Individual bankruptcy – new reality for the Russian economy

The Supreme Court on September 29, 2015 has discussed the plenary meeting act on operation of the Law of December 29, 2014 that was put in force on October 1st № 476-FL «On Amendments to the Federal Law “On Insolvency (Bankruptcy)” and Certain Legislative Acts of the Russian Federation to Regulate Rehabilitation Procedures for Individual Debtors».  

The aim of the plenum – to give an explanation and legal objectives to the Arbitral tribunals for making fewer errors in the law enforcement practice. 

According to the Supreme Court and National Association of Professional Recovery Agencies, about 200 thousand people can apply to the court for bankruptcy for the first six months of operation of the Law.

The Supreme Court clarified that courts must receive petitions on individual bankruptcy and on debts appeared before operation of the Law that is on obligations before October 1, 2015. 

While in the absence of finances for bankruptcy procedure and remuneration payment to the supervisor, case may be dismissed by the court at any stage. 

The question of amount of minimum required sum for financing of individual bankruptcy procedure stays open. In this case there different explanations may appear, most often not in favor of debtor. Moreover, both in the Law on Bankruptcy and in the Supreme Court clarifications, it stays unclear, how to divide, in case of bankruptcy, co-property of spouses, in repayment of this debt. 

In the plenum act of the Supreme Court it`s noted that only one bankruptcy case against individual entrepreneur is permitted – physical person cannot be bankrupt as individual and as sole entrepreneur at the same time. Cases on individuals insolvency by the Arbitral tribunals are heard according to the place of the debt`s residence, that is defined by registration documents or extract of the Unified State Register of Sole Entrepreneurs. If the place of individual`s residence is unknown or is located outside Russia, such bankruptcy cases are heard by the court according to the last place of debtor`s residence in the RF.

Court costs of case on debtor`s bankruptcy and costs on payment for supervisor are paid on count of debtor`s property. If individual himself applies to the court for bankruptcy, he pays an amount (10 th RUB) into court`s deposit, also supplies with evidential document proving existence of property for repayment on the bankruptcy case. If bankruptcy is initiated by creditor, he pays recompense to financial manager, but spent money can be repaid in case of finding debtor`s property, notes the Supreme Court.

Restructuring of the debt plan must be approved on the first creditors` meeting but the court can confirm it without such approval if gets debtor`s agreement. As an exception court can do without debtor`s agreement if the debtor abuses his rights, for example, having high salary and insisting on the fastest discharge of bankruptcy. It is noted in the Supreme Court paper that court cannot confirm restructuring of the debt plan, if it is beforehand unenforceable or does not stipulate for financing for living of debtor and his family at the lesser of living wage. The plan cannot be also approved if on completing the realization period debtor is not able to settle with prospective creditors (due date to those does not come about yet). Maximum term of the plan realization is three years. 

Thus,absolute majority of individuals bankruptcy procedures will become property realization procedures while payment in full discharge on the part of individuals who were not able to pay debts before that, seems to be unlikely; moreover under conditions of high interest rate (key rate of the Central Bank of the RF), preventing from refinancing of the financial obligations under more profitable conditions.