Legislation amendments

According to the Order of the Government of the Russian Federation No. 1587 dated 01.10.2020, the delay in initiating of bankruptcy cases on creditors' applications was extended until January 7, 2021. We have already informed about moratorium on bankruptcy and its consequences in our article dated 27.07.2020.

It is worth reminding that moratorium covers the companies and individual entrepreneurs, the main activity code of which is specified in the list of Russian economy industries the most affected by the coronavirus infection. The list was approved by the Order of the Government of the Russian Federation No. 434 dated 03.04.2020.

The list is available in «Lists we recommend» of the Information and Analytical system Globas. Currently there are more than 2,1 million of companies and individual entrepreneurs in the list.

As before, during the moratorium the judicial installment obtained by the decision of the arbitration court is available for the companies and individual entrepreneurs. The installment involves change in payment terms for overdue tax liabilities and termination of enforcement proceedings on property penalties.

Moratorium on bankruptcy and its consequences

The Russian economy will face a wave of bankruptcies in the next six months. There is only one reason: the end of the moratorium on bankruptcy. The postponement was introduced on April 1, 2020 by the Federal Law No. 127 "On Insolvency (Bankruptcy)", Article 9.1 "Moratorium on initiating bankruptcy proceedings". The reason is a decrease in business activity because of the risk of the spread of Covid-19 in Russia. Realizing the scale of future damage, the Government of Russia suspends the initiation of insolvency proceedings of legal entities for six months in order to avoid mass liquidations.

However, along with the moratorium, restrictions are introduced that directly affect the growth of companies liquidated due to insolvency, namely: businesses are prohibited from selling assets, illiquid property, making changes to the shareholder structure, distributing profits and paying dividends. On the one hand, this measure will prevent unscrupulous debtors from withdrawing assets and selling property, but on the other hand, it puts the owners of companies in a difficult situation where they are obliged to maintain unprofitable assets, pay costs and accumulate debts.

The State can postpone the wave of bankruptcies. The Federal Bankruptcy Law regulates the duration of the moratorium, which can be extended by a decision of the Government of Russia, if there are enough reasons. According to the Ministry of Health and the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor), the second wave of Covid-19 will begin in Russia in autumn. Hence, we should expect an extension of restrictive measures not only among the population, but also in the business environment. Again, most companies will be forced to suspend economic activity. The first lockdown has been too expensive for business, and not every company can survive in the second lockdown.

Despite this fact, we cannot insist that Covid-19 is the main cause of massive insolvency.

According to the Information and Analytical system Globas, today there are 3.6 million legal entities operating in Russia, 2 million companies have submitted financial statements for 2019 to the Federal Tax Service of Russia, of which 30% have problems with solvency and financial stability. The total share of legal entities capable of withstanding a short-term economic crisis or recession without significant losses does not exceed 15%.

It turns out that already in 2019, every third company have experienced financial problems.

First of all, small business with lack of administrative resources suffered. Tourism, hotel business, public catering, consumer services and the beauty industry, leisure and entertainment were on the verge of ruin. Small businesses with one or two cafes or beauty salons are in the most dangerous position.

According to a survey of micro-, small- and medium-sized enterprises conducted by the National Agency for Financial Research (NAFI) in June 2020, many entrepreneurs noted the negative effects of the pandemic: 76% reported a decrease in revenue, 66% - a decrease in demand for goods or services, 36% - a decrease in the number of suppliers, 24% - a decrease in the number of branches / sale offices. Every third entrepreneur (34%) put employees on unpaid vacation, and every fifth (18%) had to pay off employees. Most entrepreneurs do not expect a return to pre-crisis indicators in the short term.

The coronavirus pandemic has become a catalyst in bankruptcies, but by no means the main factor. Incorrect strategy, lack of technological equipment, financial reserves accelerated the life cycle of the most companies and brought it to its logical end.