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The role of arbitration courts in insolvency proceedings: fair arbitrator or tool of abuse

In the modern Russian legal system, arbitration courts have been existing for almost 25 years, since they were first introduced by the «Temporary Provision on the Arbitration Court for Resolution of Economic Disputes» (approved by the Decree of the Supreme Soviet of the Russian Federation as of June 24, 1992.

By this anniversary date, the system of arbitration courts has been modified by the adoption of the Federal Law No. 102-FZ “On Arbitration Courts in the Russian Federation» as of July 24, 2002 and later by the adoption of the Federal Law No. 382-FZ “On Arbitration in the Russian Federation” as of December 29, 2015 (effective date: September 1, 2016).

Currently, arbitration courts can be created only as part of nonprofit organizations, which must obtain relevant permit from the Ministry of Justice, or on the basis of an active Arbitration Court, which was created before September 1, 2016, while the same arbitrators may not be the members of more than three arbitral institutions.

The role of arbitration courts in insolvency proceedings

The reason for submission of a dispute to the arbitration court is the arbitration agreement, which can be in the form of a separate document or be a part of a civil contract in the form of an arbitration clause.

The main claim to the arbitration courts is the low level of confidence of third parties (not the confidence of actual parties to the disputes) in their acts. Mostly, it undoubtedly appears in bankruptcy cases, in which the main target of creditors (including unconscientious ones) is to get control over the bankruptcy proceeding, for which purpose they use a various shadow schemes.

Unfortunately, one of these schemes for control over the bankruptcy is a fictitious debt confirmation through the Arbitration Court and initiation of insolvency proceedings in such a way.

This case became the subject of examination by the Collegium of Economic Disputes of the Armed Forces of the Russian Federation, which is reflected in the decision as of April 28, 2017 with regard to the case No. 305-ES16-19572.

NORDSTROI (LLC), Negotiant (LLC) and Otkritie Financial Corporation Bank (PJSC) have become the parties to the dispute.

Providing the evidence of affiliation between NORDSTROI (LLC) and Negotiant (CJSC), Otkritie Financial Corporation Bank (PJSC) has filed the cassation appeal against the decision of the Arbitration Court of Moscow as of October 19, 2015 with regard to case No. 147645-A40/2015 and to the award of the Arbitration Court of Moscow District as of November 15, 2016 with regard to the same case upon request of NORDSTROI (LLC) as to the issuance of the enforcement order for compulsory execution of the decision of the Arbitration Court at the Independent Examination Consulting Center Autonomous Non-Profit Organization as of July 23, 2015 with regard to case No. KS-36/2015 in the claim filed by NORDSTROI (LLC) against Negotiant (CJSC) as to collection of the total amount of RUB 4 million.

The arguments of Otkritie Financial Corporation Bank (PJSC) were that the arbitration proceeding has been initiated by affiliates of Negotiant (CJSC) and NORDSTROI (LLC) in order to legalize the unreasonable claim, based on artificially created debt, for its future use as the basis for initiation of insolvency proceedings, introduction of bankruptcy administration by simplified bankruptcy proceedings of the debtor being liquidated, with the appointment of a bankruptcy trustee, indicated in the statement of the creditor, associated with the debtor, in order to circumvent the provisions of the current legislation, excluding the debtor’s right to independently choose the liquidator or an SRO.

Otkritie Financial Corporation Bank (PJSC) considers, that the statements of Negotiant (CJSC) as to the financial difficulties and lack of funds for fulfillment of liabilities, owed to NORDSTROI (LLC), which were the basis for the decision of the Arbitration Court, are unreliable, because, according to the data on the current account of Negotiant (CJSC), opened with the Bank, during the period from July until December 2015, Negotiant (CJSC) has transferred to third parties more than RUB 31 million. In addition, NORDSTROI (LLC) appealed to the Arbitration Court with the petition of bankruptcy of Negotiant (CJSC) immediately after the publication by Otkritie Financial Corporation Bank (PJSC) of the notice of intention, based on which fact the Bank concluded that the real purpose of appeal to the Arbitration Court for NORDSTROI (LLC) was not to collect the said debt, but to create for the Bank the obstacles to implementation of rights of the actual creditor and the first applicant in the case of bankruptcy of Negotiant (CJSC).

Formally approaching to the circumstances of the case, the Arbitration Court of the Moscow District, dismissing the stated claims of the Bank, pointed out that the verification procedure and examination of evidence, on the basis of which the decision of the Arbitration Court has been made, is not provided for by the Arbitration Procedure Code of the Russian Federation.

Revoking the decision of the Court of Cassation instance, the Committee of Economic Sovereignty of the Russian Federation proceeded on the basis that the approach, defined by the current legislation, pursuant to which the absence of the need to revise the award of the Arbitration Court on the merits, and therefore ensuring of the procedural economy and expedition of the case on the dispute, already approved by the Arbitration Court, did not exclude the generally recognized authority of the State Court on the protection of interests of public order, which the State Court of the place of performance of the arbitration decision carries out on its own initiative.

Recognizing the agreed actions of NORDSTROI (LLC) and Negotiant (CJSC) to be the abuse of the right, the Committee of Economic Sovereignty of the Russian Federation called up the court to take into account the reasonableness and good faith of actions and behavior of parties to civil-law relations to ensure the protection of the rights and legitimate interests of third parties, not involved in the case, in particular — creditors.

As a result, the case was sent back for new consideration to the Arbitration Court of Moscow, where, beyond all doubt, the Court of First Instance will have to take into account the conclusions of the superior court.

Such a decision, in our opinion, is quite adequate, with regard to the legal situation in the particular dispute and common origins of the arbitration reform, aimed at the creation of effective judicial control over the activity of the arbitration courts.

R.S. Lebedenko, Partner of Legal-choice

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