The Supreme Court will figure out how to sell shares in a closed mutual fund in bankruptcy

The Supreme Court of the Russian Federation (SC) will understand the rules for the sale of shares of a closed-end mutual investment fund (CLIF) owned by a bankrupt citizen. The difficulty is that the sale of such securities is at the intersection of several areas of regulation: on the part of investment legislation, they are limited in circulation and require closed trading, while the bankruptcy law obliges to involve the widest possible range of participants to determine the most favorable price for the property. The courts could not reach a consensus, and lawyers are hoping for clarification from the Supreme Court.

The Supreme Court decided to consider the question of how shares of a closed-end mutual investment fund should be sold through bankruptcy trading. Sergei Nozhin, who was declared bankrupt, challenged in court the auction that took place in the spring of 2022 for the sale of 1,281 shares of the combined closed-end mutual fund “New Land Investments” that he owned. The value of the fund’s net assets then amounted to 2.7 billion rubles, the size of the sold share was 49.98%. The winner of the auction in May 2022 was Samvel Ananikyan, who bought the securities for 111.1 million rubles. The co-plaintiff was the financial manager of another owner of shares of the closed mutual fund with a share of 47.68%.

Both plaintiffs claimed that the circle of participants was illegally limited, which resulted in “unfair, non-market pricing” and caused losses to the bankruptcy estate. They also pointed to the contestability of decisions of the closed mutual fund made with the participation of a “new owner with improper status,” as well as a violation of the rights of other fund shareholders and third parties.

The arbitration court of first instance declared the auction and the agreement based on its results invalid, obliging the buyer to return the shares. The court considered open trading a violation and decided that the requirement to have the status of a qualified investor “was not communicated” to an indefinite number of persons. All this, the decision says, “influenced the exclusion of potential buyers from participation in the auction” and the formation of the bankruptcy estate, which violated the rights of the plaintiffs. The appeal made the opposite decision, recognizing the auctions as legal, but the cassation court again canceled them.

Samvel Ananikyan and Denis Lukyanov, who was the financial manager in the bankruptcy of Sergei Nozhin and conducted the controversial auction, filed complaints with the Supreme Court. They referred to the absence of significant violations, the presence in the notice of the necessary information about the property being sold and the requirements for participants. Mr. Ananikyan explained that he has the status of a qualified investor (confirmed by a notification from Alfa Bank), and other applicants were not allowed to bid due to violations.

Also, according to the applicants, the courts ignored that the auction was already the fourth attempt to sell the lot; the previous ones did not take place due to a lack of applications. The admission of only qualified investors to participate is determined by the rules of trust management of the closed mutual fund and the law on investment funds. In addition, the shares are pledged to the bank, the minimum price for their sale is set at 10.88 million rubles, but in fact the securities were sold for 111.1 million rubles. The case was transferred to the economic board, the meeting was scheduled for January 29.

“Due to the relatively rare use of closed-end mutual funds that are not traded on the stock exchange in Russian commercial circulation,” there are few disputes regarding the sale of such securities, especially in bankruptcy, so the practice has not been formed, notes Pavel Novikov, partner at Melling, Voitishkin and Partners.

Lawyers see the main difficulty in the intersection of regulation from different areas. Thus, Mr. Novikov explains, “the purpose of holding bankruptcy auctions is to attract as many buyers as possible.” But the rules for the sale of closed-end mutual fund shares as property limited in circulation, not intended for purchase by a wide range of persons, require closed trading and the status of a qualified investor for participants.

“This case reveals a characteristic problem of challenging bankruptcy auctions – the relationship between formal violations of the procedure for conducting them and the final positive result of the sale of property,” says Ruslan Petruchak, adviser to the dispute resolution and bankruptcy practice of BGP Litigation. According to Dmitry Kletochkin, partner at Rustam Kurmaev and Partners, “the auction was invalidated without justification,” which ultimately violated the interests of creditors.

The main mistake of the courts, explains Mr. Kletochkin, is that they considered the holding of open auctions to be a violation of the rights of qualified investors who were allegedly scared off by the format: “But it is unclear how open auctions infringed on the rights of potential buyers.” Mr. Novikov also considers this conclusion “logically erroneous.” Moreover, Mr. Petruchak clarifies, “in the end, the shares were sold at the market price.” The requirement to have the status of a qualified investor, according to him, also cannot be considered a violation of the interests of creditors, since “the status is necessary for the buyer of shares by virtue of the law.” “It is likely that the controversial conclusions of the courts and the lack of clarity in legislative regulation attracted the attention of the Supreme Court,” believes Pavel Novikov. Lawyers hope that the Supreme Court will clarify the rules for the sale of such bankrupt property.

Anna Zanina