets limits as to how much of the liability can be written off.

4.2.4. On request, a third external management process may eventually be set up to further assist the debtor in returning to solvency. In that case, under the security of a moratorium on litigation cases, an external contractor takes over the administration of the company.

4.2.5. Winding up proceedings. The default insolvency procedure is to wind up liquidation proceedings. The liquidation step may begin at the request of the parties or if the temporary administrator decides at the conclusion of the monitoring period that the debtor is not viable and can not be saved. Until liquidating the company's assets and transferring the profits to the creditors according to their priority needs, a liquidator would be named to classify the creditors and create a register of all valid claims. Within one month of the court's issuance of the bankruptcy decree, investors will submit their lawsuits.

4.2.6. Priority rules. The laws of priority normally apply while the profits are allocated to the creditors. The different legal bills and the new loans negotiated during the turnaround process are given absolute precedence over the other allegations (claims of workers, claims of unsecured creditors, etc.).

4.2.7. Cancelation of suspect transactions. Liquidators normally have the right to request that the court cancel certain transactions concluded prior to the insolvency proceedings. In particular, any measure taken by the debtor would typically be void, deemed fraudulent or detrimental to the creditors. Can be for a suspicious period of up to three years.

4.2.8. Duration of insolvency process. On average, for two years.

4.2.9. Important documentation. The following set of documents required for litigation:

• Request
• Agreement
• Invoice/proforma invoice
• Shipment notice with approved person's signature and debtor's stamp
• Dunning letter
• Certificate of incorporation (abstract from business register)
• Case report with proof that it was sent to the claimant
• Abstract from the EGRUL (applies)

4.2.10. Therefore, papers should be apostilled (if the government is a member of the International Public Papers Convention of 5 October 1961 Abolishing the Requirement for Legalization). To deliver documentation to Russian commercial courts, a qualified interpreter will interpret the documents and a notary should confirm the signature of the translator.