Clarifications of the Supreme Commercial Court on Bankruptcy Law in the Russian Federation

Practical Law UK Articles 3-500-3898 (Approx. 5 pages)

Clarifications of the Supreme Commercial Court on Bankruptcy Law in the Russian Federation

by Igor Ostapets and Irina Dmitrieva, White & Case LLP

Resolution No. 58: Secured Claims

On 23 July 2009 the Plenum of the Supreme Commercial Court adopted Resolution No. 58 "On Certain Issues Related to Satisfaction of the Pledgeholder's Claims in Case of the Pledgor's Bankruptcy."

According to the Bankruptcy Law, a creditor's claims which are secured by a pledge are to be satisfied with the value of the pledged property prior to the claims of unsecured creditors (in accordance with the rules set by the Law).

Establishment of the amount of the secured claims

The Court clarified that when establishing the amount of a creditor's secured claims to be entered in the register of creditors' claims, the bankruptcy court should verify a number of facts (the scope of such facts depending on whether the creditor has already obtained a court decision on enforcement of the pledge). In particular, if the court finds that the debtor does not possess the pledged property (for example, as a result of its sale to a third party), the creditor's claims will not be considered as secured by the pledge over that property (however, the creditor will be able to submit a claim for enforcement of the pledge against the current owner of that property). The Court also pointed out that:

The pledge holder's claims are deemed secured in the full amount irrespective of the value of the pledged property as indicated in a pledge agreement.
The bankruptcy court should not apply the Civil Code rules limiting enforcement of the pledge if the debtor's default is insignificant when deciding that the creditor's claims are to be included in the register as secured claims.

No enforcement in the course of supervision

According to the Bankruptcy Law, enforcement of the pledge in the course of supervision (which is the initial bankruptcy procedure) is not allowed. Therefore, the Court clarified that:

An agreement on out-of-court enforcement of the pledge concluded after the date of introduction of supervision is void, and the performance of the agreement concluded before this date is not allowed.
Where the pledge holder files a claim for enforcement of the pledge before this date, the court may continue to consider (provided the claimant does not ask for suspension of the trial) and sustain the claim, but the enforcement of this decision in the course of supervision is not allowed.

Enforcement in the course of certain bankruptcy procedures

The Bankruptcy Law allows the pledge holder to enforce the pledge in court in the course of financial rehabilitation or external management of the debtor. The property will be sold at a public sale. The Court clarified that the proceeds from the sale of the pledged property at these bankruptcy stages may not be used to satisfy current claims and claims of creditors of the first and second priorities until the pledge holder's claims are discharged.

According to the Bankruptcy Law, if the pledge holder does not choose to take the above course, the pledged property will be sold at a public sale during receivership. The proceeds from the sale will be allocated among the creditors as provided by the Law (a portion will be used to satisfy the secured creditor's claims and another portion to satisfy claims of creditors of first and second priorities and cover current expenses). The Court clarified that the same rules on distribution of the proceeds apply where the property is pledged to several pledge holders, but the initial pledge holder's claims are to be satisfied (from the portion of proceeds designated for the secured creditors) prior to the claims of the subsequent pledge holder.

The Court also clarified that where the pledged property constitutes part of the debtor's enterprise, it may be sold within the enterprise as a single object. In this case the pledged property must be separately valued and the pledge holder will be entitled to receive a respective portion of the proceeds from the sale of the enterprise.

Third party pledgor

The Bankruptcy Law provides that where a third party pledgor undergoes bankruptcy procedures, a pledge holder is considered a secured creditor with respect to the pledgor. The Court clarified that:

If a supervision procedure is introduced with respect to the pledgor, the pledge holder may submit a claim for enforcement of the pledge only to the bankruptcy court. In this case the pledge holder is not required to present a court decision on the recovery of debt from the debtor.
If the pledge holder has already obtained a court decision on enforcement of the pledge, the enforcement of this decision will be suspended.
The amount of secured claims as established by the bankruptcy court may not exceed the value of the pledged property indicated in a pledge agreement or in a court decision on enforcement of the pledge, if any (with due regard to the interested parties' arguments about changes in this value).
The pledge holder's claims may be satisfied only with the proceeds from the sale of the pledged property.

The Court also pointed out that a pledge holder cannot initiate a bankruptcy process with respect to a third party pledgor.

It also clarified that if the debtor was found bankrupt and was further removed from the Unified State Register of Legal Entities, the pledge is still considered valid if the pledge holder had filed a claim for enforcement of the pledge against a third party pledgor by that time.

Previous rules on satisfaction of secured creditors' claims

The Court also provided clarification on the application of the Bankruptcy Law rules on satisfaction of secured creditors' claims which had been effective before their amendment by Federal Law No. 306-FZ, dated 30 December 2008. These comments may be of interest if, in particular, a receivership procedure with respect to the debtor was introduced or a bankruptcy process with respect to a third party pledgor commenced before those amendments.

Resolution No. 59: Enforcement Proceedings

On 23 July 2009 the Plenum of the Supreme Commercial Court adopted Resolution No. 59 regarding application of the Enforcement Law where the debtor undergoes bankruptcy procedures.

The Bankruptcy Law provides that after the supervision procedure is introduced with respect to the debtor, all the claims against the debtor may be submitted only in accordance with the rules set by the Bankruptcy Law. The Court pointed out that:

This rule applies equally to creditors' claims confirmed by the enforcement documents.
The debtor's satisfaction of claims of certain creditors (including on the debtor's own initiative) would be in conflict with the Bankruptcy Law.
A bank which receives an enforcement document for direct debiting of the debtor's account after the introduction of supervision with respect to the debtor may perform this enforcement document only if it relates to (i) current claims or (ii) claims specifically listed in the Law.

Under the Bankruptcy Law and the Enforcement Law, the introduction of supervision, as well as financial rehabilitation and external management, entails the suspension of the performance of enforcement documents (save for a few exceptions). The Court clarified that if an enforcement document is submitted to the bailiffs' service after the introduction of supervision, bailiffs must refuse initiation of enforcement proceedings.

The laws also provide that introduction of receivership entails termination of enforcement proceedings (save for a few exceptions). In this case bailiffs transfer enforcement documents to a receiver. The Court clarified that on receipt of the enforcement documents, the receiver must notify the creditors whose claims are confirmed by the enforcement documents of the need to submit those claims to the bankruptcy court for their entry in the register of creditors' claims.

The Court also clarified a number of issues relating to application of interim measures with respect to the debtor (for example, attachment of the debtor’s property) in the course of bankruptcy procedures.

Resolution No. 60: December 2008 Amendments

On 23 July 2009, the Plenum of the Supreme Commercial Court adopted Resolution No. 60 regarding application of amendments to the Bankruptcy Law introduced by Federal Law No. 296-FZ, dated 30 December 2008.

The Court provided clarifications relating to amendments to the Bankruptcy Law introduced by Law No. 296-FZ (see White & Case's Special Update on Amendments to the Bankruptcy Law, dated 23 January 2009).

In particular, it pointed out that as a result of the amendments, claims under monetary obligations which arose before commencement of the bankruptcy proceedings do not qualify as current claims irrespective of their maturity date (more details on the current claims are provided below).

The Court also clarified certain issues relating to the filing of a bankruptcy petition and submission of claims for their entry in the register of creditors' claims; discharge of the debtor's obligations by third parties (for example, payment of the tax debts by its shareholders); and appointment and activities of bankruptcy managers.

Resolution No. 63: Current Claims

On 23 July 2009 the Plenum of the Supreme Commercial Court adopted Resolution No. 63 "On Current Claims under Monetary Obligations in a Bankruptcy Case."

Under the Bankruptcy Law, the current claims are creditors' claims under monetary obligations which arise after the date the court accepted the bankruptcy petition (relevant date). They are not included in the register of creditors' claims and are to be satisfied prior to other claims that arose before the relevant date.

The Court clarified that the following claims do not qualify as current claims:

The claim for interest due under an obligation which arose before the relevant date (the amount of interest accrued is to be added to the amount of the loan or credit and this total amount is to be included in the register of creditors' claims).
The claim for payment of damages and penalties for violation of the obligation which arose before the relevant date.
The guarantor's claim against the debtor for the reimbursement of payments made under the bank guarantee after the relevant date, if the bank guarantee secures an obligation which arose before the relevant date.

Further, the obligations are deemed to arise as follows:

The obligation to repay the debt under a loan or credit agreement arises as of the moment when funds are provided to the borrower.
The surety's obligation to be liable for the debtor's debt arises as of the moment when the suretyship agreement is executed.
The obligation created under a novation agreement or an amicable settlement agreement is deemed to arise as of the date of the initial obligation (which is terminated by the novation agreement or restructured by the amicable settlement agreement).

The Court also pointed out that the assignment of claims does not affect their qualification as current claims.

The Resolutions are mandatory for lower commercial courts when considering similar issues.

Clarifications of the Supreme Commercial Court on Bankruptcy Law in the Russian Federation | Practical Law