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Pre-litigation procedure in bankruptcy proceedings

The Legal Highlights section does not involve the reporting or editorial staff of The Moscow Times

Oleg Permyakov
Senior associate, Dispute resolution, Goltsblat BLP*

Federal Law No. 47-FZ dated 2 March 2016 (effective from 1 June 2016) amended the Arbitration Procedure Code by introducing a mandatory pre-litigation resolution procedure (the Procedure) for all disputes arising from civil law relations, while exempting bankruptcy cases. 

Yet bankruptcy case history knows one peculiarity of contesting transactions for specific reasons given in this law: the claimant (insolvency officer) has a procedural duty to observe the Procedure when contesting the debtor’s transactions by sending the defendant a demand for return of illegally obtained property. 

This collision is due to the explanations provided by the Supreme Commercial Code (cl. 29.2 of its Plenum Resolution No. 63) stating that, before a transaction challenge claim can be brought, the insolvency officer must offer the other transaction party the chance to return the illegally obtained property. If nothing is returned within reasonable time of the offer being made, after the transaction has been subsequently successfully contested in court, the defendant will be included on the debtor’s creditor register, but with lower priority, this virtually meaning denial of restitution. 

The question yet to be answered is whether these explanations amount to the Procedure being mandatory. In practice, we sometimes encounter situations when, guided by the above explanations of the Supreme Commercial Court, commercial courts construe cl. 29.32 of the SCC Plenum Resolution of 23 December 2010 as another pre-litigation procedure (1), so leave claims challenging debtor’s transactions unconsidered. 

The Procedure essentially requires a party to the dispute to submit claims or other written notices to an opponent that fails to perform its obligations properly and establish a response time and other conditions enabling dispute resolution without going to court. 

Under Art. 148 of the Arbitration Procedure Code, a claim may only be left unconsidered if the claimant fails to observe the Procedure, if it is mandatory under federal law or an agreement between the parties.

In this context, the formal reference in cl. 29.2 of SCC Plenum Resolution No. 63 dated 23 December 2010 to an insolvency officer’s obligation to offer a transaction party the chance to return to the bankruptcy estate everything received in the transaction before the transaction can be contested in court may not be viewed as a claim or other pre-litigation dispute resolution procedure (2)

We believe that, in this type of dispute involving transaction invalidation claims, the Procedure is generally impossible because the issue is not whether a party failed to perform an obligation properly as part of the transaction, but rather the validity of the transaction underlying the obligation, while only courts are competent to invalidate a transaction and invoke the consequences of its invalidity. 

The legal purpose of the Procedure is to avoid legal proceedings and enforcement of obligations. Although this is not stipulated by the Bankruptcy Law, an insolvency officer’s proposal that assets be returned to the bankruptcy estate before litigation is initiated equally seeks to cut legal costs and time spent. In view of this, it is also possible that the assets might be returned after the separate litigation is initiated. 

So, if the transaction party does not exercise its right to return the assets to the bankruptcy estate during the litigation, its motion to leave the application on invalidating the debtor’s transaction unconsidered will also entail the need for another litigation, thus directly contravening the above purpose behind prelitigation contesting of deals (3)

Notably, cl. 29.2 of SCC Plenum Resolution No. 63 dated 23 December 2010 does not specify the consequences if an insolvency officer fails to discharge its obligation to send a property return offer first. 

At the same time, it does say that, after returning everything obtained in a dubious deal to the bankruptcy estate, a bad debtor’s counterparty will not face having its claims given lower priority and will be able to lodge its claims against the debtor in the general manner.

You will see that the legal implications of the insolvency officer failing to observe this condition do not affect procedural progress of the case, but rather the substantive law consequences of invalidating a deal and the bilateral restitution procedure (4)

We believe, therefore, that the bankruptcy legislation does not prescribe the Procedure for disputes associated with contesting transactions made by an insolvent debtor. The explanations in cl. 29.2 of SCC Plenum Resolution No. 63 dated 23 December 2010 do not introduce a pre-litigation procedure but rather promote voluntary return of property to the debtor with a view to cutting the legal costs of bankruptcy procedures and their duration. The SCC explanations list actions an insolvency officer should take to contest the debtor’s transactions and the implications of a transaction party voluntarily fulfilling the demand to return unlawfully obtained property. This may not be regarded by courts as claims or another prelitigation procedure in contesting a debtor’s transactions as part of bankruptcy procedures.

(1) Ruling of the Sverdlovsk Region Commercial Court dated 27 July 2016 in case А60-59308/2015 // Consultant Plus Legal Database.

(2) Resolution of the Northwestern Circuit Commercial Court dated 26 January 2016 in case No. А13-7213/2014 // Consultant Plus Legal Database. 

(3) Resolution of the East Siberian Circuit Commercial Court dated 4 July 2016 in case No. А13-18553/2014 // Consultant Plus Legal Database. 

(4) Resolution of the 7th Commercial Court of Appeal dated 29 March 2016 in case No. А27-18234/2013 // Consultant Plus Legal Database.

*Goltsblat BLP is the Russian practice of Berwin Leighton Paisner (BLP), an award-winning international law firm headquartered in London and with offices operating in major commercial and financial centres throughout the world — Moscow, Abu Dhabi, Beijing, Berlin, Brussels, Dubai, Frankfurt, Hong Kong, Paris and Singapore, Tel Aviv and Yangon. The firm has a team of 100 Russian, English and US law qualified lawyers based in Moscow and over 800 lawyers in the other international offices. Goltsblat BLP currently has over 1700 clients among the major international investors operating in Russia, including 37 Fortune 500 companies.    

Tel:+7 (495) 287 44 44


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