We must pay tribute – Newspaper Kommersant No. 149 (7350) of 08/17/2022

The Ministry of Construction, following the decision of the Constitutional Court (CC), intends to close the legal gap that arose in 2019 with the introduction of a new regulation on shared construction in terms of protecting the rights of secured creditors who financed construction without being equity holders, this applies to both individuals who purchased non-residential premises, and and lending banks. Now, de facto, they are deprived of the opportunity to receive funds if the apartment building that has become problematic was transferred for completion to another investor or the Territorial Development Fund, but the project proposes to provide for the right to satisfy such requirements. Lawyers agree that now the rights of such creditors are not protected – the proposed changes can solve this problem.

The Ministry of Construction has prepared a draft law that closes the legal gap in the field of guaranteeing the rights of mortgage creditors of developers who are not equity holders. The document was developed in pursuance of the decision of the Constitutional Court, which in July 2022 declared unconstitutional the provision of the law on shared construction, which allows, when transferring a long-term construction to a new developer or the Territorial Development Fund (formerly the Shareholders Fund), to de facto cancel collateral without compensation to such creditors.

The essence of the problem is that with the introduction of escrow accounts from July 1, 2019 and the mechanism for transferring problematic objects to the Shareholders’ Fund, the rule providing that an unfinished object can be transferred for completion only after the claims of secured creditors are repaid has ceased to be valid. As recognized by the Constitutional Court, the updated regulation worsened their situation: the only chance for compensation they had was only during the general bankruptcy procedure of the developer if he had any other property, except for unfinished construction.

At the same time, the Constitutional Court established temporary rules for resolving such situations, allowing secured creditors to present claims to the fund of equity holders. The Ministry of Construction proceeds from the same logic in its bill. The amount of claims of such creditors (if they were not satisfied during the bankruptcy procedure) will be proportional to their share in the obligations secured by the pledge and paid out of the proceeds from the sale by the fund of premises in the object of construction in progress (minus the costs of putting the object into operation). In case of partial satisfaction of their claims in the event of bankruptcy of the developer, the payment should be proportionately reduced.

It is also proposed to directly introduce into the law on shared construction a provision on the transfer of “incomplete” for completion only in the absence of collateral requirements of creditors who are not equity holders, or with their consent – but it will not have retroactive effect in the presence of court decisions on the transfer of the object. The project also provides for guarantees for the payment of salaries to persons involved after the start of bankruptcy to complete construction – with this in mind, the Ministry of Construction writes with reference to expert estimates, budget expenditures may increase by 8.5 billion rubles.

According to Elena Kravtsova, partner of ProLegals, now secured creditors are not entitled to make decisions at general meetings and determine the fate of unfinished projects. Such situations are quite common — as Forward Legal lawyer Oles Gruzdev notes, there are secured creditors in almost every bankruptcy case of a developer. “Given that the rights to the land and the unfinished object are the main assets of the developer, other creditors who are not participants in the construction do not receive satisfaction in the bankruptcy case, because the developer does not have any other property,” he says.

“Of course, this will affect the willingness of the purchasers to complete the construction of facilities, since the factor of secured creditors must be taken into account,” says Elena Kravtsova. But, she continues, such regulation should put construction participants, secured creditors and purchasers of objects on an equal footing. Oles Gruzdev agrees with this: “The bill strengthens the position of creditors who are not participants in the construction, and gives them more guarantees that their requirements will be satisfied to some extent.”

Evgenia Kryuchkova