03.03.2017 — Supreme Court: Asset Freeze Is Not Equal to Pledge and Does Not Entitle the Creditor to Bankruptcy Priority

In the bankruptcy case of JSC “ENBIMA Group” (No. А11-9381/2015) the courts of three instances considered the creditor, who had earlier successfully requested freeze of certain assets of the company, to be entitled to the same rights as those creditors with a pledge based on new provisions of Art. 334(5) of the Russian Civil Code. However, the Supreme Court reversed these decisions in this part. According to the Supreme Court, asset freeze does not entitle the creditor to priority satisfaction of the claims during bankruptcy as pledge does under Art. 134 and Art. 138 of the Federal Law “On Insolvency”.

Art. 334(5) of the Russian Civil Code entitle the creditor who obtained asset freeze to pledge rights over affected assets. However, due to legislative uncertainty, the issue of whether this provision also entitled the creditors with asset freeze to pledge rights for priority satisfaction of the claims during bankruptcy remained unsettled.

Courts of three instances considered asset freeze to be a statutory form of pledge, and thus expanded all legal provisions related to pledge to asset freeze, including the privileges envisaged in the bankruptcy law, in particular, the right to priority satisfaction of claims through levying execution on the pledged property of the debtor. However, the Supreme Court disagreed and did not provide this pledge lender status to the creditor.

Therefore, the Supreme Court has delineated the status of creditors with contractual pledge rights or by virtue of law, and the status of creditors who merely obtained an asset freeze as temporary measure effective prior to judicial resolution of their claims. On the other hand, had these statuses been made equal in terms of bankruptcy privileges, an effective mechanism against unfair debtors, who use bankruptcy proceedings as an intentional obligation avoidance measure, could have been created. However, the Supreme Court did not follow this way. The detailed arguments for its decisions can be analyzed after the decision is published in full. 

02.03.2017 — State Duma Has Passed Law Allowing Live Broadcasting of Judicial Hearings on Internet

The legislators have adopted in the second reading a bill providing for live Internet broadcasting of judicial hearings on the Internet. Online broadcasting can be organized by the parties to the proceedings, by the attendees of judicial hearings, and by the press. However, the broadcasting requires permission from the court and the parties. The court can also arrange broadcasting, specifying the website for broadcasting.

The bill is primarily aimed at increasing the judicial transparency and at the same time envisages a number of measures aimed at safeguarding the rights of parties to judicial proceedings. In particular, the law provides that the persons recording the proceedings should not interfere with the course of hearings and should be performed only at the spots specified by the court considering other parties’ opinion. The minutes of the judicial hearing should specify the media outlet or website through which broadcasting was performed.

Apart from that, the law clarifies the procedure and time limits for publishing court decisions on the Internet. As a general rule, court decisions are to be published within reasonable term, but no later than one month after the decisions are issued in full. In respect of a number of cases, the bill also provides for reduced time limits. In particular, decisions of arbitrazh courts are to be published on the day following the day when the decision is issued in full.

01.03.2017 — Banks Can Provide Collectors with Personal Data of Debtors without Their Consent

The Ministry of Justice has clarified that banks and financial organizations are entitled to transfer personal data of debtors without their consent to third parties if the debts in question are assigned to the third parties or if the debt is transferred through agency arrangements. The stated explanations have been given in response to the request of the National Association of Professional Collectors.

In practice, other provisions of the new law on debt collection, which entered into force on January 1, 2017, also cause controversies. In particular, the law prevents collectors from exerting undue pressure on the debtors, and prohibits communicating to any debtor which filed a written refusal to communicate with the collector. Due to this, the collectors are unsure whether it will be lawful to warn collectors of their intention to file a lawsuit on the recovery of debts after such a refusal. The issue of whether collectors are entitled to contact the debtors for several times until they receive the debtor’s response also remains unsettled.

However, the Ministry of Justice refused to provide comments to a number of raised issues on the ground that there was no practice of application of the rules involved. Given the variety of problems identified in the new law, the National Association of Collectors hopes that the law will be amended as a result of meetings and discussions with the Ministry of Justice.

28.02.2017 — Supreme Court Put an End to Disputes on Bank Loans in Foreign Currency: Sharp Ruble Devaluation Is Not Sufficient for Contract Review

The Supreme Court has published the first Digest of Case Law in 2017. This Digest includes the Supreme Court’s judgment on the issue of sharp ruble devaluation as a ground for reviewing the conditions of bank loan agreements issued in foreign currency. In that case the Supreme Court refused to review contract conditions on that ground, since neither the sharp currency devaluation, nor financial hardships of the borrower, loss of job or other similar situations can justify forcible change of contract conditions under Art. 451 of the Russian Civil Code.

In the case considered by the Supreme Court, a mother of a large family, having lost her job, demanded that the courts the conditions of her loan nominated in foreign currency. The courts of lower instances expressed sympathy with her position, agreeing that the parties could not foresee the drastic ruble devaluation that took place in 2015-2016, which constituted a fundamental change of circumstances (Art. 451 of the Russian Civil Code).

However, the Supreme Court reversed and remanded the decisions. According to the Supreme Court, the borrower’s proposition on the advantageousness of the loan in a given currency does not by itself mean that the parties could not foresee the possible change in the exchange rate when concluding the contract. Had the contract been amended by court pursuant to Art. 451 of the Russian Civil Code to change such an exchange rate, would mean failure to return the loan in full, given that the contract would in reality become a ruble contract with foreign (lower) interest rate. 

27.02.2017 — Companies May Not Be Prohibited To Change General Director as Guarantee of Debt Repayment

In one of the cases, a bailiff issued an order prohibiting the indebted company from changing its general director. The bailiff saw this as a guarantee of debt repayment, since it is the general director that may be held criminally liable for the company’s failure to comply with court orders for prolonged periods of time. The first-instance and appellate courts supported this position. However, the cassation court reversed these decisions, stating that such a prohibition would not ensure repayment of debts, and could, to the contrary, create undue obstacles to the company’s regular business activity.

In the case at hand, the bailiff responsible for enforcing a court order against the debtor issued an order prohibiting the debtor from changing its general director, whose powers would soon expire. According to the bailiff, the risk of criminal liability would motivate the general director to take the necessary steps to ensure the company’s compliance with the court order by repaying the debts sought.

The first-instance and appellate courts upheld this approach on the basis that the statutory list of possible restraining measures that can be used by the bailiff to enforce a court order is not exhaustive. However, the Arbitrazh Court of Moscow Region (cassation court) disagreed, explaining that such prohibitions would not contribute to the performance of court orders, but instead violate the company’s right to engage in economic activities without unnecessary interference and breach the prohibition of forced labor (case No. А40-15772/16).

It is necessary to note, however, that in some cases the bailiff is entitled to prohibit companies from making changes to the Unified State Register of Legal Entities. Such measures are necessary, as a general rule, during consideration of corporate disputes, where they are truly a guarantee of enforcement of the court decision.