What is meant by deliberate bankruptcy of an individual, what are its signs and responsibility for it?

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Published: 06/18/2019

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The bankruptcy procedure for an individual is aimed at writing off debt. But if the debtor deliberately brought himself to a state of financial insolvency, then the debts will remain with him, and, among other things, he faces criminal punishment.

• Concept
• The main signs of deliberate bankruptcy of an individual
• Responsibility under the Criminal Code and the Code of Administrative Offenses of the Russian Federation
• Arbitrage practice

Fictitious and deliberate bankruptcy

Carrying out bankruptcy proceedings for an individual is a legal right of a citizen and individual entrepreneur.
This right was granted to citizens not so long ago. Previously, only legal entities could declare themselves bankrupt. If a citizen is unable to pay off existing financial obligations, this may serve as a reason for declaring him bankrupt.

However, if this is done with the aim of extracting benefit for oneself, such actions may be considered fraudulent, which, according to Russian legislation, entails legal liability (administrative or criminal) for a citizen or individual entrepreneur.

Let's figure out what actions can be regarded as illegal?

The regulation of the bankruptcy (insolvency) procedure of an individual and individual entrepreneur is carried out by Federal Law No. 127 “On Insolvency (Bankruptcy)”, the Civil Code of the Russian Federation, the Criminal Code of the Russian Federation, as well as the Code of Administrative Offenses of the Russian Federation.

To identify illegal actions and recognize the fraudulent actions of a false bankrupt, the bankruptcy procedure is specially complicated by law. Individuals who get rid of their debt obligations through fraudulent means risk acquiring new financial problems.

There are 2 types of illegal bankruptcy: fictitious and intentional.

Fictitious bankruptcy is understood as a bankruptcy in which a person declares himself financially insolvent, but at the same time he has the funds to satisfy the claims of creditors.

Intentional bankruptcy is a person’s intentional commission of actions/inactions that will lead to ruin.

Both of these concepts are legally different, but they have a common feature - the commission of illegal actions, the purpose of which is the desire to evade the obligation to repay debts to creditors and preserve one’s property. In other words - to benefit.

Actions that obviously entail an inability to satisfy the claims of creditors (objective side)

The objective side is characterized by actions or inactions that obviously entail the inability of the debtor to satisfy the property claims of creditors.

Actions that knowingly entail an inability to satisfy the demands of creditors are a deliberate act aimed at causing or increasing the insolvency of a legal entity or individual entrepreneur. Such actions (inaction) include:

1) concluding, under conditions that do not correspond to market relations and business customs, transactions for the alienation of property, including the purchase and sale of property, without which the main activity is impossible;

2) concluding transactions not secured by property;

3) concluding other transactions aimed at receiving or providing, concluded on obviously unfavorable conditions;

4) failure to take measures to collect receivables.

Purposes of fictitious bankruptcy

The goals pursued by unscrupulous individual entrepreneurs and citizens may be different. For example:

1. an attempt to escape debt obligations. This reason is the main one. A false bankrupt, who is burdened with financial obligations to creditors (banks, tax services, Pension Fund, etc.), is trying to avoid paying his debts. Indeed, as a result of the bankruptcy procedure, the bankrupt’s debts can be partially or completely written off.
2. receive a deferment in the payment of monetary obligations. During the bankruptcy procedure, the payment of financial obligations, as well as the accrual of monetary sanctions (interest, penalties, etc.) are frozen. In addition, the debtor can “beat out” for himself more favorable conditions for repaying the financial burden.
3. close your business project. If an individual entrepreneur decides to completely close his business, but does not want to pay his debts, then he tries to declare himself financially insolvent.
4. committing fraudulent activities with credit funds. In this case, opening your own business is intended to borrow money from credit institutions and, in the near future, declare yourself bankrupt. Here is an original business plan.

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Protection of the rights of bona fide creditors

The dominance of the “documentary” or formal approach in “bankruptcy” cases can be put to an end by a very non-standard definition of the Economic Collegium of the Supreme Court of the Russian Federation (IES) dated July 25, 2016 No. 305-ES16-2411, aimed at protecting the rights of bona fide creditors.

As already mentioned, in practice, it is not difficult for an unscrupulous debtor to enter into an agreement with “friendly” creditors or to form “his own” accounts payable. The judges faced such a case.

So, in 2013, a large bank issued a loan to the company in the amount of 70.4 million rubles to purchase real estate. It was assumed that in the future this property would be rented out (this is exactly the kind of activity the company was then engaged in). However, instead, literally a month later, the company poured all the loan funds, and even part of its own, into some non-core assets. Namely, it entered into an agreement for the supply of 344 tons of meat products with a certain individual entrepreneur. Moreover, for a large amount - 78 million rubles.

Six months later, the entrepreneur went to court and, citing the fact that the goods had not been paid for, demanded that the company recover 78 million rubles of debt and 1.8 million rubles of interest. The company did not object to the claim, as a result of which in September 2014 the Arbitration Court of the Moscow Region satisfied it. A month later, the individual entrepreneur initiated another case - declaring the company bankrupt (A41-63886/2014). And again everything went like clockwork: on December 3, a monitoring procedure was introduced in relation to the company, and the individual entrepreneur was included in the register of creditors’ claims. In general, the rather crudely implemented “scheme” worked very effectively. Thus, the imaginary creditor was able to get ahead of the bankers and gain control over the bankruptcy procedure.

The bankers, who were never repaid the loan, decided to intervene in the situation by appealing the court decision in a dispute over debt under a supply agreement to the 10th Arbitration Court of Appeal. The deal is imaginary, the bank insisted, appealing to common sense. Its true goal is to create artificial debt.

Many reasons were given in support of this. Too much meat was supplied by one single entrepreneur in a very short time. Moreover, where did the company suddenly become so interested in meat products, and how was it going to use it? After all, this organization was not previously engaged in such activities at all, and it does not even have equipment for processing or storage. And what is this attraction of unheard-of trust? Before this, the company had never worked with this particular entrepreneur, and suddenly - it’s on you: the lion’s share of the goods (and contrary to the terms of the contract) is delivered without payment.

Alas, the entire argumentation of the bankers remained a voice crying in the wilderness. Neither the appeal nor the cassation (AS of the Moscow District), all these nuances did not seem like something out of the ordinary. They were quite satisfied with the invoices presented by the “supplier”, which confirmed the fact of the transfer of meat and were properly executed. As a result, the entrepreneur’s “bankruptcy” claim was once again fully satisfied.

note

Intentional bankruptcy is the commission by the head of an enterprise, individual entrepreneur or citizen of deliberate actions or inaction, which subsequently led to financial insolvency (Article 195 of the Criminal Code of the Russian Federation). Fictitious bankruptcy is a deliberately false public announcement that a given economic entity is bankrupt (Article 197 of the Criminal Code of the Russian Federation).

Turning to the highest court for support, bank representatives indicated that the courts unreasonably limited themselves to examining circumstances typical of a normal delivery. However, the transaction between an individual entrepreneur and a bankrupt company was not such. The judges ignored the important arguments of the plaintiff and assessed the evidence formally.

The three judges of the Economic Collegium of the Supreme Court of the Russian Federation were also not satisfied with the superficial approach of their lower-ranking colleagues. In delivering their verdict, they recalled that a characteristic feature of a fictitious transaction is the absence of a goal to achieve the stated results.

“By making a deal just for show, the parties correctly draw up all the documents, but do not strive to create real legal consequences. This means that evidence of only the formal execution of the contract is clearly insufficient,” says the ruling of the Supreme Court of the Russian Federation. Moreover, the judges emphasize, if this affects the “bankruptcy” case - in particular, the question of inclusion in the register. The courts had to check the existence of an actual supply relationship, and if there was convincing evidence of its impossibility, shift the burden of proof to the defendant. However, the lower authorities generally ignored all the arguments of the bank, whose rights were infringed by the inclusion of a “supplier” “friendly” to the debtor in the register. As a result, the verdicts of all lower courts were overturned, and the case was sent for a new trial.

Yes, this is not the outcome of the confrontation yet. But the precedent is that for once it was a conscientious creditor, and not a bankruptcy trustee, who managed to convince the court of the fact of an imaginary transaction. In this case, the Economic Collegium of the Supreme Court of the Russian Federation issued fairly clear instructions to the courts on checking the validity of clearly suspicious claims. It directs courts to examine contracts in more detail already at the stage of including claims in the register of creditors. The positive effect of the decision of the “highest arbitrators” is that it continues to confirm specific legal mechanisms for ensuring the rights to judicial protection of persons not involved in the case. After all, the bank, as a creditor of the defendant in the case, intervened in the ordinary process, and not in the insolvency procedure. In general, the courts have been given an “instruction to be attentive,” and there is no hope that they will ignore it.

Main methods of fictitious bankruptcy

Bankruptcy is a rather complex, lengthy legal procedure and has a number of significant nuances. Therefore, incorrect interpretation, as well as misunderstanding of the law, can lead to the fact that the actions of debtors can be regarded as intentionally illegal.

The law provides for criminal and administrative liability for fictitious and deliberate bankruptcy. The Code of Administrative Offenses of the Russian Federation establishes liability in accordance with Articles 14.12 and 14.13. Criminal liability is provided for in Articles 195 and 196 of the Criminal Code of the Russian Federation.

What actions of debtors can be considered illegal?

• The debtor concealed information or deliberately distorted information about his property and financial position;
• Actions of the debtor that cause damage to creditors;
• Attempts to interfere with the work of authorized persons, such as a financial manager.

Criminal liability

In accordance with Article 196 of the Criminal Code of the Russian Federation, the following penalties may be applied to a convicted person:

• Monetary penalty in the amount of two hundred thousand to five hundred thousand rubles.
• A monetary penalty in the amount of the defendant’s income for a period of one to three calendar years.
• Forced labor for up to 5 calendar years.
• Imprisonment for up to 6 calendar years and a fine of up to two hundred thousand rubles.

Identification and evidence of fictitious bankruptcy

Signs of a fictitious bankruptcy of a debtor may include:

• discrepancy between the information collected by the financial manager and the information provided by the debtor;
• provision by the debtor of false and falsified documents on his income and expenses;
• the debtor conducting a large number of transactions shortly or immediately before filing an application for financial insolvency.

This may include: sale of the debtor’s property (for example, its sale, donation, etc.); withdrawal of funds; obtaining loans and borrowings, which increases the debtor’s debt burden and reduces his financial solvency (i.e., the ability to fulfill his financial obligations).

The procedure for identifying fictitious bankruptcy:

1. Conducting an assessment for signs of fictitious bankruptcy. This procedure can begin only after a citizen or individual entrepreneur has filed an application to be declared bankrupt.
2. Analysis of transactions made by debtors 2–3 years before filing an application for bankruptcy, as well as the period after filing the application. In this case, the debtor provides documents about his property, and the financial manager makes requests to the relevant organizations (Rosreestr, banks, etc.) about transactions carried out by the debtor during the reporting period;
3. Checking documentation for the presence of fictitious bankruptcy. It is made on the basis of documentation provided by the debtor and information that was received from other organizations. This information is compared and contrasted to identify similarities and financial discrepancies;

As a result, the court will decide whether there are signs of fictitious bankruptcy in the case.

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Unlawful actions in bankruptcy (Article 195 of the Criminal Code of the Russian Federation)

This article covers a whole range of criminal acts, which are divided into three groups.

1. The first group (part 1) includes: concealment of the property itself (property rights) or information about it, i.e. their complete or partial concealment, transfer of property for temporary possession to other persons, its alienation or destruction, as well as destruction or falsification of accounting or other accounting documents. For example, transfer of debt on accounts receivable to a friendly company; transfer of property to pay off debts under imaginary transactions; filing a police report about the theft of expensive property that the debtor is actually hiding.
2. The second group (Part 2) covers actions performed by the debtor in the interests of individual creditors to the detriment of other creditors. For example, the order of creditors provided for by the Civil Code of the Russian Federation is violated; in violation of the debt repayment schedule during financial recovery, the debtor makes payments to individual creditors to the detriment of others.
3. In the third group (Part 3), the legislator includes the actions of the debtor aimed at creating conditions that do not allow the arbitration manager to fully exercise his functions. For example, restricting access to the premises, to documentation and other information media, evasion or refusal to transfer documents or property.

This article provides for criminal liability for actions that interfere with the correct conduct of the bankruptcy procedure and the full satisfaction of the interests of creditors. Persons who may be held liable under this article include: citizens, including individual entrepreneurs, heads of organizations, founders, members of the board of directors, as well as the arbitration manager himself.

Evidence of misconduct

In order to bring the general director to criminal liability in bankruptcy under Article 195 of the Criminal Code of the Russian Federation, evidence of guilt, intent and the establishment of a cause-and-effect relationship between his actions (inaction) and the damage caused to the interests of creditors is required.

Various steps taken by the debtor may be considered as evidence of the debtor’s unlawful actions. A number of crimes under Parts 1 and 2 of Article 195 of the Criminal Code of the Russian Federation are committed even before filing a bankruptcy petition in court. For example, withdrawal of assets for the purpose of subsequent bankruptcy.

Criminal acts will also include providing false information or deliberately concealing information about existing property and other assets that the debtor indicates in the response to the creditor’s application for bankruptcy. The following actions of the debtor may serve as grounds for initiating a criminal case within the framework of bankruptcy:

• conclusion and execution of contracts concluded on conditions that are clearly unfavorable for the debtor;
• concluding contracts with obviously insolvent organizations and paying for them;
• writing off funds for undocumented expenses;
• retroactive registration of loan agreements; issuance of powers of attorney for re-registration of rights to the debtor’s property.

Usually, in practice, unreliability of information and facts of falsification are revealed by the arbitration manager in the process of analyzing primary documentation.

Legal support of bankruptcy proceedings

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Preparing for the final decision

With the introduction of temporary rules, it has become easier to identify the presence or absence of a fictitious / deliberate bankruptcy of a debtor. In the conclusion, after checking the debtor’s activities, the arbitration manager must indicate the following data:

• day, month, year of document preparation;
• the place where the conclusion was drawn up;
• information about the specialist who verified the authenticity of the debtor’s bankruptcy, the date of appointment;
• information about the self-regulatory organization in which the insolvency practitioner is registered;
• full name of the arbitration court;
• Case number, date of the arbitration court's decision to begin insolvency proceedings;
• information about the debtor;
• bank details of the bankrupt person/company;
• a conclusion on the presence or absence of signs of fictitious or deliberate bankruptcy of the debtor;
• documentary evidence of the conclusion made - calculations, financial analysis, actions or facts of inaction that led to fictitious bankruptcy;
• information about the impossibility of checking the debtor to identify the presence of signs of fictitious bankruptcy due to the lack of necessary documentation.