BGP Litigation senior associate Evgeny Polyakov speaks with Izvestia about the proposal by the Federal Tax Service to limit the powers of company shareholders that act in bad faith in insolvency cases

""The simpler the auction process to sell off a debtor's assets and the easier it is for any interested person to take part in it, the more effective the bankruptcy procedure will be from the standpoint of satisfying creditors' claims, including in terms of payments to the state treasury," says Evgeny Polyakov, senior associate at BGP Litigation, agreeing with the logic of the Federal Tax Service.

He believes the question of holding a debtor's true beneficiaries liable is of great interest at this time".

Further to the comments given to Izvestia, Evgeny Polyakov also noted that there is clearly a need to improve how auctions are held. As a rule, at such auctions everything depends on the court-appointed administrators, who do not miss an opportunity to arrange for attractive property to be sold to controlled companies and only later for the debtor's assets to be sold at their market price.

The BGP Litigation senior associate says most abuses occur at the stage of describing the property that is to be sold (annotations can be uninformative and fail to provide a proper description of the property being auctioned) or by contriving obstacles which prevent the property from being inspected, e.g., if it is impossible to reach the auction organizer by phone in order to arrange to inspect property to be auctioned. Another favored method of auction organizers is not to admit potential bidders to an auction.

But Evgeny Polyakov believes that attempts to exclude a company's participants (shareholders) from bankruptcy proceedings have little real chance of success. A debtor's participants (shareholders) are entitled to the debtor's assets that remain after settlements have been made with all creditors, and they cannot be deprived of that right.

To hold a debtor's true beneficiaries liable, the adoption of urgent measures is necessary, the lawyer says. At present it is not often one encounters cases where a court meets a court-appointed administrator or creditors halfway and applies for information about the assets of a debtor's beneficiaries or management from other jurisdictions.

In cases where a court-appointed administrator has some affiliation with a particular creditor, the issue is not so much the affiliation itself as the administrator's disinclination to act in the interests of all creditors, says Evgeny Polyakov. This problem can and should be resolved through the courts, which by rendering comprehensive, reasoned decisions establish a so-called standard of "reasonability of the actions of court-appointed administrators" based on specific cases that have occurred in bankruptcy proceedings. 

Courts today tend to be "stingy" when it comes to explaining the rationale for their judgments, notes the BGP Litigation senior associate. This is a colossal problem that prevents better application of the law and the establishment of standards of good faith behavior in applying the law. 

The percentage of claims filed by creditors, including tax authorities, which are ultimately satisfied is extremely low, notes Evgeny Polyakov.

The proposed ideas with regard to auctions and holding foreign-based beneficiaries of debtors liable are steps in the right direction, he believes. But the details and mechanisms of implementation of the measures will be key.

The main role in a bankruptcy, says Evgeny Polyakov, belongs to the court, which should not step back in cases where there are clear abuses by the debtor, the court-appointed administrator, creditors or other parties involved in the process.

As for the rest, only time will tell whether the proposed changes are effective or not, says the lawyer. 

The full article (in Russian) is available here: "Банкротство не спасет от налогов".