The Supreme Court will clarify how to resolve disputes over the value of the collateral

A case has been submitted to the Supreme Court of the Russian Federation (SC) on whether a corporate borrower can challenge the value of collateral if the lender decided to take it on account of the debt. The borrowing company insisted that the value of the asset in the contract was significantly lower than the market value, so an examination was needed to determine the price. The lender and arbitration courts saw no reason for this, referring to the fact that the company signed the contract and agreed to its terms. Lawyers are in favor of an independent examination, noting that the price of the pledge recorded in the documents is often underestimated, and over time it can both rise and fall.

The SC will explain how to resolve disputes over the value of the collateral. In December 2020, GriTa LLC borrowed RUB 15 million from Lider Transport Security Division LLC. under 10% per annum. The parties agreed that in case of late repayment of the debt, the borrower will pay 0.1% of the total amount for each day of delay. In addition, as security for the loan, GriTa pledged to the lender a building in the Kaluga Region and the land plot under it, the value of which in the contract was estimated at 26 million rubles.

“GriTa” was unable to repay the debt, and in December 2021, “Leader” collected 18 million rubles through the court, including interest and a penalty. But the creditor did not receive the money, so he decided to use the right to take the pledged property (“keep the pledged property for himself”) and went to court for this.

In July 2022, the Moscow Arbitration Court decided to foreclose on the pledge by transferring it to the plaintiff at the price agreed in the contract. The borrower’s request to appoint an examination to assess the market value of the property was rejected – the court noted that the company “first agreed with the price, and then began to challenge it.” The appeal and cassation fully supported this decision.

“GriTa” complained to the Supreme Court, insisting on its right to obtain an assessment of the market value of the pledge in the event of “reserving the property by the pledgee.” According to the borrower, the price of real estate in the contract is understated, and the amount of money that the lender must return to the borrower depends on the value of the collateral. In addition, since even the contractual price of the property is greater than the amount of the debt, the courts “simultaneously with foreclosing the pledge had to recover the difference in money” in favor of “GriTa”. For these reasons, the case was transferred to the Economic Board of the Armed Forces, the consideration is scheduled for July 10.

Alexander Katkov, Novator Legal Group partner, says that disputes over the price of collateral arise very often. The Supreme Court has already explained the need for an appraisal for the sale of pledged property at auction, but for cases where the creditor decides to keep the property, there is no uniform judicial practice, lawyers say.

Denis Krauyalis, junior partner of the Yakovlev & Partners legal group, explains that the Civil Code of the Russian Federation (CC) allows you to write in the contract not only the right of the creditor to take the pledged property (without bidding), but also at what price. At the same time, the lawyer clarifies, the Civil Code contains an important clause that such a price “cannot be lower than the market value.”

However, the question remains how to define it. The price of the collateral in the contract can be determined by “estimating its value by a specialist,” says David Kononov, head of the bankruptcy practice at Lemchik, Krupsky and Partners. If the parties themselves can determine the value of the collateral and they do not have a dispute about the price, they can do without the involvement of an appraiser, says Mr. Kononov.

When issuing a loan secured by property, banks, as a rule, resort to the services of independent appraisers, it all depends on the size of the loan and the recipient’s credit rating, says Anton Krasnikov, partner at Sotheby’s law firm.

In the case of a pledge between ordinary commercial enterprises, the assessment is rarely carried out and “often the value of the pledged property in such agreements is below the market value,” adds Alexander Katkov. According to him, this is due to the fact that the business “puts the property on the balance sheet at a lower cost to save on tax payments,” and then it is taken as a guideline when transferring the asset as collateral.

It also happens that the lender insists on the low price of collateral in the contract, and the borrower cannot object, needing a loan. “The pledgor could initially know about the non-market price of the pledge, and the court must take this into account,” says David Kononov.

However, even an assessment at the time of signing the contract does not exclude a dispute between the parties in the future. “In a market economy, the cost of any thing changes dynamically” both up and down, emphasizes Anton Krasnikov. Therefore, in the case when the creditor decides to keep the pledged property, the court should appoint an examination to determine the market price of the property and not deprive the pledger of the right to prove the higher value of the asset, Alexander Katkov believes. Mr. Krasnikov also advocates an examination if one of the parties asks for it, but warns that the borrower can insist on an assessment only for the purpose of “banal delay in the procedure for collecting property.”

Ekaterina Volkova, Anna Zanina