Debt collection in Russia

The process of debt collection in Russia is carried out through negotiations with the debtor. In cases where negotiations do not lead to a constructive resolution of the debt issue, the creditor should initiate official pre-trial dispute resolution.

This procedure involves drafting and sending a claim to the debtor for payment of the debt. The claim is sent by registered mail with an inventory of contents. Moreover, the Supreme Court of the Russian Federation, in its resolution of the plenum “On Some Issues of Pre-trial Settlement of Disputes Considered in Civil and Arbitration Proceedings” No. 18 dated June 22, 2021, confirmed that a claim can be sent to the debtor’s email address if such a method of sending claims is provided for in the agreement between the parties or if the parties have previously used such a method of correspondence and communication.

In commercial disputes considered by Russian arbitration courts, the debtor generally has 30 days to consider the claim, unless a different period is established by law or by the agreement between the parties. If a mandatory pre-trial dispute resolution procedure applies and the creditor cannot prove that it was properly followed, this may create procedural obstacles for the claim, including the risk that the court will not proceed with the case until the defect is remedied or will leave the claim without consideration in the situations provided by procedural law.

Therefore, after the thirty-day period for considering the claim, the creditor has the right to file a lawsuit for debt collection in court if the debtor has not complied with the claim’s demands.

Before turning to the court, the creditor should assess the statute of limitations. As a general rule under Russian civil law, the limitation period is 3 years, and for obligations with a fixed payment deadline it usually starts after the expiry of that deadline. At the same time, the starting point may depend on when the creditor knew or should have known about the violation of its right and about the proper defendant. The expiration of the limitation period does not automatically prevent the creditor from filing a claim, because the court applies limitation only if the debtor invokes it before the court decision is issued.

Therefore, if the debtor remains inactive and does not participate in the judicial proceedings, or simply overlooks the expiration of the statute of limitations, the creditor has the opportunity to obtain a court decision in their favor.

Additionally, it’s important to consider that the statute of limitations can be interrupted if the debtor takes actions that indicate acknowledgment of the debt, such as partial payment of the debt. Consequently, after such an action, the three-year period will start anew.

Judicial debt collection is carried out through order proceedings, simplified proceedings, and regular case review.

Cases under order proceedings are considered within 10 days from the submission of the application to the court, without summoning the parties and without conducting a court hearing. In Russian arbitration courts, this type of proceedings may be used for documented monetary claims arising from non-performance or improper performance of a contract if the amount of the claim does not exceed 750 000 rubles. The result of the court’s consideration under order proceedings is the issuance of a court order for debt collection, which is sent to the debtor by the court. In turn, the debtor has 10 days from the receipt of the court order to present their objections to the court. If the debtor submits their objections within the specified period, the court cancels the court order and returns the case to the plaintiff, explaining that in such a case, they should address the court with a lawsuit in the regular case review procedure. If the debtor does not submit their objections within the established period, they have the right to appeal the order in an appellate or cassation procedure.

Regular case review involves summoning the parties and a time frame of consideration of no more than six months from the date of filing the lawsuit in court. In certain cases, the court may extend this period to nine months if it deems the case complex. This procedure also provides for the possibility of judicial reconciliation with the participation of a retired judge. The outcome of such judicial reconciliation can be the conclusion of a settlement agreement between the parties, partial or complete dismissal/acknowledgment of the claim. Judicial reconciliation is interesting in that it allows avoiding appellate and cassation appeals, thus saving time for the creditor. In the event that the debtor breaches the obligations reached through judicial reconciliation, the creditor has the right to obtain an enforcement document from the court and use it for forced execution.

Simplified proceedings are conducted similarly to regular proceedings, but without summoning the parties and within a time frame of no more than two months from the date of filing the lawsuit. This type of proceedings is applicable in Russian arbitration courts to claims against legal entities where the amount of the claim does not exceed 1 200 000 rubles and to claims against individual entrepreneurs where the amount of the claim does not exceed 600 000 rubles.

The result of the court’s consideration under simplified or regular proceedings is the issuance of a court decision. Each party to the case has the right to file an appeal against the decision of the court of first instance. The appellate complaint is filed within one month from the date of the decision. The arbitration court of appeal generally considers the appellate complaint within a period not exceeding three months from the date when the complaint together with the case file is received by the appellate court, including the time for preparing the case for hearing and adopting the judicial act. In certain complex cases or cases involving a significant number of participants, this period may be extended up to six months. As a result of the consideration of the complaint, the appellate court issues a resolution, which enters into force on the day of its adoption.

After the appellate review, in the event of the lawsuit being granted, the creditor has the right to obtain an enforcement document based on the decision of the appellate court in order to submit it to the enforcement service. However, the debtor has the right to file a cassation appeal.

The cassation appeal can be submitted within two months from the date the court decision enters into force. At the same time, the legislation provides for the possibility for the debtor to file a motion to suspend the enforcement of the legally effective court decision. However, in this case, the debtor will have to substantiate such a request with substantial arguments or provide collateral in the amount of the disputed sum. Collateral can be provided in the form of payment money in size of the disputed amount into the court’s deposit account or by providing a bank guarantee to the court.

The consideration period for the cassation appeal is two months, but in certain cases, the court may extend this period to six months if it deems the case complex. As a result of the consideration of the cassation appeal, the cassation court issues a resolution, which enters into force on the day of its adoption.

If the creditor already has a foreign court judgment or a foreign arbitral award against a debtor located in Russia, ordinary Russian enforcement proceedings usually cannot be started immediately. A separate recognition and enforcement stage may be required before compulsory enforcement in Russia. Applications for recognition and enforcement of foreign court judgments and foreign arbitral awards are considered by a Russian court under the applicable procedural rules, depending on the nature of the dispute and the parties involved. In civil matters, foreign court judgments are recognized and enforced in Russia where this is provided by an international treaty of the Russian Federation. Foreign arbitral awards are considered separately from foreign court judgments and may be enforced under the applicable international convention and Russian procedural rules.

After successfully completing the judicial enforcement of the debt and if the debtor is unwilling to voluntarily comply with the court’s decision, the creditor should obtain an enforcement document and present it for compulsory execution.

The most expedient method of enforcing the debt, assuming the debtor has funds in their accounts, is independent bank account garnishment. Bank account garnishment involves presenting the enforcement document to the debtor’s bank. Within 3-5 business days, the bank will debit the debtor’s funds in favor of the creditor. If the debited amount does not cover the entire debt or if there are no funds in the debtor’s accounts, the enforcement document will be put on hold until funds are deposited into the debtor’s account.

The bank account  garnishment procedure is limited in that the original enforcement order is issued in a single copy. Banks must exclusively be presented with the original, so if the debtor has multiple accounts in different banks, the enforcement document must be submitted to each bank sequentially. This can lead to a situation where the enforcement document is submitted to a bank where there are no funds in the accounts, necessitating the retrieval of the document to be submitted to another bank. The process of submitting the document to another bank may take some time during which the debtor can transfer funds from the second bank to the first, resulting in insufficient funds in the second bank for debiting. Thus, this process can become indefinite.

To avoid such circumstances and increase the chances of presenting the enforcement document to the correct bank, the creditor should identify the debtor’s bank accounts before choosing the bank for direct enforcement. Russian tax authorities may provide information about the debtor’s bank accounts to the creditor if the creditor submits a request and confirms its right to receive such information with the original or a duly certified copy of a valid enforcement document. This makes it possible to determine where the enforcement document should be presented first and reduces the risk of losing time with a bank where the debtor has no funds.

If independent bank account garnishment yields no results, then the enforcement document should be submitted to the Federal Bailiffs Service for compulsory execution. Creditors have the option to use this method within three years from the date of issuance of the enforcement document.

To expedite the debt collection process at this stage, the judicial officer should request the freezing of the debtor’s assets and apply legally prescribed restrictive measures. By comparison with independent bank account garnishment, at this stage, the judicial officer freezes all of the debtor’s bank accounts simultaneously.

If funds are available in the debtor’s accounts, they will be debited in favor of the creditor. If there are no funds or they are insufficient, the satisfaction of the creditor’s demands can be realized by the judicial officer through other enforcement actions, including seizing the debtor’s property and subsequent sale, executing against the debtor’s property held by third parties, executing against the debtor’s receivables or property rights.

The law provides a two-month period for the performance of enforcement actions and the application of compulsory enforcement measures after enforcement proceedings are initiated. This period should not be understood as a guaranteed deadline for actual recovery of the debt. In practice, due to the workload of judicial officers, the need to search for assets, debtor objections and other procedural actions, enforcement may take from six to twelve months or longer.

If the judicial officer determines that the debtor has no funds in their accounts or other assets that can be executed upon, then the enforcement document will be returned to the creditor. In such cases, the creditor has the right to represent it no sooner than six months later. It should be noted that when the enforcement document is returned, the three-year period for its presentation is interrupted.

If compulsory debt recovery through judicial officers has not yielded results, it is advisable to assess whether there are grounds for holding controlling individuals of the debtor subsidiarily liable. This mechanism is not automatic: the creditor must evaluate whether the relevant person actually controlled the debtor, whether the debtor has signs of insolvency or insufficient assets, whether bankruptcy-related duties were breached, and whether there is a causal link between the conduct of the controlling person and the impossibility of satisfying the creditor’s claims. According to Russian bankruptcy rules, the head of the debtor may be required to apply to the court to declare bankruptcy if the debtor cannot fulfill financial obligations to creditors or displays signs of insolvency, and failure to do so may be one of the grounds for subsidiary liability. A similar situation arises if the debtor is deemed inactive or excluded from the registry of legal entities.

To implement this approach, it’s necessary to initiate the debtor’s bankruptcy procedure and during this process, submit a request to the court for the procedure’s termination due to lack of funding. Based on this reason, the court halts the bankruptcy process, and subsequently, a separate request should be filed to hold controlling individuals of the debtor subsidiarily liable.

The timeline for completing the mentioned actions is approximately eight months. The outcome of this stage would be the acquisition of an enforcement document to recover the debt from the controlling individual, after which the process of compulsory debt recovery from this individual needs to be initiated.

Among additional effective methods of debt recovery, criminal prosecution of controlling individuals of the debtor can also be pursued. The Criminal Code of the Russian Federation holds individuals responsible for “Malicious Failure to Comply with a Legally Binding Court Decision” (Article 315, Part 1).

This approach is applicable if, within the scope of the enforcement procedure, a judicial officer determines that the controlling individuals of the debtor are not present at the debtor’s legal address. In such a scenario, the judicial officer compiles an absence report detailing the measures taken and issues a resolution to close the enforcement proceedings due to impossibility of recovery. These documents serve as the basis for holding the debtor’s management liable under the aforementioned article of the criminal code.

As practice shows, in the majority of cases, the threat of criminal liability for the management of the debtor has a significant impact and compels the debtor to resolve the debt matter to avoid criminal punishment.

If you have any questions or need assistance with debt collection in the Russian Federation, our company can help analyze the documents, determine the appropriate pre-trial, judicial or enforcement strategy, assess the debtor’s assets and support the recovery process at each legally available stage. Please contact us to discuss the case and receive practical recommendations based on the debtor’s status, the available evidence and the applicable Russian procedure.

# DEBT COLLECTION AGENCY RUSSIA

06.02.2022

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