Challenging the debtor's transactions in bankruptcy of individuals

The presence of transactions involving the debtor's alienation of property (its sale, donation, division, exchange, etc.) over the last 3 years is one of the most common contraindications to going through bankruptcy proceedings. The reason is not only that the above transactions can be challenged, but also that:

• the arbitration manager and creditors may see signs of deliberate bankruptcy in these actions (transactions) and contact law enforcement agencies with a statement under Article 196 of the Criminal Code of the Russian Federation “Intentional Bankruptcy” or 195 of the Criminal Code of the Russian Federation “Illegal Actions in Bankruptcy”;
• the court may consider the debtor’s behavior to be dishonest, and the actions to be aimed at deliberately concealing property and not to release him from debts upon completion of the bankruptcy procedure for an individual in accordance with Art. 213.28 of Federal Law No. 127-FZ “On Insolvency (Bankruptcy)”.

However, transactions made over the last 3 years are not always disputed and their presence is a contraindication to bankruptcy . Let's look at in what cases and how transactions are contested during the bankruptcy of an individual (most of the information is also relevant for the bankruptcy of legal entities, since the law on bankruptcy for individuals and legal entities is the same, and the rules on challenging transactions are the same: Chapter III.1 of the Federal Law No. 127-FZ “On Insolvency (Bankruptcy)”). But there are people who do not want to part with their property in bankruptcy, but are thinking about transferring it to another person in order to ultimately retain control over the property. It is for these people that we will analyze the TOP 3 most popular schemes for the withdrawal of property, offered on a paid basis by some bankruptcy law firms.

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Why challenge a citizen’s transactions during bankruptcy?

When filing for bankruptcy, a citizen is obliged to report all transactions with property made by him within three years. For example, by the time the debtor goes to court, he can sell or donate an apartment, car, land, or other expensive property, which could be used to pay off debts to creditors.

Most often, property transactions are made for the following purposes:

1. Withdrawal of property from the bankruptcy estate. The debtor hopes that during the bankruptcy period his property, registered in the name of other persons, will be preserved. For example, a citizen gives an apartment to one of his relatives so that later, after the bankruptcy is completed, he can register it again in his name.
2. Fictitious or deliberate bankruptcy. The citizen recognizes himself as insolvent in order to write off his debts. For the court to make a positive decision, he needs to prove his insolvency. This is achieved by deliberately worsening one's financial situation. For example, a citizen transfers a large amount from his bank deposit to a close friend.

In order to avoid the illegal withdrawal of property from the bankruptcy estate, actions are being taken to challenge such transactions. By a court decision they are declared invalid. Next, the property is returned to the bankruptcy estate and sold at auction in order to pay off debts to creditors.

Why is there a need to challenge contracts?

Challenging transactions in the event of bankruptcy of an individual is carried out on the basis of Federal Law No. 127 and additional regulations, which provide explanations of the essence of the provisions of the law.

When planning to enter into bankruptcy proceedings, a citizen, first of all, must realistically assess his own financial situation. Having come to the conclusion that his income is not enough to pay off his debt obligations, he begins to look for options on how to get out of the impasse. The law gives him this opportunity.

Another type of applicant for bankruptcy status: an individual, having taken out financial loans, understands that by recognizing himself as insolvent, he risks real estate and assets that will be used to pay off debts, which is undesirable for him. Then he begins to withdraw assets, showing miracles of ingenuity: he transfers property to relatives, moves real estate and money to offshore zones . This is done in the hope that upon acquiring bankruptcy status, the court will write off all debts. After this, it will be possible to return all property back. These actions lead to challenging transactions in bankruptcy proceedings for an individual.

In this regard, the law provides for the possibility of refuting the authenticity of the debtor’s cunning financial transactions. By court order, they are annulled, the alienated property is sold at auction in order to pay off debts with the proceeds.

What transactions are disputed in the bankruptcy of an individual?

Chapter III.1 of the Bankruptcy Law explains which transactions of the debtor can be challenged.

The grounds for challenging transactions in bankruptcy are as follows:

1. Suspicious transactions. This category includes contracts concluded on the terms of unequal counter-performance. For example, the debtor sold a car to his brother for 100,000 rubles, and the market value of the property is 800,000 rubles. As a result, creditors suffer material harm, since they are deprived of the opportunity to repay the debt at the expense of the property disposed of from the bankruptcy estate.
2. Transactions concluded with priority (preference) in favor of one of the creditors. That is, the debtor enters into an agreement with one of the creditors for the purpose of priority repayment of debts to him compared to other creditors. For example, a citizen has a debt to the bank and other creditors. In order to repay the loan debt, an agreement is concluded on the transfer of unrealized property, which must be sold at auction. If the property had initially been sold at auction, each creditor would have received a portion of the proceeds from the sale in proportion to the existing debt.

Important! To identify voidable transactions, an analysis of all contracts concluded within three years prior to the filing of a citizen’s bankruptcy application is carried out. Those that need to be contested are reviewed by creditors and the financial manager. The financial manager applies to the court with a corresponding application and returns the property to the bankruptcy estate.

Is it possible and how to keep a car during personal bankruptcy?

Financial manager in bankruptcy of individuals

Signs of suspicious transactions

So, what transactions should be considered suspicious? Contracts concluded within a 3-year period before bankruptcy are recognized as such if:

• at the time of conclusion, the debtor already had arrears, large debts and an insufficient amount of property;
• the property in respect of which the transactions were concluded is not included in the list of Art. 446 of the Code of Civil Procedure of the Russian Federation and does not have any signs of immunity;
• the transaction caused damage to the creditor. We are talking about transactions where objects were clearly valued too low or were taken out of ownership without reciprocal execution - by donation;
• the second party was a close person of the debtor.

It should be noted that there are transactions that cannot be disputed! These include those that were concluded in relation to untouchable property, for example, in relation to the only dwelling.

Who has the right to challenge a citizen’s transactions in bankruptcy?

The bankruptcy process of a citizen is accompanied by a financial manager who collects information about the debtor’s property and income. He forms the bankruptcy estate, conducts valuations, organizes tenders and distributes the proceeds among creditors.

Typically, challenging transactions falls on the shoulders of the financial manager. After discussing this issue with creditors, he goes to court with a statement. Subsequently, he takes part in the consideration of the case in order to prove the illegality of the transaction.

Bankruptcy creditors also have the right to apply to the court to challenge an illegal transaction. In this case, the financial manager participates in the consideration of the case as an interested party and supports their claim.

Procedure for invalidating contracts

Challenging transactions is carried out within the framework of a bankruptcy case for individuals.

An application for pairing a transaction in bankruptcy proceedings for an individual has a standard format:

• The name of the court where the claim is being sent.
• Indication of the registration number of the insolvency case.
• Bankruptcy information.
• Statement of the essence of the petition, the reasons for the need to challenge it.
• Plaintiff's claims.
• List of documents that are attached to the claim: copies of contracts that are proposed for challenge, explanations for each document.

The application is accompanied by the minutes of the meeting of creditors with their collective decision on the need to cancel the attached agreements and the argumentation.

The procedure for challenging a transaction:

1. Filing a petition to the Arbitration Court by a meeting of creditors or a financial manager. Creditors initiate the cancellation of one transaction or several - this is decided collectively at a general meeting and documented in minutes.
2. The financial manager proceeds with the creditors' petition. His task is to collect the necessary documents.
3. Consideration of the application by the court. The court recognizes the contracts proposed by the manager as invalid or refuses to challenge them.

How to challenge a citizen’s transaction in bankruptcy: step-by-step instructions

Transactions involving the withdrawal of property from the bankruptcy estate are contested within the framework of a citizen’s bankruptcy case.
The financial manager takes the following actions:

1. Forms a package of documents confirming the contestability or nullity of the transaction.
2. Draws up an application to the arbitration court.
3. Takes part in court proceedings.
4. Monitors the return of property to the bankruptcy estate.

Let us analyze the entire algorithm for challenging transactions in bankruptcy in more detail.

Step 1 – Formation of a package of documents confirming the contestability of the transaction

The financial manager must prove in court that the transaction was concluded with unequal counter-execution or to preferentially satisfy the claims of one of the creditors.

For this purpose, you should prepare a package of documents:

• disputed contract;
• information about the transfer of property to another person;
• information about the value of the transferred property;
• register of creditors' claims with information on the amount of debt for each creditor;
• inquiries to the State Traffic Safety Inspectorate, Rosreestr, and other registration authorities regarding the debtor’s property and responses to them;
• other documents.

In addition, the financial manager can attract witnesses who have information about the controversial transaction.

Step 2 – Drawing up an application to the arbitration court

The issue of challenging the debtor's transaction is considered by the arbitration court, which is handling the bankruptcy case. The financial manager submits an application filled out taking into account the requirements of the Arbitration Procedure Code of the Russian Federation and the Bankruptcy Law.

The application must indicate the following:

• name of the court considering the bankruptcy case;
• Full name of the financial manager, his address;
• Full name of the debtor, his address;
• information about the persons who became parties to the transaction (name of the company, full name of the entrepreneur or citizen, registration or residence address);
• information about the start date of the bankruptcy procedure;
• information about the transaction (contract, date of its conclusion, conditions);
• information about the transfer of the debtor's property to another person;
• the value of the transferred property;
• information about the document on the basis of which the debtor owned the property by right of ownership;
• circumstances confirming that the transaction is suspicious or made with preference;
• requirement to recognize the transaction as invalid and return the property to the bankruptcy estate;
• list of applications;
• date and signature.

Sample application

Application for recognition of a citizen’s transaction in bankruptcy as invalid

Before going to court, a state fee must be paid. The mandatory fee is 6,000 rubles. If there are no funds to pay the state fee, a request for deferment may be submitted. Documents confirming that the applicant cannot pay the state fee for valid reasons should be attached to it.

We must remember! The application must be sent to the debtor, the person who received the property, and other interested parties involved by the financial manager. Postal receipts confirming the sending of the document are attached to the bankruptcy case materials.

Step 3 – Participation in legal proceedings

After receiving the application, the court sets a date and time for the trial. All interested parties take part in its consideration, provide explanations, and submit written objections and reviews to the court.

If the court considers the transaction invalid, a ruling is made declaring it void or voidable. The recipient of the property is obligated to return the debtor's property to the bankruptcy estate.

Step 4 – Control over the return of property to the bankruptcy estate

Based on the determination to return the property to the debtor, the financial manager receives a writ of execution. If the dishonest acquirer does not intend to comply with the court ruling, the manager has the right to transfer the writ of execution to the bailiff service.

Based on the application of the financial manager, enforcement proceedings are initiated. The bailiff applies enforcement measures: searches for property, freezes accounts, and confiscates the disputed item. As a result of enforcement actions, the property is returned to the debtor's bankruptcy estate.

You should know! To successfully challenge a transaction, you must go to court within the statute of limitations, which is three years before the citizen’s bankruptcy petition is accepted. In the case of a transaction with preference, the limitation period is six months.

Features of challenging real estate transactions

Real estate transactions are often the subject of disputes. For example, contracts of purchase and sale and donation of an apartment, land plot, non-residential premises.

The financial manager analyzes real estate transactions for unequal counter-performance, since if the transactions were made with the aim of concealing property, the contract is formally drawn up indicating a value significantly lower than the market value.

Particular attention is paid to transactions completed within a year before bankruptcy and transactions involving close relatives. If the administrator discovers that as a result of the transfer of real estate the bankruptcy estate has significantly decreased, he takes measures to return the debtor's former property to the bankruptcy estate.

An example from judicial practice. In the bankruptcy process Kraeva A.Yu. The financial manager applied to the court to invalidate the gift agreement dated December 30, 2014, concluded between A.Yu. Kraev. and Kraev A.A. During the trial, the court revealed that the debtor transferred free of charge to A.A. Kraev’s closest relative. three buildings and two plots of land. If there are unfulfilled obligations to creditors, the gratuitous transfer of liquid, expensive property led to a decrease in the debtor's assets and violated the rights of creditors to repay the debt. The court declared the gift agreement invalid and obliged Kraev A.A. return the property to the ownership of Kraev A.Yu. (Decision of the Arbitration Court of the Nizhny Novgorod Region dated 06/09/2018 in case No. A43-33094/2017).