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Bankruptcy: what the lawmaker and the higher court instances do no mention

On February 11, the Government of Russia submitted to the State Duma a draft law making pointed amendments to the Law “On bankruptcy”, and the Board of the Higher Court of Arbitration of Russia discussed drafts of resolutions regarding payments to trustees in bankruptcy on February 14. Those amendments could spark an avid discussion, but are rather specific. However, last year’s business and court practice revealed some more serious problems, which may make life harder for the companies in bankruptcy and their creditors this year.

A series of celebrated bankruptcies marked the last year, with court proceedings having started way back during the crisis of 2008-2009. Those include “very large” ones, the creditors demanding 3 to 33 billion roubles in each case. Those are the bankruptcies of a number of banks and ventures: AMT-Bank, Izh-Auto, Pavlovskgranit, Meget Plant of metallic constructions. Also, bankruptcies of tourist operators, like Lanta-Tour Voyage and Capital Tour Company, were of great resonance.

Legislation gaps

That was precisely the moment, when bankruptcy legislation gaps became evident, which would affect the court disputes come 2013. Lawyers as well as businessmen have already had to deal with them in practice.
First, the entities affiliated with the debtor frequently receive the majority of the votes in the list of the creditors’ claims. The list contains indications of the amount of the claims by the debtor’s creditors, which are to be settled within the bankruptcy case.

Claims by affiliated entities may be created artificially. For example, the debtor may execute a loan agreement with such entity, while knowingly intending to default, and the affiliated entity thus gains a place on the claim list. It does not seem right that “relative” companies, whose actions or inaction could well have caused the debtor’s bankruptcy, sometimes receive the bigger part of the company’s assets. But the current legislation does not ban the claims by affiliated entities from the list, and the courts frequently refer to that and take the conservative position, which is most convenient to them. This problem may only be resolved through legislation.

Second, it is difficult to take off the list of the creditors’ claims the previously included demands, even if the latter are illegal for any reason. Such elimination is at times necessary because a court has put the demand on the list without having studied the situation thoroughly. Some bankruptcy cases are made up of dozens and hundreds of tomes, so that some faults by the courts (taking into account their systematic overload) are fully understandable.

The legislation is also ambiguous on the issue of the order of filing and considering those requests. Motivation of the court acts, which refuse to take the claims off the list, tends to vary. One of the arguments – the court act, which puts the claim on the list – was left unchanged by the higher instance courts. Another common thesis is that a bankruptcy creditor is essentially unable to request that the court should strike another creditor from the list of claims. This assertion is usually accompanied by the reference to the possibility to review an existing court act for new or newly discovered circumstances.

It is a good thing that courts of arbitration, including the Higher Court of Arbitration (HCA) of Russia, get involved. The courts drew conclusions in certain court acts of 2011-2012 that bankruptcy creditors were in fact entitled to request a court of arbitration to eliminate another creditor from the list of claims. However, the practice favorable to the creditors has appeared only recently, and has not yet been adopted by the courts of arbitration of all districts.

Third, the problems of delimitation of competencies of courts of arbitration and common law courts on bankruptcy-related disputes arise in practice. New proceedings procrastinate and complicate judicial processes even more, and the latter are cumbersome enough already.

Some debatable matters

The debtor’s management frequently and fraudulently non-performs under the orders of the trustee to submit copies of the documents relating to the company’s activities. Said actions by the debtor’s management are punishable with the sanctions fixed in part 1 of Article 14.13 of the AOCRF (“Fraudulent actions during bankruptcy”). A justice of peace should consider the cases of such administrative offences from the formal point of view, but the problem is that justices of peace are rarely competent to decide on bankruptcy-related matters. It would be logical if such cases were considered by the same judge of arbitration, who is already considering the bankruptcy case, as he is already aware of the circumstances, and all materials are already at the bankruptcy case file. The need for a more clear legislative regulation of the procedure of contesting the results of the auction of sale of the debtor’s property is similarly motivated. The current legislation on the matter only seems unambiguous enough.

In practice, there are cases, when statements of claim to contest the auctions are filed with the common law courts, and such claims are upheld by those courts. Maybe time has come to adopt a non-ambiguous legislative norm or, which is more correct, a respective explanation by the Board of the HCA of Russia.

For more details see here.

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