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ART DE LEX Restructuring and Bankruptcy practice Bulletin (Issue 3, 2019)

1. CURRENT DISCUSSIONS AND INITIATIVES IN THE LEGAL COMMUNITY ON INSOLVENCY AND BANKRUPTCY

The Russian State Duma amends the Tax Code to clarify the taxation of transactions of banks undergoing financial rehabilitation.


The amendments provide for the recognition of market prices in transactions involving the assignment by the taxpayer of rights (claims) by the bank in cases where such assignment took place as part of the measures included in the plan for the participation of the Central Bank in the implementation of measures to prevent bankruptcy of the bank.
In the current version of the Tax Code of the Russian Federation, if transactions between related parties create conditions different from those that would have occurred in comparable transactions between persons who are not related, then any income (i.e., profit, revenue) that could have been received by one of these persons, but which as a result of this difference was not received, are taken into account for taxation purposes.
Also, the amendments would deny recognition to controlled transactions on the assignment of the rights of claim by the bank in cases that arise in the transfer of loans for the execution of the state defense order, as well as when the Central Bank takes measures to rehabilitate banks.

The Ministry of Economic Development proposes to allow the Federal Tax Service to offset tax liabilities.


The draft law is under development, but the main idea is clear: to apply overpayments of taxes to existing tax debts.
Bankruptcy set-off is currently prohibited, except in three cases: (1) liquidation netting of liabilities in case of bankruptcy of financial organizations, which allows settlement of futures and repo transactions concluded in accordance with the general agreement; (2) offsetting in case of counter-liabilities in leasing, and (3) offsetting in case of counter-liabilities under contractual transactions.

The Profiling Committee of the Russian State Duma introduces a simplified free bankruptcy procedure for citizens.


The bill provides for the introduction of a free bankruptcy procedure for citizens, which is needed because currently citizens who are in difficult financial situations often cannot afford to participate in bankruptcy proceedings against them.


Thus, according to the Judicial Department of the Supreme Court, in 2018, 7,518 citizens had bankruptcy cases filed with a debt of less than 500 thousand rubles. The United Credit Bureau reports that 8 million people carried loan debts that were more than three months overdue. This is the most problematic category of debtors: those with a relatively small debt but unable to file for bankruptcy because of the cost of the proceedings, which is at least 100,000 rubles.
Funds to finance the free bankruptcy procedures are proposed to be taken from the funds of arbitration managers.

Experts note the threat looming over the arbitration managers.


On 17 May 2019, as part of the International Bankruptcy Forum, experts expressed their concerns about the situation surrounding arbitration administrators.
First of all, the involvement of managers in losses has been growing recently. In January-March 2019, courts recovered 469.6 million rubles from arbitration managers, which is 2.7 times more than in the first quarter of 2018. And for the period from 2015 to the first quarter of 2019, the total amount of losses to be recovered from managers was 2.92 billion rubles, according to the data of the Unified Federal Register of Bankruptcy Information.


Large losses are paid out of the civil liability insurance funds of arbitration managers or the compensation funds of self-regulated organizations. Small amounts are paid by the arbitration managers themselves. However, the compensation system faces a crisis. Insurance companies pay only 100-150 million rubles per year, which indicates that the insurance mechanism does not work. Only 11 insurance companies operate in this market.
Secondly, the disqualification of arbitrators is growing rapidly.

The FSSP does not rule out transferring part of its powers to the arbitrator.


The FSSP proposes to give arbitration managers the powers of bailiffs.
The Institute of Arbitrage Managers has “matured”, noted Kirill Nogotkov, the Director of the Russian Union of Self-Regulatory Organizations of Arbitration Managers (RUSAU), as he responded to the proposal. There is self-regulation of managers, with the liability of managers covered by insurance, he pointed out.
In his view, "at the stage of forcible foreclosure, arbitrators and bailiffs are, by and large, doing the same job." True, the bailiffs have the opportunity to limit the debtor's travel abroad, but the arbitration manager has more authority to enforce subsidiary responsibility.

The Federal Tax Service proposes an extrajudicial appeal by authorized bodies against the actions of arbitration managers in bankruptcy cases.


The draft proposes a pilot project for a pre-trial procedure by which the authorized body may appeal against an action or inaction of an arbitration manager to the self-regulated organization (SRO) of which he or she is a member. The appeal must be considered by an authorized person of the SRO within 30 days of receiving the complaint.


SROs may join the pilot project by writing to the Federal Tax Service. The Service reserves the right to refuse an SRO if its members have uncovered damages caused in connection with the execution of the powers of an arbitration administrator.
This procedure would permit challenges to: the failure of an arbitration manager to comply with the order; the proportionality and timeliness of the current debt and the debt included in the register of creditors' claims; the unreasonableness of administration expenses; and other correctable deviations from the "road map". At the same time, the pre-trial appeal procedure is acceptable only before the expiration of a limitation period of at least three months, and only when the bankruptcy procedure is not completed or terminated.

The Ministry of Economic Development proposes large-scale changes in bankruptcy bidding.


The Ministry of Economic Development proposes to abandon the multi-stage sale of the property of bankrupts and move to trading with floating pricing and the ability immediately to sell assets with a lower price.
The existing system is ineffective, practice shows. Bidding during open auction as part of bankruptcy procedures in 2017 and 2018 did not take place in 95% and 94% of cases, respectively, according to data from the Unified Federal Register of Bankruptcy Information (EFRSB, Federal Resource).
The proposed legislation offers a combined scheme of selling a bankrupt's property. Under its procedures, if the auction receives no offers to buy, the price will be reduced before further offers are invited. After that, the auction will reopen at the reduced price, but if no one bids to raise the price, the winner will be the one who voiced a proposal at the minimum price. In this case, the minimum price for the first auction should be equal to half of the initial price, and a quarter of the price at the second stage.


The bill provides for the transfer of tenders in bankruptcy to universal electronic platforms, while simultaneously abolishing the mandatory membership of operators in self-regulated organizations of arbitration managers.
The draft law outlines restrictions on the rights of secured lenders, which from time to time is a matter of interest in legislation and law enforcement. It proposes to deprive secured lenders of their status if they do not want to keep the pledged property.

Arbitration managers may be able to form a register of creditors' claims without judicial review.

The Russian government has approved a bill that allows arbitrators to determine independently the validity of creditors' claims against the debtor and include them in the register. It will be possible to challenge the decision of the arbitrator in the court which considers the bankruptcy case.

2. CURRENT BANKRUPTCY DECISIONS OF THE RUSSIAN SUPREME COURT

No. 310-ES17-15048 (2) – 29 April 2019


If the courts find an illegal failure by the arbitration manager, he or she should be suspended from duties if the violations of the law committed give rise to reasonable doubts about the manager’s ability properly to conduct bankruptcy procedures.
The following actions (or inactions) of the arbitration manager may be considered as giving rise to doubts and being sufficient for removal: the manager's failure to conduct a detailed assessment of the debtor's account; the manager's failure to check the disposition of proceeds from the sale of the debtor's property; opposition to the creditor trying to neutralize the negative consequences of the manager's failure to act; the manager's failure to verify the reasons for the decision of the debtor's bodies to change corporate relations and the debtor's location.

No. 305-ES17-10167 (6) – 25 April 2019


When considering the application of a citizen-client for inclusion of his or her claims in the register of creditors' claims of the debtor bank, it is necessary to take into account that the creditor, when making a contribution to the bank, shall be obliged only to be cautious in the performance of the respective actions, as is usual in such conditions (e.g., to conclude an agreement in the building of the bank, to transfer the sums of money to the employees of the bank, to receive a document confirming or certifying the performance of the transfer operation).


An absence of original documents confirming that a citizen has made a deposit cannot discredit the behavior of a bona fide creditor-citizen, because these circumstances are not related to his or her will or actions, but fully depend on the behavior of the bank as a counterparty to the transaction. Thus, when making a deposit to a bank, the citizen is required only to exercise the usual discretion in such situation (e.g., to conclude an agreement in the bank building, to transfer money to the bank employees, to get confirmation of the commission of the operators).
In such a situation, the manager objecting to the inclusion of a citizen's claim should refute the creditor's evidence, including by examining contracts and cash receipts.

No. 302-ES18-24434 – 6 May 2019


The grounds for recognizing pledge rights to persons who have concluded participation agreements with the developer of shared construction are regulated by special provisions of civil legislation, in particular, by the law On Participation in Shared Construction of Apartment Buildings and Other Real Estate Objects and not by the Bankruptcy Law (Federal Law 127-FZ).

No. 306-ES18-26294 – 8 May 2019


Once the court includes in the creditors' register of claims the payment of persons who worked under an employment contract, they are defined as the requirements of the creditors in the bankruptcy case and do not have an inseparable relationship with the identity of the creditor. Therefore, the prohibition of concession (Article 383 of the Russian Criminal Code) is not violated.
In this regard, when the owner of the unitary enterprise's property chooses a model of performance of obligations to employees that uses the civil-law mechanism of an assignment of rights of claims, such a method is considered permissible.

No. 307-ES16-3765 – 14 May 2019


The right of a third party (i.e., a creditor) to sue for recognition of an imaginary transaction as null and void is not related to the fact of the contract conclusion and its execution as an ordinary transaction, reflecting the true will of the parties, but to the onset of consequences artificially created by the parties’ appearances of execution. Such a nullification right is aimed at eliminating these consequences. Therefore, within the meaning of paragraph 1 of Art. 181 of the Civil Code of the Russian Federation, the beginning of the statute of limitations is determined by the moment from which the third party should have learned about the formal nature of the beginning of execution of the imaginary contract.
The Supreme Court of the Russian Federation also pointed out that recognition of a debtor's transaction as invalid on corporate grounds does not deprive its creditors of the right to apply to the court with a separate claim for recognition of the transaction as null and void. To hold otherwise would prevent creditors from effectively defending their violated rights in court.