On April 30, 2020, The Presidium of the Supreme Court of the Russian Federation (hereinafter referred to as “the SC”) adopted the Review on certain matters of judicial practice related to the application of legislation and measures to combat the spread of the novel coronavirus infection (COVID-19) No. 21 (hereinafter “Review”). The release of the second review was known in advance: it was reported on the official website of the SC2, and after the release of the first review many unresolved issues remained.
The new provisions supply and concretize the provisions of the review issued a week earlier3. The first review is also applied to subsequent non-working days4. In particular, clarifications on procedural periods and their restoration, on limitation period, on special “bankrupt” periods and on the entry into force of rulings on administrative cases apply to these days.
I. Civil legislation
The new Review highlights in detail issues that were only raised in the first review. The SC gave recommendations on the execution of credit, loan agreements and lease agreements, as well as on some specifics of the application of Federal Law No. 127-FZ “On Insolvency (Bankruptcy)” of October 26, 2002.
1. Citizens are entitled to demand repayment holidays for up to six months
From April 3, 2020. Act No. 106-FZ amended5 several legislative acts regulating performance of obligations under credit and loan agreements. These amendments envisage possibility to suspend obligations, in fact — repayment holidays, for up to six months (“grace period”). Individuals and individual entrepreneurs may exercise this right subject to certain conditions:
| Condition | Comments |
|---|---|
| Deferral for more than 6 months |
The beginning of the deferral period is determined by the will of the borrower, but in compliance with the following rules:
for credits (loans) secured by a mortgage — not earlier than one month before the date of such request sent to the creditor; for consumer credits (loans) with credit limit (credit cards) — not earlier than the date of request; in other cases — not earlier than 14 days before the date of request. |
| Request shall be filed before September 30, 2020 | Potential negative effects may occur sometime after restrictive measures repealed. Therefore, repayment holidays for citizens will be in force until April 2021. |
| The loan amount does not exceed the maximum amount determined for such situations by the Government of the Russian Federation |
Maximumloan amount6:
for consumer credits (loans) where the borrowers are individuals — RUB 250 000; for consumer credits (loans), borrowers on which are individual entrepreneurs*, — RUB 300 000; for consumer credits (loans) providing for granting consumer credits (loans) with a credit limit, borrowers on which are individuals — RUB 100 000; for consumer credits for the purpose of purchase of motor vehicles with a pledge of motor vehicles — RUB 600 000; for credits (loans) granted for purposes not related to business activities and obligations under which are secured by mortgage — RUB 1 500 000* * where the obligations under the contract are suspended, the borrower — individual entrepreneur may request a reduction in the amount of payments during the grace period. * individual entrepreneurs do not have the right to request changes in the credit agreement with regard to which a grace period has been granted on other grounds7. |
| Decrease in the borrower’s income (total income of all borrowers) by more than 30% as compared to the average income for 2019 for the month prior to the borrower’s request to the creditor |
The decrease in income is presumed. If in doubt, the burden to prove the opposite rests with the creditor. The creditor has rights:
to request the borrower to provide the documents confirming the decrease in income. Such documents may be: 2-NDFL (income) certificate for the current and 2019 year; an extract from the register of recipients of state services in the sphere of population’s employment — individuals, on the registration of a citizen as unemployed; temporary disability lists issued in the event of temporary disability or in case of maternity leave for a period of at least one month. The Central Bank of Russia is entitled to set additional documents required to confirm the decrease in income8. The borrower is obliged to submit these documents not later than 90 days after the first application to the creditor for changing the terms of the agreement. With reasonable grounds the term may be extended for another 30 days. or to make an individual request to: the FTS and its territorial bodies; the Pension Fund of the Russian Federation; the Social Insurance Fund of the Russian Federation; the Federal Fund for Mandatory Medical Insurance. The Government of the Russian Federation has also adopted a special methodology for calculating the average monthly income of a borrower9. |
| While requested, there is no grace period in accordance with Art. 61-1 of the Federal Law of December 21,2013 No. 353-FZ “On consumer credit (loan)”. | Article 61-1 provides an opportunity to request a grace period under credit agreements secured by a mortgage. The grace period granted under Act No. 106 and article 61-1 of Act No. 353 may be granted to the same person in any sequence, but not simultaneously. |
After the borrower’s request10, the documents are to be reviewed within 5 days. If the request meets these conditions, the lender grants a deferral.
2. Penalties or other measures of liability are not applied during the grace period
The conditions of the grace period, in particular the amount and procedure for accruing interest, the procedure for repaying the principal debt and interest, the prohibition of accruing forfeits, fines, fees, foreclosures on the subject matter of pledge, claims against the guarantor, acceleration of the entire amount of the loan, etc., are stipulated in Act No. 106-FZ. Thus, in the event of a dispute over penalties, the courts will refer to this Act as a special regulation in relation to the Civil Code, Federal Law of December 21, 2013, No. 353-FZ “On Consumer Loan (Loan)” and Federal Law of July 16, 1998, No. 102-FZ “On Mortgages (Pledge of Real Estate)” and will be guided by it.
According to the Act No. 106-FZ during the grace period no penalties and fines will be charged, no acceleration of the contract can be made, no foreclosure on pledge / mortgage, no claims can be submitted against the guarantor (paragraph 14 of Article of the Act No.106-FZ). If at the time of request the borrower had accrued interest for breach of obligations under the contract, it is fixed on the date of establishing the grace period and is not accrued until the end of the grace period.
If the borrower (individual) became overdue, regardless of whether or not he used the right for grace period, he may be exempted from liability if such breach was not his fault (Article 401 of the Civil Code). In addition to the force majeure circumstances explained in the first review (see footnote 3), the SC indicated the impossibility to use the online payment system and the inability to make payments in the usual way as the circumstances which are beyond the control of the borrower’s will.
3. Whether or not the obligation under the credit agreement is breached is dependent on the period in which the alleged breach occurred
In the previous review, the SC had already indicated that declared non-working days11 were not the ground for suspending the performance of obligations. This rule applies to loan agreements with certain exceptions.
After the first decree of the President of the Russian Federation, the Central Bank of Russia issued an information letter12, where, with reference to Article 193 of the Civil Code, explained that “obligations performance postponement to the next business day following the period under consideration cannot be considered as a violation of the time limit for performance of obligations and, accordingly, does not indicate the occurrence of overdue payments”. Following the issue of the second Presidential decree, the Central Bank of Russia has changed its position13: “The Central Bank of Russia assumes that the obligations under financial transactions, the execution time limit of which falls on non-working days, must be fulfilled by the debtors within the period stipulated by the agreement”. Also, the Central Bank of Russia specified that when determining the delay, the creditors should assess the real possibility of fulfilling the obligation within the time limit specified in the contract.
Taking into account the position of the Central Bank of Russia and the fact that borrowers could have relied in good faith on the first information letter, the Supreme Court explained that non-payment of contractual payments under loan agreements within the period from March 30 to April 5, 2020 does not indicate a breach of obligations and does not entail liability for the borrower. Delay or non-payment after April 5 is considered as a breach of obligation and entails liability.
4. Postponement under lease agreements is provided regardless of the possibility of using the real estate property
As from April 1, 2020 Act No. 98-FZ14 introduced an additional possibility to change the payment terms of the real estate lease agreement. Depending on the situation, the tenant is entitled to request a postponement (rental payment holiday) or reduction of rental payments. The landlord, on the other hand, is obliged to enter into an additional agreement providing such changes if the tenant requests. The SC of the Russian Federation has indicated the following exhaustive conditions for granting a postponement:
| Condition | Comments |
|---|---|
| The agreement is concluded before the introduction of high alert regime or emergency situation | The regime is introduced by the state authority of the constituent region15 of the Russian Federation. For example, such regime was introduced by the decree of the Mayor of Moscow of March 5, 2020, No. 12-UM “On Introduction of the High Alert Regime ” (as amended by decree of the Mayor of Moscow of May 7, 2020 No. 55-UM), decree of the Government of St. Petersburg of March 13, 2020, No. 121 “On measures to Combat the spread of novel coronavirus infection (COVID-19) in St. Petersburg ” (as amended by decree of the Government of St. Petersburg of April 29, 2020, No. 269). Similar acts have been adopted in many regions of Russia. |
| Tenant is an individual entrepreneur or a legal entity | The tenant is also required to operate in sectors of the Russian economy worst affected by the deteriorating situation due to the spread of the novel coronavirus infection (see footnote 7). |
| Postponement only in relation to real property | Such property may be in state15, municipal or private ownership. Postponement does not apply to tenancy agreements. |
Only the criteria mentioned above are relevant for granting the postponement. The burden of proof rests with the landlord — the tenant does not have to prove that he or she was unable to use the property. However, the landlord, in turn, can prove that the tenant has not been de facto affected and evidently will not be, because, for example, he continues to operate using the real property in violation of the established restrictive measures. The courts may consider the actions of the tenant as abuse of right or actions bypassing the law and deny him/her in protection of rights in part or in full (paragraph 2 of Article 10 of the Civil Code, paragraph 1 of the resolution of the Supreme Court Plenum of May 23, 2015, No. 25 «On application by the courts of certain provisions of Section I, Part One of the Civil Code of the Russian Federation»).
5. Postponement of payments under the real estate lease agreement is provided from the date of introduction of the high alert regime or emergency situation in the region
Requirements on the terms and conditions of granting a postponement are determined by the Government of the Russian Federation17. Postponement can be granted in case of the high alert or emergency situation regimes in the region. Regardless of the date of the agreement on postponement, it can be granted starting from the date of introduction of restrictive measures (retrospectively). The same rule applies if the terms of the agreement have been changed by court decision. At the same time, the parties have the right to establish an earlier moment of granting a postponement — before the date of introduction of the high alert or emergency situation regimes.
More importantly, the postponement can be granted automatically, but only if certain conditions are met:
- The tenant has not paid the rent in the amount and within the terms stipulated in the contract;
- The landlord knew or could not have been unaware of the tenant’s activities in the sectors of the Russian economy worst affected by the deteriorating situation due to the spread of the novel coronavirus infection;
- The landlord did not notify the tenant of its right to a postponement. The Supreme Court deduced such obligation from the principle of good faith (paragraph 3 of Article 307 of the Civil Code).
For the purposes of the provisions of Art. 10, para. 3 of Art. 432 of the Civil Code of the Russian Federation the Supreme Court specified that similar consequences apply if the landlord unreasonably evaded conclusion of an additional agreement or, by its conduct, induced the tenant to believe that the postponement will be granted or has not raised any objections to payment made by the tenant under the conditions stipulated by the Government.
Taking into account the publicity of the information from the Unified State Register of Legal Entities, availability of the acts of the Government of the Russian Federation and Russian National Classifier of Types of Economic Activity, as well as wide media coverage of news about the support of persons whose activities were affected by the coronavirus, it will be quite difficult for the landlord — a legal entity — to prove that he did not know and should not have known that the tenant is entitled for a postponement. Therefore, if a dispute arises, it is likely that the courts will take the tenant’s side if other conditions are met. At the same time, we would like to emphasize that both parties are obliged to conduct their business in good faith and therefore the tenant should also inform the landlord that he has the right to a postponement.
6. Rent payments reduction is possible from the moment when it is impossible to use the real estate
Tenants have the right to request reduction in rent payments if:
- the high alert or an emergency regime is introduced in the region;
- a tenant cannot use the rented property, and such impossibility has arisen due to the restrictions imposed within the framework of the high alert or emergency regime.
At the same time, the activities of the tenant may not be included in the list of economy activities worst affected by the spread of coronavirus. For such companies, rent reduction is possible from the moment when the tenant was unable to use the real estate for the originally agreed purpose. The reduction can be also applied retrospectively — the reduction of rent payments from the moment specified is possible regardless of the date of conclusion of an additional agreement. These provisions are also applied if the terms of the agreement have been changed by a court decision.
If the landlord files a claim to collect the rent, the tenant has the right to indicate that the landlord unreasonably evaded entering into an additional agreement on rent reduction. The rent payments may be reduced if the court finds the existence of necessary circumstances.
In this situation, the Supreme Court did not indicate a special distribution of the burden of proof, so it will be distributed according to the rules of Art. 65 of the Commercial Procedure Code — each party proves the circumstances to which it refers. Therefore, the tenant in the event of a claim for recovery of rent payments will have to prove:
- that the tenant has not used the property after the imposition of restrictions;
- that the tenant has sent to the landlord a notice of intent to enter into an additional agreement to reduce the rent;
- that the landlord has evaded entering into an additional agreement;
- the amount by which the rent payments are usually reduced in a similar situation.
It is, however, possible that courts will similarly apply the clarification on the postponement (see previous paragraph) and shift the burden of proof to the landlord.
7. Postponement or reduction of lease payments is also possible under lease agreements for a part of the real property.
The SC laid its clarification on the following. Articles 606 and 60718 of the Civil Code provide the possibility to lease a part of a real estate item. Law No. 98-FZ does not contain any restrictions on the subject of the lease agreement, except that it must be real property. If interpreted systemic, these provisions mean that tenants under lease contracts of a part of real property can also request postponement or reduction of rent.
II. Bankruptcy law
8. The published notice of the creditor’s intention to declare a debtor as a bankrupt becomes void
If no proceedings were initiated before the introduction of bankruptcy moratorium, the notification of the creditor’s intention to apply for the debtor’s bankruptcy becomes null and void. In this case, both messages published prior to the moratorium and messages published during the moratorium shall cease to be valid. The latter, by virtue of legislative regulation, should not be published at all19, but presumably it speaks about those notices that were actually published.
Creditors at the end of the moratorium or after the debtor has been excluded from the list of persons to whom it applies, must re-send the notice of intent to file for the bankruptcy. This explanation corresponds to the current regulation established by the Law on Bankruptcy20 about the notice losing its force after the expiration of a certain period.
It is important for creditors who have failed to initiate bankruptcy proceedings to monitor the possible exclusion of the debtor from the list of persons protected by the moratorium in order not to lose the status of the first bankruptcy applicant authorized to propose aqualified receiver.
9. The moratorium does not affect the initiation of bankruptcy proceedings against the debtor in liquidation
The moratorium on bankruptcy does not apply in cases when the debtor adopted the decision on its liquidation. The purpose of the moratorium is to protect the affected debtors and provide them with an opportunity to find the way out of the difficult situation and return to normal economic activity. However, it is obvious that the decision on liquidation does not imply a return to business activity. In such circumstances, the impossibility on introduction of bankruptcy proceedings would not meet the intentions of the moratorium, and could also violate the rights and legitimate interests of creditors, who through bankruptcy proceedings gain access to certain legal mechanisms to influence the debtor’s estate.
This clarification is consistent with the earlier position of the SC that if a liquidation procedure has been introduced with respect to the debtor, there is no need for rehabilitation procedures21. The liquidation procedure indicates the intention of the company to cease its economic activity, so the protective provisions of the moratorium do not apply to such companies.
10. During the period of the moratorium, no interest is accrued under Article 395 of the Civil Code
The Supreme Court explained that during the period of the moratorium no interest is charged under Art. 395 of the Civil Code. This explanation is by its nature an adaptation of the rule of the Law on Bankruptcy22, according to which, during the period of the moratorium, no financial sanctions are accrued against the debtor for failure to fulfill or improper fulfillment of monetary obligations.
11. Recovery of funds under the writ of execution through banks or other credit institutions during the period of the moratorium is not allowed
Recovery from the debtor subject to the moratorium may not be carried out by submitting a writ of execution to a bank or other credit institution. Thus, the Supreme Court has extended the application of the rule of the Law on Bankruptcy23, according to which the enforcement proceedings on property recovery against the debtor are suspended in respect of claims that arose before the moratorium, extending its effect to the implementation of executive actions. This position is a consistent continuation of the prohibition on enforcement of obligations during the period of the moratorium and the explanation to enforcement actions in non-bankruptcy cases given in the first review.
1http://www.supcourt.ru/files/28881/
2The work of Russian courts in the context of the pandemic / URL
3See Russia’s Supreme Court provides recommendations on case handling in the light of COVID-19 / URL
4The days from May 6 to May 8, 2020 were declared as non-working by President decree No. 294 of April 28, 2020.
5Federal Law No. 106-FZ of April 3, 2020 “On amendments to the Federal Law „On the Central Bank of the Russian Federation (Bank of Russia)“ and certain legislative acts of the Russian Federation regarding specifics of alteration of credit agreements, loan agreements ”. Entered into force on the date of publication on April 3, 2020.
6Resolution of the Government of the Russian Federation No. 435 of April 3, 2020 “On setting the maximum amount of a credit (loan) for credits (loans) under which a borrower is entitled to apply to a creditor with a demand to change the terms and conditions of a credit agreement (loan agreement) stipulating suspension of a borrower’s obligations ”. Entered into force on April 3, 2020.
7Art. 7 of the Federal Law of April 3, 2020, No. 106-FZ provides possibility of a grace period for small and medium-sized businesses, which are covered by the List of industries of the Russian economy, most affected by the deterioration of the situation as a result of the spread of novel coronavirus infection (approved by Resolution of the Government of the Russian Federation of April 3, 2020 No. 434 (ed. of April 18, 2020).
8At the time of publication, the Central Bank of Russia did not introduce additional documents.
9Resolution of the Government of the Russian Federation No. 436 of April 3, 2020 “On approving the methodology for calculating the average monthly income of a borrower (total average monthly income of borrowers) for the purposes of establishing a benefit period providing for the suspension of the borrower’s performance of its obligations under a credit agreement (loan agreement) ”. Entered into force on April 3, 2020.
10The approximate form was approved by information letter of the Central Bank of Russia No. IN-06-59/49 of April 5, 2020 “On peculiarities of application of Federal Law No. 106-FZ of April 3, 2020 ”.
11Decrees of the President of the Russian Federation of March 25, 2020, No. 206 “On the announcement of non-working days in the Russian Federation ”, of April 2, 2020, No. 239 “On measures to ensure sanitary-epidemiological well-being of the population on the territory of the Russian Federation in connection with the spread of novel coronavirus infection (COVID-19) ” and of April 28, 2020 No. 294 “On the extension of measures to ensure sanitary-epidemiological well-being of the population on the territory of the Russian Federation in connection with the spread of novel coronavirus infection (COVID-19) ”.
12Information letter of the Central Bank of Russia No. IN-03-31/32 of March 27, 2020 “On the term of obligations performance ”.
13Information about work of financial institutions and Bank’s of Russia ensure measures for regularity in financial sector of economy during period from Aril 4 to April 30, 2020 / URL: https://cbr.ru/press/pr/?file=03042020_132700if2020-04-03T13_25_36.htm
14Art. 19 of Federal Law No. 98-FZ of April 1, 2020 “On amendments to certain legislative acts of the Russian Federation on issues of emergency prevention and elimination ”. Entered into force on the date of publication on April 1, 2020.
15Art. 11 of the Federal Law of December 21, 1994, No. 68-FZ “On protection of population and territories from natural and technogenic emergency ”.
16For additional support measures for tenants of federal property — small and medium business entities, see the Order of the Government of the Russian Federation No. 670-r of March 19, 2020 (as amended by the Order No. 968-r of April 10, 2020, and Order No. 1155-r of April 28, 2020).
17Resolution of the Government of the Russian Federation of April 3, 2020, No. 439 “On establishing requirements for the conditions and terms of postponement of payment of rent under real estate lease agreements ”. Entered into force on of April 6, 2020. See also
18In the interpretation of paragraph 9 of the review of judicial practice in cases related to challenging the refusal to carry out cadastral registration (approved by the Presidium of the Supreme Court of the Russian Federation on November 30, 2016), paragraph 25 of the review of judicial practice of the Supreme Court of the Russian Federation № 1 (2019) (approved by the Presidium of the Supreme Court of the Russian Federation on April 24, 2019).
19Para. 2 P. 2 Art. 9.1 of Federal Law No. 127-FZ “On insolvency (bankruptcy) ” of October 26, 2002.
20Para. 2 P. 2.1 Art. 7 of Law on Bankruptcy.
21Ruling of the SC of July 27, 2017, No. 305-ES17-4728.
22Para. 10 P. 1 Art. 63 of Law on Bankruptcy.
23Pp. 4 Para. 3 Art. 9.1 of Law on Bankruptcy.