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Daniel Klein’s Legal Line

Each month Daniel Klein fields corporate legal questions posed by Passport’s readers. Do you have a Russia-related legal question you’d like Daniel to address? Tell him about it at dklein@passportmagazine.ru.

Dear Daniel:

I am the expat general director of the Russian subsidiary of a publicly listed British company. Our headquarters have just informed me that I must close our local office. For various reasons, we cannot sell the Russian subsidiary. Can you give a thumbnail sketch of what such a closure in Russia would entail?

Dear Closer:

Given the recent economic downturn, your situation is becoming increasingly common. Generally speaking, there are two options for closing a company: bankruptcy and liquidation.

Bankruptcy. Bankruptcy in Russia is instigated for the same reasons as in the West — a creditor can force the initiation of the process, or a firm can initiate it of its own volition. But this is where the similarities end.

In Russia, bankruptcy is a complex procedure that can last for several years and has a measure of unpredictability. For example, while in the West the existing management is oft en permitted to remain in place during the bankruptcy proceeding (with the idea of giving management a second chance), by Russian law the court appoints a so-called “independent” bankruptcy administrator. The assumption behind this is that the current management is incapable of running the company, and so the responsibility passes to the courts. This leaves the shareholders with little if any influence over the process.

It is important that a voluntary bankruptcy be properly planned so as to avoid settling debts incorrectly. The general rule is that if repaying a debt less than six months prior to filing for bankruptcy would put other debtors at risk, the transaction can be deemed illegal and voided and the general director held both civilly and criminally liable. For example, if a contractor is paid while employees are left without salaries, the payment of the debt to the contractor may be invalidated. Criminal liability usually takes the form of an administrative fine, but for a foreigner such a fine may be considered grounds for expulsion from the country or future denial of visas.

One reason for choosing bankruptcy is that it facilitates the laying off of staff. As Russian labor laws are quite inflexible and provide employees with many protections, the ability to lay off workers is an important consideration.

Liquidation. Unlike bankruptcy, which provides a firm protection from its creditors when it goes broke, liquidation is a process of clearing a balance sheet by paying all creditors and collecting (or even forgiving) remaining debts in advance of closure. Liquidation also requires the settling of all outstanding tax issues with the Russian authorities. If during a liquidation proceeding it is determined that a firm’s assets are not sufficient to satisfy its debts, then the company must file for bankruptcy.

An important difference between bankruptcy and liquidation is that the latter is brought through an administrative body whereas the former, as mentioned above, is done through the courts. Since shareholders choose the liquidation committee, they can exercise some control over the liquidation process.

Laying off staff is easier and quicker in a liquidation proceeding than a bankruptcy. However, as with bankruptcy, careful planning is essential as failure to satisfy all creditors and to file tax statements — or the fulfillment of these tasks incorrectly — may lead to criminal charges and/ or administrative fines for management.