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Liquidation with obstacles


On Friday, February 5, the State Duma will consider reforms to the registration and liquidation procedures for legal entities in a first reading of a new bill.

Despite the fact that the bill is intended to prohibit the use of fly-by-night companies and protect creditors from unscrupulous debtors, it can greatly complicate the lives of a much wider range of business members.

Many experts believe that if the bill is passed, requirements for the liquidation procedure would be so difficult as to make liquidation virtually impossible. Even without taking into account the technical shortcomings of the text, a hasty adoption of the bill would  make it impossible for a business to function normally, or, at minimum, would result in additional bureaucratic intricacies of the kind already present with regard to state registration procedures for a commercial entity.

The bill would considerably expand the reasons that a company could be denied registration - for example, if there were a court ban on registration activity, or if an unqualified citizen is representing the legal entity.

In addition, new legislative initiatives are imposing financial responsibility upon business managers and founders when a company with debt violates registration or liquidation procedures. State control would be tightened. 

Given the current lack of refinancing opportunities and the demands of banks and creditors for early repayment of loans, liquidation is tempting for many businesses. A liquidated entity is not subject to the demands of investors, punitive measures, consumer claims, etc. Moreover, creditor demands left unsatisfied because a company does not have enough assets to repay the debt are considered extinguished. Many companies will gladly help other companies to circumvent lawful liquidation and to get rid of debts and/or commitments. Advertisements on the metro, street, and internet are full of headlines about a quick and inexpensive liquidation for companies in debt.

This type of liquidation is not uncommon today. After the completion of the liquidation process and removing the company from the United State Register of Legal Entities (USRLE), lenders can no longer recover debts from that company, including from its founders and executives.

The new bill would amend the law “On Insolvency (Bankruptcy),” which has already repeatedly undergone cardinal changes. This time a new article, 10.1, would be added, which establishes liability for those who violate bankruptcy rules. The proposed amendment would establish the legal grounds to bring the perpetrators to justice within the extent of negligent company-debtor obligations, i.e., the interests of lenders would be protected from companies that illegally liquidate. 

That said, it is currently extremely difficult to bring fly-by-night companies to justice or to prove business relationships with them, and thus far all attempts of the state to resolve the issue have failed. Therefore, the state must adopt a decision that would force all commercial companies to operate legally.

In general, according to lawyers, the idea behind the bill is admirable. However, the chosen approach is not unambiguously positive.

While the law hopes to increase transparency, many of the particular changes proposed are only cosmetic. For example, in addition to the changes mentioned above, it proposes increasing the period for considering applications and implementing changes to a registration.  While it’s simpler to make quantitative changes, this approach is not beneficial in the long-term. 

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