This article was first published in ‘INSOL World’, The Quarterly Journal of INSOL International, on 18 June 2021. The full issue is available to INSOL members, accessed here.

Introduction

As in other jurisdictions, Russia’s insolvency legislation is based on the pari passu principle. However, this principle is subject to certain exceptions, specifically with respect to shareholders and other non-arm’s length creditors, such as the controlling persons of an insolvent company (“Affiliated Creditors”).

In practice, Affiliated Creditors use other instruments (e.g., loans, intergroup supplies, etc.) to have their claims listed in the creditors’ register of an insolvent company.

First, this enables such creditors to control insolvency proceedings through participation in the creditors’ meetings, to block the approval of important decisions, and to appoint a
favorable insolvency manager etc. Second, having their claims listed enables Affiliated Creditors to return their de facto investments through insolvency proceedings. This is despite the fact that the financial distress of the company often stems from improper management by these Affiliated Creditors.

To prevent such adverse practices, which harm the interests of independent creditors, the Russian courts drew up rules on the subordination of Affiliated Creditors’ claims.

This article is an overview of subordination mechanisms and their development in the recent practice of the Supreme Court of the Russian Federation (the SC) and State Arbitrazh (commercial) Courts.

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Author

Associate, Baker & McKenzie CIS, Limited
Moscow
Email: Pavel V. Novikov

Author

Associate, Moscow
Email: Andrey Bogdanov