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Bankruptcy law to punish foreign companies in Russia

Bankruptcy law in Russia

Foreign companies are seeking to leave Russia because of the war in Ukraine. It is anticipated that the bankruptcy law of Russia can be used to forfeit assets and even face criminal penalties.

What is the difference between Bankruptcy law in USA and Russia?

In the US, bankruptcy law is meant to give new life to indebted companies. If the US-based troubled companies fail in their efforts, the law allows them to maintain existing management and control over assets.

EXPLAINER-How Russia could use bankruptcy law to punish foreign companies |  HeadlinesHowever, Russian law generally gives priority to the needs of creditors who owe money. It means that the creditors, including the government of Russia, can, therefore, force a company into involuntary bankruptcy and be expelled from the management.

Some legal experts say that the foreign firms are concerned with the creditors of Russia, and it will abuse the process to install executives willing to sell their assets to rival firms or private equity firms.

In the late 1990s and early 1980s, it was often used as a way to loot businesses in post-Soviet Russia (Virginia Law University professor Paul Stephan and expert on the legal system of the Soviet Union and post-Soviet states.)

EXPLAINER-How Russia could use bankruptcy law to punish foreign companies |  HeadlinesCriminal Penalties on the bankrupt company in Russia

The bankruptcy law in united-states is more civil. But Russian courts are more willing to impose criminal penalties for bankruptcy-related crimes, such as concealment of assets.

The company Camel and Lucky Strike British American Tobacco PLC has expressed its distress that their departure from Russia could be seen as a criminal act leading to local authorities forcing bankruptcy crime.

It is not the first time the Russian government has threatened criminal charges against foreign companies and investors. Russia has repeatedly asked Interpol to arrest fund director Bill Browder on charges against him, including intentional bankruptcy and tax evasion.

Browder said the false subpoenas were part of a guise by corrupt Russian state officials. Interpol did not accept Russia’s arrest request.

EXPLAINER: How Russia could use bankruptcy law to punish foreign companiesPast incidents where Russian bankruptcy law is used to punish a company

According to the international arbitration court, tax debt has been used to push companies in a way that punishes foreign investors.

Yukos Oil went bankrupt in 2006 after its former boss, Mikhail Khodorkovsky, fought with Russian leader Vladimir Putin and the Russian government demanded billions of dollars in taxes back.

Many of Yukos’ assets have been recovered by top Kremlin oil producer, Rosneft, but international shareholders argue that Russia’s tax claims are illegitimate. The Hague, the permanent court of arbitration, agreed that in 2014 the court system was manipulated to bankrupt the company and cease all the assets of Khodorkovsky.

Since the Russian government owns significant energy companies, it can use energy bills as well as taxes to force a company out of business, experts say.

The local courts, including local regulators, are potentially influenced as the government uses its power strategically. Jason Kilborn, a professor of law, said that it also forces foreign owners to sell their business and go bankrupt.

Explainer: How Russia could use bankruptcy law to punish foreign companies  | ReutersThe safe way of companies to leave Russia

Russian officials have proposed a fast-track bankruptcy procedure to hold local regulators accountable for their assets and operations for the companies that want to leave Russia.

Experts say that few firms are scared of Russia’s bankruptcy law as they can act as a retaliatory action against the companies.

Russia’s ruling party recently proposed legislation that would allow the government to nationalize the assets of certain companies that intend to leave Russia.

The experts say that the proposal would draw on a bankruptcy law procedure to install outside court-appointed management but could be used against companies with no debt.

Edited by Prakriti Arora

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