THE SUPREME COURT OF RUSSIA MADE EVALUATION OF COMPENSATORY FINANCING IN BANKRUPTCY

The issue of affiliation of the parties in bankruptcy and compensatory financing by the creditor of the debtor is the subject of disputes in commercial courts. Recently, an Economic board considered a case where several creditors and a manager disputed the inclusion of a debt to a third company in the list of the creditor’s claims.

Their arguments were related to the legal and actual affiliation of the company with the debtor, as well as to possible compensatory financing in this regard.

Despite objections, the courts of three instances did not find contradictions in the position of the creditor company and included its claim in the list of creditor’s claims. But the judges of the Supreme Court of Russia drew the attention of their colleagues to a number of shortcomings, among which threre were the following:

-          the affiliation of the parties to the transaction, on the basis of which the debt arose, was at first quite formal and legal, but later became de facto (the head of the creditor company was the father, and the debtor - his son);

-          the company's behavior was absolutely different from what is usually demonstrated by the creditor. The multimillion-dollar debt had not been returned for a long time, and the company did not take any actions to return it, and only after an insolvency petition had been filed, the representatives of the company revived and demanded that the debt should be included in the list of the creditor’s claims.

The Supreme Court of Russia recalled that the situation of detection of affiliation between the creditor and the debtor does not entail a decrease in the register of claims.

However, if the courts establish the fact of concealing the unfavorable financial condition of the debtor with the financial support of the creditor, this is the basis for lowering the priority of claims in the list of the creditor’s claims.

The reason is related to the fact that such an affiliated creditor, unlike everyone else, was aware of the difficult financial situation of the debtor, and took on the financial risk for his hidden support (definition No. 307-ES19-1671 (2, 3, 4) dated October 19 2020).