Debt collection in Russia
One of the most common subjects of disputes and litigation is default in obligations. The basic principles and features of the debt collection process in Russia are outlined below.
The Russian Civil Code establishes the general limitation period, during which claims against the debtor can be brought in court, at 3 years. This period is counted from the moment when the creditor found out or should have found out about the default in obligation. There are also special limitation periods for certain types of disputes.
At the same time, if the debtor acted demonstrating recognition of the debt (e.g., he or she partially repaid it, signed a reconciliation act, etc.), then the limitation period is interrupted and starts to run again. The period can also be restored if it was missed for valid reasons, if they existed during the last 6 months of the term (however, these reasons, as a rule, apply only if the creditor is an individual).
Courts for disputes
First of all, the creditor must check whether the contract includes provisions on applicable law and competent court.
The parties to an obligation may establish in a contract or separate agreement that disputes between them should be resolved in commercial arbitration tribunal (arbitration clause). As a rule, the consideration of the case is carried out by the arbitrators of one of the arbitration institutions, which the parties trust. It should be noted that the enforcement of an arbitration award on the Russian territory requires an application for recognition to a Russian state court. The latter either turns the award to enforcement or refuses to enforce it. The most common reason for refusal is non-compliance with the public order of Russia (interpreted by Russian courts very broadly at times).
If the debt dispute should not have been resolved in commercial arbitration tribunal or in the foreign court, it can be considered in one of two types of Russian courts: general jurisdiction court or state arbitration court.
Courts of general jurisdiction consider cases where at least one of the parties has no commercial status and, as a rule, acts as an ordinary citizen. Most cases are considered by district courts (one per district of region of Russia, a small town, or a district of a large city); courts of second instance at the level of region of the Russia and interregional cassation courts are also envisaged.
State arbitration courts in Russia are courts that deal with disputes among companies and / or individual entrepreneurs. They should not be confused with commercial arbitration tribunals which are non-governmental institutions. There is one state arbitration court per each Russian region. Its decisions can be appealed to the arbitration courts of appeal and courts of cassation. The highest instance in relation to both courts of general jurisdiction and state arbitration courts is the Supreme Court of the Russian Federation.
As a rule, the lawsuits are considered by the court at the place of location/residence of the debtor. If such a place is unknown at the time of the process, a claim can be filed at the place of location/residence that the debtor had before or where his or her property is located. In addition, the parties to the contract can, by their agreement, determine the court that will consider the dispute between them. Some types of cases have their own "links" (for example, disputes over real estate - at the location of the real estate).
Mandatory pre-trial settlement procedure
In disputes considered by arbitration courts, as a rule, a lawsuit to the court can be filed only after a demand (which is a pre-trial claim) to the debtor to repay the debt is made. Submission of a claim to the court shall be carried out only after 30 days from the date of sending the demand to the debtor. This rule does not apply if the parties have agreed otherwise, as well as in some other cases established by law (e.g., when in relation to claims during bankruptcy proceedings or those made on behalf of a group of persons, etc.).
When considering a case in a court of general jurisdiction, preliminary demand to the debtor is not mandatory, except for certain cases established by law (request to terminate the contract, dispute over cargo transportation, etc.).
A state fee should be paid for bringing a claim to court. Its amount depends on the sum claimed and can range from 400 to 60,000 RUB in a court of general jurisdiction, and from 2,000 to 200,000 RUB in an arbitration court. In case of winning in the case, the amount of the fee is collected from the other party in the case in favor of the plaintiff as part of legal expenses.
To avoid the concealment of property from collection, the creditor may require the court to apply interim measures. The most common of these measures is the seizure of the debtor's property. It means the prohibition for the debtor to carry out any transactions with his or her property, the inability to withdraw funds from bank accounts. However, to achieve such a measure, the creditor must, as a rule, prove to the court that the threat of concealment or alienation of the property by the debtor is real.
Representation in court
In a court proceedings an individual can act by himself, an organization can act via its duly appointed chief executive (director, general director) without power of attorney (POA). Any other person can be made a representative on the basis of POA - but in courts operating at the level of a region and above (including all arbitration courts), a representative is also required to have a law degree (bachelor, master, or PhD). Russian law does not require any license or admission to a lawyers’ association to be a representative in the court.
Submission of documents to the court
Any documents submitted to a Russian court must be executed in Russian or have a notarized translation into Russian language. In addition, official documents (extracts from trade registers, POAs) may require apostille (for countries participating in the 1961 Hague Convention) or consular legalization. Documents from countries with which Russia concluded agreements on the mutual recognition of official documents (in particular, the countries of the former USSR) do not require apostille or legalization.
A forfeit may be charged on the initial amount of the debt, the amount of which is determined by the contract. If the amount of the forfeit has not been determined, the debtor may be charged a forfeit under the law, the amount of which corresponds to the key interest rate of the Central Bank of Russia - for obligations in Russian rubles (RUB), or the average interest rate on loans in foreign currency - for obligations in the respective currencies. At the same time, the courts often reduce even the contractual forfeit if they consider it excessive (however, as a rule, not less than double the size of the Central Bank's key interest rate).
Also, the creditor can reimburse from the debtor, in addition to the debt and forfeit, legal costs proportionally to the sum awarded. It should be noted that the courts award such expenses only “within reasonable limits” (mostly, it concerns the expenses for the services of representatives). Therefore, it is necessary to provide confirmation of both the fact of incurring the costs and their reasonableness and validity (which, however, does not guarantee the recovery of the entire amount of costs). Expenses incurred for out-of-court and pre-trial procedures are not subject to reimbursement from the debtor (except when such procedures are mandatory for filing a lawsuit).
Terms of court proceedings
Consideration of a dispute in court usually takes at least 2 months. It can take 6 months or a year, depending on the complexity of the dispute. Some claims can be considered in the order of simplified proceedings, where shorter periods (no more than 2 months) and making a decision on the basis of the submitted documents without summoning the parties to court are provided.
The decisions made by the courts on the debt collection come into force after 1 month, if they have not been appealed, or after the decision by the appellate court (usually made within 2-3 months). After the entry into force of the decision, the claimant must receive from the court of first instance a document confirming the right to enforce the recovery of the amount awarded by the court - a writ of execution (in the case of court order proceedings, this court order itself is executive document). Having received a writ of execution, the creditor may submit it to the bank where the debtor has an account. If the debtor's bank is unknown or the funds on the accounts are not enough, the creditor should contact the Bailiffs Service to search for the debtor's property. Bailiffs make requests to banks and various state registers, come to the debtor's location/residence and conduct an inventory of the property in his or her possession, at the expense of which the claims can be seized.
If the debtor cannot serve the creditors' demands within 3 months, his bankruptcy procedure may be initiated. A legal entity (with an amount of liabilities over 300,000 RUB) or an individual (with an amount of liabilities over 500,000 RUB) can be declared bankrupt. The bankruptcy procedure is carried out by an arbitration court. The creditors must submit their claims with supporting documents for inclusion in the registry of creditors’ claims. After that, the debtor's property is sold, and the claims are settled at the expense of his property according to the priority established by law. First of all (out of turn) claims for current payments (mainly expenses due to the bankruptcy procedure) are settled, then claims for compensations for harm to health and salaries (1st and 2nd rankings) and only then all other claims (3rd ranking) in the order of calendar priority. Therefore, it is important to draw up and file claims as early as possible to have more chances to settle them at the expense of the debtor's remaining property. In addition, many important decisions in bankruptcy (concerning the candidacy of a court receiver, the schedule of debt repayment) are made by the meeting of creditors, in which creditors have the right to vote in proportion to the amount owed to them. To participate in this meeting, the creditor must include his claim in the registry of creditors’ claims.
Third party liability
Also, in some cases, it is possible to collect a debt from persons other than the debtor. The most advantageous option for the creditor is the joint liability option. In this case, the creditor has the right to demand performance both from all debtors jointly and from any of them separately, moreover, both in full and in part of the debt. Such a procedure for liability is provided, in particular, in the case of a surety. Another type of liability - subsidiary - provides for the possibility of recovering from third parties the part of the debt that the original debtor was unable to pay. Such liability is provided for in the case of an independent (including a bank one) guarantee.
Although additional liability of third parties for debt, as a rule, requires formalization by agreement of the parties, it is also possible on the basis of the law. So, if the debtor is a legal entity in the form of a joint-stock company or a limited liability company (LLC), then its shareholder can be responsible for the debts of such a legal entity, if he or she deliberately brought it to bankruptcy by his or her actions. If the LLC was liquidated and failed to pay off its debts, its obligations may be transferred to the persons managing it or to its participants (if their unscrupulous or unreasonable actions led to non-payment).
Based on the foregoing, when collecting a debt in the Russian jurisdiction, the creditor needs the following:
- check whether the contract includes provisions on applicable law and competent court;
- duly record of the grounds for debt to arise and its amount. As a rule, it is necessary to draw up a written contract. If the contract was not made in paper, the obligation should be fixed in another written form (exchange of letters, receipts, payment orders indicating the grounds, etc.);
- compliance with the pre-trial settlement procedure (as a rule, making demand in a proper written form);
- obtaining the most complete information about the debtor, in particular, about his bank accounts, accounting and tax reporting, the property in state registers;
- timely and proper filing of claims to the court (if the pre-trial measures were unsuccessful);
- ensuring legal representation in accordance with the requirements of Russian law;
- advance payment of the required state fees;
- translation and certification (if necessary) of foreign documents which should be submitted to the court;
- initiation and justification of interim measures (if there are risks of concealment of property by the debtor);
- timely joining the debtor's bankruptcy procedure (if it happened).
How we can help
Lawyers of Avakov Tarasov & Partners provide legal aid in debt collection cases, including legal advice on possible legal ways to get money back, negotiations with the debtor party, preparation and filing of pre-trial complaints, lawsuits and other court documents, representation in court, and interaction with Russian authorities during the enforcement procedures.
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