The issue of the fee for an insolvency practitioner affects every single person involved in insolvency (bankruptcy) proceedings. It is known that the receiver’s fee is generally paid out of the debtor’s assets. Accordingly, the higher the fee, the fewer the assets that remain to satisfy creditors’ claims, restore the debtor to solvency and distribute the liquidation surplus among the members.
On 14 February 2013, the Presidium of the Russian Supreme Commercial (‘Arbitration’) Court met to discuss the draft resolution of the Plenum of the Supreme Commercial (‘Arbitration’) Court “On several issues regarding the fee for an insolvency practitioner during bankruptcy procedures”.
Though these aspects of case law seem to be merely practical in nature, the Presidium of the Supreme Commercial (‘Arbitration’) Court’s discussion of them ended in a heated debate which has in fact a long history; the theoretical issues concerning the insolvency practitioner’s status and the nature of its fee have actually been in the spotlight already for some centuries.
Each party involved in an insolvency procedure, whether debtor or creditor, acts only for its own benefit. Yet, if during bankruptcy one party exercises its interests, the interests of the other parties will inevitably be infringed. This made it necessary for a specific person (an insolvency practitioner), who would take into account the interests of each party, to participate in the procedures. In other words, the insolvency practitioner aims to keep a balance between the interests of all those involved in the insolvency (bankruptcy) procedure.
One could leave the insolvency practitioner’s status and nature of the fee to scholarly theoretical debate, if it were not for important practical consequences which flow out of these issues. The courts’ decisions will be significantly influenced by the approach adopted by the Supreme Commercial (‘Arbitration’) Court in its explanations, which are binding on lower courts, regarding the following:
- may interest be charged pursuant to article 395 of the Russian Civil Code if the insolvency practitioner’s fixed fee is in arrears?
- may the insolvency practitioner’s fee be decreased if the practitioner performs its duties improperly?
- may a fee already paid to the insolvency practitioner be recovered to cover losses?
Moreover, the issue of whether the insolvency practitioner represents the government is far-reaching because it directly relates to the pivotal question of whether the Russian state may be held liable for the practitioner’s improper actions. Most notably, this issue was considered by the European Court of Human Rights (ECHR) in the case Kotov v. Russia. The Court decided to dismiss Mr. Kotov’s claim against the insolvency practitioner because he had already been granted priority in terms of being paid in the case concerning the insolvency of Yurak commercial bank. One of the grounds for the ECHR dismissing the claim was the Court’s conclusion that, in accordance with Russian legislation in the 1990s, an insolvency practitioner did not represent the government in Russia.
The main approaches articulated by the Supreme Commercial (‘Arbitration’) Court during the discussion are as follows.
According to one point of view, the insolvency practitioner performs public functions. As early as in the 19th century, noted legal academic K. I. Malyshev spoke of a “judicial supervisory authority” when referring to a commissioner who acted in a French insolvency proceedings in a similar way to an insolvency practitioner. The public status of an insolvency practitioner was also evoked by another legal academic of the late 19th and early 20th century, G. F. Shershenevich. Today scholars who support this point of view refer primarily to the fact that the insolvency practitioner is appointed by court and its functions are set by law. Accordingly, the conclusion is that the insolvency practitioner’s fee is neither a salary nor a service fee. In this context, the debtor or other persons provided for by law bear non-monetary obligations, and in the event of default no interest should be accrued pursuant to article 395 of the Russian Civil Code.
Another point of view is that the insolvency practitioner provides certain specific services to those involved in an insolvency procedure, which allows these services to be paid for in accordance with the provisions of the Civil Code concerning paid services and, in part, contractor arrangements. This approach implies that interest may be accrued on a fee that is in arrears pursuant to article 395 of the Civil Code. Numerous insolvency practitioners agree with this approach.
Although the Presidium of the Supreme Commercial (‘Arbitration’) Court did not mention during its session that the insolvency practitioner’s activity represented essentially a labour relationship, the discussion concentrated on whether a fee could be paid when the insolvency practitioner is temporarily unable to work.
Owing to definition in the Federal Law “On insolvency (bankruptcy)” of an insolvency practitioner as a person who pursues professional activity and is engaged in private practice, it is impossible to resolve the above issues unequivocally.
However, in virtually all bankruptcy procedures, the insolvency practitioner receives its fee with a delay. This occurs mainly because the debtor’s assets are deficient or it is impossible to dispose of real estate or other property. Yet, it is not uncommon that the debtor, having assumed the obligation to pay a fee to the insolvency practitioner during supervisory procedures and financial rehabilitation, acts in bad faith when it comes to performing that obligation.
It should be mentioned that the members of the Presidium of the Supreme Commercial (‘Arbitration’) Court were not able to come to a unanimous decision and state whether it is possible for interest to be accrued on a fee in arrears, as provided for by article 395 of the Civil Code. Moreover, those who took part in the discussion expressed, among other things, the opinion that the approaches can differ depending on the procedure adopted for the case. For instance, it was suggested that it be considered whether interest can be accrued if the debtor, during supervisory procedures and financial rehabilitation, delays in paying the fee to the insolvency practitioner. It was also considered whether another approach to bankruptcy administration and insolvency proceedings may be applied if the debtor’s management bodies have been suspended and whether it is possible to pay the fee largely depends on the insolvency practitioner’s own activity.
Another major issue discussed by the Presidium of the Supreme Commercial (‘Arbitration’) Court is whether the court may decrease the insolvency practitioner’s fee.
As follows from the Bankruptcy Law (article 20.6), the insolvency practitioner may receive an additional fee if the creditors’ meeting so resolves, i.e. the Law provides for the fee to be increased as compared with a fixed amount. There is no legal provision for decreasing the practitioner’s fee, let alone for not paying it altogether.
At the same time, it is not uncommon for insolvency practitioners to fail to perform their obligations properly or not to perform them at all. According to statistics published on the official website of the Supreme Commercial (‘Arbitration’) Court, from year to year the Court has been considering an increasing number of complaints with regard to the actions of insolvency practitioners and motions to have such practitioners removed from their appointment. The website features resolutions disqualifying as much as 19 insolvency practitioners in 2012 alone. My experience as a judge who considered insolvency cases among others was that the evidence showed most of these complaints with regard to the actions of insolvency practitioners were justified.
All this obviously suggests that it is necessary for a mechanism to protect the interests of the parties involved in bankruptcy proceedings to be protected not only by way of official explanations from the Supreme Commercial (‘Arbitration’) Court but first and foremost in legislation.
The main idea of the working group who prepared the draft resolution of the Plenum of the Supreme Commercial (‘Arbitration’) Court is that the fee payable for a period in which the insolvency practitioner failed properly to perform its obligations may be considered as loss. Moreover, if an insolvency practitioner which has avoided performing its obligations applies to recover its fee, the relevant party (the debtor or the applicant) is entitled to file a counter-claim for losses to be recovered. Under such circumstances the court will opt for a set-off procedure if the initial claim and the counter-claim are upheld in full or in part.
A considerable block of the issues under discussion related to interest possibly being withheld that is payable to an insolvency practitioner and accrued on the practitioner’s fee for being involved in the relevant insolvency procedure (this amount payable to the interim receiver and the insolvency practitioner is determined depending on the book value of the debtor’s assets, i.e. it does not depend directly on the results of their activity).
It is difficult to agree with the opinion voiced during the meeting of the Presidium of the Supreme Commercial (‘Arbitration’) Court by a representative of the insolvency practitioners’ community that no exceptions should be made owing to the binding nature of article 20.6 which sets out the insolvency practitioners’ right to receive an interest payment and the amount of such payment.
For instance, this applies to situations when the insolvency proceedings were dismissed because a third party has performed its obligations. My personal experience of considering insolvency cases and providing representation in such cases one of the parties shows that it is not to the insolvency practitioner’s credit (albeit with rare exceptions) when proceedings are successfully completed. In this respect, the approach suggested by the working group of the Supreme Commercial (‘Arbitration’) Court that in such cases interest is not paid, seems reasonable. An exception is when the debtor is restored to solvency during financial rehabilitation or bankruptcy administration, and a positive effect becomes possible as a result of the insolvency practitioner’s activity.
An acute problem is the book value of the assets based on which interest is accrued on the insolvency practitioner’s fee. It is a known fact that in many instances the book amount of the assets does not correspond to the fair value of the debtor’s assets. We believe that a formal approach to calculating interest should not be used as this may cause the bankruptcy assets to decrease significantly and be detrimental to the interests of the parties involved in the bankruptcy procedure.
In our opinion, the argument of some insolvency practitioners that the term “fair value” is incorrect and that the overall amount of assets booked in the balance sheet should be taken into consideration does not stand up to criticism. For many years the notion of fair value has been successfully used in considering corporate disputes regarding the value payable to former members of an LLC in relation to their membership interest.
Another highly controversial issue is whether proceeds of sale from the debtor’s pledged assets should be included, in full or in part, in the amount on which interest on the insolvency practitioner’s fee is accrued.
It is well known that the amount of interest payable to the insolvency practitioner depends on the amount of claims met and included in the claims register of the debtor’s creditors. We believe it is obvious that the amounts which are received from selling pledged assets and which are applied to make current payments (5% or 10%, in accordance with article 138(1) and 138(2) of the Bankruptcy Law) should not be taken into account when calculating interest on the insolvency practitioner’s fee.
To sum up the discussion in the Supreme Commercial (‘Arbitration’) Court, it should be noted that a wide spectrum of interested parties are keen for the resolution of the Plenum of the Supreme Commercial (‘Arbitration’) Court “On several issues regarding remuneration for the insolvency practitioner during bankruptcy procedures” to appear as soon as possible. In this context, practical issues can be handled only after the theory underpinning an insolvency practitioner’s status and nature of its fee is dealt with comprehensively and in depth.