The Overview of case law of the Russian Supreme Court with regard to the participation of a court appointed administrator in bankruptcy
Pepeliaev Group advises that the general approaches of courts to issues connected with court appointed administrators participating in bankruptcy cases are listed in the Overview of Case Law dated 11 October 2023The Overview of case law on issues when the court appointed administrator participates in a bankruptcy case, approved by the Presidium of the Supreme Court on 11 October 2023.
An assessment of the independence of a court appointed administrator
Case law proceeds from the fact that well grounded doubts concerning independence of the court appointed administrator shall be interpreted against the approval of his/her candidacy (clause 4 of the Overview).
The circumstances allowing doubts to be raised as to the independence of the court appointed administrator include the following (clause 4.1 of the Overview):
when the court appointed administrator combines duties of both the court appointed administrator and a creditor of the debtor;
unusual behaviour of the claimant in the bankruptcy case who proposed the candidacy of the court appointed administrator (for example if the petition was filed at the same time as the liquidation procedure was initiated by the company and after a third party repays the claims the creditor objects to procedural succession and insists on the bankruptcy of the debtor (clause 4.1 of the Overview);
if the initiator of the bankruptcy who proposed the candidacy of the court appointed administrator is affiliated with the debtor;
a candidate for the court appointed administrator is a major participant in the same business entity as the head of the creditor of the debtor;
if a candidate for the court appointed administrator assisted his/her predecessor, who was suspended from his/her duties for illegally conducting bankruptcy proceedings.
At the same time the proposal by a creditor on more than one occasion of the same candidate for the court appointed administrator does not evidence that the latter is dependent on the creditor (clause 5 of the Overview).
The court appointed administrator should be a person who ensures the balance of interests (often polar opposites) of all the participants in the bankruptcy case. We recommend that persons involved in bankruptcy cases analyse whether the approved or the proposed court appointed administrator complies with the requirements established by the Federal Law On insolvency (bankruptcy)” (the “Bankruptcy Law”), including in terms of the independence of the court appointed administrator. This will allow control to be prevented over bankruptcy by bad-faith persons interested in preventing the examination of the activities of the debtor and related persons.
Change of the candidacy of the court appointed administrator
The case law confirms that it is possible to change the candidacy of the court appointed administrator before the court has approved him/her. In order to do so it is necessary to conduct a new creditors' meeting (clause 6 of the Overview).
For example, if as at the date when the creditors meeting elects the court appointed administrator the claims of the major creditor have not been established, the latter is entitled to initiate a new meeting for this issue to be reconsidered.
The possibility of reconsidering the issue of the candidacy of the court appointed administrator is an important guarantee for creditors whose claims were not considered before the meeting at which this issue was resolved. Now it is advisable for such a creditor to apply to have the court hearing on the approval of the candidacy adjourned until a repeated meeting is held. Please be reminded that the status of a creditor arises from the date when the court announces the operative part of the ruling on the inclusion of claims in the register.
Duties of the court appointed administrator
In order to prevent unjustified spending of the bankruptcy estate to pay for the services of persons engaged by the court appointed administrator, the Overview focuses on classifying the following duties of the court appointed administrator as ‘personal’:
an initial check of whether the creditors’ claims are justified and preventing unjustified claims from inclusion in the register of claims (clause 14 of the Overview);
independent organisation of auctions in order to sell the debtor’s property if only engaging a third-party organisation will result in reducing costs of the debtor or if a positive effect cannot be reached without such engagement (clause 21 of the Overview);
taking measures to recover accounts receivable; if such an obligation is not fulfilled, the court, at the request of the creditor, may oblige the court appointed administrator to file a claim for debt collection and determine the deadline for its enforcement (clause 15 of the Overview);
challenging transactions (clause 16 of the Overview); at the same time the bankruptcy of respondents in itself cannot serve as a sufficient ground to conclude that claims have no prospects.
In the conditions of a shortfall in the bankruptcy estate in the vast majority of bankruptcy cases, control over the spending of the bankruptcy estate by the court appointed administrator on persons he/she engages may allow significant amounts to be saved. This is especially significant in bankruptcy cases of credit and other institutions in which the powers of court appointed administrators are exercised by State Corporation Deposit Insurance Agency. We recommend analysing regularly the composition and functionality of the persons involved, the potential amount of resources necessary for the bankruptcy procedure, as well as the actual activity of the court appointed administrator himself/herself. If there are justified doubts we recommend challenging actions of the court appointed administrator in a timely manner, and if necessary we recommend recovering losses.
The remuneration of the court appointed administrator
It is emphasised in the case law cited in the Overview that the percentage of the remuneration of the court appointed administrator depends on the volume and quality of the work performed by him/her (clause 23 of the Overview).
If the court appointed administrator has rendered only a part of the services provided for by the Bankruptcy Law for reasons that are objective (for example, the absence of a need for certain measures) or subjective (for example, the creditor's fulfilment of part of the measures), he/she has no right to expect to receive full payment.
Parties to a bankruptcy case may rely on the fact that actions performed by the court appointed administrator cannot be compared with the full amount of percentage-based remuneration.
Bad-faith performance by the court appointed administrator of his/her duties may result in a complete refusal to pay him/her a percentage-based remuneration. For example if the court appointed administrator sold all of the debtor's property even though only a part of the estate would have been enough to settle accounts with the creditors (clause 24 of the Overview).
The percentage-based remuneration of the court appointed administrator can be a rather significant amount. Setting the amount of remuneration corresponding to the court appointed administrator’s contribution to achieving positive results of the procedure is another area in which the bankruptcy estate can be preserved, with guarantees of the creditors increased. We recommend regularly analysing the activity of the court appointed administrator before paying remuneration, and, if there are grounds, we recommend forming an evidence base for the future petition to be filed with the court to have payment of the remuneration reduced or denied (requests to the court appointed administrator, complaints concerning his/her actions (omissions)).
Challenging actions of the court appointed administrator after the bankruptcy case is terminated
As noted in the Overview, the completion of bankruptcy proceedings and the liquidation of the debtor do not prevent the court from considering a complaint against the actions of the court appointed administrator (clause 25 of the Overview).
Article 150(5)(1) of the Commercial Procedure Code in this case cannot apply since the proceedings are subject to termination when a company that is a party to the dispute is liquidated. But if the creditor files a complaint neither it as a claimant nor the respondent (the court appointed administrator) lose their legal capacity.
The above position significantly strengthens the defence of the creditors’ rights. Now court appointed administrators will not be able to avoid liability for bad-faith behaviour under such a formal ground as the termination of the bankruptcy case.
Financing the proceedings may be imposed on the debtor's members
If the debtor has no funds for financing the bankruptcy proceedings, the necessary expenses (including the remuneration of the court appointed administrator) can be recovered from its members (clause 25 of the Overview).
The obligation of members to pay the costs of the debtor's liquidation (including as a result of its bankruptcy) is imposed on them by law and does not depend on their fault in the debtor becoming bankrupt. This obligation depends neither on whether a bankruptcy petition has been filed, nor on whether measures have been taken to create a liquidation commission.
What to think about and what to do
The case law listed in the Overview has ‘armed’ debtors, creditors, participants, beneficiaries, and controlling persons with additional tools to safeguard their interests. If the company or an individual is involved in a bankruptcy case we recommend not limiting protection by one or several separate disputes. The degree of satisfaction of claims, the invalidity of transactions, the amount of personal liability, the size of the liquidation quota – this is an incomplete list of what can be directly affected by proper oversight over the activities of the court appointed administrator.
Help from your adviser
Pepeliaev Group’s lawyers have significant experience in protecting the rights of parties in bankruptcy cases, including with regard to liaising with court appointed administrators and overseeing their activity. Cooperating with the court appointed administrator, providing legal support to him/her and exchanging information can significantly increase the efficiency of bankruptcy proceedings.
We are ready to provide legal support in all the above areas, including settling separate disputes and/or bankruptcy cases in full by a settlement agreement or using other conciliation procedures, including negotiations with the involvement of the court appointed administrator.