A pledge status of a competent body’s claims in bankruptcy cases: risks and consequences

Amendments to the Russian Tax Code have been introduced by Federal Law No. 325-FZ dated 29 September 2019 “On amending Part I and Part II of the Tax Code of the Russian Federation”, including to article 73 of the Code. The provision has been supplemented with clause 2.1 concerning the creation of a pledge with respect to the obligations to the state budget by virtue of a law. Please find below the principal amendments and consequences of the new provisions being implemented as applied to the interests of a taxpayer company and its creditors if the company goes bankrupt.

The basis and priority of a pledge.

According to the amendments, a taxpayer’s property is deemed to be pledged to a tax authority by virtue of the law in the following cases:

• for 1 month, there have been arrears in taxes (levies or insurance contributions) specified in a decision for recovery which is secured by a seizure of taxpayer’s property;
• when a decision comes into effect for which article 101(7) of the Tax Code provides and which is secured by a prohibition on the disposal (pledging) of property of a taxpayer (payer of levies or insurance contributions, or a tax agent), without the consent of a tax authority.

If the property has already been pledged, what we call the ‘tax’ pledge will be a subsequent pledge. This means that claims of previous pledge holders will be satisfied first, while the remaining part, if any, will be channelled to pay the tax debt.

Given the wording of conditions under which a pledge arises, the ‘depth’ and time lines of a tax audit and of a decision by the tax authority under article 101(7) of the Tax Code, a taxpayer’s obligations which arose long before such amendments came into effect may become secured by a pledge of such taxpayer’s property. This should be borne in mind when a company’s future strategy is elaborated and risks are assessed of the procedures applied in bankruptcy cases. Property which cannot be pledged Under article 73(2.1) of the Tax Code, no pledge arises with respect to property pledged to third parties by the date when the above circumstances occur, provided that, according to Russian civil legislation, no subsequent pledge of such property is permitted [2].  The consequences of a pledge do not apply to bank accounts and deposits designated to satisfy claims under Russian civil legislation which appeared earlier than the obligation to pay taxes (levies or insurance contributions).

Pledge registration procedure

A pledge that arises under article 73(2.1) of the Tax Code must be registered with a state authority in accordance with Russian legislation[3]. Therefore, registration with the Unified State Register of Real Estate will be required with respect to immovable property, while registration in the notary’s register of notices of pledges over movable property may be performed with respect to movable property. 

The implementation of article 73(2.1) of the Tax Code will entail a number of negative consequences, listed below, for other pledge creditors of a taxpayer, as well as creditors whose claims are not secured by the pledge. We draw your attention to some of the below consequences which should be borne in mind when you select your contracting parties, carry out transactional work, develop your company’s future business strategy and exercise your rights in bankruptcy cases.

1. The question remains open whether the application of article 73(2.1) of the Tax Code results in a situation when a competent authority accrues the rights of a pledge creditor in bankruptcy cases, which rights are stipulated by articles 18.1 and 138 of the Law on bankruptcy, considering the approach of the Russian Supreme Court stated with respect to ‘seizure pledges’[4]. As regards the ‘tax’ pledge, it is entirely possible that courts will take into account that such pledge arises by virtue of the law and will include such claims in the register of creditors’ claims as claims secured by the pledge of the debtor’s property[5]. In this case, given the extremely low percentage of creditors’ claims that are satisfied in bankruptcy cases (3.9% for non-secured claims and 33.8% for pledge claims), that claims over mandatory payments are given the status of a pledge may reduce to a minimum the chances of ‘unsecured’ creditors.
2. As regards movable property, given the difficulties with identifying such property and singling it out from among the overall mix of similar objects and it being not mandatory to register the pledge, ordinary creditors may face significant difficulties with exercising their rights. It may even be impossible for them to exercise such rights given the conflict between pledges.

Conclusions and recommendations

When they enter into a pledge agreement, bankruptcy creditors must be cautious: they should conduct thorough due diligence to identify any risks of encumbrances over property offered as a pledge or other assets of a company on which a creditor relies when it concludes and incorporates into its agreements provisions which mitigate such risks.

Help from your adviser

Pepeliaev Group's specialists boast extensive experience of protecting the interests of any category of persons, creditors included, who are involved in the procedures that bankruptcy cases entail. Our lawyers also provide qualified legal assistance, including during litigation involving defending the rights of creditors.

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1. In accordance with article 3(4) of Federal Law No.325-FZ dated 29 September 2019.
2. For instance, article 27.3-1(1)(3) of the Federal Law “On the securities market” and article 43(2) of the Federal Law “On mortgage (pledge of real estate)”.
3. Article 339.1 of the Russian Civil Code.
4. The Russian Supreme Court’s Rulings No. 305-ES16-15945 dated 19 December 2016 in case No. А41-108121/2015 and No. 301-ES16-16279 dated 27 February 2017 in case No. А11-9381/2015.
5. It should be noted that there are certain grounds for talking about it being impermissible for a court that is considering an insolvency case to introduce a different regime for satisfying claims depending on the procedural criteria of the basis of a pledge from the perspective of the creation of a ‘tax’ pledge as a result of the seizure of or a prohibition on the disposal (pledge) of taxpayer’s property by fiscal authorities, as well as the so-called ‘seizure pledge’.
6. https://fedresurs.ru/news/179cceff-02d6-4aa3-aa61-a65f77820b15?attempt=2