Debtor’s Controlling Persons Granted the Rights to Influence Secondary Liability Limits in Bankruptcy Cases
Legal Update № 882
An Overview of Developments in Bankruptcy Laws by the Dispute Resolution Practice of Bryan Cave Leighton Paisner (formerly Goltsblat BLP in Russia).
In its Resolution No. 49-P/2021 dated 16 November 2021, the Russian Constitutional Court defends the rights of a debtor’s controlling person (DCP). The Court permitted them to challenge court rulings on putting creditor claims on the creditor claims register of a bankrupt debtor.
Until recently, under the current legislation (Clause 1, Article 61.15 of the Bankruptcy Law) and consistent Russian Supreme Court1 practice, a DCP has been unable to influence either enlargement of the bankruptcy estate or tenability of creditor claims put on the register, even though the DCP’s liability generally consists in the difference between the two figures. The DCP had no procedural rights in isolated disputes unrelated to imposing secondary liability (Clause 1, Article 61.15 of the Bankruptcy Law), this significantly restricting the methods the DCP might use to reduce or eliminate the liability claimed against it.
The Russian Constitutional Court believes that the established approach violated the DCP’s rights to fair trial and triggered granting the DCP the right to challenge court rulings on putting creditor claims on the debtor's creditor claims register, subject to the following conditions:
a court ruling on putting creditor claims on the relevant debtor's creditor register may be challenged. Such a court ruling must be issued as part of a bankruptcy case including an isolated dispute on DCP secondary liability;
the contested creditor claim seeking inclusion on the register must relate to the period when the applicant was a debtor’s controlling person.
The Russian Constitutional Court noted that the DCP’s interest in challenging claims by debtors’ creditors might also stem from its disagreement with the scope and elements of provisional remedies introduced in relation to its assets.
We believe that the position taken by the Russian Constitutional Court fits into the trend of expanding the DCP’s rights. You might remember that, this September, as a first step in this direction, the Russian Constitutional Court granted the DCP the right to appeal against actions (omissions) by the receiver affecting enlargement of the debtor’s bankruptcy estate2.
1See, for example, Russian Federation Supreme Court Ruling No. 305-ES21-11184 dated 23 July 2021 on case No. А40-156781/2019, Russian Federation Supreme Court Ruling No. 305-ES20-788 date 12 March 2020 on case No. А40-108590/2017.
2Russian Federation Supreme Court Ruling No. 307-ES21-9176 dated 30 September 2021 in case No. А56-17680/2017.
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