The Supreme Court Сonfirmed the Jurisdiction of Russian Courts to Bankrupt a Foreign Debtor

26 February 2024
Elizaveta Fursova
Counsel

Starting from 2021 bankruptcy of foreign legal entities in Russian commercial courts has been actively developing. Most of the judgments were issued by courts of appeal and cassation stages and then confirmed by “refusal” rulings of the Supreme Court. It is also interesting that such bankruptcy proceedings were initiated by either Russian state bodies or Russian legal entities.

On 8 February 2024 in case No. A40-248405/2022, the Supreme Court actually put an end to the issue of determining national jurisdiction. What is more, the fact that the bankruptcy was initiated by a foreign creditor did not influence the final conclusions.

The Supreme Court recognized the application of AMN Commercial Property Advisers Ltd to declare Westwalk Projects Ltd (hereinafter - the debtor) insolvent in the territory of the Russian Federation (both companies are Cypriot companies). The Supreme Court stated that current national legislation1 does not exclude the possibility for a court to initiate insolvency proceedings complicated by a foreign element both on the side of the creditor (in particular, the applicant in a bankruptcy case) and on the side of the debtor.

Examining the validity of the application, the court should check whether there are indicators that the debtor is closely connected to the territory of the Russian Federation (national jurisdiction). Such signs may be evidenced by the following:

  1. The organization conducts non-temporary economic activities in the territory of the Russian Federation.

  2. Commercial activities of the company are focused on persons under the jurisdiction of the Russian Federation.

  3. The center of main interests of controlling persons is located in the territory of the Russian Federation.

  4. Management body, branch or representative office of the foreign entity are located in the territory of the Russian Federation.

  5. Controlling persons have Russian citizenship, temporary residence permit or residence permit in the Russian Federation, or controlling persons are bounded by corporate legal relations with Russian legal entities.

  6. Controlling persons were brought to subsidiary liability by a Russian court.

  7. Property assets of the company are located in the Russian Federation.

  8. Significant part of company`s creditors are Russian citizens and legal entities or persons whose activities are closely related to the territory of the Russian Federation.

  9. The organization entered into a significant number of transactions with the place of execution in the Russian Federation.

  10. The main evidence in the case is in the territory of the Russian Federation.

This list is not exhaustive and the parties are entitled to refer to other factors and circumstances for the purposes of determining the court's jurisdiction. Some of these circumstances, such as the location of the debtor's creditors2 or the place of contract performance3, were previously used by courts to determine the debtor's close connection to the Russian Federation. But the Supreme Court systematized and clarified the list of circumstances that may be subject to proof when initiating a cross-border bankruptcy case.

Similar factors may be applied to determine domestic territorial jurisdiction.

Having established the national jurisdiction, the court is supposed to determine whether the center of debtor's main interests is located in or outside the Russian jurisdiction. Depending on the result of such determination, primary or secondary bankruptcy proceedings should be initiated:

  • If the center of debtor's main interests is in the territory of the Russian Federation, the court should start primary bankruptcy proceedings that will have an effect in all other jurisdictions.

  • If the center of debtor's main interests is in the territory of a foreign state, but the debtor has a permanent establishment or assets in the Russian Federation, the court has the right to start secondary proceedings extending its effect to creditors and property only in the territory of the Russian Federation.

In the considered case the essential criteria for determining national jurisdiction were the following: (1) the formal nature of the debtor's registration in a foreign jurisdiction; (2) the debtor has not commercial activities outside the Russian Federation; (3) the sole director and shareholder of the debtor was a citizen of the Russian Federation; his son is the director of the branch; (4) all assets of the debtor were located in the Russian Federation; the assets had been transferred to the twin company shortly before the filing of the application for bankruptcy.

The possibility of bankruptcy of a foreign debtor in the Russian Federation significantly simplifies the procedure of debt collection and foreclosure of the debtor's local assets. However, this case still does not mean that a similar possibility for recognizing foreign bankruptcy of Russian debtors will appear.

1 According to articles 27, 247 Arbitration Procedure Code, paragraph 2,5 of Article 1 of Federal Law on 26.10.2002 No. 127-FZ “On insolvency (bankruptcy)”.
2 For example: Resolution of Commercial Court of Moscow district dated 25.07.2018 No. F05-12224/2018 in case No.  А40-187534/2017.
3 For example: Resolution of Commercial Court of Moscow district dated 01.03.2022 No. F05-1905/2022 in case No.  А41-72478/2019.