At a regular Plenary Meeting of the Supreme Arbitration Court of the Russian Federation held on July 30, 2013, a number of essential amendments were adopted to Resolution No.63 of the Plenary Meeting of the Supreme Arbitration Court of the Russian Federation “On certain issues tied to applying Chapter III.1 of Federal Law ‘On insolvency (bankruptcy)’” dated 23.12.2010, dedicated to issues of contesting transactions of a debtor.

The adopted amendments are aimed at protecting the interests of bona fide creditors and other persons (contracting parties) and at providing stability to civil affairs. The most significant provisions of the adopted Resolution No.59 dated 30.07.2013 are the following:

1.    Circumstances evidencing bad faith of the debtor’s contracting party

The Supreme Arbitration Court clarified that when preferred transactions are contested based on Part 3 Article 61.3 of Federal Law No.127-FZ “On insolvency (bankruptcy)” dated 26.10.2002 (hereinafter the “Bankruptcy Law”), a mandatory condition is the proof that the creditor’s actions have signs of bad faith conduct, which can be evidenced by the following:

• Repeated queries of the debtor to the creditor with a request to delay repayment of debt;

• Creditor being aware of the debtor having a long-standing log of unpaid items on a bank account;

• Creditor knowing that the debtor filed an application for bankruptcy.

At the same time, the Supreme Arbitration Court also listed the circumstances which by themselves do not evidence bad faith of the debtor’s contracting party:

• Creditor receiving payment in the course of enforcement proceedings, or with a substantial delay, or from a third party for the debtor;

• Creditor receiving payment after such creditor, along with other creditors, files an application on recognizing the debtor bankrupt, if the applicant deems such measure to be an ordinary variant of enforcement of a court order, and there are no real signs of insolvency;

• Information on initiation of a bankruptcy case against the debtor being placed in the arbitration case card catalog, unless, considering the nature of the transaction, the contracting party was not obliged to check data on the debtor by checking him through such card catalog;

• The fact that the creditor is a credit organization.

2.    Transaction in the ordinary course of business

Supreme Arbitration Court of the Russian Federation gave recommendations concerning the criteria for ordinary business transactions, indicating in particular that such transactions include payments under ongoing obligations (return of due part of credit in accordance with the schedule, payment of monthly rent, payment for utilities, etc.). At the same time, such transactions do not include payments that are substantially overdue, paying a break-up fee, as well as an economically unjustified early return of credit.

3.    Priority for satisfying a restored request of bona fide creditor, and interest

Supreme Arbitration Court of the Russian Federation provided a clarification according to which if a creditor is not at fault for a disputed transaction, its restored claim is to be satisfied pursuant to the general rules of priority, rather than after claims of third priority creditors are satisfied, as was in effect earlier. At the same time, the creditor can voluntarily return what it received under the transaction (property or cost thereof) after any bankruptcy procedure is initiated against the debtor, but prior to an application being filed on recognizing the transaction as void. In such event the said creditor claim is to be included in the list of creditor claims likewise under the general procedure.

In addition, the creditor’s bona fide conduct also affects the time from which interest starts to accrue for the use of another entity’s monies, in the event the debtor’s actions on paying such monies are found to be invalid. If it is proven in court that the creditor acted in bad faith when conducting the disputed transaction, then the interest for the use of another entity’s monies can accrue not from the time the relevant court decision becomes effective, but from an earlier date.

Summarizing the above, we can definitely say that the adopted amendments will substantially affect the existing practice of disputing a debtor’s transactions, will help protect the interests of bona fide creditors (contracting parties) and will increase the workload for arbitration administrators as pertains to proving the existence of signs that parties to a transaction acted in bad faith. No single company is safe from the risk that a party it does business with may go bankrupt, but the clarifications of the Supreme Arbitration Court will help companies protect themselves against shady transactions and thereby decrease the risk of financial loss in the event its contracting parties go bankrupt.

Additional notes

Should any questions arise in connection with the above or if you need any additional materials, please contact Irina Onikienko, St. Petersburg Office of Capital Legal Services.

This Information letter keeps the clients of Capital Legal Services and other interested parties abreast of information that may, to any extent, affect their activity or cater to their particular interests. The opinions and commentaries expressed in this information letter shall not be deemed as legal opinions and do not cancel the need to obtain legal advice or legal opinion on separate issues.