Challenging deals with preference. Challenging debtor transactions in bankruptcy proceedings. Challenging transactions in bankruptcy proceedings.
When initiating insolvency proceedings, the claims of creditors included in the register are subject to satisfaction in the order established by the Bankruptcy Law. Given that the property of the debtor is usually not enough to fully fulfill obligations to all creditors, repayment of claims bypassing this order means giving preference to one of them and violating the rights and legitimate interests of others. Therefore, such transactions aimed at circumventing the priority may be invalidated on the basis of Art. 61.3 Bankruptcy Law. However, the establishment of formal signs of invalidity does not always entail the contestability of a transaction.
The plot of the case:
A purchase and sale agreement was concluded between the Company (debtor) and the Agrofirm (creditor), by which the Company transferred the combine to the Agrofirm. In fulfillment of the obligation of the Agrofirm to pay for goods between the parties, the mutual claims were offset: the debts of the Agrofirm under the purchase and sale agreement and the debts of the Company - under a lease agreement previously concluded with the creditor.
2 months after the offsetting, a bankruptcy case was opened against the Company, which was subsequently declared bankrupt. The bankruptcy trustee of the debtor appealed to the arbitration court with a request to recognize the netting as invalid, since this transaction violated the procedure for repayment of obligations to other registered creditors, which led to the preferred satisfaction of the requirements of the Agrofirm.
The trial and appeal courts refused to satisfy the requirements of the bankruptcy trustee. Formal grounds for invalidating the transaction were established, however, the possibility of contesting in connection with the preference was provided only for the purpose of protecting the property interests of creditors, while it follows from the case materials that the available bankruptcy estate is more than enough to satisfy all the existing claims against the debtor.
The district court canceled the acts of lower instances and declared the transaction invalid, requiring the Agrofirm to return to the bankruptcy estate everything received as a result of the offset.
Judicial act: Decree of the Administrative Court of the Volga-Vyatka District of April 29, 2019 in case No. A43-24875 / 2017 [Ф01-1165 / 2019]
Court findings:
1. The lower courts came to the correct conclusion that the formally disputed transaction contains the signs of the transaction with preference, since at the time of its conclusion the debtor had signs of insolvency, and the Agrofirm is an affiliate.
2. The courts did not take into account the amount of claims of late creditors who are “behind the register”, as well as existing and reasonably necessary future claims, if any. Bankruptcy proceedings against the debtor are not completed, in connection with which additional operating expenses may arise.
3. The expert opinion alone does not indicate that the property of the debtor will be really sold at such a price, and the court’s conclusions that the bankruptcy estate is sufficient to repay the claims of all creditors are presumptive.
Comments:
1) All formal conditions allowing to recognize the transaction as invalid are met: at the time of its conclusion, the debtor had significant overdue payables, which the Agrofirm knew or should have known, since it has full corporate control over the Company and is actually its parent company, being co-founder with an 80% stake in the authorized capital. On the other hand, the law establishes only the presumption that the person concerned knew about the signs of insolvency of the debtor; however, evidence that could refute the presumption and indicating the credibility of the creditor was not submitted by the Agrofirm.
2) The position of the Supreme Arbitration Court of the Russian Federation remains in force, according to which transactions in the insolvency process should not be disputed for formal reasons, and the courts should always keep in mind the purpose of legislative regulation - to protect the property interests of creditors directly affected by the transaction. Accordingly, the identification of the formal conditions of contestability of a transaction cannot be sufficient to invalidate it if material conditions are not established - the harmful consequences of the transaction.
3) The Supreme Arbitration Court of the Russian Federation spoke about the need to take into account the interests of late creditors included in the register. In turn, the district court either very boldly or incorrectly interpreted this position, having stood up for the protection of “registered” creditors. A late creditor is not always registered, because its requirements under certain circumstances may be included in the register.
If the creditor is registered, then only because of its unlawful or dishonest behavior, since the creditor, whose fault is missing the deadline, must be included in the register (for example, when the grounds for inclusion in the register arose later or the creditor was not notified of the need for an application bankruptcy claims). Protecting the claims of such creditors on a par with bona fide, the district court significantly distorts the meaning of their special legal status and acts contrary to the norms of the Civil Code of the Russian Federation on the inadmissibility of profit from illegal or unfair behavior.
4) According to the district court, the risk of the negative consequences of non-inclusion of requirements in the register should be borne by the counterparty who concluded the disputed transaction with the debtor with preference, and not by the registered lender himself. In essence, such an approach means that before the end of bankruptcy proceedings, courts must invalidate transactions in the event of the possible emergence of new creditors. Until they enter the bankruptcy case, no one can protect their interests, except for the court, whose role in this case should be active.
5) In addition, registered lenders can rely on the satisfaction of their claims only if the property was sufficient to repay the claims of all the creditors included in the register. Since in the vast majority of cases the debtor’s property mass is not enough even to pay the first lines with creditors in full, the apprehension of the district court seems excessive.
6) The appraiser’s opinion on the value of the property of the debtor was not recognized as indisputable evidence of the security of interests of creditors, since the market value is determined in the process of selling the property, i.e. during the bidding. This is especially true, given that in this case the book value of the property was significantly different from the value determined by the expert.
Meanwhile, the appraiser’s report is a written evidence that was not disputed by other parties to the case; no objections were made to the validity of the conclusions made therein. It is unacceptable to call judicial acts based on assumptions, based on the conclusions of a specialist, only in view of the fact that the final market price can be adjusted by demand.
7) Payment made with preference may be invalidated only in part, significantly exceeding the difference between the cost of the bankruptcy estate and the total amount of claims of creditors. The district court invalidated the set-off for the entire amount of 900,000 rubles, unjustifiably assuming the market value of the bankruptcy estate. The fact that it is difficult to reliably establish the ratio of restitutional claims to claims of creditors on the basis of the available evidence cannot be an excuse under the condition that the cassation instance decided to submit its own judicial act, which resolves the case on the merits, without sending the matter for a new consideration.
Please note that the Law Firm "Vetrov and Partners" in 2018 was awarded the industry rating of Pravo.ru-300 law firms in the nomination "Arbitration Proceedings". This allowed us to enter the TOP-50 regional companies throughout Russia in this nomination.
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Dmitry Podgorny, legal analyst
