The Supreme Court has expanded the range of grounds for challenging bankruptcy auctions

The Supreme Court of the Russian Federation (SC) has expanded the range of grounds for challenging bankruptcy auctions, even if they were held without violations. The terms of the contract with the winner must correspond to the declared ones, their change may become the basis for canceling the results of the auction. In particular, putting up for sale the seized property narrows the circle of potential applicants and reduces the price, while the removal of the seizure by the time the contract is signed raises doubts about the legality of the procedure, the Supreme Court decided. Lawyers note support for the rights of creditors, but expect a decrease in interest in bankruptcy bidding due to an increase in the risk of challenging them.

The Supreme Court of the Russian Federation explained the features of the sale of property of a bankrupt arrested in a criminal case. The decision was made as part of a dispute over the sale of the asset of Mebe-Development LLC, which was part of the Mebe Group of the Turkish developer Mustafa Bilek (owned 49.99%). As part of a criminal case against a businessman accused of tax evasion, the Babushkinsky District Court of Moscow, at the request of the investigator, in December 2018 seized 49.99% of the company’s ownership of the Mebe One Khimki Plaza business center.

Due to a delay in the loan, Sberbank initiated the bankruptcy of Mebe-Development in March 2019. As part of the procedure, the business center was sold for 1.493 billion rubles. LLC “Center for Chemistry of Medicinal Products” In January 2021, the Federal Tax Service challenged the contract with the winner and the auction itself. The service considered the sale of property as being under arrest a violation, which led to “narrowing the circle of potential buyers” and led to a decrease in price. Meanwhile, by the time the contract was signed with the winner, the arrest was lifted at the request of the bankruptcy trustee.

Arbitration courts of three instances rejected the claim of the Federal Tax Service, recognizing the auction as legal. The decisions state that the building was valued by Rebus LLC as of July 19, 2019 at 1.95 billion rubles, the fact of the arrest is reflected in the report, and the price was the market one. The manager proceeded from the fact that he was selling the seized property, which was indicated in all publications about the auction. The first and second auctions did not take place due to lack of bids, so the building was sold through a public offer. In addition, the courts decided that the rights of the Federal Tax Service as the current creditor are not violated, and the one-year limitation period has expired.

The tax authorities appealed to the Supreme Court, explaining that even during the period of accepting applications at the first auction, the manager asked the arbitration court to oblige Rosreestr to remove the mark on the criminal arrest of the building. The court agreed to do this only on November 26, 2019, a week after the signing of the protocol on the results of the last auction, when the property had already been sold. As a result, at the time of the conclusion of the sale and purchase agreement with the winner (December 13, 2019), the building was not under arrest, that is, the company bought the asset without encumbrances. Estimating the value of property is also controversial, as evidenced by the conclusion of the Financial University under the Government of the Russian Federation. According to the Federal Tax Service, the manager “acted in concert” with the winner in order to restrict access to the auction and sell the property without encumbrances below its market value.

The case was referred to the Economic Collegium, which supported the arguments of the tax authorities and overturned the decisions of the courts. The Supreme Court emphasized that the conditions for the sale of property at auction are formed from those given in the notice of them, and the best condition for the price in the application. In the publication about the auction, the fact of the arrest was indicated, but in fact the contract with the winner was signed “on the condition of the alienation of real estate free from arrest.” At the same time, “simultaneously with the auction, the manager took measures aimed at extinguishing the arrest record.”

“Such vices do not relate to violations of the rules for bidding,” the Supreme Court explained, but the courts did not take into account that it is possible to challenge the bidding for “other violations of the law,” including in the event of a significant change in the terms of the contract with the winner. They can be changed in cases specified by law or when the adjustments are minor. But the presence or absence of an encumbrance was of “essential importance”, since “when the seized property is alienated, the circle of potential buyers always narrows, the sale price decreases,” the Supreme Court emphasized.

As a result, a contract with such modified conditions can be qualified as a void transaction, the period for challenging which is three years, and current creditors have the right to file such claims, the board decided. The dispute is referred for retrial with instructions to check the correctness of the valuation of the building and to decide whether the contract can be recognized as a transaction concluded at the end of the auction or not related to the announced offer to sell the asset.

The position of the Supreme Court “is aimed at protecting creditors in order to repay their claims to the greatest extent and can help to avoid abuse at the auction by bankruptcy trustees and buyers,” said Orchards adviser Azat Akhmetov. The general direction of practice on the issue of contesting tenders in bankruptcy usually follows “the path of maximum protection of the winner,” Oleg Permyakov, partner at the law firm Rustam Kurmaev and Partners, clarifies, while the new decision of the Supreme Court “supplements a small list of grounds for declaring tenders invalid.” Perhaps the manager, after removing the arrest from the building, “should have revalued the asset,” the lawyer notes.

However, in general, Oleg Permyakov believes, the emergence of a new reason for canceling the auction is “negative in itself”, as it “reduces the confidence of their participants in the stability and predictability” of the development of events. The head of the Lemchik, Krupsky and Partners bankruptcy practice, David Kononov, adds that the VS did not pay attention to the interests of the buyer, who invested in real estate, and now remains “under the real risk of losing not only the object, but also the funds.” Due to the fact that “there is still no fixed concept of good faith of the acquirer,” explains Mr. Kononov, those who decide to take part in them “have no clear understanding of whether the deal will fall apart later.”

Zoya Galeeva, Managing Partner of the Center for Troubled Assets, believes that when reconsidering, “in order to avoid abuse, the courts should also take into account the economic effect of the auction and the rights of the property acquirer, if he acted in good faith.”

Anna Zanina, Ekaterina Volkova