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16
April
2018

Former senior executive officer must not pay the bankrupt plant’s debts

Within the framework of the bankruptcy case of Volgograd Drilling Equipment Plant (hereinafter, VDEP), a creditor of the plant has filed a claim with court against N.M. Zatsarinniy, the former General Director of VDEP, in order to bring him to subsidiary responsibility. The amount claimed has made more than 1.4 billion roubles.

According to the creditor, the senior executive officer was obliged to file with court a petition in bankruptcy of VDEP not later than 30 October 2013 since, according to the results of Q3, VDEP has suffered losses in the amount of over 350 million roubles and the signs of insolvency and insufficiency of assets have emerged.

In the court of first instance (Arbitration Court of Volgograd Region), the VEGAS LEX associates have succeeded in getting the petition dismissed. The court has reasoned its decision by the fact that, according to the results of 2013, VDEP has gained a net profit and the claimant has failed to prove that VDEP had the signs of insolvency and insufficiency of assets during the period in question.

By the appeal court’s decree, which was upheld by the regional court (Arbitration Court of Povolzhskiy Region), a ruling of the court of first instance has been annulled, and N.M. Zatsarinniy has been brought to subsidiary responsibility in the amount equal to 1.4 billion roubles.

The judges noted that, as judged from the negative data contained in financial statements, a controlling person has become liable to file with court a bankruptcy petition but failed to discharge his liability. Consequently, the debtor’s accounts payable have increased. According to the judges, an amicable agreement, which was entered into between VDEP and Sberbank in 2014, is a contract of novation. Accordingly, the general director is subject to subsidiary responsibility for obligations established by the amicable agreement, notwithstanding that they initially arose from the suretyship agreements concluded in 2011.

The VEGAS LEX associates faced a challenging task, which was to protect the interests of the former general director of the plant at the Supreme Court and to prove that, when determining the date of incurrence of the debtor’s liability to file with court a bankruptcy petition, it is impossible to take a token approach only.

The lawyers’ position mainly resided in the fact that, besides the data contained in financial statements, it is necessary to consider the specifics of the company’s production activity, including deadlines for performance of contracts concluded with customers, opportunities to receive the payment for products and availability of crisis developments overcoming plans.

In addition, the lower-level courts have incorrectly determined the date of creation of the debtor’s obligations to Sberbank, whose claims amounted to the principal debt recovered from the former chief executive officer of the plant. In a cassation appeal, we drew the Supreme Court’s attention to the fact that the amicable agreement between the debtor and the bank is not a novation in its nature and, therefore, it does not create any new obligations.

As a result, the Supreme Court has accepted the arguments developed in the cassation appeal. The Commercial Division of the Supreme Court stated in its decree* that the courts, when settling such disputes, must determine the time of occurrence of "objective bankruptcy", i.e. the time when the debtor became unable to satisfy the creditor’s claims.

Furthermore, the Supreme Court noted that the work patterns and specifics of activity of the debtor must be taken into account, and that the company’s financial difficulties arising from time to time may be eliminated by effective actions of the management. In such cases, a chief executive officer must not be liable for the company’s debts.

Thus, the VEGAS LEX associates have managed to contribute to changing the practice of taking a token approach by judges when they judge the actions taken by subsidiary defendants shortly before bankruptcy. Frequently, these actions are specifically intended to overcome crisis developments rather than cause damage to creditors, notwithstanding the presence of the formal signs of violations.

***

* Decree of the Commercial Division of the Supreme Court of Russia with regard to case No.306-EC17-13670(3) dated 29 March 2018.

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