CHALLENGING TRANSACTIONS ON CORPORATE GROUNDS IN THE FRAMEWORK OF A BANKRUPTCY CASE

CHALLENGING TRANSACTIONS ON CORPORATE GROUNDS IN THE FRAMEWORK OF A BANKRUPTCY CASE

CHALLENGING TRANSACTIONS ON CORPORATE GROUNDS IN THE FRAMEWORK OF A BANKRUPTCY CASE
Challenging transactions in bankruptcy cases is possible not only on the grounds provided for in Chapter III.1. Federal Law No. 127-FZ dated 26.10.2002 "On Insolvency (Bankruptcy)" (hereinafter referred to as the Bankruptcy Law). The general civil grounds for the invalidity of the transaction and the grounds provided for by corporate legislation, in particular Federal Law No. 208-FZ of 26.12.1995 "On Joint Stock Companies" (hereinafter referred to as the Law on Joint Stock Companies) and Federal Law No. 14FZ of 08.02.1998 "On Limited Liability Companies" (hereinafter referred to as the Law on Joint Stock Companies LLC).

Challenging transactions in bankruptcy cases is possible not only on the grounds provided for in Chapter III.1. Federal Law No. 127-FZ dated 26.10.2002 "On Insolvency (Bankruptcy)" (hereinafter referred to as the Bankruptcy Law). The general civil grounds for the invalidity of the transaction and the grounds provided for by corporate legislation, in particular Federal Law No. 208-FZ of 26.12.1995 "On Joint Stock Companies" (hereinafter referred to as the Law on Joint Stock Companies) and Federal Law No. 14FZ of 08.02.1998 "On Limited Liability Companies" (hereinafter referred to as the Law on Joint Stock Companies LLC).

In the article, Elena Ganabina, senior associate of the RBS consulting company, and Pavel Rusetsky, partner of the RBS consulting company, will consider examples of practical application in bankruptcy cases of corporate grounds for invalidating a transaction: the commission of an interested party transaction and a major transaction without approval, the contradiction of the transaction to the company's charter.

The application of corporate grounds is accompanied by a number of controversial issues, for example, the question of the possibility of their simultaneous application with other grounds of invalidity, the possibility of their use as independent grounds for contesting in bankruptcy cases.

The analysis of law enforcement practice makes it possible to identify the main models of the application of corporate grounds of challenge in bankruptcy cases.

The first model recognizes corporate grounds as independent grounds for invalidating transactions in bankruptcy cases and allows transactions to be invalidated solely on such grounds.

In one of the cases, the requirement to invalidate the contract on the transfer of debt and termination of obligations by offset between the debtor and the company was satisfied on the basis of Articles 45, 46 of the Law on LLC due to the lack of approval of the contract as an interested party transaction (resolution of the Arbitration Court of the Central District of 26.04.2021 No. F10-394/2021 in case No. A83-17343/2019, confirmed by the ruling of the Supreme Court of the Russian Federation dated 25.08.2021 No. 310-ES21-13955 in case No. A83-17343/2019).

In another case, the court concluded: "the disputed transaction is invalid due to the fact that it was not approved in accordance with the procedure provided for by law" (Decision of the Tenth Arbitration Court of Appeal of 09.02.2023 in case No. A41-24714/2021).

The lack of approval of the transaction, especially in case of violation of the relevant provisions of the company's charter, becomes not only an independent basis for challenging it, but also an additional tool when bringing persons controlling the debtor to subsidiary liability.

As relevant decisions, we can cite the decision of the Ninth Arbitration Court of Appeal of 20.01.2023 in case no. A40-230905/2016, the decision of the Arbitration Court of the Moscow District of 23.09.2021 in case no. A40-134540/2017. In these cases, the court concluded that the purchase and sale transactions were actually large, but in order to avoid this criterion, the parties, in order not to make a decision on approving these transactions, concluded them at a reduced price. When bringing the persons controlling the debtor to subsidiary liability, the courts referred to the violation of corporate norms established when invalidating transactions.

The second model provides for the simultaneous application of both corporate grounds for challenging in bankruptcy cases and the grounds provided for by the norms of the Civil Code of the Russian Federation and the Bankruptcy Law.

The courts point out that the presence of bankrupt and general civil grounds of invalidity does not prevent the simultaneous application of corporate grounds of invalidity. In such examples, the courts supplement the qualification of the invalidity of the transaction on special and general grounds with a reference to the relevant provision of corporate legislation.

For example, the court concluded that as a result of the disputed transactions, the property rights of creditors were harmed, there was a decrease in the debtor's property, an increase in property claims against the debtor, and creditors lost the opportunity to obtain satisfaction of part of their claims, at the same time, approval was not received when making interested-party transactions (resolution of the Tenth Arbitration Court of Appeal of 21.01.2020 in case no. A41-31167/2018).

In another case, the court simultaneously recognized the transactions as unequal, committed by affiliated persons and found that the decision of the general meeting of participants on the approval of the transaction in which there is an interest was not transmitted to the bankruptcy trustee (resolution of the Arbitration Court of the Moscow District of 31.05.2021 in case No. A41-9145/2016).

In both cases, the transactions were invalidated on the basis of clauses 1, 2 of Article 61.2 of the Bankruptcy Law, Articles 10, 168 of the Civil Code of the Russian Federation and Articles 45 and 46 of the LLC Law, respectively.

Basically, corporate grounds for contesting are applied together with bankruptcy general civil grounds. However, there is a practice where it is the presence of corporate grounds that allowed the transaction to be invalidated.

In one of the cases, the bankruptcy trustee appealed to the court with an application for invalidation of transactions on the grounds provided for in Articles 10, 167, 168, 170 of the Civil Code of the Russian Federation, Articles 61.2, 61.3 of the Bankruptcy Law. The courts of three instances refused to satisfy the claims. The case was referred for consideration by the judges of the Supreme Court of the Russian Federation, as "the courts did not give a proper legal assessment of the arguments about the interest of the debtor and society."

As a result of the review, the Supreme Court of the Russian Federation canceled the acts of lower courts with reference to the existence of the parties to the transaction in interest. In particular, the court pointed out that in order to apply the presumption of the purpose of harming the property rights of creditors, it is sufficient, in particular, to establish a combination of two circumstances: the insufficiency of the debtor's property at the time of the transaction and its gratuitous nature. The legal or actual affiliation of the participants in the transaction implies their awareness of this goal. In this case, making interested-party transactions makes it possible to supplement the composition and qualify transactions as invalid (ruling of the Supreme Court of the Russian Federation dated 21.11.2022 No. 305-ES22-14706(1,2) in case No. A41-59326/2019).


In another case, the court of cassation annulled the act that approved the settlement agreement in the case, solely in connection with the violation of corporate legislation. In particular, the Court of Cassation pointed out that checking the content of the settlement agreement for compliance with Article 140 of the APC of the Russian Federation is not enough and, since the debtor is a business company, when approving the settlement agreement, the court's duties included, among other things, checking compliance with the requirements of Article 46 of the Law on Limited Liability Companies regulating the procedure for making a major transaction. Due to the lack of approval of a major transaction, the settlement agreement could not stand (resolution of the Arbitration Court of the East Siberian District of 22.04.2022 No. F02-535/2022 in case No. A33-11393/2021).

There are court decisions in which the general civil grounds of contestation "absorb" corporate ones. In one of the cases, the court pointed to the lack of approval of a transaction that is a large and interested-party transaction, and then pointed out that the transactions are imaginary, and the contracts were drawn up and signed without the intention to create legal consequences corresponding to the nature of the loan relationship. The contract was declared invalid only on the basis of Articles 10, 168 and 170 of the Civil Code of the Russian Federation (resolution of the Arbitration Court of the Moscow District of 01.06.2020 N F05-1858/2017 in case no. A40-140966/2015).

According to the position set out in paragraph 1 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated 16.05.2014 No. 28, according to which "paragraph 5 of Article 45, paragraph 5 of Article 46 of the Law on LLC, paragraph 6 of Article 79, paragraph 1 of Article 84 of the Law on JSC are special in relation to the rules of Article 173.1 and paragraph 3 of Article 182 and the Civil Code of the Russian Federation".

At the same time, the appearance and size are equivalent grounds for invalidating the transaction. The court may give an additional qualification to the basis of the challenge (and this will not be regarded as a change in the basis of the claim claimed by the plaintiff (decision of the Ninth Arbitration Court of Appeal of 12.05.2021 in case No. A40-129395/2018), but it has no right to replace the corporate basis with a civil one.

The expansion of the grounds for challenging transactions in bankruptcy cases is of positive importance for the protection of the rights and legitimate interests of the participants in the case. Moreover, it expands the subject composition of persons who have the right to apply for invalidation of the transaction, and therefore provides additional guarantees to participants in legal relations (paragraph 13 of the "Review of Judicial Practice of the Supreme Court of the Russian Federation No. 4 (2020)").

At the same time, challenging transactions in bankruptcy cases on corporate grounds is not widely used by judges. In most cases, courts tend to invalidate transactions on the grounds that have already become customary, provided for by the Civil Code of the Russian Federation and/or the Bankruptcy Law.

At the same time, bearing in mind the experience of introducing general civil grounds of challenge into practice, we believe that law enforcement practice will follow a similar path, and challenging transactions in a bankruptcy case on corporate grounds will be perceived by the courts as organically as challenging on bankruptcy or general civil grounds. Moreover, these cases prove the indispensability of studying transactions for the presence of corporate grounds and the use of such grounds, including as the only possible grounds for invalidating transactions.


Photo courtesy of RBS consulting company


28.02.2023