Debt Subordination in the Event of a Junior Creditor's Bankruptcy: English Practice and Possible Scenarios in the Context of Russian Law

 

Author: Evgeny Melikhov, PhD in Business and Private International Law, MBA (Portland State University, USA)

Summary

The article continues research on issues related to the debt subordination mechanism that has been actively used in foreign jurisdictions and recently implemented in part in the Russian laws through article 309.1 of the Civil Code of the Russian Federation regarding creditors' agreements on the manner of satisfying their claims against a debtor. This time, the analysis covers the destiny of contractual creditor claim subordination in the event that a junior creditor goes bankrupt that raises a number of the most complex debt subordination aspects. The article provides the overview of the rules developed on the topic in English practice; then, possible implications and risks in the context of Russian law are reviewed. 

Key words: debt subordination, creditors' agreements, subordination agreements, intercreditor agreements, English law, junior creditor’s bankruptcy.

 

Debt Subordination in the Bankruptcy of a Junior Creditor in English Practice

Debt subordination is a mechanism well known in all legal systems based on English or U.S. law that allows creditors to allocate the risks of their debtor’s failure to perform its obligations based on an individual model as opposed to the general principle of allocating such risks set forth in the applicable law, contractually and, in some cases, compulsorily through a court.

In the case of contractual debt subordination, any creditor (junior creditor) is entitled to voluntarily subordinate its claims against a debtor to the claims of another creditor (senior creditor) of that debtor. Contractual subordination alters the priority of and pari passu principle in respect of the claims held by the creditors of the same rank who entered into a subordination agreement by providing for that the junior creditor’s claims shall be satisfied after all or a part of the senior creditor’s claims have been discharged[1].

Subordination agreements are recognized in Great Britain both at the level of general rules of law and case law and special insolvency related provisions[2].

In the meantime, in the event that a junior creditor goes bankrupt before the senior obligations have been performed contractual subordination can be put at substantial risk. The issue is that a valid claim against the debtor held by the junior creditor is generally deemed to be a part of the insolvent junior creditor’s assets and, consequently, as a part of its estate. If the debtor is in a good financial standing the subordinated claim can be perceived as significant value by all the creditors of the insolvent junior creditor.

When determining the destiny of debt subordination in the event of a junior creditor’s bankruptcy, the following key rules are used in Great Britain:

- section 127(1) of 1986 Insolvency Act[3] that prohibits any dispositions of the company’s property in a winding up by the court after the commencement of the winding up unless the court otherwise orders;

- principle formulated in Harrison, Ex p Jay, Re (1880)[4] and confirmed in a number of later cases “that there cannot be a valid contract that a man's property shall remain his until his bankruptcy, and on the happening of that event shall go over to someone else, and be taken away from his creditors”;

- rule against divestiture of assets in the event of bankruptcy envisaged in British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975][5] according to which it is not allowed to grant an additional advantage to any creditor by excluding certain property of the insolvent debtor from its estate in the event of its bankruptcy preventing the subsequent distribution according to the priorities recognized by the bankruptcy laws[6].

Nevertheless, English case law does not provide an absolute answer when debt subordination may be deemed to be “divestiture of an asset” (in the situation in question the asset is the claim against the debtor held by the junior creditor) and when it is a limitation or suppression to the collection of the asset[7].

In English law, the validity of contractual subordination in the event of a junior creditor’s bankruptcy is evaluated based, first, on whether it is complete or incomplete (inchoate or springing)[8]. It is worth reminding that complete subordination reduces the priority of the junior creditor claims ab initio (from the time they occur) and until the discharge of the senior debt, while incomplete subordination becomes effective upon the occurrence of an event specified in the agreement, for example, when the debtor’s winding up is commenced or the junior creditor receives a notice of debtor’s default under the senior debt[9].

Complete subordination is generally held to be valid in the event of a junior creditor’s bankruptcy although, in such a situation, the senior creditor becomes, in fact, preferred as opposed to the other creditors of the junior creditor which is confirmed in the decision SSSL Realisations (2002) Ltd (formerly Save Service Stations Ltd) (In Liquidation), Re [2004][10].

The validity of incomplete subordination is evaluated in every particular case in the legal perspective (and not in the view of the overall consequences of the deal that includes the subordination agreement); and such subordination is likely to be upheld if the subordinated claim meets the criteria of so called determinable interest, i.e. a non-absolute interest limited at its outset and coming to an end upon, for example, the debtor’s bankruptcy. In contrast, the terms of a contract that any property shall be owned by a person until his bankruptcy only and, if bankruptcy happens (which plays the role of the condition that cancels the absolute right of the insolvent owner to such property in this case), it shall pass to another person prejudicing the rights of such former person’s creditors is invalid[11]

Based on the aforesaid, the conclusion is made that subordination “activated” by the junior creditor’s bankruptcy is void. Incomplete subordination may be recognized as divestiture of an asset as well if it is triggered by not only bankruptcy or winding up of the junior creditor but also by another event that occurs prior to winding up[12]. However, a term that subordination of creditors’ claims shall become effective in the event of their common debtor’s bankruptcy is not deemed to be contrary to the rule against divestiture[13].

The second factor that impacts the validity of contractual subordination in the bankruptcy of a junior creditor is its implementation mechanism (simple subordination agreement, trust, temporary assignment of claims to the senior creditor or so called “short-circuited” subordination granting the senior creditor or agent nominated by it the right to exercise the claim of the junior creditor on behalf of the latter and receive proceeds under the junior creditor’s claims directly from the debtor)[14].

In the case of subordination based on a simple intercreditor agreement, the senior creditor proves for its claims in the junior creditor’s bankruptcy proceedings arising out of the subordination agreement on common grounds as an unsecured creditor.

In the case of trust subordination when due to a subordination agreement or separate trust instrument any proceeds that the junior creditor receives or may receive from the debtor shall be held in trust for the benefit of the senior creditor, the claims of the junior creditor are included in its estate but any proceeds received by it from the debtor in discharging the junior debt will be automatically included to the trust for the benefit of the senior creditor and, thus, excluded from the junior creditor’s estate[15].

A similar situation occurs if there is subordination with the junior creditor’s claims assignment to the senior creditor. The difference is that in such case the junior creditor’s claims are not included in its estate because they have been assigned to the senior creditor.

Short-circuited subordination ceases to be effective in the event that the junior creditor becomes insolvent as it is considered to conflict with the rule against divestiture in the English practice whether the debtor is solvent or insolvent[16].

Intercreditor agreements are exposed to risks in the bankruptcy of the junior creditor due to sections  238 and 239 of 1986 Insolvency Act providing for that, on an application by the administrator or liquidator, any transaction entered into at a time in a certain period ending with the onset of the debtor’s insolvency (suspect period – as a general rule, 6 months and 2 years between connected persons ending with the onset of the debtor’s insolvency) for the reason of its being a transaction at an undervalue or, accordingly, a transaction giving unreasonable preferences to the debtor’s creditor, surety or guarantor.

Contingent transactions may be held to be void based on the said sections even though they were entered into prior to the suspect period but the conditions precedent specified therein were met in that period (such transactions include springing subordination agreements because they specify the conditions “triggering” subordination).

To protect from a possible action aimed at invalidating a subordination agreement pursuant to the said sections of the Act it is recommended to apply the strategy of comprehensive feasibility assessment of the subordination agreement, claims and privileges granted to the senior creditor in the context of the entire financial deal that includes the subordination agreement[17].

According to section 178 of 1986 Insolvency Act, the liquidator of an insolvent person is granted the right to disclaim so called “onerous property”, i.e. property that is unsaleable or not readily saleable or is such that it may give rise to the debtor’s liability to pay money or perform any other onerous act, as well as so called “unprofitable contracts”.

However, in SSSL Realisations (2002) Ltd (formerly Save Service Stations Ltd) (In Liquidation), Re [2004], it was concluded that subordination agreements did not meet the criteria of onerous property or unprofitable contract for the purposes of section 178 of the Insolvency Act; and, accordingly, they my not be challenged based on the above section of the Act[18].

 

Bankruptcy of a Junior Creditor in the Context of Russian Law

Like in Great Britain, the destiny of contractual debt subordination in the event of a junior creditor’s bankruptcy who is a party to a subordination agreement entered into under Russian law will be determined, primarily, according to the Russian bankruptcy laws. The junior creditor’s claim against the debtor constitutes a part of its assets and, therefore, in the event of its bankruptcy it has to be included in its estate based on article 131 of the Federal Law on Bankruptcy[19].

The status of the proceeds received by the junior creditor from the debtor in breach of the terms and conditions set forth by the creditors’ agreements is a more complicated issue because article 309.1 of the Civil Code of the Russian Federation does not give an express answer thereto. In the opinion of this article’s author, such proceeds should be, by default, deemed to be owned by the junior creditor until they have been handed over to the senior creditor because the junior creditor receives them from the debtor, although in breach of the creditors’ agreement, but lawfully under a valid obligation with the debtor who may not be subject to the intercreditor agreement at all and who may provide the performance to the junior creditor with no intentional acts by the latter. Therefore, such proceeds must be included in the junior creditor’s estate as well.

 

***************************************************************************************

Article 309.1 of the Civil Code of the Russian Federation “Creditors' Agreement on the Manner of Satisfying Their Claims against a Debtor” (in Russian – “Соглашение кредиторов о порядке удовлетворения их требований к должнику”)

1. Between the creditors of one debtor under congeneric obligations, an agreement on the manner of satisfying their claims against the debtor may be entered into, including on their priority and distribution of the proceeds in a way other than on the pro rata principle. The parties to that agreement shall not undertake any acts aimed to receive the proceeds from the debtor in breach of the terms and conditions of the said agreement.

2. The proceeds received from the debtor by one of the creditors in breach of the terms and conditions set out in the agreement between the creditors on the manner of satisfying their claims against the debtor shall be transferred to the creditor under the other obligation in accordance with the terms and conditions of the said agreement. The claim of the creditor to whom another creditor transferred the proceeds received from the debtor shall pass to the latter in the corresponding part.

3. A creditors’ agreement on the manner of satisfying their claims against the debtor shall not create any obligations for persons who are not parties thereto, including the debtor (article 308).

***************************************************************************************

 

In the meantime, it seems that article 309.1 of the Civil Code of the Russian Federation does not prevent creditors from including in a creditors’ agreement the provisions that, for example, the title to the proceeds that will be received by the junior creditor from the debtor in breach of the agreement shall automatically transfer to the senior creditor and that such proceeds shall be deemed to be held in trust by the junior creditor for the benefit of the senior creditor (analogue of the English and U.S. trust).

Pursuant to article 1018(1) of the Civil Code of the Russian Federation, property transferred to trust shall be separated from the other property of the trust settlor (in this context – the senior creditor) as well as from the assets of the trustee (in this case – the junior creditor), and in the event of the trustee’s bankruptcy it shall not be included in its estate. However, the potential of using the trust mechanism in the relationship between the senior and junior creditors is significantly limited by article 1013(2) of the Civil Code of the Russian Federation, pursuant to which money may not be an independent trust asset except as otherwise provided by law, because creditors’ agreements are entered into mainly in respect of monetary obligations[20]. That restriction narrows the scope of the trust mechanism application within creditors’ agreements setting out subordination of monetary obligations down to the situations where the junior creditor is a credit[21] or other specialized organization entitled to manage trust money by law.

Article 309.1 of the Civil Code of the Russian Federation does not contain any visible obstacles that would prevent structuring of a creditor’s agreement based on the temporary assignment of the junior creditor’s claims to the senior creditor[22] or shirt-circuited subordination model.

The temporary assignment of the junior creditor’s claims to the senior creditor may be effected by indicating in the creditor’s agreement that as of entering into it the subordinated claims shall be transferred by way of cession to the senior creditor and, after the senior debt has been fully discharged, they shall be returned to the junior creditor. In such case, it is recommended to govern, in the creditor’s agreement, the rights and obligations of creditors related to such assignment and provide for that if the senior creditor exercises the claims assigned to it by the junior creditor the claims of the senior creditor shall transfer to the junior creditor in the corresponding part. It seems that if subordination is set up in respect of monetary obligations the assignment scheme is permitted by virtue of article 384(2) and article 327.1 of the Civil Code of the Russian Federation. However, there may be required to engage an independent agent in the deal who would secure the performance of the arrangements reached between the creditors to effectively implement such scheme.

Such assignment would result in exclusion of the junior creditor’s claim from its assets and, consequently, from its estate in the event of bankruptcy. As an alternative to the assignment, a pledge of subordinated claims in favor of the senior creditor may be used to secure the junior creditor’s obligations under the creditors’ agreement because the Federal Law on Bankruptcy treats creditors secured by pledge as preferred ones.

However, the assignment or pledge option does not eliminate the risks of invalidating the creditors’ agreement or the subordinated claim assignment or pledge agreement entered into pursuant thereto based on the provisions of chapter III.1 of the Federal Law on Bankruptcy.

It is potentially possible to implement the short-circuited subordination model in Russia through granting, to the senior creditor, the authority to represent the junior creditor in the relationship with the debtor related to the junior creditor’s subordinated claims. In order to comply with the requirements of article 312(2) of the Civil Code of the Russian Federation, it is recommended for the debtor to be a party to such agreement and the junior creditor has to issue an irrevocable notarized power of attorney to give the senior creditor the authority to represent the junior creditor in the relationship with the debtor under the subordinated obligation, including the authority to receive the performance and special judicial powers. The terms of such power of attorney should provide for that it may be revoked after full discharge of the senior debt only.

 

***************************************************************************************

Article 312 of the Civil Code of the Russian Federation “Performance of an Obligation to the Due Person” (in Russian – «Исполнение обязательства надлежащему лицу»)

1. Unless otherwise provided for by an agreement between the parties or follows from customs or the tenor of the obligation, the debtor shall be entitled, when performing an obligation, to request evidence that the performance is being taken by the creditor itself or a person authorized by it to do so and shall bear the risk of failure to make such a request.

2. If the representative of the creditor acts upon the powers contained in an instrument that is executed in a simple written form the debtor shall be entitled not to perform the obligation to that representative until the confirmation of its authority has been received from the represented person, in particular, until the representative has produced a notarized power of attorney except as provided for by law or except in cases when a written empowerment has been provided by the creditor directly to the debtor (paragraph 3 of article 185) or when the powers of the creditor’s representative are contained in an agreement between the creditor and debtor (paragraph 4 of article 185).

***************************************************************************************

 

However, the short-circuited scheme would hardly survive in the event of the junior creditor’s bankruptcy. Pursuant to article 34(1), articles 36(1), (4) of the Federal Law on Bankruptcy any bankruptcy creditor may be represented in insolvency proceedings by, inter alia, an attorney-in-fact. In the meantime, pursuant to paragraph 7 of article 188(1) of the Civil Code of the Russian Federation, in the edition that took effect from the 1st day of September, 2013[23], initiation in respect of the represented or representing person of a bankruptcy procedure in which the relevant person loses the right to give powers of attorney independently serves as the ground for terminating the power of attorney. Currently, the Federal Law on Bankruptcy contains express rules indicating that powers of attorney shall be terminated if some bankruptcy procedures are initiated in relation to credit organizations[24]. As for the other legal entities, based on clause 130 of Decree of the Plenum of the Supreme Court of the Russian Federation dated 23.06.2015 No. 25 on Application by the Courts of Certain Provisions in Section I of Part One of the Civil Code of the Russian Federation, the Supreme Court treats external administration and receivership proceeding as the bankruptcy procedures that result in termination of powers of attorneys.

Thus, issuance by the junior creditor of an irrevocable power of attorney in favor of the senior creditor is not a 100 percent guarantee that a creditors’ agreement based on the short-circuited subordination model will be implemented because pursuant to the position of the supreme judicial authority of the Russian Federation, in the event of the junior creditor’s bankruptcy such power of attorney will cease to have effect as of the date on which external administration or receivership proceedings are initiated  in relation to the latter.

On the 1st day of June, 2015, article 327.1 was added to the Civil Code of the Russian Federation that permits to tie the performance of duties, exercise, modification or termination of certain rights under a contractual obligation to making or failure to make certain acts by a party to the obligation or occurrence of other events specified in the agreement, including those that are fully dependent on the will of one of the parties. In this connection, there is the question whether inchoate subordination is valid in creditors’ agreement entered into pursuant to article 309.1 of the Civil Code of the Russian Federation, especially, when the subordination “triggering” event is, for example, filing a petition to recognize the debtor or junior creditor as bankrupt.

 

***************************************************************************************

Article 327.1 of the Civil Code of the Russian Federation “Contingent Performance of an Obligation” (in Russian – “Обусловленное исполнение обязательства”)

The performance of duties as well as exercise, modification or termination of certain rights under a contractual obligation may be contingent on making or failure to make certain acts by a party to the obligation or occurrence of other events provided for by the agreement, including those that are fully dependent on the will of one of the parties.

Article 384 of the Civil Code of the Russian Federation “Scope of the Creditor’s Rights Passing to Another Person (in Russian – “Объем прав кредитора, переходящих к другому лицу”)

1. Unless otherwise provided for by law or agreement, the right of the initial creditor shall pass to the new creditor in the same scope and subject to the same conditions as those existed by the time when the right passed. In particular, the interests securing the performance of the obligation as well as all other interests related to the claim, including the right to charge interest, shall pass to the new creditor.

2. A claim under a monetary obligation may pass to another person in part unless otherwise provided by law.

3. Unless otherwise provided by law or agreement, the right to receive a performance other than payment of the amount of money may pass to another person in part provided that the relevant obligations is severable and partial assignment does not make the performance of its obligation significantly more onerous for the debtor.

***************************************************************************************

 

If the debtor is not a party to the creditors’ agreement, then, there are no visible obstacles that could prevent inclusion, in the creditors’ agreement, of the condition that the subordination of the claims held by the creditors who are parties thereto shall take effect upon the occurrence of a certain event related to the debtor’s default or bankruptcy. Nonetheless, given the current state of the Russian laws, subordination “triggered” by the debtor’s bankruptcy would not make a big sense. The issue is that the Federal Law on Bankruptcy that prevails over the general rules in the Civil Code of the Russian Federation on the ranks and procedure of discharging claims held by the creditors of an insolvent debtor[25], does not contain any rules that would provide direct recognition and enforcement of creditors’ agreements entered into pursuant to article 309.1 of the Civil Code of the Russian Federation in insolvency proceedings. As a result, enforceability of such agreements in insolvency proceedings is highly questionable[26].

Let us assume that the relevant provisions will be added to the Federal Law on Bankruptcy[27] or practice will develop toward direct recognition of creditors’ agreements in bankruptcy proceedings without making any amendments to that law. In such situation, if the creditors’ agreement provides for that the subordination of their claims shall be “triggered” upon, for instance, filing the petition to recognize the debtor who is a party to the creditors’ agreement or junior creditor as bankrupt there will be the risk that the creditors’ agreement and transactions executed in furtherance thereof may be held void based on chapter III.1 of the Federal Law on Bankruptcy because they may be recognized as transactions executed with the intention to detriment the proprietary rights of the other creditors or placing the senior creditor in a preferred position as opposed to the other creditors of the insolvent person.

At the same time, it is important that a creditors’ agreement structured based on the inchoate subordination model would be a contingent transaction; therefore, pursuant to article 61.1(2) of the Federal Law on Bankruptcy it may be held invalid even after expiry of the suspect periods set out by articles 61.2 and 61.3 of that law if the condition “triggering” subordination is met in such periods[28]. It should be noted that, based on the articles contained in chapter III.1 of the Federal Law on Bankruptcy, it is also possible to challenge separate acts of the junior debtor that have been made in the performance of the obligations under the creditors’ agreement (including a cash or non-cash payment made by the insolvent junior creditor to the senior creditor, transfer of title to other property by the insolvent junior creditor to the senior creditor) or other acts aimed to terminate obligations (setoff declaration, novation agreement, provision of termination compensation, etc.).

 

Conclusion

The analysis carried out in the article shows that the risks affecting the subordination of creditor’s claims in the context of Russian law arising in the event of a junior creditor’s bankruptcy before the senior claims has been satisfied are similar to the exposures faced by subordination agreements in a junior creditor’s bankruptcy proceedings in Great Britain. The article shapes the possible mechanisms that can be used to mitigate those risks; however, they need to be further developed and tested in the Russian courts. As mentioned in numerous publications, when drafting article 309.1 of the Civil Code of the Russian Federation, the legislator was focusing on the English and U.S. subordination models. In this connection, it would be logical to use English experience to develop relevant solutions in Russia.

 

[1] See. e.g.: Kenneth Kaoma Mwenda and Anna Laszczynska. Legal Problems of Debt Subordination: A Comparative Study. 10 Afr. J. Int'l & Comp. L. 1998 P. 675.

[2] See in greater detail: Melikhov, E. Debt Subordination: U.K., U.S. Practice and Applicability Prospects in Russia. Mergers and Acquisitions Agency Journal. 2015, No. 4 (18). P. 34-45.

[3] 1986 Insolvency Act. The text of the Act is found at: http://www.legislation.gov.uk/ukpga/1986/45/contents.

[4] 14 Ch D 19. The names and sources of English cases are hereinafter given pursuant to: Mika J. Lehtimäki. Debt Subordination in Corporate Liquidation: [Electronic document] (http://www.thetrust.fi/wordpress/wp-content/uploads/2015/03/Debt-Subordination-1.pdf).

[5] 1 WLR 758; [1975] 2 All ER 390; [1975] 2 Lloyd's Rep 43; (1975) 119 SJ 368 (HL).

[6] Cit. ex: Look Chan Ho. A Matter of Contractual and Trust Subordination. J.I.B.L.R. 2004. Issue 12. P. 495-496. This rule was also confirmed in Money Markets International Stockbrokers Ltd (In Liquidation) v London Stock Exchange Ltd [2002]. See: Mika J. Lehtimäki. Op. cit. P. 42.

[7] See: Mika J. Lehtimäki. Op. cit. P. 41.

[8] See: I bid. P. 14, 17.

[9] See: I bid. P. 39-40.

[10] EWHC 1760 [2005] 1 BCLC 1 [2004] BPIR 1334 (Ch). See: Mika J. Lehtimäki. Op. cit. P. 50-52; Look Chan Ho. Op. cit. P. 499.

[11] See: Mika J. Lehtimäki. Op. cit. P. 41-42.

[12] In Fraser v Oystertec Plc [2003] it is indicated that the terms of inchoate subordination shall be evaluated, inter alia, in the view of the creditors’ expectations in each particular case which leaves the room for invalidating incomplete subordination in the bankruptcy of the junior creditor for the reason of its being contrary to the rule against divestiture even though the completion of such subordination is not tied to the bankruptcy or liquidation of the junior creditor. This position was reiterated in Money Markets International Stockbrokers Ltd (In Liquidation) v London Stock Exchange Ltd [2002]. See: Mika J. Lehtimäki. Op. cit. P. 53.

[13] This conclusion is also confirmed in Money Markets International Stockbrokers Ltd (In Liquidation) v London Stock Exchange Ltd [2002]. See: Mika J. Lehtimäki. Op. cit. P. 45.

[14] See: I bid. P. 31-32, 57.

[15] See: Mika J. Lehtimäki. Op. cit. P. 14, 37.

[16] See: I bid. P. 36, 55-58.

[17] See: I bid. P. 38, 70-79.

[18] See: I bid. P. 67-69.

[19] Federal Law dated 26.10.2002 No. 127-FZ on Insolvency (Bankruptcy) (as amended and supplemented.).

[20] It should be noted that the scope of prohibition set forth by article 1013(2) of the Civil Code of the Russian Federation is disputable. Some lawyers believe that the provision relates to cash only and it does not apply to non-cash funds that are not, due to their nature, money but, instead, claims held by the account owner against the credit organization. See, e.g.: Trust in the Field of Entrepreneurship / Z.E. Benevolenskaya. 2nd edition, revised and supplemented. – M: Wolters Kluwer, 2005. P. 138-139; Braginsky, M.I., Vitryansky V.V. Book 3. Contract Law: Agreements for the Performance of Works and Provision of Services. – M, 2002. Chapter 17. Section 2 “Money as a Trust Asset” (http://bellib.org/?p=36462 - in Russian).

[21] Credit organizations are granted the right to manage money in trust under an agreement with individuals and legal entities pursuant to paragraph 3, part 3,  article  5 of Federal Law dated the 2nd day of December, 1990 No. 395-1 on Banks and Banking Activity (as amended and supplemented).

[22] The assignment of claims by way of security is used in bank practice. See, e.g.: Smirnov, A.L. Lending Secured by a Pledge of Rights and Assignment of Monetary Claims. Bank Lending. 2010, No. 6. The article is also available online (in Russian) at: http://www.reglament.net/bank/credit/2010_6_article_1.htm.

[23] Article 188 of the Civil Code of the Russian Federation was amended by Federal Law on Amending Subsections 4 and 5 of Section I of Part One and Article 1153 of Part Three of the Civil Code of the Russian Federation. Prior to the time when the above amendments took effect, initiation by an arbitration court of bankruptcy proceedings, notwithstanding some deviations in practice, did not create grounds for terminating powers of attorneys issued by the debtor’s head prior to the onset of the bankruptcy case. See, e.g., guidance in paragraph 9 of Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 64 dated the 14th day of June, 2001 on Certain Issues Related to Application of the Federal Law on Insolvency (Bankruptcy) in Judicial Practice which was reiterated on multiple occasions in the case law of the arbitration courts, including after the effective date of the Federal Law on Bankruptcy for the time being in force. That said, the powers provided for by such powers of attorney could be exercised by an attorney-in-fact on behalf of the debtor in the manner and subject to the restrictions set forth for the debtor by the Federal Law of Bankruptcy and a court-appointed administrator was entitled to revoke them if good reasons existed.

[24] See: articles 183.8 and 189.35 of the Federal Law on Bankruptcy.

[25] See, e.g.: Commentary to the Law on Insolvency (Bankruptcy). 4th edition. Clause-by-Clause, Scientific and Practical.  Under the editorship of Popondopulo, V.F. – M: “Publishing House Prospekt”, 2015. Commentary to article 1.

[26] See: Melikhov, E. Op. cit. P. 42-43.

[27] Now, a bill amending the Federal Law on Bankruptcy is being reviewed where it is proposed to obligate the court and a court-appointed administrator to take creditors’ agreement into account at any stage of a bankruptcy trial. See:   http://regulation.gov.ru/project/24786.html?point=view_project&stage=2&stage_id=18535

[28] See: clauses 1 and 2 of Decree of Plenum of the Supreme Arbitration Court of the Russian Federation dated the 23rd day of December, 2010 No. 63 on Certain Issues Related  to the Application of chapter III.1 of the Federal Law on Insolvency (Bankruptcy) (as amended and supplemented).