The Afterlife: Insolvency of an Individual

The Bill of the Federal Law №105976-6 "On Amending the Federal Law "On Insolvency (Bankruptcy)" and separate legislative acts of the Russian Federation regulating restoration procedures applied to an individual debtor" (hereinafter called the Bill) was submitted to the State Duma of the Russian Federation at the request of the Government of the Russian Federation on 05.07.12. On 14th November the Bill was adopted by the Duma in the first reading.

It should be noted that the Insolvency (Bankruptcy) Law still provides in theory for a chance to declare an individual insolvent , but the said rules on bankruptcy of individuals shall come in force only after the federal law on amendments and additions in the federal laws has been adopted and enforced . It is those amendments and additions that are contained in the Bill under question.

Currently the legislation provides for a single way of debt collection from individuals – it is the executor proceedings. The practice, however, proves that in some cases this procedure is not efficient and is even useless at times. Besides, there are some drawbacks affecting the debtor and his creditors. The drawback affecting the debtor is the lack of chance to recover his solvency within the framework of the executor proceedings. In a number of cases the executor proceedings are undesirable because within the executor proceedings the claims of the creditor that was the first one to go to the court are enforced against the debtor’s property. Other creditors being unaware of petition for executor proceedings or in case their trial was delayed for a long time are at risk to be late with their claims and to lose the chance to recover the debt from the individual.

One of the reasons for drafting and adoption of the Bill was a wide spread occurrence of consumer loans that was followed by a rapid growth of delays in repayment of the individual debts. The main author of the Bill is the Ministry of Economic Development of the Russian Federation, it submitted to the Government of the Russian Federation the suggestions for increase of opportunities for settlement of debts of individuals that are not sole traders. The majour and most crucial idea the Bill was based on is introduction of legal procedure of individual loan restructuring that provides for the possibility of repayment of the individual debt in installments as well as incentives for individual debtors and their creditors to settle the disputes in civilized ways.

According to the adopted bill individual debtors will enjoy the advantages of bankruptcy of legal entities in force in the Russian Federation. It should be noted that the bankruptcy procedure for individual debtors (consumer bankruptcy) has long been established in overseas practice and is used as a civilized tool for settling individual debts.

We suggest reviewing the majour provisions of the Bill regulating the individual bankruptcy procedure.

Most importantly, the Bill provides for introduction of a number of new legal concepts in bankruptcy legislation (debt restructuring, debt restructuring schedule, financial receiver). This, in effect, is understandable since introduction of new procedure and phenomena is caused by the urge for new concepts describing such phenomena.

We will review the ground for initiating individual bankruptcy procedure. The bankruptcy application can be submitted by the individual personally, his creditors or the authorities.

The reason for creditors and authorities to apply to the court with the petition to recognize an individual insolvent is the claims against the individual which in total are over fifty thousand roubles and the repayment of which was delayed for over three months. An individual can personally petition the court to declare him bankrupt even without the above circumstances. In particular, he is entitled to make the said application in case he foresees bankruptcy and in case there are circumstances that obviously witness that he is incapable to repay the debt on time. Moreover, an individual shall have to petition the court to recognize him insolvent in case the circumstances arise under which fulfillment of the claims of one or more creditors shall lead to inability to fulfillment of obligations against other creditors.

Unlike a trial on insolvency of legal entities (where in order to initiate the bankruptcy proceedings a valid court order is require that confirms the indebtedness ), an application for declaring an individual insolvent can be made whether or not there is a court order that confirms the claims on debt liabilities.

An application for declaring an individual insolvent made either by the individual himself or by the creditors (the authority) can contain the candidate for the position of the administrator. We as can see, over and above the existing types of types if receivers which are one of the most important figures in insolvency procedure of legal entities (interim chief executive, administrative receiver, external administrator, official receiver), another person came along – a financial receiver for cases of individual bankruptcy.

Financial receiver

A financial receiver is an administrator of arbitration appointed by a court of arbitration upon petition of the persons taking part in the insolvency procedure; the appointed person carries out restructuring of debts and other functions.

The financial receiver must comply with all the requirements set out by the court of arbitration for this role in order to be appointed in a case of insolvency. The appointment of a financial receiver is carried out by the court in accordance with the existing procedure provided for in Article 45 of the Federal Law "On Insolvency (Bankruptcy)". The minimum remuneration of the financial receiver is ten thousand roubles per month. The existing provisions set out the following fixed minimum remuneration amounts: an interim chief executive – thirty thousand roubles per month; an administrative receiver – fifteen thousand roubles per month; an external receiver – forty-five thousand roubles per month; the official receiver – thirty thousand roubles per month .

Moreover, apart from the said fixed remuneration amount in a number of cases a financial receiver can expect an interest. The size of the interest varies depending on the total amount of the satisfied claims of the creditors and can be set at the following rates: 3%, 4,5%, 6%, 7% from the amount of the creditor’s claims that have been recovered.

For the purposes of giving the relevant legal status to the financial receiver it is assumed that he must carry out certain rights and obligations. The rights and obligations of the financial receiver in general correlate with those of other administrators and are specific only due to a different status of the debtor.

Debt restructuring

Debt restructuring is a new procedure applied to individual insolvency cases for the purposes of repayment of the claims of priority creditors and authorities included in the register of claims of creditors in accordance with the scheduled terms and conditions of debt restructuring. Debt restructuring procedure may be ordered by the court as a result of considering the grounds of the petition to declare an individual insolvent in case the petition is held well-grounded. Otherwise, the court may leave the petition unconsidered and terminate the trial.

The ruling to recognize a petition void or to implement debt restructuring procedure is subject to immediate enforcement and while the ruling is appealed the execution is not suspended. From the date such ruling is made there is a moratorium on satisfaction of the creditors’ claims on monetary obligations. It causes the following consequences:

• The date of performance of monetary obligations and repayment of mandatory payments that an individual had acquired before the debt restructuring is considered to be due for the purposes of the bankruptcy proceedings;
• all proprietary claims of the creditors against the debtor can be made within the insolvency proceedings of the individual (except for the claims to recognize the ownership rights, claims to recover the alimony, to reclaim property from illegal ownership of a third party, claims related to invalidity of transactions);
• interest, penalties (fines) and other financial sanctions on all obligations of an individual are no longer charged;
• the charges on all executor documents are terminated (except for executor documents on claims for recovery of damages to life and health, recovery of non-pecuniary damages, vindicatory claims, claims for removal of obstacles for ownership, claim of ownership, claims of alimony);
• all seizures on individual’s property previously made and other limitations on the use of property of the individual are released.

Moreover, introduction of debt restructuring is an unconditional ground for unilateral refusal of the creditor to perform the agreement which provides for performance by the debtor of non-monetary obligation in favour of the creditor.

The notification of restructuring is published in the Common Federal Register of Insolvency (Note: apart from the said information the other details are subject to be published: recognition of the debtor insolvent, termination of the trial on the insolvency case, appointment, resignation or dismissal of the financial receiver, carrying out and results of the auction to sell the individual debtor’s property, as well as cancellation or amendment of the details published earlier). It should be noted that the Bill directly states that there is no need to publish the above mentioned details in the Official Gazette – the “Kommersant” ("Коммерсантъ") (the procedures applied to insolvency of legal entities provide for mandatory publication of the details in this newspaper). The deadline for making the claims by the creditors for the purposes of participating in the first creditors meeting is two months from the publication of the notice of debt restructuring.

Debt restructuring schedule

An individual has the right to forward a debt restructuring schedule to the members of the insolvency procedure within ten days after the deadline for making the claims of the creditors for the purposes of participating in the first creditors meeting is due. Not every debtor, however, is given such a right. The debt restructuring schedule can only be available to an individual that complies with the below conditions:

• availability of a fixed income;
• absence of existing unsettled or outstanding convictions for intentional offence in the field of economics;
• absence of criminal record for a theft, willful damage or destruction of property, intentional or fake bankruptcy within three years from the date the application for bankruptcy was accepted;
• five years prior to the debt restructuring schedule was submitted an individual had not been recognized bankrupt, and within eight years a debt restructuring schedule of that individual had not been confirmed.

A debt restructuring schedule must contain provisions on the procedure and the deadlines for repayment on the claims of all the priority creditors and authorities known to the debtor on the date of submitting the schedule. The maximum time for carrying out the schedule is five years. The following attachments must be attached to the debt restructuring schedule:

• a list of property that belongs to the individual;
• the details of the fixed income sources of the individual for the last six months;
• the details of the creditor’s indebtedness;
• a credit report (or a document confirming the absence of the credit history with the individual);
• a statement of the individual that the attached documents are complete and true.

A debt restructuring schedule is submitted for approval to the creditors’ meeting and afterwards – to the court of arbitration. As a result of review of the schedule the court makes one of the following rulings:

• to approve the debt restructuring schedule;
• to adjourn the review of the matter on approval of the debt restructuring schedule;
• to reject the approval of the debt restructuring schedule and recognize an individual bankrupt.

Furthermore, upon the approval of the debt restructuring schedule the Bill provides for two possible scenarios. The first one is a successful performance of the debt restructuring schedule by the creditor meaning that the claims of the creditors and the authorities have been satisfied as per the schedule. This fact shall be the grounds for termination of the trial on bankruptcy, release of an individual from the obligations and all limitations made due to the trial and the bankruptcy procedure. The other scenario is that upon expiration of the deadline set out for the completion of the debt restructuring schedule the individual for any reason cannot repay the creditors and repay the existing debt the court must cancel the debt restructuring schedule and recognize the individual bankrupt. The court of arbitration can, nevertheless, recognize an individual bankrupt earlier (in case an individual fails to submit the debt restructuring schedule on time or in case the schedule has not been approved).

After an individual is recognized bankrupt all his property that makes the bankruptcy assets is subject to selling at the auction. The proceeds shall be used to repay the creditors in the established priority. The claims of the creditors that are not satisfied because the proceeds are not enough shall be considered settled. Due to this some experts show some apprehension that introduction of insolvency procedure for individuals can cause increase a number of cases when dishonest individuals will use this procedure in order to escape the repayment of debts and liabilities at the expense of honest creditors. The Bill, however, provides respective amendments to the criminal and administrative procedures in order to make it possible to bring to justice dishonest debtors in cases of fake or intentional bankruptcy.

Besides, recognition of an individual bankrupt causes in itself a number of negative factors for him. For example, in case an individual is recognized bankrupt he cannot take new obligations under loan agreements or credit agreements without mentioning his insolvency. Besides, within the said period an insolvency procedure cannot be initiated upon request of the individual. Within one year from the date an individual is recognized bankrupt he cannot be registered as a sole trader.

In this article we attempted to review the main provisions of the Bill. Most of experts agree that the new amendments are positive and they view them as a herald of new civilized methods of settlement of disputes and indebtedness of individuals. The judgment on how these amendments will be performed in practice, what issues can arise, can only be made after the law is adopted in its final version and the corresponding case law is formed.