“District Court Protects Shareholders' Rights in Developer’s Bankruptcy” — Tatiana Tereshchenko for PRObankrotstvo
The District Court revoked the collateral status of an investor's claim, recognizing the model of attracting an incapable developer to raise shareholders' funds as an impermissible redistribution of risks.
Mekomstroy JSC and Megatrans LLC entered into an investment agreement for the construction of an apartment building. Subsequently, the housing cooperative "Status" joined the agreement as a co-investor. The parties divided shares in the apartment building. "Mekomstroy" transferred developer functions to the cooperative. The housing cooperative attracted shareholders' funds but lacked construction resources. During the bankruptcy of "Status" cooperative, "Mekomstroy" demanded its claim be included in the register as collateral. The first-instance and appellate courts agreed but lowered the priority. The cassation court overturned the rulings regarding the collateral, stating that "Mekomstroy" involved "Status" in a bankruptcy risk redistribution scheme violating shareholders' rights as the weaker party (Case No. A46-16075/2021).
Why This Matters
Tatiana Tereshchenko, Attorney, Head of the Analytical Department at Prime Advice Law Offices, noted: The court particularly emphasized that bankruptcy procedures aim to create conditions for fair protection of creditors' economic and legal interests, including those requiring additional social protection guarantees.
Equally important is establishing fair balance between competing interests affected in bankruptcy cases. In this regard, the ruling develops the emerging trend of prioritizing bankruptcy's social function over individual investors pursuing commercial gain, while setting guidelines for evaluating construction financing models and shareholder rights protection. Specifically, subordinating affiliated investors' claims aims to protect bona fide shareholders' rights. This requires examining actual grounds for subordination rather than limiting analysis to formal affiliation. Schemes where developers without necessary resources attract shareholder funds contradict bankruptcy law objectives.