The Supreme Court explained what a settlement agreement between a bankrupt and creditors should not be

The Supreme Court of the Russian Federation (SC) explained that a settlement agreement in the bankruptcy of a company should not violate not only the rights of individual creditors, but also the debtor himself. In the case under consideration, creditors received the debtor’s main asset at a reduced price, which led to the inability of the company to continue operating. The Supreme Court emphasized that it is necessary to comply with the principle of “rehabilitation parity” and ensure the debtor’s return to normal activities. Lawyers note that in settlement agreements within the framework of bankruptcies, the rights of the debtor are often affected, which the decision of the Supreme Court will help protect.

The Supreme Court considered the case of challenging the settlement agreement in bankruptcy. As part of the bankruptcy of the Krasnodar developer Lafer-Yug LLC, a meeting of creditors voted for a settlement agreement. According to its terms, the claims of two creditors (in the amount of about 181 million rubles) were repaid in full, and the rest (more than 570 million rubles) were to be satisfied by transferring to them the shared ownership of an unfinished non-residential building owned by Lafer-Yug.

The Arbitration Court of the Krasnodar Territory approved the settlement agreement in December 2022, noting that it is “economically justified” and the incoming funds will be “sufficient to carry out settlements with all creditors.” The cassation agreed with this.

A number of interested parties, including the sole participant of the LLC and creditors affiliated with the latter, appealed the approval of the agreement to the Supreme Court. They insisted that the unfinished building with a high degree of readiness (90%) was transferred at a reduced cost in the presence of potential buyers who were ready to purchase it at a higher price. Moreover, the conclusion of the settlement agreement was not approved by the owner of the debtor, and the court did not consider applications from third parties who were ready to pay off all the debts of the bankrupt. The case was referred to the economic board, which canceled the settlement agreement.

Since the building was the debtor’s only asset, its transfer to the creditors made it impossible to continue business activities. In fact, under the guise of a settlement agreement, the majority of creditors agreed on the distribution of all the debtor’s assets with the deprivation of his property base, that is, in essence, “liquidation has occurred,” the Supreme Court noted. In addition, the court clarified, part of the building is registered not in the name of the debtor, but in the name of another person. All this casts doubt on the appropriateness of the settlement agreement.

The panel explained that the numerical superiority of creditors with a large number of votes should not allow them to make “arbitrary decisions.” Thus, the court is obliged to check the agreement for “rehabilitation parity, ensuring the return of the debtor to normal business activities,” and also evaluate the “economic feasibility and feasibility” of the conditions, “the degree of likelihood of their fulfillment, taking into account the requirements of reasonableness and market conditions,” the resolution says.

At the same time, the Supreme Court emphasized, the courts did not consider applications from third parties about their intention to repay the bankrupt’s debts, the first of which was filed a year and a half before the approval of the settlement agreement. As a result, the bankruptcy case was reopened.

Advisor to the bankruptcy practice of the BVMP law office, Dmitry Palin, says that settlement agreements in bankruptcy procedures are rarely concluded and even less often disputed. Thus, according to statistics from the Judicial Department under the Supreme Court for 2022, out of 9,965 court decisions based on the results of bankruptcy proceedings, only in 447 cases a settlement agreement was approved. At the same time, based on the voting results of the majority of creditors at the meeting to approve the settlement agreement, the rights of the debtor and its owners are often violated, emphasizes Anastasia Shamshina, managing partner of the legal boutique K’AMELAWT.

According to Mr. Palin, a “unique situation” has arisen in the case when the debtor’s assets are more than twice as large as his liabilities, although they are usually not enough to cover the debts. But in the end, “instead of the possibility of rehabilitating the debtor and continuing his activities, the courts allowed the alienation of a highly liquid asset at a reduced cost,” adds Elena Gladysheva, managing partner of RI-Consulting. In addition, approval of the agreement requires corporate approval of the debtor’s management bodies, otherwise it may be challenged on corporate grounds, says Elena Kravtsova, partner at ProLegals. But the judicial acts say nothing about such approval, she notes.

In the resumed case, the court will first have to consider the applications of individuals to repay the claims of creditors, and if the applicants confirm their intentions, they will satisfy the earliest of them, says Dmitry Palin. If this does not happen, adds Anastasia Shamshina, we can expect a new settlement agreement or the sale of the debtor’s asset at auction, but with a mandatory assessment of the market value of the object.

Ekaterina Volkova, Anna Zanina