How to Buy a Pre-Bankrupt Business in Russia
By Roman Makarov, Nektorov, Saveliev & Partners
In the COVID-19 crisis, business is looking for a way to overcome the diffcult situation, and investors are looking for target companies that are being sold at an attractive price. The value of money is historically low. Investors understand that the time for opportunities has come.
What aspects should a buyer consider when preparing and executing a deal to acquire a prebankrupt business in Russia?
First, check the asset
The general principle that applies to an organisation in a prebankruptcy state is the same as for an ordinary M&A transaction – this is, an asset verification. It is important to make an inventory and grouping of assets and debts.
In particular, the following aspects should be checked:
- The existence of the debt (for example, the fulfilment of the obligation is not reflected
in the accounting).
- The period for repayment of the debt (it may turn out that the limitations – three years
in Russia, have passed).
- The creditor’s activity (demanding or, conversely, extremely passive).
- The due date for future payments. It would be a professional solution to group them by maturity – this will allow the establishment of a systematic approach to negotiations. It is also worth trying to negotiate with creditors about the postponement of maturity with the signing of the corresponding additional agreements. This will help to protect against unexpected bankruptcy claims from creditors. Some contracts contain a clause providing the creditor’s right to reclaim the debt ahead of schedule in the event of a change of ownership and management. Therefore, it is extremely important to agree the amendment of this clause with these counterparties.
- It is also necessary to check whether the seller’s guarantees for the debts of the target company are valid and, if so, it may be rational to try to save them.
- The reality of assets, including the volume of receivables, their “freshness”, and the reality of collection.
- Policy, regulations, and systematic claims work of lawyers.
- Tax risks.
- Separately, the relevance of public and administrative permits and environmental risks (if applicable) should be checked.
- The Seller’s portfolio of previous market behaviour in similar situations.
- Pure bankruptcy risks:
a. Does the target company have a plan for overcoming the crisis?
b. Have the counterparties been warned about the pre-bankruptcy state of the company?
c. Have any conclusions been made with the participation of independent lawyers on the bona fide behaviour of the seller and the target company management?
d. How much corporate and accounting documents are transferred?
Second, establish the liability of the seller
It is important to establish warranties and representations of the seller as well as a significant liability for their violation. Also, it is necessary to establish a deferred payment for the transaction, which is paid when certain business indicators are achieved (debt level, operating profitability, etc).
In the event of bankruptcy in Russia, the corporate veil would be relatively easily pierced and the persons controlling the debtor during the period when the company was unable to meet its obligations may be brought to vicarious liability in the amount of a “hole” in the balance sheet.
Roman MakarovGGI member firm
Nektorov, Saveliev & Partners
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Nektorov, Saveliev & Partners is a law firm established in 2006 in Moscow, Russia, and focuses on providing comprehensive legal solutions to corporate and private clients under Russian and English law. Their main practice areas are tax, corporate and M&A, arbitration and litigation, banking and finance, investments, public-private partnership, and real estate. They provide legal support to clients in Russia, CIS countries (Belarus, Kazakhstan, Ukraine), and worldwide.
Roman Makarov specialises in dispute settlement and complex bankruptcy cases. Roman develops strategies and tactics of legal defence in court.
Published: Litigation & Dispute Resolution Newsletter, No. 13, Autumn 20 l Photo: bbsferrari - stock.adobe.com