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Legal briefing notes

What is meant by the transaction that is made to the detriment of creditors?

Challenging of transactions that are made to the detriment of creditors is possible if they were made within a three-year period prior to prosecution of an insolvency case of the debtor. Such a grace period for creditors is combined with the need to prove a high degree of dishonesty in the intentions and actions of both the debtor and his counterparty. Therefore, participation in challenging such transactions requires a high degree of professionalism and experience. In order for the court to declare such a transaction as invalid, the applicant has to prove a number of circumstances:

  1. The debtor, at the time of transaction, wanted to inflict harm to creditors, that is his goal was to create a situation in which creditors would not be able to obtain the fullest satisfaction of their legal claims.
  2. At least a partial loss of the creditor's ability to receive satisfaction of his claims against the debtor at the expense of his property means that there was harm to the creditor. Such harm may be because of such legal consequences of the challenged transaction as a reduction of the debtor's property, including through the withdrawal of means of production, an erosion of the income from its normal economic activity, the replacement of liquid assets with non-liquid ones, an inadequate increase in debts.
  3. Awareness of the debtor's counterparty in the transaction about the debtor's intention to inflict harm to its creditors.

This awareness may be both from formal signs of interest (including affiliation), and obviously unreasonable acts and behavior of the debtor when making a transaction. And the transaction is so atypical and undervalued that for any reasonable counterparty it will be obvious that the transaction is to the detriment of creditors. Whereas that there is a particular intention of a person is a fact that is difficult to prove, the law establishes special presumptions (assumptions). If there are such, it is sufficient evidence for a claimant that there is a purpose to damage the property rights of creditors. There are many examples like if an insolvent debtor makes a transaction with an interested person and transfers property free of charge or pays shares/stake to OOO/AO participants and assumes obligations or transfers property worth more than 20% of its book value and also continues to use the alienated property or gives orders to the new owner to determine his fate or completely destroys the documentation and tries to hide. So then all the circumstances clearly indicate the intention of the debtor to inflict harm to creditors.

At the same time, the evidence of these circumstances (presumptions) does not yet guarantee the recognition of the transaction as invalid, since the debtor or counterparty can prove that the transaction still met the interests of the debtor's property base, despite the transfer of property to the interested person, donation of assets, destruction of documentation, etc. Thus, if one of the presumptions is proved, the debtor or counterparty must take the lead in the legal proceedings.

The detection of transactions to the detriment of creditors

The detection of transactions to the detriment of creditors may be done through a comprehensive work on in-depth examination of transactions and the actual activities of the debtor and his financial statements. Also, the financial condition of a debtor should be checked as well as the possible involvement of experts and specialists. It is also necessary to carefully verify the debtor's counterparties to identify potential interest in participating. The check should be conducted both on formal grounds and through an analysis of their economic activities.

Consequences of challenging the transactions to the detriment of creditors

Challenging transactions in bankruptcy is one of the legal tools that are used to replenish the insolvency estate for the subsequent satisfaction of the legitimate claims of creditors. Considering the transaction to the detriment of creditors as invalid entails the obligation of the counterparty to return the funds to the debtor. A dishonest counterparty who has returned what was acquired into the insolvency estate also acquires the right to compensate for what was performed on its part, but only after satisfying the claims of third-priority creditors (so the creditors who were harmed by the transaction). The debtor's counterparty finds itself in an extremely disadvantageous position in the order of priority of settling the claims, and in the vast majority of cases will not receive satisfaction. Specialists of the Tsentralny Okrug Law Firm are ready to advise you on all issues related to challenging the debtor's transactions, including transactions made to the detriment of creditors, and to analyze the documents and to represent interests in court.

Author is Stanislav Valezhnikov

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