Risk-free reorganization: refining the mechanism for protecting creditors’ rights

The Draft Law was prepared to address ambiguity identified by the Constitutional Court in item 2 of Article 60, of the Civil Code of the Russian Federation. According to the current legislation, creditors of a legal entity undergoing reorganization may demand early repayment purely on formal grounds, without assessing whether the reorganization actually threatens their rights.

The Constitutional Court’s primary focus was on determining whether a creditor is entitled to demand early fulfillment of obligations only because the debtor has initiated reorganization. The Court found that the automatic exercise of this right, based solely on the fact of reorganization, upsets the balance of the parties’ interests.

The Constitutional Court emphasized that while protecting the creditor’s rights, it is important not to disregard the interests of the business:

• Early performance of all obligations driven only by reorganization may unreasonably undermine financial stability of a good-faith and solvent company.
• Such an approach upsets the balance of interests between the creditor and the debtor and may limit the freedom to engage in an economic activity and protections for property rights guaranteed by the Constitution of the Russian Federation.

The Constitutional Court’s position is that such disputes should not be premised on the mere fact of reorganization, but on an assessment of real implications for the creditor. If the debtor’s financial position remains stable and the creditor’s rights are not prejudiced, the claim for early repayment must not be satisfied automatically.

The purpose of the Draft Law is to refine the mechanism for protecting creditor rights during corporate reorganizations. Specifically, it proposes to tie the creditor’s right to demand early performance of obligations not to the reorganization itself, but to the existence of a real threat that the respective obligations will not be met when due. 

If a legal entity in reorganization provides proof that the creditor’s rights are not prejudiced and its interests are sufficiently protected, including through appropriate security, the court hearing the dispute may reject the creditor’s claim after examining the facts, including the debtor’s solvency and the adequacy of the security.

Such an approach requires courts to shift from granting creditors’ claims on formal grounds to evaluating factual circumstances, the debtor’s financial position and the adequacy of guarantees.

In light of the legal position of the Constitutional Court of the Russian Federation formulated in the abovementioned ruling, the relevant law is soon to be adopted. Nevertheless, even now, reorganization in an intragroup restructuring can be considered alongside other possible solutions.

B1 has a proven track record of supporting intragroup restructurings, from handling preparatory arrangements to delivering a complete suite of procedures covering legal, accounting, tax, HR and other aspects.