The Practice of Subordinating Claims of Creditors Affiliated with Debtor’s Shareholders
By Roman Makarov, Nektorov, Saveliev & Partners
The subordinating claims of affliated creditors is the most relevant topic in Russian bankruptcy industry in recent years. Now the courts actively subordinate the claims of affliates, but since such a possibility is not directly provided for by the law, the criteria were unclear until the beginning of 2020.
This regulatory gap should be filled in by the new (published this January) Supreme Court’s Review.
Understanding that in almost all highprofile decisions on subordination the Supreme Court lowered the money claims of affliated creditors, we expected the Review would be tough: if you are an affliated creditor, you almost automatically go out of the registry of creditors. But, in our opinion, the Review turned out to be quite balanced, because it uses the so-called soft model of subordination.
The Supreme Court emphasises that the priority of a creditor’s claim cannot be lowered solely on the ground that he is an affliate or controlling person of the debtor. If financing within the group of companies is carried out in good faith and does not violate the interests of other creditors, then the claims of the affliate creditor who provided the loan do not need to be subordinated.
Reasonable doubt must be dispelled by an affliate creditor. If the court has doubts regarding the true nature of the agreement on which the claim of the creditor affliated with the debtor is based, then the creditor must refute them. In other words, the burden of proving good faith rests with such a creditor. Cash claims of the creditor who issued a loan to the debtor in a situation of property crisis, shall be satisfied only after the claims of other creditors.
The Review establishes a new rule: The person who controls the debtor and who is brought to subsidiary liability shall be excluded from the register of creditors.
Finally, an affliate creditor with a “reduced” line-up claim has the right to participate in bankruptcy court hearings as an ordinary creditor, to appeal against judicial acts adopted in this case, to raise objections to creditors’ claims, to file complaints against the actions of the bankruptcy trustee, and to participate in meetings of creditors without the right to vote.
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Nektorov, Saveliev & Partners is a law firm established in 2006 in Moscow, Russia, and focuses on providing comprehensive legal solutions to corporate and private clients under Russian and English law. Their main practice areas are tax, corporate and M&A, arbitration and litigation, banking and finance, investments, public-private partnership, and real estate. They provide legal support to clients in Russia, CIS countries and worldwide.
Roman Makarov is a Partner of Nektorov, Saveliev & Partners, specialising in dispute settlement and complex bankruptcy cases. Roman develops strategies and tactics of legal defence in court.
Published: Debt Collection, Restructuring & Insolvency Newsletter, No. 12, Spring 2020 l Photo: Denira - stock.adobe.com