Who is denied collateral in bankruptcy and why?

The status of a secured creditor in bankruptcy is the most valuable, since the security of the debt with property allows you to receive six times more than for an unsecured debt. In this regard, there is an active struggle in the courts to recognize claims as collateral, which does not always end successfully for the creditor. The most common grounds for refusal are a debt that exists only on paper and the actual absence of the collateral. This follows from a study by the Arbitrazh.ru company, which Kommersant reviewed. According to lawyers, the first reason is related to frequent attempts by persons affiliated with the debtor to take away his remaining assets. The second concerns the difficulties of controlling the pledged movable property, which can be withdrawn.

The Arbitrage.ru law firm has prepared a review on the topic of collateral in bankruptcy. The importance of the issue is explained by the fact that secured creditors receive significantly more from the bankrupt than ordinary creditors, and this share is growing. Thus, according to Fedresurs estimates, in the bankruptcy of legal entities, the percentage of repayment of collateral claims increased from 21.6% in 2020 to 25.3% in 2022, in the bankruptcy of individuals – from 19.9% ​​to 27.7%, respectively. The share of repayment of ordinary debts is about 4%.

However, secured creditors also have something to worry about – Arbitrazh.ru notes “a shift in the balance from competition between secured creditors and the budget in favor of fiscal authorities” both in the practice of the Supreme and Constitutional Courts.

Partner at Melling, Voitishkin and Partners Pavel Novikov emphasizes that a pledge is one of the “most secure ways to ensure the fulfillment of obligations”, “does not require active expenses” and is more reliable than “a guarantee, which is usually issued by affiliates that go bankrupt after the main borrower.”

The review was compiled based on an analysis of 200 judicial acts of cassation instances (arbitration courts of districts) for 2022, in which the bankrupt’s creditors were denied collateral status. The courts issued the most refusals in the Moscow District (62 cases), followed by the West Siberian District in second place (30), and the North Caucasus District in third place (20). The fewest such decisions are in the East Siberian (6 cases), Far Eastern (8) and Central (9) districts.

As for Moscow, this region is, in principle, the leader in the number of arbitration cases being considered, including bankruptcy cases. Partner at the law firm Rustam Kurmaev and Partners, Oleg Permyakov, also points out that disputes over collateral in bankruptcy more often arise in those districts where the bulk of the assets being the subject of collateral are concentrated. He clarifies that, as a rule, claims on credits and loans are secured as collateral. In addition to banks, large investors often require real estate collateral, adds Pavel Novikov.

The most interesting part of the review concerns the reasons why the courts do not recognize the creditor’s claim as secured by the debtor’s property.

The most common reasons are missing the deadline for inclusion in the register (17% of decisions) and failure to prove the main requirement (17%).

Mark Vaskovsky, senior lawyer in the commercial disputes practice at MEF Legal, explains the first reason by the fact that creditors do not always have time to track the bankruptcy of their debtors if they change their address or this creditor has a large number of such debtors. The second reason, in essence, means that the debt is fictitious and exists only on paper. The authors of the study note that refusals for lack of proof of debt are “the result of the active role of the court in countering abuses in bankruptcy cases.”

In third place among the reasons is the lack of collateral (16.5%). We are talking about movable property, for example, valuable equipment or goods in circulation. According to Oleg Permyakov, this suggests that debtors often “withdraw or hide property in order to prevent collection by creditors.” Regular monitoring of the collateral can prevent this, but this is quite labor-intensive, admits Mr. Novikov.

Other popular grounds for refusal include invalidity of the transaction (14.5%) and subordination (demotion in priority) of the creditor’s claims (9%). Mark Vaskovsky explains that the claims of affiliated creditors are usually subordinated if they, for example, provided compensatory financing, which allowed the debtor to delay bankruptcy and create the appearance of a good financial position.

In general, the review says, a large number of denials of collateral status are due to creditor interest or “flawed transactions” underlying the claims, as well as the withdrawal of the mortgaged property.

This is an “indicator of a high level of abuse” in bankruptcy, mainly by persons affiliated with the debtor. In addition, the review authors conclude, this suggests that non-professional lenders (not banks) are not using collateral enough to secure their claims against businesses.

Anna Zanina, Ekaterina Volkova