Russia: Corona Crisis – Legal Issues
The most important on-going legal issues in Russia
The confirmed number of persons in Russia infected with SARS-CoV-2/Covid-19 (Corona) exceeds 6,000. Many people and enterprises are affected by non-working days, lock down measures and the resulting direct and indirect impact on work, business and finances. This summary highlights some recent legal issues in connection with the Corona crisis in Russia.
Quarantine and lock down measures
The period until 30 April 2020 (incl.) has been declared as non-working days by Decree of the Russian President. This measure is being accompanied by far-reaching quarantine measures in many regions.
According to the President’s Decree of 2 April 2020 only certain companies who are regarded as essential for social purposes or to fight the corona crisis are still permitted to operate. A number of specific industries are exempt by the Decree from the general standstill. In addition, the regional governments are authorized to determine which companies are deemed to be essential and can continue to operate. Companies that regard themselves as essential and would like to keep operating are advised to apply to their regional administrations. For German businesses the German-Russian Chamber of Commerce (AHK) is supporting such applications on the federal level (https://russland.ahk.de/corona-krise/q-a). However, the current understanding is that the decree does not restrict remote work while such work is sparsely regulated at the moment.
In Moscow, people are generally forced to stay at home and leave their home only for essential tasks, in particular food purchases. A distance of 1.5m has to be kept at all times between people, save for a family living together and when using a taxi. Non-essential businesses, shopping centers, public parks, cultural institutions, restaurants, cinemas are closed. Similar measures are being applied in many regions.
The measures related to quarantine and lock down have various effects on employee-related aspects, such as home office work, access to office, payment of salary, reduction of salary or working hours.
According to the President’s Decree and the clarifications by the Ministry of Labour and Social Protection, the full salary must be paid during the non-working days. Accordingly, provisions of the Russian Labour Code on idle time (with 1/3 salary reduction) appear not to be applicable. In the past, one-sided payment reductions for economic reasons by the employer have not been recognized by the court; in addition, reductions for other reasons would require a two-months’ notice. Consequently the legally most appropriate way to implement temporary salary reductions is by way of agreements with the respective employees, even though some employees may not agree or may try to challenge the agree-ment later on. On the other hand, the non-working days are not public holidays, meaning that no double salary has to be paid for those employees that are still working.
Companies in Moscow that are still permitted to operate are obliged to define which employees are to be transferred to remote work, which employees are to continue work in the ordinary course and which employees are to be released from work with full payment of the salary. The companies shall also submit this data to the administration in the established form. Many companies are now busy implementing home office regimes, adopting internal regulations and possibly concluding amendment agreements to existing employment agreements. The temporary transfer to remote work is not explicitly regulated by the Russian Labour Code. Given this, in response to the new work environment, it is widely discussed in mass media that the Russian State Duma will introduce changes to the Russian Labour Code soon that will allow a mix of office and remote work.
Access to the company’s premises at least for some employees is vital to many companies. The clarifications by the Ministry of Labour and Social Protection can be interpreted as permitting to have someone come to the office to ensure the safety of the office. Arguably this can be further interpreted more widely, including not only those who are responsible for electricity and fire safety, but the IT manager who should support operations of a server for the purpose of remote work. In practice companies in Moscow are apparently issuing specific permits (propusk) for certain of their employees who still have to come to the office; however, at least in certain regions the issuance by such permits is only permitted by authorities, not by the concerned companies themselves.
In Moscow companies are obliged to arrange for measurement of the body temperature of those employees that come to the office. The results in the collection of personal data, with consequences under the data privacy laws at least with respect to the storage of such data limited in time to 24 hours.
Rent payments and other contractual obligations, force majeure
The corona crisis and related lock down measures have a significant impact on business relationships. Parties may not be able to fulfil their contractual obligations, use their premises, conduct sales or pay their loans.
The Moscow mayor, the Federal Antimonopoly Service and other authorities have characterized the corona crisis as force majeure. While these statement do not bind courts who have to decide on a case-by-case basis, they make it more likely that courts will increasingly regard corona-related circumstances as acts of force majeure or as significant changes of circum-stances underlying a contract.
Many contracts contain specific provisions on circumstances of force majeure. These provisions should be carefully analysed, in particular with respect to notice periods that have to be obeyed.
The Russian Civil Code contains concepts of force majeure and of significant changes of circumstances underlying a contract, permitting the release from liability for not fulfilling a contractual obligation, or the adjustment or release from the contractual obligation as such, respectively. When assessing whether or not a party should benefit from these concepts, the courts will in particular analyse whether the party was not able to fulfil its obligation as a result of the corona crisis, or just as a result of indirect factors such as changes in the RUB/EUR exchange rate. In the past, exchange rate fluctuations were not recognised as significant change of circumstances. The concepts described above relate only to unforeseeable changes in circumstances, i.e. parties entering into contracts now in full knowledge of the corona crisis could not refer to force majeure later on for that reason.
Specific regulations apply to the lease of business premises. Beside the general legal concept of “significant change of circumstances” under Art. 451 Russian Civil Code, Art. 614(4) Russian Civil Code possibly allows the tenant to claim a reduction of the rent payments in case of a significant deterioration of the terms of the use for the reasons not attributable to the tenant. Moreover, a law has been adopted allowing commercial tenants (including, but not only, those in the retail sector) to defer rental payments to the landlords in the current circumstances.
Like in many other countries, Russian authorities have adopted anti-crisis measures to support companies affected by reduced business activity and forced restrictions implemented to restrict the spread of COVID-19.
The first package of tax relief measures in Russia was adopted on 17 March 2020 by the Order of the Chairman of the Government of the Russian Federation No. 2182p-P13, which inter alia provides for a moratorium on tax field audits, allows for a deferral of tax and social security payments for companies engaged in certain affected industries (aviation transport, sport, culture, tourism), small and medium-sized businesses, and suspension of new bankruptcy proceedings at the initiative of the Federal Tax Service.
A further package of relief measures was adopted by Law No. 102-FZ that grants the Russian Government rights to defer tax payments and reporting deadlines, to determine grounds for exempting from tax penalties. This law also provides for a reduction of social security contributions for small and medium-sized businesses for salaries exceeding the minimum monthly wage (15%).
Further to Law No. 102-FZ, the Russian Government adopted Resolution No. 409 of 2 April 2020 which sets out the specific dates for extension of the tax payment/ reporting terms and the freeze on new audits.
M&A transactions and corporate law
On-going M&A transactions as well as general corporate housekeeping and other measures under corporate law are being affected by the corona crisis as well.
The need for liquidity can require a number of measures and result in the need for additional transactions, such as the sale of assets, the granting of additional security, etc. In on-going transactions, particular attention is to be paid to definitions of material adverse effect or force majeure as well as to disclosure with respect to representations and warranties. A number of technical issues may render the administrative handling of a transaction more difficult, such as the limited availability of notaries, adoption of corporate resolutions, obtaining of notarized translations, likely extension of review periods by authorities such as the Federal Antimonopoly Service, etc.
As a general rule, the deadline for holding the annual general shareholders’ meeting of a Russian JSC expires on 30 June and for LLCs on 30 April of a respective calendar year. The deadline for both JSCs and LLCs has been extended until 30 September 2020 this year, and additionally there is now an option to conduct the annual meeting of a JSC by absentee voting. The respective draft law still must be signed by the Russian President to enter into force.
A list of notaries on duty on Moscow can be found here: http://www.mgnp.info/dezhurnye-notarialnye-kontory/.
Availability of authorities, regulatory issues
The Russian Federal Antimonopoly Service (FAS) is largely operating as usual. However, planned on-site investigations are being suspended, only in certain cases dawn raids will be conducted. Hearings may be postponed or conducted remotely. Deadlines for the review of merger clearances have not been formally extended yet, while a longer than usual process is to be expected. In terms of market supervision FAS is in particular focusing on the review of prices for essential groceries, face masks and mobile phone tariffs.
Rospatent has established temporary rules for handling incoming and future correspondence and other communication during the obligatory self-isolation period. The relevant information is published on the official websites of Rospatent and the Federal Institute for Industrial Property. In particular, acceptance of paper-based correspondence is suspended, all hearings before the Chamber for Patent Disputes will only be held remotely by video conference, in-person consultations have been discontinued, with consultations to be done by telephone or email, and educational programmes have been converted into webinars. Applications can be filed and correspondence submitted electronically and by post.
Multifunctional administrative centers in Moscow have largely ceased to operate. Operating administrative centers are listed on official web-site and being open mainly only for the registration of acts of civil status (births or deaths). Other services can be provided only in electronic form, if possible. As they have also been conducting entries to the real estate register, conducting real estate transactions has become more cumbersome. The Federal Service for State Registration, Cadastre and Cartography (Rosreestr) still operates but informed that they do not accept documents in person, only by means of post office deliveries or in electronic form, and a part of employees is transferred to remote work.
Similarly, the Moscow tax office No. 46 which is responsible for the registration of Russian subsidiaries of foreign companies does not receive applications in person (although applications can be dropped in a post box) while it continues to provide services via nalog.ru or gosuslugi.ru.
It is expected that the Ministry of Finance will exempt from fines businesses that, on the account of COVID-19, violated currency control regulations (e.g. did not receive goods purchased abroad in due time, did not obtain repayment of advance payments for undelivered goods or did not receive the payment in time for the exported goods). The relevant Ministry of Finance letter was published on the ministerial website. At the same time, the letter stresses that each case will be reviewed individually.
The Association of European Businesses in Moscow has requested that, inter alia, the introduction of the serialization (marking) requirement for pharmaceutical products be postponed. It remains to be seen if this will be taken into account by the authorities.
Insolvency, moratoriums, financing aspects
Measures have been, or are being, implemented to grant increased protection from insolvency or mandatory liquidation.
In case an LLC’s or JSC’s net assets are lower than the amount of its paid share capital based on the results of the 2020 financial year, this fact will not entail statutory decrease of the share capital or the company’s mandatory liquidation.
Companies operating in the spheres mostly affected by the corona crisis are also granted additional protection from insolvency. According to amendments to Federal Law No. 127-FZ On Insolvency dated 26 October 2002 the Russian Federation Government is empowered to introduce a moratorium on initiation of insolvency proceedings by creditors in specific situations to maintain economic stability. The moratorium due to the corona crisis was enacted for six months by the Russian Federation Government Order as of 4 April 2020. It covers companies mostly affected by the corona crisis as determined by the Government Commission and other separately listed companies (systemically important and strategic companies). The Federal Tax Service has already developed a service for identification of companies subject to the moratorium by means of a simple check by INN or OGRN (https://service.nalog.ru/covid/index.html).
The moratorium measures include a restriction to initiate insolvency proceedings by creditors, exemption of the obligation of a debtor to initiate insolvency, restriction to levy execution on pledged property, suspension of enforcement proceedings (arrests are not withdrawn), restriction of set-offs of pecuniary obligations, restriction of payments of dividends and distribution of profits.
In addition, within the term of moratorium creditor meetings, creditor committee meetings, construction participants, employees and former employees meetings initiated by an insolvency administrator and related to all companies under insolvency proceedings (not only listed by the Russian Government) shall be held in a form of absentee voting.
Additional protection measures were introduced for small and medium sized entities with respect to their debt coverage. According to Federal Law No. 106-FZ dated 4 April 2020 individuals, sole entrepreneurs and small and medium sized entities operating in areas determined by the Russian Government are entitled to request for temporary changes to conditions of loan agreements (“special regime”). The special regime includes the possibility to apply for deferral of loan repayments and a decrease of payment amounts within a specified period.