The article of the Managing partner of Paradigma Law Firm - Klim Rusakomsky in magazine "Lawyer of the company". #9 - September of 2016
Performance of obligations by the third party. Dangerous gaps for each party of the contract.
Expert: Kliment Rusakomskiy
Managing partner of legal company “Paradigma”
The source: magazine Lawyer of Company
If it concerns about performance of obligations in favor of the third party a creditor comes into a question. This is fair, because the payment for the services rendered by the third party shall be proved and correctly stated in an accountancy. Except of this, the creditor needs an insurance that the third party will not demand paid money with an interest back. Legal practice is familiar with such examples (the award of Arbitration Court of Moscow district №FO5-14263/2015 dated 22/10/15 regarding the case № А40-208790/14). Moreover, the third party can undertake obligations of the third party, sign relevant contract and then commence the bankruptcy procedure. This means that creditor not only will lose the funding, but also will be engaged into long-term court proceeding and challenging the transactions.
The previous publication of Law provided a choice for the creditor: to accept performance or not. The Civil Code afforded performance of obligations by the third party upon two conditions:
- there is threat for the rights of the third party (e.g. an indebtedness for the rental payment which might lead to a loss of rights on accommodation);
- obligation did not include the term about personal performance by the debtor.
The new version of the article has provided more possibilities for such performance. Now it is allowed to perform obligations of the debtor without his consent (art.313 of CC RF). The law concedes it in case of financial obligation. Civil Code prescribes two options of payment: transferring money to the notarial deposit or performance of the set off.
It also became possible to perform for the debtor non-monetary obligation. In that case this person undertakes a liability for the quality of performance.
The problems appeared when these provisions came into force. New version of law has discovered a number of abuses and created additional risks for all the parties of such relations. The courts detected the controversial aspects of an application of rules of the art. 313 CC RF, but had to find a solution of this problem and solved the disputes. We have examined the practice of law, determined the moment, when the problems arise and offered some decisions.
THE GAP №1. AFTER THE REPAYMENT OF DEBT, THE THIRD PARTY OBTAINS CONTROL FOR THE BANKRUPTCY PROCEDURE
A partner organization can repay debt for the debtor. According to new rulings a creditor shall accept performance, because a debtor have conceded laches. Here is important to take into account two points. Firstly, if new creditor of the debtor extinguishes the essential part of the debt, the real management of the property transfers to him and he acquire the possibility to influence making the main decisions of the company. In this case other creditors blow theirs chances to influence a course of bankruptcy procedure. They simply have not enough votes for this. Thus, in one of the cases court came to conclusion that the number of votes in percentage ratio to the general number of claims would not let the creditor to influence the decision of the meeting (award of the Arbitration Court of Povolzhskij circuit dated 06.08.15 №FO6-26524/2015 on the case № А57-11170/2014). In other case court indicated, that the attendance of the bank in a work of the first meeting of creditors could not have an influence on the results of a voting (award of the Arbitration Court of Central district dated 18.02.16 №Ф10-4156/2015 on the case № А35-1612/2015).
Secondly, a problem arises in case of private payment of the debt. In this instance the third party can pursue the same aim as in case of a full payment. But if in the first situation the creditor loses only a right of attendance in the bankruptcy procedure, here there is a risk to be left without a substantial amount of money or a property. Even when an unpaid part presents a sum of percentage, their amount can reach a good deal of money for the creditor.
Solution: not accept a payment when the attendance in bankruptcy procedure is more important. The High Court upholds the strong position: partial repayment of debts does not come to procedural succession.
This judicial act has stated two important conclusions:
- Creditor is enabled to withhold a performance by the third party, when he loses control after a bankruptcy procedure;
- Partial performance of an obligation on behalf of the third party does not lead to succession;
- A court will estimate partial repayment of the debt for a bankrupt company as an abuse, when it leads to infringement of interests of the creditor.
Consequently, a creditor has a choice. He can reject performance or to accept it and lose his rights in bankruptcy procedure of the debtor. Decision depends on variety of circumstances, which includes presence or absence of a property at the disposal of the debtor, financial situation in a company of the creditor and etc. When a third party, which was denied in succession, transferred payment for the bankrupt debtor on the account of the court, the last will return it back (award of the Arbitration Court of the Far Eastern District dated 29.07.16 №FO3-3285/2016 on the case № А51-13382/2013).
There are decisions, where courts have held that the creditor is not entitled to withhold a performance of obligation, which was offered by the third party (The Ruling of the Arbitration Court of the North Caucasus District dated 29.04.16 №FO8-2427/2016 on the case № А32-26308/2013). But these are singular events, which does not coincide with the attitude of the High Court (award of the High Court of Russian Federation dated 16.06.16 № 302-ES16-2049 on the case № А33-20480/2014). The legal opinion of the supreme body can serve as the proof-point in case of solving this question.
THE GAP №2. A NEW CREDITOR MAKES IT IMPOSSIBLE FOR THE CREDITOR TO PROVIDE HIS SERVICES UP TO THE DISCHARGE OF A DEBT IN FULL
Creditors usually abuse their rights. For example, a contract forbids cession without a consent of a creditor. When a creditor nonetheless concludes such an agreement, a debtor can litigate this transaction ( appellation award of the Moscow cCourt dated 22/06/16 on the case №33-21441/2016). In order to elude such situation, a creditor makes an arrangement with a third party. A third party performs obligations for a debtor and thereby a creditor and a third party achieve their aim – a creditor has been changed in contravention to the terms and conditions of a contract. In that case a debtor cannot litigate transfer of rights or claim for a cancellation fee for a breach of contract. A new creditor is not liable for the terms and conditions of a contract with a debtor. In this situation a third party simply exercised his civil right (art.313 CC RF). Problems for a debtor will arise when a new creditor turns to recover a debt in every imaginable way. This will make it impossible to make a work for the debtor up to the discharge of a debt in full (a creditor has a right to lodge a legal application on adjudication of bankruptcy of the debtor, commence a proceeding in execution with a following seizure of accounts).
Solution: keep out of big amounts and long-term periods of indebtedness. A practice of law does not know such arrangements for the acknowledgment of this behavior of creditors as a misconduct. A debtor is entitled to perform obligation, which does not demand a personal performance, independently or not requesting for a debtor`s consent to transfer performance to the third party. Law does not prescribe to find out the grounds, that have induced a debtor to assign performance of his obligation to the third party, to verify his authority (award of the Fifth Appellation Arbitration Court dated 18.08.15 № 05АP-4948/2015 on the case № А24-5793/2014). A dialog with a creditor helps to avoid this situation.
Experience has shown that the debts are to be sold on and enforced by action, when all the opportunities have already been lost. It is possible to arrange about partial payment, draft an engagement letter and to finalize a schedule of discharge of a debt. In this case a creditor does not need to assign it.
Nonetheless, this plan could be disadvantageous for a new creditor (third party). It is necessary for him to acknowledge that an indebtedness exists. Otherwise it will be impossible to recover a debt. For example, a creditor received finances from the third party and transferred him a right of foreclosure to the primary debtor. He refused to return finances and a new creditor applied to a court. It emerged that sum required was at the disposal of defendant on the legal grounds, because it was the payment for the delivery of goods (award of the Court of Leningradskiy District dated 15.10.15 №33-5237/2015).
THE GAP № 3. DEFEATED PARTY USES A FACT OF PAYMENT BY THE THIRD PARTY AS A REASONING TO AVOID A COMPENSATION OF A COURT FEES.
A person who claims to reimburse expenses for representative services is obliged to prove their amounts and the facts of payment (art.3 of The Informational Letter of the Presidium of the High Arbitration Court of Russian Federation dated 05.12.07 №121 «Law review on questions related to allocation of court fees between the parties…», further – informational letter №121). The defeated party calls in question the last fact, to avoid payment or even to minimize amount requested. In this circumstances a court will claim from the party, who applied for the court fees, to file a proof of payment. This party will have to prove the connection between the payments and the rendered legal services. The High Arbitration Court noted that only factual expenses incurred can be recovered. Amounts that a claimant will pay for the rendered services in the future, according to the art. 110 APC RF, cannot be recovered (point 4 of the informational letter №121). When not a principal has paid a legal fee to a representative, but a third party, losing party will refer to this fact.
Solution: draft the documents, which prove expenses. A representative of a winning party has enough time to prepare necessary documents.
He is entitled to claim for payment for the legal services before a court will make a decision on case, and also after coming of this decision into force (the award of Arbitration Court of Moscow district dated 14.05.15 on case № А40-77957/2014). The representative of the party, which won a court and require to cover legal costs, can refer to the information letter of the High Arbitration Court of the Russian Federation (clause 5 of the information letter № 121). In this letter Court points out that the fact of depositing funds by a third party does not created grounds for refusing recovery to the legal costs.
The matter regarding the time period for requesting to recover the court costs is considered by the representative independently. However, it is believed that after the execution of the decision the legal costs may be requested for recovering in a larger size. This is explained by the fact that the representative will provide more evidence of rendered services (legal costs will include the service of preparing the documents for the enforcement proceedings, the interaction with the bailiff, the implementation of its orders for the purpose to find assets of the debtor, etc.).
THE GAP № 4. THE DEBTOR CAN REFUSE REPAYMENT WITH REFERENCE TO THE ILLEGALITY OF CHANGE OF THE CREDITOR
The problem occurs when the company acquires the right of claim against the debtor. For example, if the original creditor - a credit company, and the next is not. The debtor will take advantage of it, to initiate litigation.
The company-debtor involves former debtor into litigation, claims that the credit company violates the law, giving rights under the company's credit agreement, which does not apply to credit companies. It will allow the debtor to defer repayment. In some cases, he does it in order to hide assets, through which you can pay off the debt.
Solution: do not agree to assignment, which is not permitted by the Law (Article 383 of the Civil Code.). Before you sign an agreement for the assignment and pay the creditor, you need to estimate the risks of buying foreign debt. It is not recommended to enter into such agreements if the funds are needed in the near future or if such assignment is prohibited by law. For instance, the debtor filed a lawsuit. He stated that the defendants (the new and the previous creditors) acted not in bad faith. They abused the rights. The claimant demanded to recognize the transaction as invalid. The former creditor (the bank), giving all the rights under the credit agreement to non-credit company, deprived the claimant's right to receive subsidies. The claimant believed that this is contrary to the law on state support lending. He pointed out that the assignment of the rights to deprive him of subsidies for reimbursement of the cost of interest on the loan, resulting in a credit company.
The Court did not agree with the claimant’s position. It pointed out that the law does not prohibit the bank to give rights under the loan agreement to company which is not credit and does not have the license for banking activities. The challenged transaction does not violate the provisions of article 313 of the Civil Code Russian Federation. The claimant's obligation to pay does not connect with its personality. The law does not allow the transfer to another person only those rights that are inextricably linked with the personality of the creditor. For instance, the requirement of alimony, compensation for harm caused to life or health, is prohibited (Art. 383 of the Civil Code). The court dismissed the claim (award of Arbitration Court of East-Siberian District dated 11.03.16 № F02-7785 / 2015, F02-1317 / 2016 F02-1167/ 2016 on case № A33-25070 / 2014).