The Supreme Court of the Russian Federation reminded when the loan repayment by the debtor is not recognized as an ordinary business transaction
March 05, 2021

In connection with the reorganization, the borrower transferred the rights and obligations under the loan agreement with the bank to the debtor and a third party. They signed an additional agreement and became solidary co-borrowers.

The debtor partially paid off the debt to the bank. The insolvency practitioner contested this payment in court as a transaction with unfair preference. It violated the legal priority of creditors.

The first instance refused to the insolvency practitioner. It was not proven that the bank knew about the debts to other creditors. The payment was in the normal course of business in accordance with the terms of the additional agreement.

However, the appeal claim sided with the practitioner. The debt was paid during the bankruptcy procedure. The appeal supported the conclusions of the first instance.

The Supreme Court disagreed with the District Court. The bank signed this additional agreement a month and a half after the start of the debtor's bankruptcy, and 4 months later it accepted the disputed payment from the debtor. The bank should have known that it has overdue obligations to other creditors. Information about the initiation of bankruptcy proceedings was posted in a publicly available source.

The debtor's payment partially covered the arrears of the original borrower. The repayment of a loan with a significant delay, as a general rule, does not apply to transactions that are carried out in economic business activity.

The Supreme Court of the Russian Federation took into account the fact that the bank was aware of the debtor's insolvency; it was impossible to recognize the payment as a typical transaction of the parties. The Court upheld the order of appeal. In addition, the District court, when challenging another transaction of the debtor in the same bankruptcy case, agreed with a similar position of the appeal.

Alexander Mishchenko
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