Challenging a debtor's transactions and defending against challenges

What is happening

Six months before its bankruptcy the debtor sold its only warehouse to a company registered to a relative of the director, and the purchase price was never paid. The creditors can see the scheme, but they need evidence that will persuade the court.

A supplier received payment of an old debt from its customer a month before the customer filed for its own bankruptcy. The officer now demands the full amount back as a preferential payment, although the supplier knew nothing of the customer's difficulties.

A company bought machinery from the debtor at market value, paid for it and has been using it for over a year. The officer is challenging the sale as intended to harm creditors and wants the machinery returned to the estate.

What the law says

• The special grounds for challenge are set out in Chapter III.1 of Federal Law No. 127-FZ of 26 October 2002 "On Insolvency (Bankruptcy)" (the Insolvency Law). A challenge is brought within the insolvency case by the officer or by creditors holding a sufficient share of the claims.
• A suspect transaction for inadequate consideration can be challenged if it was made within one year before the bankruptcy petition was accepted or afterwards. A transaction intended to harm creditors can be challenged within three years, but it must be shown that the counterparty knew of that intention.
• A preference, meaning payment of one creditor at the expense of others, can be challenged if made within one month before the petition was accepted or afterwards, or within six months where the counterparty was aware of the debtor's insolvency.
• Transactions in the ordinary course of business worth no more than one per cent of the debtor's assets are generally not open to challenge as suspect transactions or preferences. For a good-faith counterparty this is an important argument.
• Beyond the special grounds, transactions can be challenged under the general rules of the Civil Code, for example as sham transactions or as an abuse of rights.
• Where a transaction is set aside, what was received is returned to the estate and the counterparty's claim against the debtor is reinstated. The limitation period for such applications runs from when the officer learned or should have learned of the grounds for challenge.

What we do

• We analyse the debtor's bank statements and transactions for the suspect period and single out those showing inadequate consideration, asset stripping or preference.
• We establish links between counterparties and the debtor: family ties, shared addresses and managers, chains of onward sales.
• We prepare challenges backed by evidence and interim measures so that property cannot be resold before judgment.
• We defend counterparties by proving market pricing, genuine payment, the ordinary nature of the deal and lack of awareness of the debtor's difficulties.
• We arrange valuation and expert evidence on the market value of the property at the transaction date.
• We represent the client in the separate dispute in the commercial court and on appeal.

What we will need from you

• For a creditor: the bankruptcy case number and details of any suspicious transactions you know of.
• For a counterparty: the officer's application and the ruling accepting it.
• The contract, payment records, transfer documents and correspondence about the transaction.
• Evidence of market pricing: valuation reports, comparables, commercial offers from the period.
• Information on what you knew or could have known about the debtor's finances at the transaction date.