The Supreme Court sets criteria for the bankruptcy of foreign companies in Russia

On 8 February 2024 Russia’s Supreme Court published a progressive ruling No. 305-ES23-15177 on the Westwalk Projects insolvency case, in which it developed guidelines for determining whether a Russian court has jurisdiction over a foreign company’s insolvency proceedings and whether to introduce main or non-main (secondary) proceedings.

Background: Cyprus-based AMN Commercial Property Advisors LTD applied to Moscow Commercial (Arbitrazh) Court to commence bankruptcy proceedings of its parent company, Westwalk Projects LTD. The lower courts found that they lacked jurisdiction and dismissed the case, but the Supreme Court remanded the case to the court of first instance.

Step 1: jurisdiction of a Russian court over a foreign company’s bankruptcy proceedings

Firstly, a court shall determine whether it has jurisdiction to preside over a foreign company’s bankruptcy proceedings.

To this end, a court shall establish that the debtor has a close connection with the territory of Russia relying on the non-exclusive list of criteria below:

  • non-transitory economic activity is conducted in Russia;
  • activities are directed at Russian persons;
  • the centre of the main interests of the debtor’s controlling persons is in Russia;
  • the debtor’s management, its branch or representative office are located in Russia;
  • the debtor’s controlling persons have Russian citizenship / a Russian residence permit, or have corporate relations with Russian legal entities;
  • the debtor’s controlling persons have been held personally liable for corporate debts by a Russian court;
  • assets (including real estate and lease rights to land) are located in Russia;
  • a significant portion of the creditors are Russian persons or persons whose activities are closely connected with the territory of Russia;
  • the place of performance of a significant number of the debtor ‘s transactions is in Russia;
  • evidence material to the case is located in Russia.

The creditor must prove that the circumstances indicating a close relationship of the Debtor with Russia are material, which may be rebutted by a debtor under a more stringent standard of proof.

Stage 2: determining the model of proceedings – main or secondary

Further, the court determines the model of the proceedings conditional upon whether the centre of the debtor’s main interests (COMI) is present or absent in Russia:

  • main proceedings, which have a universal effect and encompass all of the debtor’s assets and creditors worldwide, or
  • secondary proceedings, which apply only to assets and creditors connected with the territory of Russia.

A court opens main proceedings if the debtor’s COMI is in Russia, which may be indicated by the following factors:

  • the location of the debtor ‘s main assets;
  • the location of the majority of creditors;
  • the location of the debtor ‘s manufacturing facilities;
  • the place of the debtor’s operations;
  • the place where most of the debtor’s revenue is generated;
  • the place where the debtor’s reorganization was carried out;
  • the place of the origin and performance of the debtor’s major obligations;
  • the habitual residence and centre of the main interests of the debtor’s controlling persons;
  • other indications that a significant connection exists between the debtor’s activities and the territory of Russia.

If the debtor’s COMI is outside Russia, the court checks whether the grounds are present for opening secondary proceedings: whether the debtor has a representative office or property in Russia. The presence of these factors is also checked with retrospect to minimizing the effect of the possible dissipation of the debtor’s assets.

If the criteria above are met, the court introduces secondary proceedings, which have effect only with respect to the Russian-based assets and creditors.

The manifested goal of secondary proceedings is to protect the interests of Russian creditors if they are deprived of effective access to the debtor’s bankruptcy proceedings in other jurisdictions. Examples are the refusal of a Russian court to recognize foreign main proceedings, international sanctions, and the disproportionately high cost of initiating main proceedings abroad.

To sum up, if a Russian court is faced with the issue of a foreign company’s bankruptcy, it first determines its jurisdiction following the criteria of the debtor having a close connection with the territory of Russia. If the answer is positive, the court proceeds to determine the debtor’s COMI and, if the COMI is in Russia, opens the main proceedings, while if the COMI is abroad, it opens secondary proceedings for cases when Russian creditors lack means of safeguarding their interests other than at the expense of the debtor’s Russian property.

Kseniya Malmygina

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