“Cassation: Compensatory Financing Not Considered in Transaction Invalidation” — Anna Volynets for PRObankrotstvo
Financing of a bankrupt's current operations by an assignee cannot be offset against claims, ruled the district court.
IC Yukola Energy Investment LLC and Liga Udachi LLC entered into a loan agreement. Subsequently, IC Yukola Energy Investment LLC assigned its claim under this loan agreement to GermesOil LLC. After IC Yukola Energy Investment LLC was declared bankrupt, the bankruptcy trustee filed a lawsuit to invalidate the assignment agreement and apply the consequences of the invalid transaction. The court of first instance fully granted the trustee's claims. The appellate court upheld the invalidity of the transaction but modified the ruling regarding consequences, reducing the recovery amount from GermesOil LLC. The cassation court overturned the appellate court's decision and upheld the first-instance court's ruling, stating that financing provided to the debtor by an affiliated party, subsequently directed to the beneficiary and related parties, given the established abuse, should not be considered when applying the consequences of transaction invalidity (Case No. A40-46183/2023).
Why This Matters
Anna Volynets, Project Manager and Attorney at Prime Advice Law Offices, believes the cassation court's position is well-reasoned and aligns with current judicial trends regarding subordination of affiliated creditors' claims.
In this case, while deciding on the consequences of transaction invalidity, the court essentially resolved the issue of subordinating the 'claim' of the transaction party against the debtor. This approach can be considered procedurally rational. In our view, even if the cassation court hadn't applied subordination principles when reviewing this separate transaction challenge (as the appellate court didn't), the issue of subordinating compensatory financing could have been resolved in a separate proceeding (depending on the procedural creativity of case participants),
— noted Volynets.