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Position of creditors

Forms of security

What are the main forms of security over moveable and immoveable property and how are they given legal effect?

The primary way to secure transactions involving movable or immovable property is through a pledge.

The status of the pledge creditor is considered to be privileged. The claims of a creditor which are secured by pledge are listed in the creditors’ registry as part of the claims of creditors of the third priority, while most of the funds received from the disposition of the subject of a pledge are used to discharge the claims of the pledge creditors.

However, the right of pledge creditors to vote at the creditors’ meetings is sufficiently limited by the Bankruptcy Law. Such creditors are entitled to vote only in cases directly provided for under the law.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

The Bankruptcy Law provides for the following order of priority in which creditors’ claims will be settled:

  • first-priority – those arising from the debtor’s liabilities for personal injury and moral harm;
  • second priority – severance benefits, employees’ salaries (if any are due) and other amounts payable under employment agreements, as well as royalties to authors of intellectual property;
  • third priority – all other creditors’ claims in the ranking list, including:
    • claims arising out of violation of environmental legislation;
    • claims for taxes and other mandatory payments;
    • claims of secured creditors;
    • claims of unsecured creditors; and
    • claims from challenged suspicious or preferential transactions.

The recent judicial practice considered the status of the shareholders of the debtor who provided a loan to the debtor when it was in a poor financial situation and claimed for its recovery in terms of bankruptcy proceedings. The courts considered that financing a company is an obligation of its participants, and unreasonable actions of loan provision by the shareholders aimed at artificial creation of the debt cannot be grounds for inclusion of such a creditor’s claims into the registry along with the claims of other creditors.

Current payments are outside the general order of priorities for satisfaction of the creditors’ claims and are to be satisfied on a first-priority basis as they fall due and before any other payment. ‘Current payments’ refer to monetary obligations, claims for payment of severance benefits and salaries of current and former employees employed under an employment contract, as well as mandatory payments arising after the date of the application for a declaration of bankruptcy. Claims for payment for goods supplied, services provided and works performed after initiation of the bankruptcy proceedings are also considered current payments.

Can this ranking be amended in any way?

The ranking of settlement of creditors’ claims, except for the claims for mandatory payments (the priority of which cannot be amended in any way), may be amended if creditors reach the settlement agreement. If the amount of a creditor’s claims is amended by such an agreement or a creditor’s claims are terminated by it, receiving the consent of this creditor to the terms of the agreement will be required.

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