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20.11.2022

Lawfulness of withdrawal of claims in bankruptcy proceedings by a court-appointed manager

Today court-appointed managers quite rarely withdraw their claims in bankruptcy proceedings (such as claims for invalidation of a deal or for imposition of secondary liability) or outside of bankruptcy proceedings (claims for collection of a debt). Still, such withdrawals occur from time to time. Although reasons for them may vary, not infrequently they may involve a court-appointed manager’s abusive practices and collision with debtors or their contracting parties. In this regard, we would like to outline recommendations that may help creditors to preclude such cases.

It should be mentioned that during the effective periods of different editions of the Bankruptcy Law courts followed different approaches to withdrawal of claims by court-appointed managers and, in particular, abuse of third party rights and interests by such withdrawals.

Thus, according to Article 10(6) of the Bankruptcy Law effective during the period from March 5, 2012 to June 30, 2012, a claim for imposition of secondary liability on persons controlling the debtor could be filed during the bankruptcy management proceedings by a court-appointed manager or by resolution of the meeting of creditors or the committee of creditors.

Under the earlier versions of the Bankruptcy Law (in particular the version which was in effect in 2012), a court-appointed manager was the only participant in bankruptcy proceedings who had the right to file a claim for imposition of secondary liability. In 2012, withdrawal of a claim for imposition of secondary liability by a court-appointed manager might be regarded as violation of interests of creditors who at that time had no independent right to file such claim. Therefore courts did not accept such withdrawal of claims.

The current version of the Bankruptcy Law grants creditors in bankruptcy proceedings the procedural independence from a court-appointed manager, the meeting of creditors and from each other, as well as the right to independently defend their pecuniary interests, in particular by contesting deals and claiming imposition of secondary liability on controlling persons. The Bankruptcy Law does not require that a court-appointed manager should obtain a prior consent or approval of the meeting of creditors for withdrawal of claims.

As the procedural rights of creditors became broader, courts’ opinions on possible acceptance of withdrawal of claims started to differ.

Some courts believe that a court-appointed manager has an unconditional right to withdraw, in particular, a claim for invalidation of a deal or for imposition of secondary liability on one of the defendants. Courts point out that the provision of Article 49 of the RF Code of Arbitrazh Procedure apply to any kind of claims, including those submitted in bankruptcy proceedings. There is no exception to this general rule of the RF Code of Arbitrazh Procedure. So, withdrawal of claims by a court-appointed manager only affects the manager’s procedural rights such as the right to file a claim with a court repeatedly.

Such opinion was expressed in the ruling of the Arbitrazh (Commercial) Court for the Moscow District of August 9, 2018, No. Ф05-9846/15, in matter No. А40-81013/2014, where the court held the following: “The argument of the complainant about violation of its rights as the debtor’s creditor is rejected as invalid. Acceptance of the withdrawal by one of the creditors of its claim for imposition of secondary liability on the persons controlling the debtor does not contradict the law or violate other parties’ rights and legitimate interests relating to independent submission of such claim.

A similar approach can be found in the rulings of the Twentieth Arbitrazh (Commercial) Court of Appeals of January 28, 2019 in matter No. А62-8941/2015 and the ruling of the Tenth Arbitrazh (Commercial) Court of Appeals of December 4, 2019 in matter No. А41-6795/13.

However, in our opinion, such straightforward approach of court with regard to acceptance of withdrawal by a court-appointed manager of his claims has a number of fundamental defects.

First, creditors do not always monitor carefully the progress of bankruptcy proceedings against their debtors and rarely appear at the hearings. This brings about the risk that the creditors might be too late to discover that an unfair court-appointed manager acting by a ‘backroom’ agreement with the debtor or its beneficiaries has withdrawn some claims and therefore the creditors might be unable to preclude this during the proceedings.

Second, not infrequently claims for imposition of secondary liability are submitted shortly before expiry of the statute of limitation. In the event of lengthy legal proceedings which result in withdrawal of a claim by the court-appointed manager, creditors might miss the statute of limitation for repeated submission of the claim and thus be unable to exercise the relevant legal remedy.

Third, creditors will actually be forced to divert their time and financial resources for the purpose of difficult and time-consuming analysis of the situation and drafting their own claim, which work has already been done by the court-appointed manager.

Fourth, there is no certainty that an attempt to recover damages from the court-appointed manager will be successful. Creditors would need to prove 3 circumstances which are very hard to prove:

  • High probability of invalidation of the deal and imposition of secondary liability if the court-appointed had not withdrawn the claim;
  • Realistic possibility of getting satisfaction from the defendant;
  • Calculation of damages, i.e. what portion of money returned into the bankruptcy estate the creditor would have received.

Cases over recovery of damages are among most complicated in terms of the burden of proving. Therefore, the risk that the court will regard the creditor's arguments as a groundless assumption is rather high.

In this regard, it seems that most appropriate is a different approach by courts which accept the withdrawal of claims in certain exceptional cases, for example, where:

  • Creditors in bankruptcy proceedings have expressly authorized the court-appointed manager to withdraw a legal action or claim, as evidenced by relevant minutes of the meeting of creditors (see e.g. the ruling of the Arbitrazh (Commercial) Court for the Moscow District of July 18, 2017 in matter No. А40-148646/2016);
  • Withdrawal of the claim by the court-appointed manager has been exhaustively substantiated, including the absence of a potential harm to the creditors’ interests (see e.g. the ruling of the Arbitrazh (Commercial) Court for the Volgo-Vyatski District of February 13, 2018 in matter No. А31-6981/2015). In particular, it should be shown by evidence that there is no chance of satisfying the claim, that further consideration of the claim is unreasonable that that there is high probability of recovery of legal costs form the debtor and increase of its current payments, etc.

Thus, in proceedings over bankruptcy of claims of the debtor represented by its court-appointed manager, withdrawal of a claim should not be regarded as the claimant’s dispositive act exercised by the claimant at its own discretion. Bankruptcy is a public procedure and the manager should act bona fide and reasonably to the best interest of the debtor, its creditors and society. In this regard, a court-appointed manager should not be equated to the claimant in the broad sense, as established by Article 49 of the RF Code of Arbitrazh Procedure.

Therefore, a court assessing potential violation of rights of creditors in bankruptcy by withdrawal of a claim should take into account the circumstances referred to by a court-appointed manager in substantiation of the withdrawal. However, in any event the most efficient way to preclude such negative scenario is proactive procedural conduct of creditors, timely monitoring the progress of bankruptcy proceedings and personal involvement in all separate key disputes.