Bankruptcy of the debtor and the creditors’ risks

Artem Kukin, Partner of the Law Firm "YUST",

The legal mechanism of recovery of debts (under loans, credits etc.) is a topical problem of protection of economic interests of the business. Bankruptcies of companies, including large ventures, have become frequent lately, and no downward trend is yet apparent. Some debts are recovered with great difficulties due to legal gaps. Let us consider in more detail some problems the creditors get, when their debtor goes bankrupt.

1. One of the most common risks associated with bankruptcy is the withdrawal of assets by the debtor, who “senses” his imminent bankruptcy. Such transactions may be executed urgently, in haste, even when the bankruptcy proceedings have already started. The situation is further aggravated by the fact that the courts are extremely reluctant to apply security measures in the form of prohibition for the debtor’s management to execute any transactions without the trustee’s approval. Therefore, one should look for the possibility to recover one’s funds from the sureties, backers, if any, up to their bankruptcy, as the legal regulation allows it. Also, the arsenal of claims to rule invalid the debtor’s dishonest transactions.

2. The issue of abuses, which occur in the bankruptcy cases and which are performed by the debtor’s affiliates, whose artificially created claims towards the debtor have been included in the list of the creditors’ claims (hereinafter – “the Register”), has been raised many times in theory and in practice. Current bankruptcy legislation contains no prohibition for the persons, who are members of the same group as the debtor, to seek the inclusion of their claims into the Register and – often – to obtain the majority of the votes. Such claims may be artificially created: for example, they may arise on the basis of execution by the debtor of loan agreements with his affiliate, and notorious non-payment of borrowed funds under that agreement will enable the affiliate to be included into the Register. The affiliated creditors, should they form a majority, may execute an amicable agreement, which would be as lenient as possible for the debtor. Or, inversely, they may request the court to initiate bankruptcy proceedings despite the trustee’s conclusion of the possibility to restore the debtor’s solvency. <…>

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