Bankruptcy of a construction company imposing the subsidiary liability on the debtor’s controlling party

В этом кейсе показываем, как мы помогли выйти должнику из описанной ситуации с минимальными потерями – всего 1.5 млн. руб., вместо 650 млн. А также уйти от попытки уголовного преследования и субсидиарной ответственности.

In this case we demonstrate how we helped the debtor resolve the described situation with minimal losses — only 1,5 million rubles ($ 20 000) instead of 650 million ($ 8,6 million). We also managed to avoid criminal prosecution and subsidiary liability.

A construction company specializing in industrial construction and utilities.

The company was performing subcontracting work for one of the holdings, constructing several facilities for an oil refinery. Due to financing delays and project deadline failures, a conflict with the holding arose. The client terminated the subcontract agreements under the provisions of Article 715 of the Civil Code of the Russian Federation, demanding the return of the unprocessed initial advance payment and reimbursement of costs.

The construction company found itself in the following situation before initiating bankruptcy procedure:
  • creditors' debt of approximately 200 million rubles ($ 2,6 million) to subcontractors based on the acts of acceptance (KS-2);
  • the client refuses to accept and to sign the acts of acceptance and the accumulation cost report — the documents showing that the advance payment was spent during the construction of the oil refinery;
  • a potential debt to the client of 300 million rubles ($ 4 million) arises.
The construction company does not acknowledge the potential debt to the client and does not repay it. Meanwhile, they attempt to gain some time to resolve the conflict with the client.

To partially repay the debt to subcontractors, a loan of 50 million rubles ($ 660 000) was obtained. The loan was provided by a bank affiliated with the client, with the following collateral:
  • guarantees from the debtor’s controlling persons;
  • pledge of accounts receivable from one of the client's companies.
The client refuses to resolve the conflict, realizing they are in a highly advantageous position.
The initiation of bankruptcy proceedings and the aggravation of the situation

One of the subcontractors, who "won" the debt dispute, initiates the bankruptcy proceedings against the construction company. The client submits claims to the LCC amounting to over 400 million rubles ($ 5,3 million) (the sum of the unutilized advance payment and the value of materials supplied). As a result, the client becomes the majority creditor.

The debtor loses control over the situation and initiates the collection of accounts receivable from the client's companies during the observation procedure. However, only 120 million rubles ($ 1,6 million) are successfully collected in the first instance court. By the time the court ruling on the collection of accounts receivable becomes legally enforceable, the debtor is already subject to bankruptcy proceedings.

The debtor's situation is further aggravated by several factors:
  • claims from the bank affiliated with the client are included in the LCC, so the bank determines the terms and conditions for the realization of the pledged accounts receivable;
  • the client's lawyers independently challenge a number of the debtor's transactions, raising the issue of holding the controlling persons of the debtor subsidiary liable for losses;
  • an attempt of criminal prosecution of the controlling persons is made;
  • due to an internal corporate conflict within the debtor's company, the control over a significant part of the primary documentation is lost, preventing the bankruptcy trustee from making a claim for the collection of accounts receivable from the client's companies.

At this stage, the debtor approaches our company. The goal is to minimize the losses.

The primary task is to exclude the customer's claims amounting to 400 million rubles ($ 5,3 million) from the claims register. The claims have been appealed. During the consideration of separate disputes in the appellate court, we successfully obtained the appointment of judicial construction and technical expertise. Their objective is to confirm the amount of work performed by the debtor for the customer.

The case was under consideration in the appellate court for 2 years, including the suspension during the expert examination. As a result, the claims of the customer's companies exceeding 400 million rubles ($ 5,3 million) were deemed unfounded and excluded from the LCC.

The following results were achieved:
  • the risk of criminal prosecution of the debtor's controlling persons was significantly reduced due to the challenge of the customer's claims;
  • the unjustified badgering from the bankruptcy trustee on the debtor's controlling persons was eliminated and the balance of interests between all the creditors and the debtor was ensured through our constructive dialogue with the bankruptcy trustee;
  • the debt assignment agreement in favor of the customer-affiliated bank was challenged, and the cash amount of approximately 50 million rubles ($ 660 000) was included in the bankruptcy estate after settling the bank's claims for the amount of 50 million rubles ($ 660 000). This allowed the payment of all current obligations, complete repayment of the first and second priority claims, and a portion of the third priority claims of the LCC;
  • the recovered debt, obtained through restitution, was assessed as accounts receivable with a discount of up to 90%, sold at auction, and repurchased by a loyal third party;
the customer's request, as the majority creditor, to hold the debtor liable for the damages was successfully opposed.

Significant work has been done to protect the interests of the debtor and defendants, minimizing negative consequences during the challenge of transactions.
Subsidiary Liability Imposed

The CEO, as well as two controlling beneficiaries, were held liable for the debtor's obligations under subsidiary liability. The reason behind this is the failure to submit the debtor's primary documentation and the annulment of several transactions.

The subsidiary liability claims against the debtor’s controlling persons, totaling 130 million rubles ($ 1,7 million), were sold for 1,5 million rubles ($ 20 000). Our active actions and the following circumstances contributed to this outcome.
  • The claims of the initiator (one of the customer's companies) in this separate dispute were excluded from the LCC before determining the amount of subsidiary liability. The initiator lost the ability to influence the situation.
  • Other creditors received partial satisfaction of their claims and lost their interest in the debtor's bankruptcy procedure (fatigue effect played a certain role).

Given the circumstances, one of the controlling beneficiaries was released from liability when the amount of subsidiary liability was being determined. The remaining two debtor’s controllers were collectively held liable for the amount of 130 million rubles ($ 1,7 million) — the remaining unpaid claims. This debt, in accordance with Article 61.17 of the Bankruptcy Law, was subject to auction sale as accounts receivable.

Simultaneously with the company's bankruptcy, bankruptcy procedures were initiated against the debtor’s controlling persons. The debtor's claims for subsidiary liability against them were evaluated at approximately 1% of the nominal value (1.5 million rubles / $ 20 000), sold at auction, and repurchased by a loyal third party.

The debtor's bankruptcy procedure has been completed with minimal losses.
  • The majority creditor’s claims amounting to over 400 million rubles ($ 5,3 million) have been proved to be unfounded. The claims have been excluded from the debtor's LCC.
  • Effective dialogue has been established with the customer-affiliated bank.
  • Attempts of criminal prosecution of the CEOs have been halted.
  • Creditor debt to subcontractors, amounting to 200 million rubles ($ 2,6 million) has been repaid.
  • The claims for subsidiary liability against the debtor controlling persons, totaling 130 million rubles ($ 1,7 million), were sold for 1,5 million rubles ($ 20 000).
  • Simultaneously with the company's bankruptcy, bankruptcy procedures were conducted against two debtor controlling persons, and the third participant was excluded from the case.

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