How Russia could use bankruptcy law to punish foreign companies

Creditors, including the Russian government, can force a company into involuntary bankruptcy and oust its management.

Creditors, including the Russian government, can force a company into involuntary bankruptcy and oust its management.

As foreign companies seek to leave Russia over the war in Ukraine, they face the prospect that Russian bankruptcy law could be used to seize assets and even lead to criminal penalties.

How Russian bankruptcy law differs from US bankruptcy law

In the USA, insolvency law is intended to give indebted companies a fresh start.

Distressed companies in the United States tend to go bankrupt willingly, and the law allows them to retain existing management and control of assets.

However, Russian law generally prioritizes the needs of creditors who are owed money. This means that creditors, including the Russian government, can force a company into involuntary bankruptcy and oust its management.

Some legal experts said foreign companies feared Russian creditors could abuse this process to appoint executives willing to sell their assets to business competitors or companies allied with the Russian government.

“In the late ’90s and early ’80s, this was often used as a vehicle to raid corporations in post-Soviet Russia,” said Paul Stephan, a professor at the University of Virginia School of Law and an expert on Soviet and post-Soviet legal systems.

Can a bankrupt company be prosecuted in Russia?

Yes. In the United States, bankruptcy is primarily civil in nature. However, Russian courts are more willing to pursue criminal sanctions for some bankruptcy crimes, such as asset concealment.

Camel and Lucky Strike cigarette maker British American Tobacco Plc. has expressed concerns that his exit from Russia could be viewed as a criminal act, leading to bankruptcy-related charges for local management.

It would not be the first time that the Russian government has threatened foreign companies and investors with criminal bankruptcy. Russia has repeatedly urged Interpol to arrest money manager Bill Browder on charges including bankruptcy and tax evasion.

Mr Browder has said the “false warrants” are part of a vendetta by corrupt officials in the Russian state. Interpol has failed to comply with Russia’s arrest requests.

Has Russian bankruptcy law been used in the past to punish companies for political reasons?

Yes. Tax debts have been used to bankrupt companies in Russia in a way that penalizes foreign investors, according to an international arbitration court.

Yukos Oil was forced into bankruptcy in 2006 after its former boss, Mikhail Khodorkovsky, fell out with Russian leader Vladimir Putin and the Russian government demanded billions of dollars in back taxes.

Most of Yukos’ assets were absorbed by the Kremlin’s flagship oil producer Rosneft, but international shareholders argued that the Russian tax demands were illegitimate. The Permanent Arbitration Court in The Hague agreed, finding in 2014 that the Kremlin had manipulated the legal system to bankrupt the company and take Mr Khodorkovsky’s assets.

Because the Russian government owns large energy companies, it could use energy bills and taxes to force a company into bankruptcy, experts said.

“If the government used that power strategically, it could well have the ability to influence local courts, influence local managers, and force a sale of the company that would displace foreign owners,” said Jason Kilborn, a law professor at the University of California IllinoisChicago.

Is there a safe way for companies to leave Russia?

For companies looking to leave Russia, Russian officials have proposed an “accelerated” bankruptcy procedure, in which local managers would take responsibility for their assets and operations.

However, some companies fear that Russia’s bankruptcy law will be used in retaliation against the exiting companies, experts said.

“If the hammer does fall, just hope that you’ve gotten as many people out of the country as you have and minimized your wealth risk in the country,” Stephan said.

Russia’s ruling party recently proposed legislation that would allow the government to nationalize the assets of certain companies planning to leave Russia.

This proposal would build on the bankruptcy law’s procedure for setting up court-appointed external management, but could be used against companies with no debt, experts said.

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