Russian court to declare bankruptcy of foreign debtors

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By Marina Romanova

maxresdefault (1)Russia’s court system is making first attempts to develop legal practice to bankrupt individual foreigners living in the country, Russian daily Vedomosti reports.
Earlier this June commercial court of Yamalo-Nenets autonomous region of Russia declared Ukrainian citizen Natalia Kuznetsova bankrupt upon her request due to the 1, 5 million rubles debt to local Starbank. Ms. Kuznetsova holds Russian permanent residency and has some assets in her possession.

Another bankruptcy case was brought before the court by Glamin Business Ltd against Akrady Briskin, now German citizen, who failed to pay back his debt of US$17 million. In February 2016, Moscow commercial court acquitted the accused due to impossibility to declare bankruptcy of the foreign citizen. The Glamin Business sent an appeal to the upper chamber of the commercial court, which uphold the ruling at first but later on, at the beginning of this month, has reopen the case for further investigation due to the facts that “defendant owns a property in Russia and was registered as individual entrepreneur.”

“Foreigners could be declared bankrupt, if they are reside in Russia, do business here and pay taxes,” Sberbank official told Vedomosti. However, commercial court’s representative Evgeny Semchenko thinks that it is “too early to speculate about bankruptcy practice development for foreigners.” He suggested waiting for the Chamber for Commercial Disputes of the Supreme Court of Russian Federation to express its position on a subject matter.

detail_6bea4a56c3696d2a1a4ea31e5ade1ab3Russia’s first personal insolvency law was signed by the president Putin in late 2014 but come into full circle in October 2015 to help “those who are struggling to pay back loans.” Previously only companies could declare themselves bankrupt.  In early 1990s, after the collapse of the Soviet Union, Russia established bankruptcy courts for businesses, but hasn’t established bankruptcy laws for people.

During prosperous years of high oil prices and before international sanctions were imposed on Russia over its illegal annexation of Crimea, domestic banks had encouraged people to take out loans and mortgages. Since the value of the ruble plummeted in 2014, many Russians are now struggling to pay back what they borrowed – especially those who took out loans denominated in foreign currency.

According to the new law, Russians with debts of more than 500,000 rubles (about US$7,600) that are more than 90 days overdue can declare themselves bankrupt.

Although, the previous system was very strict with consumers and use to force people to pay creditors throughout their whole lives, the new law has also raised a lot of questions and draw criticism. “Russian lawmakers seem to have ignored the rest of the world as they drafted a new law,” speculates, as the law “reflects neither direct input from international experts nor indirect analysis of the challenges and successes that dozens of other countries have encountered over the past 30 years with consumer insolvency systems”.

One of the main drawbacks of the law is that the process of declaring that you have no money is expensive and could cost you up to hundreds of thousands of rubles, which for ordinary debtors might total more than the debt itself. Unlike in many European countries, where the state budget covers this expense or in the U.S. and U.K, where debtors paying a flat fee for the procedure, Russian law has obliged individual welchers to cover court costs for the duration of their application, which can take months and cost a lot of money.

In addition to that, the law banning those deemed by the courts to be bankrupt from holding executive positions at companies for three years, requiring them to notify banks when applying for fresh loans of their bankrupt status for five years, and punishing those found to be declaring ‘false bankruptcy’ with up to six years in prison, The Moscow Times explained.

00The law leaves open the possibility that declared bankrupt will be restricted from traveling abroad as all other debtors. As of June 1, 2016 there were 2 million people who are restricted from leaving the country because of their debts. Almost half of them are borrowers of banks and microfinance institutions, TASS reports.

Basically, those who declared bankrupt in Russia don’t have a possibility of the fresh start that people have in many Western countries as Russian law protects creditors more than debtors and by doing so it carries on a tradition.

Despite the historical fact that the first modern, court-ordered bankruptcy discharge available to non-merchant debtors appeared not in the Europe or US, but in Russian Empire in 1800, bankruptcy law has started in Russia from a very harsh and punishing position toward debtors and remain as such until later.

According to the Charter on Bankrupts of December 1740, debtors who fell into distress through no fault of their own were to be released from debtor’s prison and not fined, while those whose fault contributed to their downfall were to be fined and executed by hanging. The law, which went into force under rule of the Russian Empress Anna Ioannovna, was replaced in 1753 with a new law (without a death penalty) by Peter the Great’s daughter, Elizabeth.

Even though, “bankruptcy conceded considerable authority to individual creditors who were free to imprison individuals for up to 5 years, could grant bankruptcy discharge, and even commit individual for criminal trial”, Sergei Antonov wrote in his research “Law and the Culture of Debt in Moscow on the Eve of the Great Reforms, 1850-1870”.

This regime persisted in Russia until the 1917 Bolshevik Revolution.

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