The Supreme Court supported the extension of the installment plan for the payment of debts of citizens

The Supreme Court of the Russian Federation recognized the priority of a citizen’s right to repay debts as part of restructuring instead of declaring him bankrupt. Even if the creditors are against it, but the plan allows the debtor to get out of the crisis, the court has the right to extend the period in case of objective obstacles to timely execution. The Supreme Court emphasized that the procedure has priority for the “social rehabilitation of the citizen” compared to the sale of property, which imposes greater restrictions on the debtor. According to lawyers, the decision of the Supreme Court is more useful for debtors than for creditors, however, the good faith of the citizen must be taken into account, and the restructuring plan must be realistic.

The Supreme Court of the Russian Federation (SC) for the first time considered a dispute concerning the rehabilitation of a debtor citizen, allowing him to avoid bankruptcy. Due to a debt in the amount of 64.8 million rubles. Nikolai Pushkin filed for bankruptcy of Arina Balakireva in October 2020. He turned out to be the only creditor, and with his consent, in June 2021, the Moscow Arbitration Court approved a restructuring plan involving repayment of the debt in installments. Within a year, the debtor had to remove the mortgage on the property (a residential building with plots) and sell it.

The mortgagee of the property, Investtorgbank, opposed it, initiating litigation, which is why Arina Balakireva was unable to remove the encumbrances. The court extended the term of the plan for several months, but the disputes with the bank dragged on, and the court again refused to extend the procedure due to the objections of the creditor. As a result, the plan was canceled, the debtor was declared bankrupt and a procedure for the sale of property was introduced. Arina Balakireva tried to challenge this decision, citing “force majeure.” The appeal with cassation was rejected, considering that the opposition of the bank, which was not included in the register of creditors, did not apply to such circumstances. But the complaint attracted the attention of the Supreme Court, and the case was transferred to the economic college, which supported the debtor’s arguments and overturned the decision to declare her bankrupt.

The panel noted that the debt restructuring plan is “a rehabilitation procedure used in a bankruptcy case in order to restore solvency and repay debts to creditors.” This procedure, the Supreme Court emphasized, is a priority because it “allows the interests of both creditors and the debtor to be respected to the greatest extent,” and its positive outcome has “a greater effect of social rehabilitation of the citizen compared to the procedure for the sale of property.” Therefore, “a citizen who conscientiously strives to fulfill his obligations” has the right to count on the use of “the most loyal bankruptcy procedure.”

The court has the right “regardless of the consent of the creditors to approve an economically sound plan for overcoming the crisis,” the panel’s decision says. Without the approval of creditors, the court can extend the restructuring plan for up to three years if the citizen proves that failure to repay the debt on time was impossible “due to force majeure.” According to the Supreme Court, the rule is applicable “in any other circumstances when a bona fide debtor, due to objective reasons, was deprived of the opportunity” to fulfill the plan. The board attributed the protracted procedure for removing the bail to just such a circumstance. The Supreme Court added that “the actions and behavior of the debtor indicated an intention to repay the debt” and there was such an opportunity, since the value of the property was several times higher than the amount of the debt.

The case was transferred to the economic board by the deputy chairman of the Supreme Court, that is, “the rehabilitation of debtor citizens was taken care of at the highest level,” emphasizes arbitration manager Pavel Zamalaev. So far, the share of rehabilitation procedures in the total number of bankruptcy cases is small: in 2023, only 675 citizens received installments in the form of an approved debt restructuring plan against 350 thousand people declared bankrupt, according to the Unified Federal Register of Bankruptcy Information (EFRB).

The Economic College identified the following conditions for extending the plan: the debtor acts in good faith, his behavior confirms his intention to repay debts, the value of assets exceeds the amount of liabilities, failure to fulfill the plan is due to objective reasons, explains Orchards adviser Vadim Borodkin. It is obvious that “not in all bankruptcy cases individuals will be able to meet these criteria,” the lawyer clarifies. However, even if the debtor does not have property, he may have a “highly paid and high-status job or business,” adds arbitration manager Dmitry Igumnov.

The priority of the restructuring plan is explained by the fact that it “allows us to avoid significant restrictions,” explains Vadim Borodkin. So, the lawyer says, after a citizen is declared bankrupt, he no longer has access to property (except for small exceptions regarding personal belongings and the only home) – everything, including money in bank accounts, is managed by the financial manager. Upon completion of the judicial procedure, bankruptcy status imposes additional restrictions on a person, clarifies Mr. Borodkin. For five years, it is difficult for a citizen to obtain a loan; during the same period, he does not have the right to file for bankruptcy. And even if a person is bankrupted by creditors, the debts will not be written off upon completion of the procedure. A citizen cannot hold leadership positions in legal entities for three years; if we are talking about a position in an insurance company, microfinance organization, non-state pension fund and mutual fund – for five years; in a bank – for ten years.

As part of the restructuring, the debtor sells assets “in a comfortable manner”, more time is given for this and, in general, there may be “flexible options for debt repayment,” adds RKT adviser Ivan Stasiuk. At bankruptcy auctions, the lawyer notes, “the debtor has almost no control over pricing, the period of exposure of property is limited, and strict payment rules are established.” Theoretically, it is beneficial for creditors to sell the debtor’s property for a higher price, but “as part of bankruptcy, they can, for example, buy the asset themselves cheaper at auction and then resell it at a higher price,” explains Mr. Stasiuk.

But the restructuring plan does not always suit creditors, “especially for banks and microfinance organizations, which also lose the opportunity to impose conditions, for example, through loan refinancing,” says lawyer Ruslan Petruchak. As part of the plan, he explains, “you can lower the interest rate, reduce or eliminate penalties and fines, extend payment terms and even change the final amount of the debt.” The procedure for selling property may take less time, and creditors are not always willing to wait. Especially taking into account, Dmitry Igumnov notes, that in 2023 the deadline for the restructuring plan has already been increased from three to five years, and if creditors disagree, from two to three years. The sale of property, according to the EFRSB data for 2021–2023, lasts on average 260–270 days.

However, the position of the Supreme Court does not yet mean that the courts will approve restructuring more often, clarifies Vadim Borodkin, since “in practice, one often has to deal with fantasy plans that are impracticable in real life.” But for “a small part of citizens” who, although they are in a difficult financial situation, can still pay, Mr. Igumnov believes, “the restructuring procedure can become a lifeline, and the Supreme Court called on the courts to assist in this.”

Anna Zanina, Jan Nazarenko