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Non-Judicial Personal Bankruptcy: A Procedure for Bad Debt Relief with Russian MFC

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On 1 September 2020, Russian legislative bodies adopted a new procedure – non-judicial bad debt relief. The specific character of the procedure is that it does not imply legal action and the participation of a financial manager. We have analysed the key aspects of non-judicial bankruptcy, as well as the difficulties that can be encountered during this procedure, and will cover them in this article.

1. Conditions for the initiation of non-judicial bankruptcy proceedings

The Federal Law “On Insolvency (Bankruptcy)”1 (the “Bankruptcy Law”) indicates the following conditions, the compliance of which will allow a person to file an application with a Russian multifunctional centre (the “MFC”) to discharge debt:

  • the total amount of debt is from 50 to 500 thousand rubles;
  • as of the date of filing an application with the MFC, enforcement proceedings have been completed in relation to the debtor due to lack of property and new enforcement proceedings have not been initiated.

A person has the opportunity to submit a request with the MFC at their registration address or place of temporary stay, file an application for non-judicial bankruptcy in due format, indicating a full list of creditors. It is not recommended that you give false information on creditors and (or) debt because otherwise, at any time, non-judicial bankruptcy may turn into judicial.

2. How is the procedure for non-judicial bankruptcy organised?

The application submitted with the MFC is checked within three business days. If all the requirements are met, the information about the applicant is published in the Unified Federal Register of Bankruptcy Information. The next step is the introduction of a moratorium on the repayment of the person’s debt to creditors including the termination of interest accrual and penalty application.

The non-judicial procedure for recognising a person as bankrupt takes 6 months. During this time, the person who submitted the application is not allowed to take loans and act as a guarantor under agreements. While the application is being dealt with, the person is also obliged to inform the MFC about the improvement of their financial situation, for example, in the case of inheritance, as well as under other circumstances showing an increase in their solvency.
If there are no such circumstances, then after 6 months the bankruptcy proceedings end, with the MFC publishing a notice about this. All the debts that the person indicated when submitting the application are then “forgiven”. However, the total amount of debt cannot be more than 500 thousand rubles.

3. What debt cannot be discharged under the non-judicial bankruptcy procedure?

Debt cannot be discharged if the person has the following obligations:

  • compensation for life and health harm, moral harm;
  • payment of salary and severance wages;
  • payment of alimony;
  • other obligations closely related to the debtor;
  • current obligations, that is, those that arose in the course of the non-judicial bankruptcy procedure (for example, utility bills that arose before bankruptcy are discharged, whereas after bankruptcy they are not);
  • debt arising as a result of intentionally or recklessly inflicted damage by the person to the property of other persons (for example, damage in consequence of a car accident).

4. Creditors’ rights protection

The creditor, on which false information was given by the debtor when filing the application, has the right, on their own initiative, to terminate the non-judicial bankruptcy procedure and defend their rights in court. Such a creditor is also entitled to search for the property or property rights of the debtor and, for this purpose, submit requests to the competent authorities.

5. Advantages and disadvantages of the non-judicial bankruptcy procedure

The non-judicial bankruptcy procedure was created in order to protect the insolvent segment of the population, therefore one of its special features is that it is free of charge for the debtor. The term of the non-judicial bankruptcy procedure is clearly specified (6 months), and the Bankruptcy Law does not provide for its extension. The convenience of the service at the MFC is another advantage worth being noted, as the procedure does not presuppose attending court sessions and the preparation of court documents.

Despite all of its advantages, the “shortcomings” and disadvantages of the non-judicial bankruptcy procedure are also to be mentioned:

First, there is a legal conflict that has arisen in connection with the introduction of the non-judicial bankruptcy procedure. So, in accordance with Art. 25 of the Civil Code of the Russian Federation (the “Civil Code of the Russian Federation”), a person can only be declared bankrupt by decision of the arbitration court. However, up to now, Article 25 of the Civil Code of the Russian Federation has not been amended.

Second, the problem of a low level of people’s legal awareness, which can manifest itself in the unfair actions of the debtor when submitting an application to the MFC, for example, provision of false information on existing debts and creditors.

Third, non-judicial bankruptcy is not accessible for those who have income from which it is lawful to make deductions in enforcement proceedings (for example, wages, pension, etc.), since enforcement proceedings do not cease with respect to such persons.

It is quite possible that the introduction of the new procedure will lead to discrepancies in applying the regulations of the Bankruptcy Law. At the same time, we hope that the honesty of debtors and creditors, the expertise of the MFC employees, as well as the convenience of the procedure will help unload the courts and protect the rights of both debtors and creditors.

Article prepared by F+P trainee Olga Fedulkina

 


1 Federal Law dated 31 July 2020 No. 289-FZ “On Amendments to the Federal Law “On Insolvency (Bankruptcy)” and Certain Legislative Acts of the Russian Federation regarding the Non-Judicial Bankruptcy of a Person”

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