Void or voidable?
Abuse of law and transactions with promissory notes
Order of priority of public interests when bankruptcy estate is constituted
Rb160 million thrown to the wind?
Inheriting equity interests in insolvent debtor's issued capital
Order of priority when offsetting claims under supervision procedure
Court-appointed administrator's second application for fees and expenses
Payment obligations in form of indexation not monetary obligations
Classifying obligations secured by pledge of property and guarantee

The Supreme Arbitrazh Court has previously issued clarifications on the timing aspects of the application of the Bankruptcy Law.(1) However, certain issues continue to arise in practice.

Void or voidable?

On May 16 2011 the court referred to the presidium a case(2) involving a claim brought by an individual entrepreneur's receiver against a limited liability company. The receiver sought the recovery of property that was unlawfully held by the company. The first and appellate courts had both declared void a transaction by the entrepreneur, against whom receivership proceedings had been commenced. However, the Court of Cassation held that the transaction was merely voidable.

The first and second instance courts had relied on Article 206(1) of the Bankruptcy Law (as it stood on December 30 2008, when the disputed contract was concluded). However, the Court of Cassation held that they had been incorrect to classify a gift transaction as void. The court found that when the receiver issued the claim, there was no specific basis (as stipulated by Article 206 of the law) for declaring void a gift contract that was dated March 5 2008. Rather, general civil law provisions and Chapter III(1) of the law applied, and under these provisions the transaction was voidable.

The Supreme Arbitrazh Court judges considered the Court of Cassation's conclusions to be unfounded. Under Article 206(1) of the law (as it read on June 5 2009), an individual's transactions are void if they involve his or her property being disposed of or otherwise transferred to interested parties up to one year before proceedings are commenced in a bankruptcy case before an arbitrazh (ie, commercial) court. However, the text of the article differs from that of Law 73-FZ - it stipulates that an individual's transactions may be declared invalid on grounds stipulated in the law and the Civil Code.

Clause 1 of Information Letter 137/2010 clarifies the application of Law 73-FZ. In particular, it indicates that the criteria for assessing the validity of a transaction are determined in accordance with the law in force on the date on which the transaction was completed. The Court of Cassation had erred in indicating that the new provisions of Article 206 of the Bankruptcy Law should be applied to assess the validity of a contract that was concluded before Law 73-FZ came into force.

When assessing the validity of a debtor's transactions (where the debtor is an individual entrepreneur), it is advisable not to refer to the provisions of the Bankruptcy Law that were in force on the date on which the bankruptcy case was commenced or the relevant claim was filed with the court. Rather, the appropriate provisions are those that were in force when the transaction in question was completed.

Abuse of law and transactions with promissory notes

Article 10 of the Civil Code on the abuse of law is increasingly applied in bankruptcy and insolvency cases. In a recent case(3) the Supreme Arbitrazh Court applied it in respect of a debtor and a promissory note. Significantly, the court considered that the holder of a promissory note, which had acquired it under an assignment agreement, was consciously acting to the debtor's detriment.

The court confirmed that in refusing to allow the promissory note claim to be included in the creditors' register, the first instance and appeal courts had correctly relied on the nature of the transactions whereby the promissory note had been issued and the rights therein had been assigned. The transactions were for no consideration and had been completed at a time when the company was on the verge of bankruptcy, with one creditor having declared its intention to commence proceedings against the debtor. On this basis the court concluded that the main purposes of a party bringing a claim based on transactions of this nature were to:

  • engineer the unjustified receipt of funds that were due to other creditors; and
  • seek to exercise material influence over the decisions made by the creditors' meeting.

Thus, when promissory notes are issued by a party that shows signs of impending insolvency or bankruptcy, the parties to the transaction should not rely solely on the abstract nature of the promissory note obligation. The risk of such a transaction increases significantly if it is completed when bankruptcy is imminent. It is prudent to consider the parties being affiliated, including the issuer, endorsers and members of their management bodies, as this may have a bearing on the absence of a principal promissory note obligation.

Order of priority of public interests when bankruptcy estate is constituted

Conflicts of rules often arise in bankruptcy procedures. In a recent case(4) the judges were required to assess the way in which Articles 141(1) and 132(4) of the Bankruptcy Law interact.

In the context of the insolvency of a municipal unitary enterprise, a decision was taken at the general creditors' meeting to substitute the enterprise's assets and create two open joint stock companies. The enterprise's property that was to be used for the substitution included municipally owned assets of social importance.

A Supreme Arbitrazh Court panel, which referred the case to the presidium, disagreed with the conclusions of the first instance and appeal court judges that the law does not prohibit the substitution of a debtor's assets in the case of socially important assets. Under Article 141(1) of the law, a decision to substitute a debtor's assets may be taken on the basis of a decision of the general creditors' meeting in the course of receivership proceedings. Article 126(2) indicates that one of the effects of initiating such proceedings is to terminate the authority of a unitary enterprise debtor which owns property. On this basis, the law governing receivership proceedings ensures the priority of bankruptcy creditors in resolving the issue of constituting the debtor's bankruptcy estate, irrespective of the property owner's opinion. In this respect, such proceedings differ from the external management procedure (in which a property owner is granted powers stipulated in Article 94(3)).

The law protects public interests, which have priority over creditors' interests. Thus, under Article 132(4) the sale of socially important assets should be carried out by tender, as stipulated in Article 110. The compulsory terms of a tender for the sale of such items require buyers to ensure that the items are constituted and used according to their designated purpose. This implies that the provisions of Article 132(4) of the law take priority, which will ensure that it is impossible to substitute a debtor's socially important assets in receivership proceedings.

Thus, parties that are involved in economic activity and intend to acquire shares in organisations formed by debtors under an asset substitution procedure should take precautions before completing the transaction. Among other things, they should verify whether the company property to be transferred by way of payment for the shares includes socially important assets.

Rb160 million thrown to the wind?

In a recent case(5) the Supreme Arbitrazh Court upheld earlier decisions that transactions by members of a company involving the sale of their equity shares in the issued capital of a limited liability company were void, as such transactions had involved an abuse of law.

Two individuals who held 100% of the equity interests in the company's issued capital sold the interests for Rb160 million to an organisation two months before bankruptcy proceedings were commenced in respect of the organisation.

The key evidence of abuse of law on the part of the members was that an expert opinion had been prepared which valued the company's issued capital at zero. From an evidentiary perspective, the presumption that a company's members have knowledge of its financial situation was highly significant.

Inheriting equity interests in insolvent debtor's issued capital

The position of the Constitutional Court in Ruling 75-O-O of January 27 2011 was the basis for the Supreme Arbitrazh Court's recent cancellation of a ruling in which, under Article 148(1)(4) of the Code of Administrative Offences, it had refused to hear an application from persons that had inherited equity interests from the members of a debtor company and were seeking to recover the value of such interests.(6)

The court upheld the position that a debtor's members (or their successors) have no special legal capacity in insolvency or bankruptcy cases and are not counted among the creditors in an insolvency. However, the law allows them to claim for the remainder of the liquidated company's property after settlements with other creditors.

Article 63(1)(4) of the law prohibits a debtor entity's member or founder from entering a claim to carve out an equity interest or share in a debtor's property as part of a process whereby:

  • the party in question ceases to be a member or founder;
  • the debtor buys back equity interests or shares which had been issued in the debtor; or
  • the debtor pays the actual value of the equity interests or shares.

However, this does not prevent members (or their successors) from asking the court to determine the actual value of an equity interest, so as to resolve issues relating to the receipt of part of the property remaining after settlements with creditors (or to the value of such property).

Order of priority when offsetting claims under supervision procedure

The issue often arises of whether it is correct to apply the provisions of the law which govern the order of priority for due payments when paying obligations by means of set-off under the supervision procedure. At first glance, there appears to be no rule that allows the order of priority to be ignored for such payments when implementing a set-off in supervision; this appears to indicate that set-off must follow the order of priority. However, three Supreme Arbitrazh Court judges took the opposite view in a recent case.(7)

While a limited liability company was subject to a supervision procedure, the tax inspectorate whose decisions were being challenged offset an amount of value-added tax (VAT) which should have been refunded according to the procedure under Article 176 of the Tax Code; instead, it was used to pay off due VAT and social tax debt.

The lower courts, guided by Article 5 of the Bankruptcy Law and Clause 17 of the Supreme Arbitrazh Court's Resolution 25/2006, upheld the inspectorate's decision to offset the disputed amount of refundable VAT to make mandatory payments in relation to payments that were due.

In declining to transfer the case to the presidium, the judges indicated that Article 63 of the Bankruptcy Law, which specifies the consequences of the supervision procedure, does not prohibit set-off within such a procedure in order to terminate a current claim; nor does it stipulate that such procedure must follow the order of priority for satisfying such claims, as defined in Article 134(3) of the law (as it stood until December 31 2008).

When planning out-of-pocket expenses under a supervision procedure, debtors and provisional administrators should bear in mind that they can use amounts which are due to be refunded from the state budget to make mandatory payments arising under that procedure without having to comply with the order of priority established for due payments.

Court-appointed administrator's second application for fees and expenses

When a bankruptcy case is terminated owing to the repayment of amounts payable, there is often insufficient property remaining to pay the court-appointed administrator's fee or the costs of the bankruptcy proceedings. In a recent case(8) the Supreme Arbitrazh Court concluded that when proceedings are terminated, if the court-appointed administrator's fee and court costs were recovered from a debtor, the administrator may not return to court with a fresh application to recover the costs of the case from the claimant, even if the debtor has no property.

Payment obligations in the form of indexation not monetary obligations

When verifying whether claims are justified, difficulties often arise in the classification of a debtor's obligations to the claimant - specifically in determining whether they meet the criteria for a monetary obligation.

The Supreme Arbitrazh Court recently assessed another contentious situation which is connected to the classification of a debtor's obligations.(9)

Under Article 2 of the law, a 'monetary obligation' is defined as a debtor's obligation to pay a creditor a specified sum under a civil law transaction or on another basis as established by the Civil Code. In confirming that the debtor has monetary obligations to the claimant, the latter supplied a ruling from a court which had made a monetary award against the debtor and in the claimant's favour in respect of the indexation of amounts previously imposed by the court. Obligations of this type are not 'monetary' within the meaning of Article 2 of the law.

Therefore, claimants and creditors are advised to consider whether obligations meet the criteria for monetary obligations.

Classifying obligations secured by pledge of property and guarantee

On July 23 2009 the plenum of the Supreme Arbitrazh Court passed a resolution on certain issues associated with upholding a pledgee's claims when the latter is bankrupt. However, the issues that the resolution addresses have continued to cause problems. In a recent case(10) the court assessed the relationship between the claims of a party that was also a guarantor of the bankrupt pledgor.

In the case of loan agreements between a bank and a limited liability company, it is established law that where the performance of obligations is secured by a pledge and a guarantee under which the debtor has assumed the obligation to guarantee the borrower's performance, such agreements are joint and several obligations.

The bank sought to have its claims included in the register of claims, maintaining that they were repayable on two grounds, as they were secured by both a pledge and a guarantee.

The court ruled that where the performance of obligations is secured by a guarantee and a pledge, claims against the debtor as guarantor are accounted for in the register as third-tier unsecured creditors' claims, with amounts deducted which are included in the register as being secured by pledge, and may subsequently be adjusted, depending on the actual sale price of the pledged property.

Creditors that come forward in respect of a bankrupt entity that has given a pledge and a guarantee would be well advised - if the value of the pledged property is insufficient to terminate the obligations secured by the pledge - to submit their claims simultaneously on two grounds and to make a timely adjustment to the amount of the obligations secured by the guarantee. This may ensure that they can participate in the general creditors' assembly during the insolvency proceedings.

For further information on this topic please contact Denis Bykov or Yulia Litovtseva at Pepeliaev Group by telephone (+7 495 967 0007), fax (+7 495 967 0008) or email ([email protected], or [email protected]).


(1) See the Information Letter on Certain Issues Associated with the Transitional Provisions of Federal Law on Amending Specific Legislative Acts (137, April 27 2010).

(2) Ruling VAS-3990/11.

(3) Ruling VAS-6184/11, May 12 2011.

(4) Ruling VAS-4104/11, May 21 2011.

(5) Ruling VAS-5331/11, May 11 2011.

(6) Ruling VAS-5993/11, May 10 2011.

(7) Ruling VAS-4985/11, May 4 2011.

(8) Ruling VAS-5608/11, May 4 2011.

(9) Ruling VAS-5497/11, May 4 2011.

(10) Ruling VAS-5341/11, May 4 2011.