Resolution of the Ninth Commercial (‘Arbitration’) Court of Appeal

dated 19 June 2012

Parties in dispute

Receiver of Digital Electronics CJSC

Digital Electronics CJSC (the “Debtor”)

SITRONICS OJSC (a party to the challenged transaction with the Debtor, the “Creditor”)


Within the proceedings regarding the Debtor’s insolvency (bankruptcy), the Debtor’s receiver filed nine claims with the commercial (‘arbitration’) court demanding that the Debtor’s transactions or any of its operations under such transactions be invalidated. The overall amount that the receiver proposed (albeit in vain) to include in the bankruptcy assets or keep for the Debtor amounted to over RUB 3 billion. In the proceedings that are analysed below, the receiver challenged the amount of RUB 85,411,328 which had been transferred from the Debtor’s account to the Creditor’s account, and asked that the transaction be invalidated. The consequence of this would be the Creditor being obliged to refund the above amount to the Debtor’s account.

The receiver founded its claims on article 103(2) of Federal Law No. 127-FZ “On insolvency (bankruptcy)” dated 26 October 2002 (the “Bankruptcy Law”). The court-appointed administrator relied on the fact that the Creditor and the Debtor had entered into a share purchase agreement. Under that agreement the Debtor, who purchased the shares, transferred to the Creditor RUB 85,411,328. Since when this amount was transferred the Creditor had been the Debtor’s sole shareholder and it could not have been unaware that the Debtor was showing signs of insolvency (bankruptcy), the receiver took the view that the transaction caused losses to creditors.

Court’s decision

In its ruling dated 13 April 2012, upheld by the resolution of the appeal court, the court of first instance dismissed the receiver's claim on the following grounds.

The court established that before the shares were purchased there had been an independent appraisal of that block’s value. The contract price corresponded to the securities’ market value. The fact that the rights actually passed from the Creditor to the Debtor was confirmed by a notification of account movements.

In accordance with article 103(2) of the Bankruptcy Law, the court or commercial (‘arbitration’) court invalidates, at an external administrator’s request, any transaction between the debtor and a concerned party if such transaction, once accomplished, could inflict losses on the creditors or the debtor.

Therefore, in order to review the application to invalidating the transaction on the grounds set out in article 103(2) of the Bankruptcy Law, the following should have been proved:

  • the transaction had been accomplished by an interested party;
  • the creditors or the debtor suffered or could have suffered losses.

The Court established that, as at the date when the amount was transferred, the Creditor had been the Debtor’s sole shareholder and, consequently, an interested party in relation to the latter.

However, the court concluded that it was not a proved fact that the Debtor’s creditors had suffered losses and that the Debtor’s insolvency (bankruptcy) had been caused by the funds being transferred.

The courts found that the receiver had no grounds to rely on the Debtor’s balance sheet which stated an unrecovered loss after the amounts had been transferred. That document is of a general character and does not evidence that the loss arose owing to the Debtor performing its obligations in relation to the Creditor under the share purchase agreement.

In addition, on the date preceding the date when the amounts were transferred the total value of the Debtor’s shares exceeded the unrecovered loss. At the same time, the transaction amount was significantly lower than the amount of the unrecovered loss. The courts also agreed with the Creditor that the Debtor had derived economic benefit from the transaction in the form of a block of shares purchased at market price, which the Debtor had possessed for one-and-a-half years free of charge.

The resolution of the appeal court also states that the Debtor’s outstanding amounts, which the receiver cited which became payable to one of the creditors before the challenged transfer, have no legal significance in terms of showing the signs of invalid transactions listed in article 103(2) of the Bankruptcy Law.


It is becoming increasingly popular to protecting insolvent debtors and their creditors by challenging the transactions made after the debtor has shown signs of insolvency (bankruptcy). 

When assessing the validity of transactions in line with the previous (article 103) and current (article 61.2(2)) versions of the Bankruptcy Law, the parties quite often challenge the transactions on the ground that the transaction in question has caused losses to the debtor’s creditors (the purpose was to inflict damage).

In addition, the provision of article 61.2(1) that the other party does not perform its counter-obligations to the debtor in equal measure also in fact implies, for its part, that the creditors have suffered losses as a result of such performance.

In order to provide evidence that the creditors have suffered losses, the external managers or receivers generally refer to figures in the debtor’s financial statements, which were compiled after the challenged transaction had been accomplished, stating any losses.

In view of the above, it becomes critical to analyse the debtor’s financial data and substantiate that it has performed its counter-obligation in equal measure if one desires to prove that there is no cause-effect relationship between a challenged transaction and the debtor’s losses.

When forming the legal position, we recommend comparing the Debtor’s recorded assets before and after the challenged transaction was completed (accomplished), as well as the amounts of unrecovered losses for the same period. If the unrecovered loss is less than the amount of the assets and the losses are disproportionate to the amount of the challenged transaction, then it would be justified to conclude that there is no cause-effect relationship between the transaction and the debtor’s losses.

In addition, it would be advisable to analyse and, if the appropriate grounds exist, provide the court with evidence that the debtor has obtained an economic benefit owing to the challenged transaction being accomplished. This applies above all to assessing the services received in return by the debtor.