“Cassation: Hidden Funds from Creditors — Grounds for Denying Debt Discharge” — Arltan Tserenov for PRObankrotstvo
The Moscow District Commercial Court clarified that debt discharge in bankruptcy is an exceptional measure and cannot be applied to dishonest debtors who misappropriated funds from asset sales to the detriment of creditors.
Alexander Krynsky was declared bankrupt. Subsequently, the bankruptcy proceedings were completed and the debtor was released from further obligations to creditors. Alfa-Bank JSC (a creditor) appealed this decision in cassation. The bank pointed out that prior to bankruptcy, the debtor had sold real estate for 29.3 million rubles but failed to provide evidence that these funds were used to repay debts. Another dispute in this case had already established that the debtor had misappropriated the proceeds. However, the lower courts did not evaluate these circumstances. The district court overturned the lower courts' rulings regarding the debtor's debt discharge. It noted that the courts had failed to examine the bank's arguments about the debtor's bad faith (Case No. A40-222795/2020).
Arltan Tserenov, Senior Attorney at Prime Advice Law Offices, emphasized that the key issue in applying the debt discharge mechanism (Article 213.28 of the Bankruptcy Law) is the need to distinguish between debtors who are genuinely in difficult financial situations and dishonest individuals who abuse the bankruptcy process.
According to him, only debtors who have nothing to hide from the court, financial manager, and creditors can expect debt discharge. At the same time, it should be noted that the mere alienation of assets during the pre-bankruptcy period is not unconditional proof of the debtor's bad faith, as the district court pointed out in the commented ruling.