How is the debtor's transactions challenged in bankruptcy?

The bankruptcy procedure for a citizen pursues two goals: to ensure the fulfillment of the debtor’s legal obligation (and right) to write off debts and to satisfy the demands of creditors as much as possible. Unfortunately, many bankrupts do not take this into account and try by all means to avoid paying debts even during bankruptcy, while risking the very possibility of their being written off. By hiding property, they forget about challenging the debtor's transactions during bankruptcy - a procedure that allows the previously alienated property to be returned and included in the bankruptcy estate. We will consider further what transactions can be challenged in bankruptcy and when this procedure is applicable.

Why does the law provide for the possibility of challenging the debtor’s transactions?

Bankruptcy status provides for a kind of barter, which consists of forgiveness of debts in exchange for property assets sold during the procedure. Only the debtor’s only housing and personal belongings are included in the immunity. The desire to protect property and go bankrupt with minimal losses pushes the debtor to withdraw from the assets included in the bankruptcy estate.

Alienation transactions completed during the three years preceding the bankruptcy procedure on the basis of a purchase and sale agreement at a price below the market price, donation, or unequal exchange fall into the risk group. The right to challenge transactions of this kind is granted to interested parties in order to prevent violations in relation to creditors and protect their interests.

In addition to including the illegally alienated property in the property for sale with subsequent partial repayment of the debt, if the transaction is declared invalid, the debtor faces:

  1. The arbitration manager's appeal to the prosecutor's office and law enforcement authorities in order to hold him accountable for unlawful actions and to convict him of an attempt to fictitiously obtain bankrupt status (Article 195.196 of the Criminal Code of the Russian Federation).
  2. Recognition of behavior as preventing the adoption of an adequate decision, and actions as intentionally aimed at concealing property assets. The arbitration court issues a ruling on the non-application of the rule on release from debt obligations (clause 4 of Article 213.28 of the bankruptcy law No. 127-FZ).

The presence of such transactions is not an unconditional contraindication to obtaining the status of financial insolvency, however, they are studied and analyzed in detail during the bankruptcy process. Schemes for the illegal withdrawal of property for an additional fee are offered by a number of companies that accompany the procedure.

Consequences of declaring a transaction invalid

What happens if the transaction is contested? All tangible assets are returned to the bankruptcy estate, which, in accordance with the procedure established by law, will be distributed among creditors and other entities that are entitled to payments from the bankrupt. In addition, the creditor’s obligations also cease (if he has not fulfilled them in full or has undertaken to fulfill them in the future).

All creditors, after challenging the transaction, acquire the right to claim. It will be based on those documents that are transferred to the party after the completion of legal proceedings.

Who can challenge the deal

In theory, creditors can challenge concluded agreements even outside of bankruptcy proceedings, however, there are obstacles to out-of-bankruptcy challenge in the form of a lack of information about the transaction carried out and its characteristics. Ideally, in order to review the materials, it is necessary to attach a copy of the title document and provide legal grounds for invalidity. It is unlikely that it is in the interests of the debtor to educate the creditor about the essence of the agreement and voicing the details.

As part of the bankruptcy process, a circle of persons has been established who have the right to file an application for challenge (clauses 1-4 of Article 61.9 of Law No. 127-FZ). For filing, a limitation period is determined, starting from the moment the applicants become aware of the existence of legal grounds for the challenge.

The arbitration court considers the legality of the conclusion of an agreement by the debtor on the basis of an application to recognize the transaction as illegal and subject to cancellation. The following persons can apply:

  • manager on his own initiative or by decision of a meeting of participants;
  • a creditor or an authorized body, provided that the amount of debt exceeds 10% of the total amount of debts in monetary terms included in the register;
  • management team of the financial institution.

If a transaction is made in favor of a specific creditor, then his vote is not taken into account when the meeting makes a decision regarding filing an application.

Grounds and deadlines for challenging transactions in the bankruptcy procedure of a citizen

The grounds for challenge are:

  1. Suspicions about the fairness of the agreement (Article 61.2 of the Federal Law of the Russian Federation No. 127-FZ). Transactions made for large sums shortly before a person is declared bankrupt are considered suspicious. Usually, the closest relatives are involved in carrying out such transactions, on whose behalf the transaction is made. In this case, the acquirer of the right under it is not the creditor, but the person who signed the agreement. Accordingly, when issuing debt claims, the debtor’s relationship to the property purchased or sold as a result of the transaction will only be indirect, which will avoid its seizure and transfer to creditors.
  2. Selective satisfaction of obligations to creditors (Article 61.3 of the Federal Law of the Russian Federation No. 127-FZ). If the debtor has spent all the funds to cover the debt to only one of the creditors, then his actions may be questioned.
  3. Invalidity of the transaction (Chapter 9, Clause 2 of the Civil Code of the Russian Federation). If a transaction was carried out in violation of the law or between persons without the right to do so, creditors whose rights were violated by the very fact of its existence may file a claim with the court to challenge it.

Important! The statute of limitations for the disputed transaction does not exceed 3 years. In exceptional cases, the court sets other deadlines.

What transactions can be challenged?

Contested agreements in the process of recognizing financial insolvency can be divided into two types:

  1. Done with preference, when priority repayment of obligations to one lender is made to the detriment of others (Article 61.3 of Law No. 127-FZ). The disadvantage for the debtor is the short statute of limitations, ranging from a month to six months. Examples include:
      settlements exclusively with one bank after the termination of repayment of obligations to other lenders, writing off money without acceptance from a salary debit card;
  2. sale of certain property to a third party without indicating the direction of spending the proceeds.
  1. Carried out with an unlawful reduction of the debtor’s property assets, withdrawn by:
      unequal performance by the second party of contractual obligations (sales at a price significantly lower than the market value or under a gift agreement) and subject to challenge within a one-year period (clause 1 of Article 61.2 of Law No. 127-FZ);
  2. transfer of ownership rights to citizens not of the first degree of kinship or business partners included in interdependent persons classified as disputed due to damage to creditors for a three-year period (clause 2 of Article 61.2 of Law No. 127-FZ).

The date of commission is understood as the date of actual registration of property rights with the relevant authorities, and the date of activation of the bankruptcy procedure is the time when the application was accepted for consideration by the court.

What transactions cannot be contested?

A mandatory condition for classifying an agreement as contested is considered to be damage caused or non-compliance with parity in relation to all participants. Accordingly, transactions made:

  1. Prior to the receipt of borrowed funds with subsequent repayment obligations arising. If execution precedes in time the conclusion of the first loan agreement, then it cannot in any way affect the creditor and the settlement procedure.
  2. With property assets that are not subject to inclusion in the bankruptcy estate. Alienation of the only residential premises for any reason, including gratuitous transfer, cannot in any way infringe on the interests of creditors, since this type of property will not be subject to sale with subsequent satisfaction of claims.

Signs of a suspicious transaction

Based on suspicion, you can challenge transactions in the following cases:

— In the case when the property transferred to the debtor as part of the transaction is not equivalent to what was received in return. In this case, you can challenge transactions concluded no earlier than a year before filing a bankruptcy petition or after the court accepted this petition.

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It is necessary to prove that certain terms of the transaction do not correspond to the conditions applied in similar transactions, and that this difference significantly worsens the debtor’s position (for example, the debtor received in exchange for the property transferred to him an amount significantly lower than the market value of such property).

-Violation of the property interests of creditors. In terms of time period, transactions entered into within the 3 years preceding the filing of a bankruptcy petition or entered into after the filing of such a petition can be challenged.

Read on the topic: Intentional bankruptcy Fictitious bankruptcy What a citizen should not do before his bankruptcy

Procedure for challenging transactions

All transactions performed during the three-year period before the initiative to join the ranks of bankrupts come under the close attention of the arbitration manager, lenders and the court. The purpose of the challenge is the return of illegally alienated assets with subsequent sale to pay off current and overdue debts.

For individuals

The bankruptcy procedure provides for regulations for challenging agreements concluded by citizens. The process provides the initiator with the following step-by-step algorithm:

  1. Analysis of transactions over the last three years with detailing by timing depending on type. The obligation to report this information rests with the debtor, but the manager, bankruptcy creditor or authorized body can obtain information from registering structures. The analysis process takes into account and evaluates:
      compliance of the market price under comparable sales conditions;
  2. payment procedure, including cash and gratuitous transfer;
  3. direction of use of the proceeds;
  4. the second party for the presence of family ties.
  1. Preparation and submission of an application for invalidation of the transaction, which indicates:
      name of the arbitration tribunal carrying out the procedure;
  2. information about the citizen and the number of the open bankruptcy case;
  3. the essence of the appeal, indicating the arguments for invalidity and whose rights are violated as a result of the commission;
  4. a statement of specific requirements regarding the return of illegally alienated property to the bankruptcy estate.
  1. Review and decision by the court. The arbitration examines documentary applications, evaluates arguments and analyzes deadlines depending on the types of transactions.

If a decision on the non-compliance of a transaction with legislative norms was made by a meeting of creditors, then a protocol must be included in the appendices. If the information is confirmed and fraudulent actions are detected by the court, the citizen is not only not released from debt obligations, but is also held accountable.

For legal entities

In contrast to citizens, only a bankruptcy trustee approved by the court has the right to challenge agreements of legal entities. When a creditor applies, no proceedings are carried out.

The main difference is that an application to challenge the operations of companies is not provided at the first stage of the process, called observation, which is an analogue of the restructuring of the debts of an ordinary citizen without entrepreneurial status. The difference is associated with shorter periods for establishing the insolvency of citizens and is aimed at the formation of assets for sale in the shortest possible period.

How are transactions cancelled?

Challenging the debtor's transactions in the event of bankruptcy of an individual is carried out according to a certain scheme established at the legislative level. Additionally, the process has been refined by many years of practice in the field of recognizing the insolvency of citizens.

The order is as follows:

  1. The financial manager analyzes the debtor's property and identifies all transactions that raise doubts about their legitimacy. If creditors have information about suspicious transactions, they can provide it to the financial manager. And the bankruptcy creditor has the right to apply to the court directly.
  2. Documents on the transaction are collected, then a petition is sent to the court to declare it void (invalid).
  3. After the transaction is annulled, the released property is included in the bankruptcy estate. If it is impossible to use it in kind (for example, the new buyer managed to damage or destroy it), then the purchaser must pay its full cost.
  4. Then the found property is sold as part of the sale procedure, and the proceeds go to satisfy the requirements of the register of creditors according to the priority circles.

The specified procedure for recognizing transactions as invalid is applied in the vast majority of cases of bankruptcy of citizens. With a few exceptions - if the debtor, through his actions, caused significant material damage to creditors, then a case of false bankruptcy can be initiated in parallel.

In this case, debts from citizens will not be written off, although the property will also be sold to satisfy the claims of creditors.

Statute of limitations for challenging transactions

The time interval is counted back from the moment the arbitration tribunal accepted the application from the candidate for bankruptcy status.

If during the specified period the manager or bankruptcy creditors did not apply to challenge the transactions on bankruptcy grounds, then it will be necessary to prove the conscientiousness and reasonableness of the actions, including objective reasons for not having the information. Otherwise, the arbitration court will refuse to satisfy the claim for reasons of missing the deadline.

Depending on the type of operations performed, the following deadlines are established:

  • 1-6 months – committed with preference;
  • 1 year – unequal counter performance;
  • 3 years – intentional harm to the interests of lenders.

If at the time of concluding the contract the citizen had no debt obligations, then the transaction is not disputed regardless of the period of actual implementation.

Nuances of canceling debtor's transactions

The process of appealing agreements in the event of insolvency of legal entities has its own characteristics, which, as a rule, are defined in judicial clarifications, for example:

  • Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation No. 63 dated December 23, 2010.

According to paragraph 8 of this resolution, the condition of unequal counter-performance was accepted as a basis for appealing the sale transaction. Thus, the unequal value of the transaction was established only by the terms of the agreement, and the fulfillment of the terms of the agreement by both parties was not taken into account.

  • Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation dated April 30, 2009 No. 32.

When considering a dispute over an agreement concluded between the debtor and his mother, the court referred to paragraph 10 of this resolution and declared the transaction invalid. According to this clause, when selling property to another person at a reduced value in order to understate the bankruptcy estate, the transaction can be challenged.

Thus, it is concluded that in the process of recognizing the insolvency of a legal entity, transactions made by it can be challenged on general and special grounds. The legislation has many nuances and exceptions, so each case requires a special approach.

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Special situations for invalidation

The execution of transactions for the alienation of property in the three-year period preceding the launch of bankruptcy proceedings is the object of close attention of participants in the process and interested parties. The category of special situations includes not only contracts of gift or exchange on unequal terms, but also divorces involving the transfer of property to an uninterested party.

Real estate transactions on the eve of bankruptcy

If a citizen owns more than one residential premises suitable for living, then alienation of the second, third, etc. living space may be contested by interested parties. There is a common misconception that choosing an SRO on your own will save you from a detailed analysis of the operation by the insolvency practitioner.

However, creditors who own 10% of the total debt can also initiate the contestation process, and real estate, due to its value, will constitute the “lion’s share” of the bankruptcy estate. The apparent solution based on the principle of divorce with the transfer of real estate to a spouse with an unblemished reputation by concluding an agreement on the division of property is also disputed, like any alternative option.

Debtor's transactions with a single residence

The alienation of the only home is not contested if the debtor simultaneously fulfills two conditions:

  • registration at the time of transfer of property rights;
  • registration at all stages of bankruptcy.

The point regarding the only residential premises in controversial judicial practice was set by Resolution of the Plenum of the Armed Forces of the Russian Federation No. 48 of December 25, 2018. The highest court determined that the alienation operation should not be declared invalid due to protection from implementation by executive immunity on the basis of Article 446 of the Code of Civil Procedure of the Russian Federation.

Is it possible to invalidate a loan agreement in bankruptcy?

In practice, it is possible to invalidate a contract. However, this procedure presents certain difficulties that can be resolved in the cassation court.

A loan agreement is declared invalid solely by a court decision. Only the arbitration court is authorized to do this.

One of the main principles of legal proceedings at the arbitration level is the basis for the immediacy of judicial settlement of the issue that has arisen. The proceedings assume that in each specific case the court must carefully study the statement of claim and the documents attached to it.

This principle is especially relevant in bankruptcy (insolvency) cases when a person is in a difficult financial situation. Since the execution of an agreement cannot be officially confirmed solely on the basis of either a challenge or recognition of the relevant circumstance by the parties to the case.

Unreasonable behavior of the debtor's creditors constitutes the issuance of money on the condition that similar loans previously received by the debtor have not been repaid. Based on this, the following conclusions can be drawn:

  • The disputed agreement between the persons was concluded solely for show. Such a transaction is considered imaginary.
  • The terms of the concluded agreement are based on a particularly trusting relationship between the parties to the transaction.

Bankruptcy: a loan agreement can only be declared invalid in accordance with the law. To do this, a person must have compelling reasons that the terms of the transaction have been violated.

To appeal, there are several options for proving the lack of money in the loan agreement that was established between the borrower and the lender:

  • Drawing up an agreement under the influence of pressure from third parties.
  • At the time of the conclusion of the relevant transaction, one of the participants was incapacitated.
  • The signature on the documents, which confirms the receipt of funds, does not belong to the borrower.
  • The information available in the details was not provided in accordance with reality.
  • In court, the borrower was able to provide strong evidence (checks, receipts, agreements) that funds were provided to his account in a different amount than was previously fixed in the loan agreement, or were not transferred at all.
  • The lender did not provide sufficient evidence to the arbitration court (acceptance/transfer certificate, checks with the specified amount, receipts, loan agreement) that he transferred funds to the borrower in the proper amount.

Audio and video recordings can also serve as evidence in court. However, they will not be direct, but only additional.

If an individual entered into a share loan agreement with an LLC, where he acted as a lender, and the other party did not fulfill its obligations, then an arbitration court will help resolve the dispute. To do this, you will need to fill out an application for inclusion of its requirements in the register.

Judicial practice on challenging transactions

Challenging in problematic situations is confirmed in the “tablets” of judicial practice:

  1. Sale to a relative. The debtor, who had signs of insolvency, sold a vehicle belonging to his father less than a year before the bankruptcy was activated. The court established a family connection and a deliberate violation of the interests of creditors due to a decrease in the size of property assets (case No. A76-43/2014).
  2. Free transfer. The donation to a minor in anticipation of the initiation of bankruptcy, according to the debtor, should have protected the operation from challenge due to the age limit, but the court made a diametrically opposite decision (case No. A07-27731/2014).
  3. Divorce with transfer of property. The court equated the assets transferred to a spouse who has no signs of insolvency to the illegal withdrawal of assets from the property mass subject to sale (case No. A33-21816/2015).

Courts do not always satisfy such claims. Selling at a price below the market price is sometimes regarded as a failed attempt to pay off debt obligations and stabilize the financial situation.

What other actions and decisions of the debtor can be challenged?

When challenging and wanting to protect a transaction, the activities of the person who has fallen into the status of debtors are analyzed. All pre-bankruptcy agreements must be reviewed. This is the responsibility of special managers. Instructions for reviewing transactions are prescribed in Chapter III.1 of the Law regulating the receipt of insolvency status. In domestic judicial practice, there are many cases when one is guided by the explanations given by the Supreme Arbitration Court of the Russian Federation in Resolution No. 63 of October 23, 2010. According to the legislative framework, the list of transactions includes the following:

  • marriage contracts, including clauses on the division of joint property of the spouses;
  • actions related to the execution of judicial acts falling under the category of settlement agreements;
  • deductions in favor of another creditor of funds proceeds from the sale of the debtor’s liquid property;
  • bank debiting money from accounts and other similar operations;
  • transfer of wages, which is carried out in the form of bonuses to an individual entrepreneur.

Preference-Based Agreements

Invalid according to Art. 61.3 of Law No. 127-FZ, agreements based on preference given to one of the creditors over others may be recognized. This happens if the implementation of the contract leads or may lead to preference for one of the creditors over the others, subject to one of the following conditions:

  1. The purpose of the transaction is to fulfill the previously arising obligation of the debtor or other person to a certain creditor.
  2. The order of repayment of counterparties' claims is or may be violated.
  3. There will be premature fulfillment of counterparties' demands.
  4. A certain creditor has been or may be given preference in the execution of claims compared to the execution that would be in the case of settlements with counterparties in accordance with the priority established by Law No. 127-FZ.

IMPORTANT! As a general rule, a transaction based on preference can be challenged if it was completed within 1 month before or after the date of acceptance of the insolvency petition.

As an exception, Law No. 127-FZ allows a transaction concluded within 6 months before the adoption of an insolvency petition to be declared annulled if its consequences include both the second and third of the conditions above in this section, and the counterparty was aware of the fact of insolvency or insufficiency property or about signs that make it possible to identify such a fact.

Challenging transactions completed before October 1, 2020

It is worth keeping in mind that the above grounds are special and apply only to transactions made by citizens after October 1, 2020. If the transaction is completed before the specified date, then it is contested according to the provisions of Article 10 of the Civil Code of the Russian Federation

Courts extremely rarely base their decisions on the provisions of Article 10 of the Civil Code of the Russian Federation; often, they use this provision in conjunction with the standard reasons for invalidity declared by Chapter 9 of the Civil Code of the Russian Federation. The most popular grounds for invalidity are violation of the law, as well as other legal acts.

By abuse of personal right, courts understand any negative consequences resulting from the exercise of this right. One of the forms of such consequences is property damage - a decrease in material wealth (reduction or loss of income, new expenses). Abuse is expressed, among other things, in the sale of property to evade collection of obligations.

Abuse of law is a direct violation of the prohibition established in Article 10 of the Civil Code of the Russian Federation, and therefore such behavior when concluding contracts entails their complete nullity, as not complying with the law.

To determine the existence or absence of abuse of rights, it is necessary to investigate and evaluate the activities and behavior of individuals from the perspective of negative property consequences for these relations, for the legal status and legitimate interests of creditors.

This position states that the courts consider each individual circumstance and consequences in each case individually and indifferently from formal data. Thus, in one case, the court may come to the conclusion that the value of the property transferred under the transaction is understated if its market value is significantly higher than the price under the transaction, and in another case it may consider the unequal value of counter-performance to be a simple manifestation of the free will of the parties and freedom of contract. Accompanying a lawyer who will choose the right approach when proving abuse or non-abuse of rights will shorten the process time and help in achieving a positive result in the case.

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