Pre-lit­i­ga­tion pro­ce­dure in bank­ruptcy pro­ceed­ings

The Moscow Times - - LEGAL HIGHLIGHTS - 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 pro­ce­dure1, 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 pro­ce­dure2.

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 deals3.

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 pro­ce­dure4.

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.

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