An article titled “How to put out debt fire” by Senior Associate Evgeny Zverev. “Legal Services”, the special supplement to “Kommersant”
Management of debts receivable requires, first of all, paying constant attention to counterparts. Since loopholes are numerous, and instrument of control are abundant, consistent systematic approach is the key in this matter.
One of the remarkable achievements of domestic judicial system is a complete and reliable bank of data containing information on current and completed investigations at websites of arbitration courts. Among other options, the data bank enables searching by name of a firm, and by surname of a businessman. Thus, any businessman willing to spend some minutes on studying legal actions of his counterpart, may learn not only about trials (if any), but also about tactics a company adheres to: whether it tends to settle disputes on an amicable basis, or nor.
Internet holds the fort
On the surface it seems that referring to courts websites is a commonplace, even everyday occupation for practicing lawyers. However, the colleagues sometimes say that they were not asked to validate information trials of a company’s counterpart, they even were not engaged in execution of the contract. Working with such sites is quite level to capacities of lawyers, and to capacities of managers as well, and how many unnecessary litigations (and, most importantly, financial losses) could be avoided by market players (and ordinary public), should they study websites of the courts in advance. And when a contract is concluded, debts arose, and a counterpart is unwilling to pay, conversation between lawyers often reminds one the formula from the famous film: “You know what I am going to tell you, I know that you are going to answer. So, let’s waste no time”.
Obviously, should the creditor have at his disposal properly executed documents which confirm the creditor’s requirements (which are not always), it shall be a matter of time to obtain an order of enforcement. But sometimes there is a long journey from receiving an order of enforcement to getting one’s money back.
Companies unwilling to pay for delivered goods in due time, tend to create a “defense in depth”: the buyer is usually a company which has little to offer (to their creditors) apart from some chairs introduced into registered capital. Naturally, the parent company, shall stand sponsor for such “buyer” only in exceptional circumstances
There was a case in practice of our client-supplier when such company-purchaser invited creditors to a meeting, and announced that those wishing to get money may line up, provided that they grant a discount to company-purchaser, while the rest of creditors risk to get nowhere, except for an order of enforcement. Even should the beneficiaries of the company be held vicariously liable (it happens from time to time in practice), the creditor shall hardly benefit the defendant going bankrupt.
Costs in litigation
One should also remember judicial methods used to defer the day of reckoning. Despite the general trend of acceleration of proceedings, judicial stratagems are still there, it is difficult to catch an opponent, and to prove his dishonesty. The practice used by debtors who, unwilling to pay subject to the contract, initiate or rescissory actions, gained universal currency with the beginning of financial crisis. This phenomenon attracted attention of the Supreme Arbitration Court. In last July a regulation was adopted by resolution of the plenum of the Supreme Arbitration Court, which stipulated for inadmissibility of such practice. The courts began to apply this regulation literally “just-in-time”, and thus alleviated the situation of many creditors. However, after a month, considering a particular case, the same Supreme Arbitration Court of the Russian Federation specified that the given resolution does not essentially forbid the courts to stop proceedings in situations similar to those described in regulation adopted by the plenum. As a result, currently the same situation may end up in suspense of proceedings on the case, thus the debt recovery shall be postponed for a long time, and it may also end up in an immediate legal investigation. This being said, higher courts agree with both methods used to solve the problem, leaving it to judges of trial jurisdiction to give an independent estimation of circumstances of the case.
Such method of dragging out the trial is more typical for credit relations, while some inherent tricks are practiced in other areas. For instance, when it comes to a contract for work and labor, the customer can substantiate his refusal to pay with a low quality of the work done, and that will result in forensic examination being scheduled, that will result in suspense of proceedings on the case. As a result, by spending some rather small sum of money on forensic examination, the debtor delays the day of reckoning, and by this moment it turns out that all the assets are distributed between creditors.
It couldn't be any faster
Speaking about methods of expedited debt collecting, one may notice the possibility of arbitration proceedings that certainly will accelerate procurement of an order of enforcement. This being said, the party which was offered to include arbitration clause in the contract is nearly always suspecting that the arbitration court will favour the opponent. Sometimes the clause text indirectly implies this. For instance, should the arbitration court affiliated with an industry association examine a dispute of a colleague with an outsider, it shall remind "Dog does not eat dogl". Unfortunately, even a limited number of arbitration courts are still hardly in the businessmen’ confidence, however, some hope still lingers on.
Interim measures (arrest of property, prohibition against certain transactions etc.) are an expedited remedy of the creditor in an ordinary arbitral procedure. In some cases such interim measures may prove the unique method to guarantee collection of recovered money. Besides, interim measures in "unfair" hands are an effective way to give the debtor a hard time, to paralyse its business activity, and it was already used by malicious persons. That’s why the highest courts pursue a policy of forbidding the courts to arbitrary apply any interim measures, with the result that such measures are very rarely applied. The situation is similar to a joke on credit granting. As you know, credits are granted to those able to prove that they have no need of money. And to apply interim measures, one needs to prove that the debtor up the spout, or else that he started to rollback his business and to strip assets. Practically, it could be pretty tricky to snatch a moment when there is already some basis for application of interim measures, and such application is still efficient. It is even more difficult to gather, among “clear data”, any evidence which can convince the court that it is high time to apply interim measures. Credit agreements used by banks bind the debtors to supply copies of accounting records. However, such requirement would look rather exotic in the context of other commercial organisations even though accounting records can show negative dynamics of debtor’ business.
In certain instances a debtor unwilling to pay off debts according to the law, but resorts to an urgent liquidation. Furthermore, the actual indebtedness may be not recorded in debtor’s accounting documents, consequently, this indebtedness shall not be included in the liquidation balance-sheet. Should such fraudulent debtor manage to exclude itself from commercial register, the creditor shall hardly succeed in maintaining his rights in the civil legal framework, so basic activity aimed at protection of creditor’s rights will be carried out in the penal legal framework.
Sometimes counterparts are even unaware of their debtor being in the process of dissolution, since the latter, unlike the bankruptcy proceedings, takes course on an extrajudicial basis. Consequently, the information pertaining to dissolution is to be gathered from the sources, other than a court website. Still, such information (not only data on dissolution, but also data concerning reorganization, which is also underlying potential problems for creditors) is also accessible on specialised websites and in print publications. Dealing with troubled debtors, creditor’s lawyer should make it a rule to monitor current status of debtor’s registration documents.
Such event as change of a debtor’s address looks like a petty issue compared to dissolution or reorganisation, however, it can result in problems as well. There's a world of difference between applying to regional court to recover a small debt, and solving the same issue thousand kilometers off there, moreover, doing it without being convinced that court decision shall be enforced with success. This being said, should the defendant change the address by the time of claim submission, the case shall be considered at a new address of the debtor. Such trick is easily neutralised by including the clause on condition of being subject to the jurisdiction of specific court, however, such “little thing” is oftentimes neglected.
Taking stock, we’d like to say that dealing with troubled debtors is based on all the principles known long before cybernation era. Correct building of contractual relations, monitoring the activity of defaulting debtor, timely and efficient judicial defense, resorting to services of specialised law firms in difficult situations. Adherence to these principles will allow to minimise costs arising from the issues of debts receivable.