The Supreme Court will figure out what is happening with the property of a bankrupt citizen seized in a criminal case
The Supreme Court of the Russian Federation (SC) will decide whether the criminal-legal seizure of the property of a citizen who is in the process of bankruptcy is retained. Despite the fact that the introduction of bankruptcy proceedings entails the lifting of all seizures from the debtor's assets, in practice the courts refuse to lift restrictions if they are imposed within the framework of a criminal case in the interests of the victims. This is the position taken by the courts during the proceedings with the bankrupt Oleg Smetanin, but now the approach may change: Deputy Chairman of the SC Yuri Ivanenko transferred the case to the Economic Collegium for consideration. Lawyers note contradictions in the legislation and expect that the SC will determine the fate of the bankrupt's property taking into account the interests of not only the victims, but also the debtor himself and his creditors.
The Supreme Court will look into what happens to the property of a bankrupt citizen that was seized in a criminal case. A precedent-setting decision will be made in the bankruptcy case of Oleg Smetanin, who was declared insolvent by the Arbitration Court of Krasnoyarsk Krai on August 2, 2022. The citizen asked to exclude his only home from the bankruptcy estate - a house with an area of 87.9 square meters in Krasnoyarsk Krai. The law allows the debtor to retain the premises if they are the only ones suitable for his habitation, in which case they are not sold at auction to pay off creditors' claims.
But the arbitration courts rejected the citizen's petition, stating that the property was subject to an arrest imposed by a court of general jurisdiction "to ensure the execution of the sentence" in part of Rosneft's civil claim filed as part of the criminal case. The fact is that in December 2021, Oleg Smetanin was sentenced to six years in prison for fraud on an especially large scale, and by the same court verdict, about 302 million rubles were collected from him in favor of Rosneft.
In leaving the house in the bankruptcy estate, the arbitration courts referred to the "principle of the general binding nature of judicial acts" and concluded that residential premises should be sold according to the rules of criminal procedure. The court of general jurisdiction did not consider the issue of whether any real estate objects had enforcement immunity (protection from foreclosure), and it is impossible to issue an act that contradicts the verdict, the arbitration courts decided, noting that interested parties could appeal the verdict itself.
Oleg Smetanin disagreed with this position and filed a complaint with the Supreme Court. In his opinion, the conclusion that "all seized property is subject to sale outside the bankruptcy case" is erroneous. The Insolvency Law and the Law on Enforcement Proceedings prohibit both the sale of bankruptcy assets outside the bankruptcy case and the imposition of seizures when selling property to pay off debts to registered creditors.
The victims in a criminal case must defend their rights "exclusively through participation in the bankruptcy case," the debtor insists. Otherwise, the complaint specifies, this will lead to "double recovery" in favor of such a creditor: both within the bankruptcy case and through the sale of property in enforcement proceedings in a criminal case. But this contradicts the norms of legislation and "makes the bankruptcy procedure itself meaningless, the purpose of which is to pay off creditors' claims," the citizen summarized. Deputy Chairman of the Supreme Court Yuriy Ivanenko considered these arguments worthy of attention and referred the case to the Economic Collegium for consideration.
Setting priorities
The issue referred to the Supreme Court for consideration was for a long time decided against the bankrupt's creditors, who also lay claim to the debtor's property, and the victims in the criminal case received an advantage over them. The problem is that "there is no clear regulation in the legislation," explains Anna Golub, partner at Criminal Defense Firm. According to her, "to this day, the legal uncertainty regarding how to deal with such property has not been eliminated": Article 115 of the Criminal Procedure Code of the Russian Federation (CPC) contradicts Article 126 of the bankruptcy law.
Head of the bankruptcy practice at Yur-Project, Viktor Panchenko, recalls the position of the Constitutional Court of the Russian Federation (CCRF) of January 31, 2011.
At that time, the Constitutional Court pointed out that the provisions of the Criminal Procedure Code and the bankruptcy law "do not provide for the seizure of the debtor's property in respect of which the bankruptcy procedure has been introduced." Mr. Panchenko says that the courts initially followed these rules, terminating criminal arrests when bankruptcy proceedings were introduced, but then the practice changed. According to him, now "criminal arrests are lifted by the court of general jurisdiction within the framework of proceedings specifically on the criminal case," while the sale of such property of the debtor in a bankruptcy case is recognized as invalid.
However, even the Constitutional Court's practice does not provide a clear answer. Oleg Permyakov, a partner at the law firm Rustam Kurmaev and Partners, cites the example of the Constitutional Court's position from January 14, 2014, which stated that the bankruptcy court should decide on the inclusion of property in the debtor's bankruptcy estate, but at the same time, this court "is bound by the requirement for the mandatory force of a court decision that has entered into force, determining the legal regime of the property." If the court in a criminal case has ruled that the disputed property of the debtor "is subject to sale to pay off a civil claim," then the asset cannot be sold in bankruptcy, Mr. Permyakov believes.
At the same time, in the case of Oleg Smetanin, we are not talking about simple property, but about the only home of the debtor. "Previously, such issues were resolved by attempts to remove criminal arrests, and the problem of excluding housing with arrest from the bankruptcy estate was not raised," Viktor Panchenko emphasizes the significance of the dispute. He calls the debtor's arguments "logical and justified." Forward Legal attorney Evgeny Zubkov believes that "the situation is unacceptable" when the debtor was not left his only home only because there is a court order to sell it as part of a criminal case. Anna Golub agrees with this, believing that the courts violated the "principle of fair distribution of the bankruptcy estate." In her opinion, if the property was obtained legally, the victim should act on an equal basis with other creditors (that is, claim money from the sale of property in bankruptcy), but if the assets are subject to confiscation (for example, acquired by criminal means), then the norms of the Criminal Procedure Code take precedence.
Lawyers are counting on a clear position from the Economic Collegium on maintaining or canceling the criminal seizure of the bankrupt's property. If the Economic Collegium supports the arguments on the priority of the bankruptcy law, this will "strengthen the protection of the interests of creditors and ensure a fairer distribution of the bankrupt's property", eliminating the possibility of double debt collection by victims, Anna Golub is sure.
