Browse Profiles > Russia > Effective Insolvency and Creditor Rights Systems
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Standards Compliance Index 47.50 out of 100 37
Business Indicator Index 5.90 out of 12 60
Russia

Effective Insolvency and Creditor Rights Systems

Summary
According to an assessment issued by the European Bank for Reconstruction and Development (EBRD), the Law on Insolvency (Bankruptcy) (the "Insolvency Law"), which governs bankruptcy and insolvency in Russia, came into force in 2002 and has been amended on a number of occasions. This represented a significant improvement over the previous regime. In the 2003 EBRD Insolvency Law Sector Assessment, the law achieved a score of 'medium compliance' when benchmarked against international standards. The EBRD assessment was based solely on the content of the Insolvency Law. The law had a significant number of weaknesses. It did not provide a balance sheet test for insolvency, nor did it provide sufficient safeguards with respect to reorganizations including a failure to prohibit critical suppliers from threatening to cut off supply unless past debts are paid in full. The cross-border insolvency provisions were insufficient, relying on international treaties and reciprocity rather than the United Nations Commission on International Trade Law (UNCITRAL) Model Law or similar EU regulations. The power of insolvency administrators to review pre-bankruptcy transactions was weak and ineffective, preventing insolvency administrators from maximizing the estate value and preventing improper behavior by debtors. Most critical, however, the system was slow, inefficient and presented significant barriers to creditor participation.

    General Overview

    According to a 2006 assessment issued by the European Bank for Reconstruction and Development (EBRD), the Law on Insolvency (Bankruptcy) (the "Insolvency Law"), which governs bankruptcy and insolvency in Russia, came into force in 2002 and has been amended on a number of occasions. This represented a significant improvement over the previous regime. Referring to the 2003 EBRD Insolvency Law Sector Assessment, the authors reiterate that the law achieved a score of 'medium compliance' when benchmarked against international standards. The assessment was based solely on the content of the insolvency law. (EBRD 2006a, p. 15)
    According to the 2003 assessment, the Insolvency Law was notable for its treatment of the qualification, appointment and removal of insolvency administrators and its allowance for priority reorganization financing. It rated relatively high in terms of the treatment of creditors, the commencement of proceedings and the liquidation process. It had a significant number of weaknesses, however. The Insolvency Law did not provide a balance sheet test for insolvency, nor did it provide sufficient safeguards in respect of reorganizations including a failure to prohibit critical suppliers from threatening to cut off supply unless past debts are paid in full. The cross-border insolvency provisions were insufficient, relying on international treaties and reciprocity rather than the UNCITRAL Model Law or similar EU regulations. The power of insolvency administrators to review pre-bankruptcy transactions was weak and ineffective, preventing insolvency administrators from maximizing the estate value and preventing improper behavior by debtors. Most critical, however, the system was slow, inefficient and presented significant barriers to creditor participation. (EBRD 2006a, p. 16)
    In the 2006 assessment, the authors note that recent amendments include the enactment of stiff new penalties. Top managers who disclose a firm's insolvency after it is too late face severe fines; deliberate bankruptcies can result in prison terms of up to 6 years; and opposition to arbitrary managers, withholding or falsifying information can result in prison terms of up to 3 years. (EBRD 2006a, p. 17)
    These recent amendments should help to improve the system, but to make the system significantly more effective, administrative improvement is required. Insolvency administrators are at the heart of any insolvency system; without improvements in their training, licensing and regulation, only minimal improvements to the system will be achieved. Moreover, the insolvency system would benefit from a dedicated judiciary that has proper training and experience in the conduct of insolvency files. To this end, the EBRD and the Ministry for Economic Development and Trade of the Russian Federation (MEDT), with funding from the Swiss State Secretariat for Economic Affairs (SECO), are set to undertake a project designed to build the capacity of insolvency regulators in Russia. It is expected that this project will help with the development of a more effective insolvency system in Russia. (EBRD 2006a, p. 17)


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    Sources of Assessment

    European Bank for Reconstruction and Development, "Commercial Laws of the Russian Federation: An Assessment by the EBRD," August 2006. Available from European Bank for Reconstruction and Development website. Accessed on March 23, 2007. (EBRD 2006a)

    European Bank for Reconstruction and Development, "Strategy for the Russian Federation," July 2006. Available from European Bank for Reconstruction and Development website. Accessed on March 23, 2007. (EBRD 2006b)

    European Bank for Reconstruction and Development, "2004 Insolvency Legal Indicator Survey," 2004. Available from European Bank for Reconstruction and Development website. Accessed on March 24, 2007. (EBRD 2004)

    Harmer, R. and Cooper, N., "Insolvency Law Assessment Project: Report on the Results of the Assessment of the Insolvency Laws of Countries in Transition," June 2003 with July 2004 update. Available from European Bank for Reconstruction and Development website. Accessed on January 19, 2007. (Harmer and Cooper 2004)

    European Bank for Reconstruction and Development, "Insolvency Law Assessments Project 2003 - Russian Federation," 2003. Available from European Bank for Reconstruction and Development website. Accessed on November 29, 2006. (EBRD 2003)

    Relevant Organizations

    Federal Service of Russia for Financial Recovery and Bankruptcy (FSFO)

    Supreme Arbitration Court (SAC)

    Central Bank of the Russian Federation (CBRF)

    Ministry for Economic Development and Trade of the Russian Federation (MEDT)



    Relevant Legislation/Regulation

    Federal Law on Insolvency (Bankruptcy), No. 127-FZ , 2002

    Federal Law on Insolvency (Bankruptcy) of Credit Institutions, No. 40-FZ, 1999 (last amended December 2006)

    Civil Code of the Russian Federation (last amended December 2003)



    Supplementary Sources

    Central Bank of the Russian Federation, "Banking Supervision Report 2005," 2006. Available from the Central Bank of the Russian Federation website. Accessed on April 5, 2007. (CBRF 2006a)

    Central Bank of the Russian Federation, "Financial Stability Review 2005," Moscow: Central Bank of the Russian Federation, 2006. Available from the Central Bank of the Russian Federation website. Accessed on March 29, 2007. (CBRF 2006b)

    International Monetary Fund, "Russian Federation: 2006 Article IV Consultation--Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion," Country Report No. 06/429, Washington D.C.: IMF, December 2006. Available from International Monetary Fund website. Accessed on March 23, 2007. (IMF 2006)

    Coface Central Europe Holding, A.G., "Country Report for Investors and Exporters--Russia," Vienna: Coface Central Europe Holding, A.G., July 2006. Available from Coface Central Holding, A.G. website. Accessed on April 5, 2007. (Coface 2006)

    International Monetary Fund, "Russian Federation: 2004 Article IV Consultation--Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion," Country Report No. 04/314, Washington, D.C.: IMF, September 2004. Available from International Monetary Fund website. Accessed on November 29, 2006. (IMF 2004)

    International Monetary Fund, "Russian Federation: Financial System Stability Assessment," Country Report No. 03/147, Washington, D.C.: IMF, May 2003. Available from International Monetary Fund website. Accessed on November 29, 2006. (IMF 2003)
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