10.03.2023 — Supreme Court: Creditors May Not Claim Restitution for Transaction Annulled in Bankruptcy if They Have Already Recovered Damages from Controlling Persons

In one recent ruling the Supreme Court held that claims for damages against controlling persons of a bankrupt entity and claims for restitution of the benefit conferred on the other party under the annulled transaction are based on the same economic interest and both seek to compensate losses suffered by the bankruptcy estate. As a result, even though restitution and damages are legally distinct remedies, creditors in bankruptcy may not obtain both remedies at the same time to avoid unjust enrichment. For instance, an action for restitution should be dismissed if the creditors have already recovered damages from controlling persons with regard to the transaction.

The case at hand dealt with the bankruptcy of a construction company. As part of that case, the company’s conveyance of two promissory notes with a total nominal value of 28 million rubles to a third party was found to be invalid. This finding was based on the fact that the promissory notes were conveyed without proper consideration, which harmed the company’s creditors. The court ordered the recipient of these promissory notes to repay the entire value of benefit thus conferred to the bankruptcy estate.

Subsequently, as the value of promissory notes had still not been paid to the bankruptcy estate, a court ordered the bankrupt company’s controlling persons to pay damages (28 million RUB) for breach of fiduciary duty in connection with the transaction. When this amount was recovered, the recipient of promissory notes requested the court to terminate enforcement proceedings in respect of the original claim for restitution of the value of promissory notes to the bankruptcy estate.

Courts of three instances expressed different views on this issue. A decisive end in the dispute was put by the Judicial Panel for Economic Disputes of the Supreme Court that supported the recipient of the promissory notes. The Supreme Court held that where two judgments against different parties serve the same economic interest of the judgment creditor, the relevant obligations are considered to be joint and several even if they arise from different legal grounds (e.g. tort and contract). This means that when one of such obligations is discharged, the other obligation is also terminated as a matter of law. As a result, in the case at hand, the company was entitled to get the practical benefit of only one remedy, either damages from the controlling persons or restitution from the recipient of promissory notes (Ruling of the Judicial Panel for Economic Disputes of the Supreme Court of the Russian Federation dated 09 February 2023 No. 301-ЭС18-395(4) on case No. А43-27511/2014).

07.03.2023 — Constitutional Court Made It Easier for Creditors to Seek Secondary Liability of an Insolvent Entity’s Controlling Persons to Cover Asset Deficiency Outside Bankruptcy Proceedings

In one recent case the Russian Constitutional Court considered the question of statutory secondary liability of an insolvent entity’s controlling person outside formal bankruptcy proceedings. The bankruptcy proceedings had been dismissed due to the lack of financial resources to pay the costs of the proceedings. Afterwards, the company was subject to administrative dissolution and was excluded from the Unified State Register of Legal Entities on the grounds of inactivity. According to the position of the Constitutional Court, in this fact pattern, the company’s controlling person is presumed to be liable for the company’s failure to perform its obligations before innocent creditors. The controlling person may rebut this presumption by offering contrary evidence. The reason for this shifted burden of proof is that innocent creditors have no opportunity to obtain evidence about the company’s financial state outside of bankruptcy proceedings and without cooperation of a bankruptcy manager.

In the case at hand, the insolvent company’s creditor first applied to the arbitrazh (commercial) court to begin a bankruptcy case. However, the case was dismissed because the company had no assets even to pay the fees of the bankruptcy manager and to cover other costs of bankruptcy proceedings. Later, the company was considered effectively inactive and was administratively dissolved by excluding it from the Unified State Register of Legal Entities.

When that happened, the creditor filed another lawsuit to the court, this time requesting that sole shareholder of the company be held secondarily liable for its debts. The courts of three instances dismissed the creditor’s claims on the ground that the claimant provided no evidence of facts necessary for the secondary liability of the shareholder. The Russian Supreme Court affirmed these rulings, after which the creditor applied to the Russian Constitutional Court.

The Russian Constitutional Court ordered a reconsideration of the court rulings in this case. The Constitutional Court found that in this situation the creditor, unlike creditors in a formal bankruptcy proceeding, was unable to benefit from the assistance of a court-appointed bankruptcy manager to protect its rights. As a result, the creditor was unable to receive the necessary information about the insolvent company from the bankruptcy manager, such as its assets, transactions and actions that might demonstrate negligence and irrationality of the controlling persons. Based on this rationale, the Constitutional Court stated that in such circumstances the court must shift the burden of proof to the controlling person and require that the controlling person prove that there are no grounds for it to bear secondary liability for the insolvent entity’s debts (Ruling of the Constitutional Court of the Russian Federation dated 07 February 2023 No. 6-P).