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Challenging transactions in bankruptcy cases is one of the ways to replenish the insolvency estate for the subsequent meeting requirements of creditors. It is not uncommon for a debtor, on the eve of bankruptcy, to “throw away” his property to affiliates or pay debts to friendly counterparties in order to withdraw assets and inflict harm to creditors. In such cases, the arbitral receiver is obliged to challenge such suspicious transactions and operations. If the arbitral receiver does not fulfill the obligations assigned to him, creditors have the right to initiate a process to challenge transactions on their own.
What is a transaction with unfair preference?
The bankruptcy law establishes special rules that are regulating the issues of challenging the transactions. Article 61.3 of the bankruptcy law establishes that a transaction made by a debtor over one or more creditors may be declared as invalid by a commercial court if it entailed a preferred satisfaction of the claims of such creditors to other creditors of the debtor under a number of circumstances established by paragraph 1 of article 61.3 of Bankruptcy Law. It is important to note that the challenging of transactions with preference also involve the transactions that were made by a third party at the expense of the debtor. The legislation establishes two time limits for challenging the transactions with preference. When challenging a transaction made within six months of auspiciousness, the applicant will need to prove the fact that the counterparty has known that the Debtor was in a pre-bankruptcy state during the transaction. If the transactions were made in a month period before filing an application for declaring a person bankrupt or after that, then one of the conditions is sufficient that are in paragraph 1 of article 61.3 of the Bankruptcy Law. We inform you that the Bankruptcy Law does not establish a complete list of cases when a transaction with preference may be challenged and the court may invalidate the transaction if there are other conditions.
Detection of transactions with unfair preference
When detecting transactions with preference, it is necessary to comprehensively and fully study the activities of the debtor, banking operations, concluded agreements, etc. The debtor, for asset withdrawal, can make preferential satisfaction of obligations, the due term for which is at the time of the transaction hasn't yet come. As mentioned earlier, the period of suspicion for transactions with preference is six months. It is important when analyzing documents, you should not be limited because of this specified period, because information for earlier periods may help to establish the counterparty's awareness of the unfavorable financial condition of a debtor. For example, the debtor and the counterparty concluded an agreement on debt restructuring and the debtor made payments under this agreement within a six-month period.
Consequences of challenging the transactions with unfair preference
The consequence of recognizing a transaction with preference as invalid is the obligation of the counterparty to return the funds to the insolvency estate of the debtor and the restoration of the possibility of such a person to establish his claims for the disputed amount in the register of creditors' claims. This mechanism allows you to proportionally distribute funds among conscientious creditors. There are cases when for a set-off made between a debtor and its counterparty may be challenged. The consequence of the recognition of such a transaction as invalid is the restoration of the debtor's right to claim funds from the counterparty. This, when collecting such accounts receivables, it may also lead to replenishment of the insolvency estate.
Protection against challenging
During the protection against challenging, it is necessary to prove that the creditor acted in good faith and did not know that the debtor was in a pre-bankruptcy position. This realization of this fact can be confirmed by the debtor's repeated requests for a deferment of payment of obligations due to the impossibility of payment or the availability of information from the creditor-bank (or other credit institution) about a long-term file cabinet of the debtor's account. So, the creditor will be saved if he proves that he was not aware of the impending bankruptcy and was overcautious when receiving payment from the debtor. Specialists of the Tsentralny Okrug Law firm are ready to advise you on all issues considering challenging the debtor's transactions, including transactions with unfair preference, and to analyze the documents and to represent interests in court.
Author is Dmitry Prosvirin