The Supreme Court will decide whether microfinance organizations have the right to bankrupt borrowers under an accelerated procedure

The Supreme Court of the Russian Federation (SC) will decide whether a microfinance organization (MFO) or a creditor who has bought the right of claim from it can file for bankruptcy of the borrower without first settling the debt, that is, under an accelerated procedure. According to current legislation, banks clearly have this right. The appeal equated microfinance organizations with them, deciding that they also operate with a license from the Central Bank. The Supreme Court will now consider this issue. Lawyers are confident that microfinance organizations should not be given the right to accelerate the bankruptcy of citizens, given the possibility of abuse. MFOs have millions of borrowers, and accelerated bankruptcy will deprive them of time to find funds to pay off debt, which could cause “social tension,” experts warn.

The Supreme Court will clarify the status of microfinance organizations in the event of bankruptcy of debtors. Lada Invest LLC took out a loan from the microfinance company Fordewind. Later, the rights of claim from the MFO were bought by individual entrepreneur Dmitry Firsov, who decided to bankrupt his debtor and filed an application for this in court. The Arbitration Court of the Moscow Region did not accept it in March 2023, indicating that the individual entrepreneur does not have the right to bankrupt the company without a court decision that has entered into force confirming this debt.

The fact is that, according to Art. 7 of the Insolvency Law, only credit organizations, a credit manager under a syndicated loan agreement and the state corporation VEB.RF can initiate bankruptcy of a debtor without first settling the debt. Persons who purchased claims from these creditors have the same rights, the Supreme Court previously clarified. Since Fordewind does not have a license to conduct banking operations, there is no reason to apply the accelerated procedure for initiating bankruptcy, the arbitration court noted.

But the appeal overturned this decision, considering that the criterion here is “not the status of the credit institution itself, but the activities it carries out to carry out banking operations on the basis of a license from the Central Bank.” According to the appeal, since “Fordewind” is included by the Central Bank in the register of MFOs, has permission from the regulator to conduct activities, and its claims are “based on a loan agreement,” then both the MFO itself and the creditor who bought the rights of claim from it have the right to initiate bankruptcy proceedings without debt debt. As a result, the case was sent to the first instance to consider the individual entrepreneur’s claim on the merits.

Another creditor of Lada Invest, VTB Bank, appealed the appeal decision to the Supreme Court. The microfinance organization “is not a credit organization and does not conduct banking activities,” the complaint says, therefore, neither it nor its successor individual entrepreneur can file for bankruptcy of the debtor without a court decision on collection. The case was transferred to the Economic Collegium of the Supreme Court, the hearing is scheduled for November 23.

The competition between creditors for the right to file for bankruptcy of the debtor under an accelerated procedure is easily explained. In this case, the creditor can save at least several months and become the first to file for bankruptcy of the debtor, explains Anton Krasnikov, partner at Sotheby’s law firm. “This gives banks a head start in the race of creditors and provides an opportunity to propose a candidate for an arbitration manager with the necessary skills and competence,” continues Kambulat Karashev, leading lawyer in the bankruptcy practice of the law firm Lemchik, Krupsky and Partners. Anton Baturin, senior lawyer in the dispute resolution and bankruptcy practice of BGP Litigation, clarifies that during the monitoring procedure, the manager analyzes the financial condition of the debtor, identifies the causes of bankruptcy, coordinates the debtor’s significant transactions, and holds the first meeting of creditors. In addition, the lawyer continues, from the date of initiation of bankruptcy proceedings, periods of suspicion are counted for challenging transactions. Thus, the creditor initiating bankruptcy receives “indirect control over the activities of the debtor,” Mr. Karashev summarizes.

Lawyers have differing opinions on whether the status of MFOs as lenders should be equal to banks. Anton Baturin considers “in general, it is reasonable to give microfinance organizations, along with banks, the right to bankrupt a debtor without a judicial act on debt collection.” In his opinion, if the requirement is based on a loan agreement, this logic applies to MFOs and any other lender, but only in relation to non-cash loans to legal entities. In the case of bankruptcy of individuals, MFOs should not be given such rights, Mr. Baturin is sure, given cases of abuse in this area, for example, issuing microloans to citizens without their consent.

Kambulat Karashev believes that microfinance organizations, in principle, cannot be given the right to accelerate the bankruptcy of a borrower, since banks “bear increased responsibility” and have stricter requirements for them from the regulator. Mr. Krasnikov notes that the appeal, referring to the license number of Fordewind, actually indicated its registration number in the register; MFOs do not have a license from the Central Bank and cannot be equated to banks.

In addition, the funds issued for bank loans are mainly money raised from depositors, that is, the bank’s right to their urgent return “is determined by social factors,” Mr. Karashev clarifies. MFOs do not have depositors, while according to statistics, the vast majority of their borrowers are individuals, the lawyer emphasizes. According to the Central Bank, the loan portfolio of microfinance organizations at the end of the second quarter amounted to 398 billion rubles, of which 324 billion rubles were loans to individuals. According to BKI estimates, as of January 1, 2023, the total number of MFO borrowers was 4 million. MFO borrowers are millions of people, and “even a small part of these people cannot be allowed to fall under accelerated bankruptcy,” Kambulat Karashev believes. “This practice is extremely dangerous and can cause significant social tension,” the lawyer emphasizes, because squandering debt “gives citizens time to accumulate resources and repay it, and it would be unfair to deprive people of this opportunity.”

Anna Zanina, Ekaterina Volkova