Seizure of debtor's property in criminal cases and implications of receivership
Invalidity of debtor's transactions
Presumption of knowledge
Choice of another self-regulating organisation

Seizure of debtor's property in criminal cases and implications of receivership

Article 126 of the Law on Insolvency is widely applied in the context of the release of a debtor's previously seized property and other restrictions on a debtor's right to dispose of property. However, the question recently arose as to whether this provision applies when property is seized and restrictions are imposed within the scope of criminal proceedings.(1)

On April 11 2011 the Supreme Arbitrazh Court handed down a ruling in reference to Case A46-22627/2009 from the Omsk Region Arbitrazh Court, reviewing under the supervisory procedure a resolution of September 10 2010 from the Federal Arbitrazh Court for the West Siberian Circuit.

A company which had bought a debtor's property at auction petitioned an arbitrazh (ie, commercial) court, asking it to declare unlawful the failure of the Administration of the Federal Registration Service to reflect in the entry in the State Property Register that the seizure of certain property had been cancelled. The petition also sought to compel the service to cure the breach of right within a month by cancelling the registrations and registering the transfer of title in such property to the company. However, the barriers to state registration of such transfer included the confiscations and prohibitions imposed in respect of the debtor's property under criminal proceedings.

The difficulty in this case arose from a conflict between two legislative provisions. Under Article 126 of the law, as soon as the arbitrazh court decided to declare the debtor bankrupt and set the receivership in motion, all prior seizures of the debtor's property were lifted and no further property could be seized. However, on the basis of Article 115(9) of the Code of Criminal Procedure, a seizure of property may be cancelled only on the basis of a resolution or ruling by a person or authority with control over a criminal case, and then only if such a measure is no longer necessary.

Moreover, the Supreme Arbitrazh Court had previously ruled(2) unequivocally that the Law on Insolvency does not govern relations connected with criminal proceedings in Russia. This meant that the issue in question could not be resolved in the context of civil proceedings.

The problem can be considered from two legal perspectives.

The approach endorsed by the appeal court in this case was that once an arbitrazh court has decided to recognise a debtor as bankrupt, all confiscations and restrictions on the disposal of the debtor's property, including those applied in criminal proceedings, are automatically disapplied. Seizures of property and restrictions may be reimposed only in an arbitrazh court bankruptcy case. Accordingly, the court that hears the bankruptcy case examines the grounds for the cancellations and seizures that have been imposed; if this is impossible, another court will do so, examining an application to cancel the entry of the registration.

The alternative approach, favoured by the cassation court, is based on the Constitutional Court's position in Clause 2.2 of Resolution 13-P of June 29 2004. This resolution stated that the cancellation of seizures of property that are undertaken as compulsory procedural measures is permissible only under the procedure set out in criminal procedural legislation.

It is too early to say which of these positions will be upheld by the presidium of the Supreme Arbitrazh Court. However, the ruling of April 11 2011 implies that when property is seized in a criminal case for the benefit of persons whose claims in a bankruptcy case are included in the register of creditors, it is by no means clear that criminal procedural law should take priority.

Parties involved in bankruptcy cases and other persons with a legitimate interest whose rights are infringed by a seizure of property (or by the imposition of other restrictions in the course of criminal proceedings) should determine:

  • whether the aggrieved party in the criminal case (for whose benefit such restrictions were imposed) is a creditor of the debtor; and
  • what the relationship is between the creditor's claims established in the bankruptcy case and the rights whose breach has led to the creditor being treated as an aggrieved party.

If the presidium of the Supreme Arbitrazh Court upholds the appeal court's position, this information will give parties a greater chance of success when applying to an arbitrazh court to prevent the seizure of a debtor's property (or the imposition of other restrictions) in the course of a criminal trial.

Invalidity of debtor's transactions

Procedural rules continue to cause difficulties for parties seeking to have transactions declared invalid for reasons specified in the law. One of the issues analysed in a recent Supreme Arbitrazh Court ruling(3) concerned the appeal and cassation courts' actions in respect of claims for a debtor's transactions to be invalidated, where a receiver has submitted such claims outside the scope of a bankruptcy case, but a first instance court has mistakenly considered them according to the rules applicable to statement of claim proceedings.

In cancelling the first instance court's decision and declining to consider the statement of claim, the appeal court had relied on Article 148(4)(1) of the Arbitrazh Procedure Code and the recommendations in Letter 137, issued by the presidium of the Supreme Arbitrazh Court on April 27 2010. The appeal court had found that the first instance court had wrongly considered the claim under the statement of claim procedure when there was no justification for examining it outside the scope of a bankruptcy case.

Challenging the appeal court's resolution of December 2 2010 and the cassation court's ruling that had upheld it on March 8 2011, the receiver alleged a breach of Clause 17 of Resolution 63 of the Supreme Arbitrazh Court dated December 23 2010. The receiver argued that the appeal court should not have declined to hear the claim, but should have referred it for consideration by the court that was handling the bankruptcy case. However, as the Supreme Arbitrazh Court clarified in its ruling (wherein it declined to refer the case to the presidium), referral for consideration by another arbitrazh court of the same level may occur if:

  • an application is made to another court; and
  • once that court has heard the case, it is clear that it was accepted for prosecution in breach of the rules of jurisdiction in Article 39(3)(2) of the Arbitrazh Procedure Code - in the case in question, the appeal court declined to hear the case on the basis of Article 148(4)(1) of the code.

Thus, only a first instance court may refer a case on the invalidity of a transaction to be heard by another arbitrazh court within the scope of a case concerning bankruptcy. If appeal and cassation courts establish that the lower court examined a claim concerning the invalidity of a debtor's transaction in error, under the procedure for statement of claim proceedings and without grounds to hear it outside the scope of a bankruptcy case, the appeal or cassation court must terminate proceedings in the case.

Presumption of knowledge

On April 14 2011 the Supreme Arbitrazh Court referred to the presidium a case which may result in a crucial legal position of three higher courts being upheld.(4) The case relates to a challenge to a debtor's transactions.

According to the position taken by the plenum of the Supreme Arbitrazh Court in Clause 19 of Resolution 32/2009,(5) if the relevant party did not know (and should not have known) when the relevant transaction was completed that the debtor was insolvent, the transaction may not be invalidated.

Until now, the courts and those involved in the liquidation process have faced difficulties in determining how to prove knowledge of the debtor's insolvency on the part of its contracting party, and where the burden of proof should lie. The Supreme Arbitrazh Court's ruling reflects a significant, modern approach. According to the ruling, since an organisation on the verge of bankruptcy always experiences difficulties in performing its obligations to its clients and partners, it is presumed that such clients and partners cannot fail to be aware of these difficulties. Accordingly, it is also assumed that an interested party has knowledge of the onset of insolvency. This puts the burden on the debtor's clients and counterparties to provide proof to the contrary.

When an application is made to an arbitrazh court to challenge a transaction between a debtor and its counterparty, it is prudent to rely - in addition to evidence - on the presumption of the latter's knowledge that there were warning signs of insolvency.

Choice of another self-regulating organisation

In many cases the suspension of a court-appointed administrator results in a change of self-regulating organisation. On a number of occasions the Supreme Arbitrazh Court has considered that creditors' views take precedence in the event of such a change.

A recent ruling(6) addressed the interpretation of Article 45(5) of the Bankruptcy Law in the context of the decision to select another court-appointed administrator or another self-regulating organisation where the court-appointed administrator is suspended or released.

As the highest court clarified, the law does not prohibit a creditors' meeting from passing a resolution to select a nominee as court-appointed administrator or self-regulated organisation before the court-appointed administrator has been suspended or released. To this end, where a creditors' meeting has taken the appropriate decision, a court may approve a new receiver during a hearing in which it has ruled on the suspension or release of a court-appointed administrator.

Thus, if a meeting of creditors is called, a person with an interest in suspending a court-appointed administrator should submit for the agenda the issue of selecting a new court-appointed administrator or self-regulating organisation.

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


(1) Ruling VAS-17219/10.

(2) Ruling VAS-11637/10 in Case A12-24342/2009.

(3) VAS-4781/11, April 12 2011

(4) Ruling VAS-722/11.

(5) Resolution on Certain Issues Associated with the Challenging of Transactions on Grounds Stipulated by the Federal Law on Insolvency, April 30 2009.

(6) Ruling VAS-1635/11, April 13 2011.