Bankruptcy of foreign companies in Russia: on the threshold of reinventing enforcement proceedings

The Supreme Court of Russia has confirmed the general rule that the bankruptcy of foreign companies is not permitted.

In the BIRCH LEGAL Telegram channel, we previously posted about the results of the “Westwalk” case and will now break it down again in a little more detail.

1. We’ll begin by dispelling the myth that the “Westwalk” case ostensibly sets a precedent for the bankruptcy of foreigners in Russia. It just isn’t so. The “Westwalk” case established criteria which the court can use to consider a foreign company’s bankruptcy case. Owing to these criteria composing it, the general rule remains a prohibition on foreign bankruptcy, whereas the criteria simply form an exception to this rule. In actuality, the “Westwalk” case merely systematized the criteria with which the court may establish the center of main interests or permanent establishment/assets of a foreign debtor in Russia (and what is listed but not disclosed thoroughly), which had previously developed in court practice (cases No. А76-31539/2021, No. А40-112325/2023, No. А40-5658/2023, and No. А65-23218/2023). For example, before the “Westwalk” case, these criteria were examined by the court in case No. А40-166286/2023 on the bankruptcy of Credit Suisse AG, which was dismissed by the court in the end.
2. Why did the Russian Supreme Court allow “Westwalk” to go bankrupt? As follows from the court rulings, the debtor was a company nominally registered abroad under the control of Russian persons with assets in Russia not conducting the activities listed under its state registration whose actual economic activities were concentrated in Russia. Thus, all of the previous criteria formed by court practice in bankruptcy cases involving such “nominally foreign” organizations were rightfully applied to “Westwalk”. The precedence of “Westwalk” resulted from the lower courts not recognizing these criteria in the case, leaving it to the Russian Supreme Court to be the first instance to do so. Keeping this in mind, in our opinion, these criteria are in no way present in factual and legal terms in the various cases on the bankruptcy of foreign companies currently being considered by the Russian courts such as those involving Credit Suisse AG and Euroclear. Who could assert with a straight face that the center of main interests of Credit Suisse AG or Euroclear are in the Russian Federation or that their activities are closely tied to the territory of Russia?
3. The proposed mechanism of “bankruptcy of the insolvency estate in the Russian Federation” in no way differs from enforcement proceedings in our opinion. The purpose of enforcement proceedings also centers around the recovery of assets in Russia. In several respects (e.g., possibility of recognition abroad), enforcement proceedings have huge advantages over foreign bankruptcy.
4. Let’s put ourselves in the shoes of the creditor pursuing our entrepreneurial goals (making a profit). How ought we recover debt? Should we try to file an action by ourselves to recover what we are owed faster than everyone else or should we rather initiate the bankruptcy procedure and invite all of the other creditors to take part in the distribution of assets so that no one leaves satisfied?The answer is obvious.
5. After the “Westwalk” case, an important question that will inevitably arise in judicial practice is being completely and carelessly overlooked: how much assets should a debtor have in Russia for a “secondary” bankruptcy to be initiated against it? Also, where is the line between having this “secondary” bankruptcy carried out and having the initiation of such procedures refused due to the lack of “…a permanent establishment or assets” in Russia? Court practice filters out the cases where the organizations clearly have no assets in Russia, and the courts dismiss the relevant bankruptcy cases accordingly. However, what “…permanent establishment or assets…” will eventually comprise in Russian court practice remains to be seen.

Read more at the link.