The Supreme Court tightens rules for advancing bankrupt bidding

If the only participant in the bankruptcy auction refused to conclude an agreement on the purchase of property, the deposit will not be returned to him, even if the rules of the trading platform or the terms of sale say otherwise. This decision was made by the Supreme Court of the Russian Federation (SC). Lawyers acknowledge that the position of the Supreme Court limits the possibilities of dishonest behavior, including manipulation of the value of property and delaying the sale.

The Supreme Court clarified the rules for participation in auctions for the sale of debtors’ property. As part of the bankruptcy of New Technologies LLC, in December 2019, the company’s “commodity and material assets” were put up for auction. Mikhail Tsyplakov applied for participation and transferred a deposit in the amount of 540 thousand rubles. (20% of the starting price). Due to the presence of only one participant, the auction was declared invalid. The manager offered Mr. Tsyplakov to conclude an agreement on the terms of the application, but he refused, demanding the return of the deposit. Having received a refusal, he filed a lawsuit against the organizer of the auction (Auction House LLC) and the manager.

Due to the different positions of the arbitration courts, the case went through two circles. As a result, the first and appellate instances rejected Mikhail Tsyplakov’s claim, considering that he unreasonably evaded the purchase of property. But the district cassation satisfied the claim, recovering 540 thousand rubles from the Auction House. The court decided that the only participant in the failed auction is not obliged to buy out the property and must “return the deposit”.

Both the plaintiff and the defendant, who filed complaints with the Supreme Court, were dissatisfied with this decision. Mikhail Tsyplakov challenged the court’s refusal against the manager, believing that he should answer “equally” with the organizer of the auction. The “auction house” did not agree that it was he who was obliged to return the money, since the deposit had already been transferred to the manager, included in the bankruptcy estate and distributed among the bankrupt’s creditors.

The case was referred to the Economic Collegium of the Armed Forces, which made a rather unexpected decision. The court emphasized that the sale of the debtor’s property at auction is subordinated to the goal of “the fastest and most complete satisfaction of creditors’ claims”, and the auction involves “competitiveness and competition.”

According to Art. 447 of the Civil Code of the Russian Federation, an auction or competition with a single participant is declared invalid. The Supreme Court noted that the code “does not regulate what specific consequences may occur in this case,” but the features of certain types of trading can be enshrined in a special law. According to Art. 110 of the bankruptcy law, if only one participant is allowed to participate in the auction, whose application meets the conditions, “the contract of sale is concluded by the manager with this participant.”

According to the Supreme Court, this means that the sole participant, as well as the winner of the auction, “the deposit is not refundable”, and its amount “is counted towards the fulfillment of obligations under the concluded contract.” As a result, the board upheld the decision of the first instance to reject the claim of the bidder.

The arbitration manager Pavel Zamalaev notes that the Supreme Court spoke for the first time on this issue, while there was no uniform practice on it. According to the manager, such situations are often “settled out of court.” “The paradox of the current law is that, on the one hand, it resembles a detailed instruction, and on the other hand, some issues remain unresolved,” notes Eduard Olevinsky, head of the legal bureau Olevinsky, Buyukyan and Partners. According to him, “experienced practitioners usually prescribe in the rules of the auction” the fate of the deposit and the consequences of evading payment or accepting property.

But now the Supreme Court has crossed out this possibility, essentially forbidding the return of the deposit to the only participant. And according to the Supreme Court, neither creditors nor organizers of the auction can change these rules, Mr. Olevinsky notes. He believes that “it would be better to establish general norms in the law, giving freedom of choice of conditions to all participants in the procedure for the sale of property.”

Sergey Lisin, a partner in BGP Litigation’s Dispute Resolution and Bankruptcy practice, calls the Supreme Court’s decision fair, believing that the only bidder “should be liable” in the form of withholding his deposit in case of avoiding signing the contract. Metaksya Arutyunyan, a leading lawyer in the banking and bankruptcy practice of the Yakovlev and Partners legal group, agrees with him, explaining that the deposit performs “both a security and an incentive function, and also guarantees the participation of applicants in the auction.”

According to Pavel Zamalaev, the decision of the Supreme Court matters precisely for unscrupulous participants, since if a person “has real intentions” to buy an object at the auction, then in case of victory or if he became the only participant, “nothing changes for him” – his deposit ” goes towards the cost of the subject of the auction. An unscrupulous participant, for example, can “bargain indefinitely”, which repels conscientious persons who have real intentions to buy property, as a result, “an unscrupulous participant becomes the winner, but evades concluding a sale and purchase agreement,” says Mr. Zamalaev.

Thus, Ms. Harutyunyan emphasizes, the retention of the deposit “is aimed at eliminating abuses in terms of delaying the auction and manipulating the value of the object of sale.”

Ekaterina Volkova, Anna Zanina