The matter in brief
How it went
Situation. Shortly before bankruptcy, the debtor stripped a significant part of its property through transactions with affiliated persons at an undervalue, reducing the chances of the creditor client being actually repaid.
What we did. We analysed the debtor’s transactions within the suspect period, proved that the parties were affiliated and that prices were below market, and challenged the transactions within the bankruptcy case.
Result. The challenged assets were returned to the bankruptcy estate, and the creditor client’s claims were satisfied from their sale.
A similar situation? Let us discuss the details at a consultation.
Legal framework for challenging a debtor’s transactions
Challenges to a debtor’s asset-stripping transactions are governed by Chapter III.1 of Federal Law No. 127-FZ on Insolvency (Bankruptcy). The law provides several independent grounds, and choosing the right one determines whether the property can be returned to the bankruptcy estate.
Suspect transactions (Article 61.2 of Law No. 127-FZ). A transaction for unequal consideration may be challenged if it was made within a year before the court accepted the bankruptcy application. If the aim of harming the property rights of creditors is proved and the other party knew of it, the review period extends to three years.
Preferential transactions (Article 61.3 of Law No. 127-FZ). If a transaction put one creditor in a better position than the others, it can be challenged within six months before the bankruptcy application was accepted, provided it is proved that the counterparty knew of signs of the debtor’s insolvency.
General civil law grounds (Articles 10, 168 and 170 of the Russian Civil Code). In addition to the special bankruptcy rules, a transaction can be challenged on the general grounds of invalidity, as a sham or feigned transaction or as an abuse of right, which often gives the creditor additional arguments in the dispute.
Who these disputes concern
The situations in which creditors and bona fide purchasers most often face challenges to a debtor’s transactions.
How a challenge to a transaction usually proceeds
The general sequence of steps in this category of disputes. Timeframes in a specific case depend on its complexity and the other side’s position.
Analysing the debtor’s transactions
We pull the transactions made within the suspect period, look for links between the parties and compare the transaction price with the market price.
Gathering evidence
We collect evidence of the parties’ affiliation, of the undervalue, and of the counterparty’s awareness of the debtor’s financial difficulties.
Filing the application in the bankruptcy case
The challenge is not heard in a separate action but within the bankruptcy case already opened, and the application is considered by the same commercial court.
Enforcing the court ruling
Once the ruling has entered into force, we work to secure the actual return of the property, or its value, to the bankruptcy estate.
Common mistakes and misconceptions
“If the deal is unfavourable to the debtor, it will certainly be declared invalid.” That is not so. The court assesses not only the price but also the buyer’s good faith. If the buyer did not and could not know of the seller’s financial difficulties, the transaction can often be preserved.
“The limitation period runs from the date of the transaction.” In practice it more often runs from the moment the creditor or trustee learned, or should have learned, of the transaction and the grounds for challenging it. These are different dates, and confusing them is a common reason for missed deadlines.
“Challenging a transaction means automatically getting the money.” Declaring a transaction invalid returns the asset, or its value, to the bankruptcy estate, from which funds are then distributed among all creditors in order of priority, not only in favour of the party who started the dispute.
“Paying in cash makes a transaction unassailable.” The absence of a bank trail more often works against the party relying on the reality of payment. It is precisely such transactions that most often raise questions for the court and the trustee.
Statutory time limits and thresholds
General benchmarks from bankruptcy legislation, not figures for any specific case.
Frequently asked questions
Can a director avoid subsidiary liability if the company went bankrupt through no fault of theirs?+
Yes, if they can prove the economic justification for their decisions and the absence of fault for the bankruptcy. This is the key line of defence.
Can assets that the debtor stripped out before bankruptcy be returned?+
Yes, by challenging such transactions within the bankruptcy case, if it can be proved that the parties were affiliated or the price was understated.
Is this a real case or a generalised example?+
It is a real matter from the firm’s practice. We publish it without company names or the names of the participants, as every client agreement includes a non-disclosure clause.