The enforced bailiff’s allocation in bankruptcy proceedings

Introduction to the problem of competition of privileges under the Obligations and Contracts Act (OCA) and the Commerce Act (CA)

The opening of bankruptcy proceedings is often preceded by individual enforcement proceedings under the Civil Procedure Code (CPC), which are initiated by independent counterparties and creditors of the debtor and may involve both collateral and sequestrable assets from the bankruptcy estate. before it is distinguished as such. The practical difference for creditors in carrying out the proceedings is manifested in the distribution of the liquidated property and the distribution of the funds received from it. Even if we only compare one of the lines of privileges under Art. 722, para. 1 CA with those under Art. 136 of the OCA, we will see that in bankruptcy proceedings claims secured by a pledge or mortgage, or lien or foreclosure, entered in accordance with the LRegistered Pledges Act (LPA) are the first in order (Item 1 of Art. 722, Para. 1 of the CA), while according to Art. 136 OCA are the third in order (item 3 of Art. 136 OCA). In practice, it is quite possible, in the cashing of the same property, depending on the type of proceedings (individual or universal), that one creditor will be completely satisfied or with a completely unsatisfied claim. It is also possible that the claims are of the same order, but again - that one of them is not included in the distribution and remains unsatisfied. This will be the case where a creditor has initiated individual enforcement proceedings, liquidated property, the bailiff's distribution has (been appealed, upheld by the court and) entered into force. Thus, according to Art. 462, para. 2 of the Civil Procedure Code, upon final distribution, the bailiff hands over the distribution amounts. But what would happen if bankruptcy proceedings were opened after the bailiff's distribution took effect, before the amounts were actually handed over?

Opening of bankruptcy proceedings and suspension of individual enforcement proceedings

With the opening of bankruptcy proceedings, the individual and enforcement proceedings regarding the debtor's property, which is included in the bankruptcy estate, are stopped, according to Art. 638, para. 1 CA. According to para. 2 of Art. 638, if the claimant receives payment in the period from the opening of the bankruptcy proceedings until the entry of the declaratory judgment, the payment must be returned to the bankruptcy estate. When creating this imperative provision, the legislator did not include good faith, resp. the claimant's bad faith, as a criterion for its application. On the contrary - the text is categorical: if a payment is made to a creditor in the period between the decision to open bankruptcy proceedings and the entry of the decision in the commercial register, the payment is returned to the bankruptcy estate. The legislator's idea is related, on the one hand, to the preservation and replenishment of the bankruptcy estate, and on the other hand, to the introduction of the principle of equality of creditors in the bankruptcy proceedings and distribution of the liquidated property in accordance with the procedure and under the conditions of Art. 722 of the CA, i.e. not to allow preferential treatment to a creditor. An exception to the rule has been introduced in two cases: for the property under Art. 193 of the Tax and Social Insurance Procedure Code (TSIPC) and in the case of a permission given by the bankruptcy court to continue the started enforcement proceedings (Art. 638, Para. 3 CA)¹.

The extent of the bankruptcy estate

The bankruptcy estate is defined as the totality of the property rights of the debtor, which are affected by the consequences of the decision to open bankruptcy proceedings and which, when the decision to declare bankruptcy is passed, are subject to cashing in to satisfy the creditors², and according to Art. 614, para. 1 of the CA covers, first of all, the property rights of the debtor as of the date of the decision to open bankruptcy proceedings and those acquired after that date. Therefore, the relevant question in this case is whether the amount subject to transfer under the enforced distribution of the bailiff belongs to the debtor and is therefore part of the bankruptcy estate?

The procedure for storing the sums of money received in the enforcement case is imperatively determined in the CPC and the Private Enforcement Agents Act (PEAA) (Private Bailiffs) (relating to private bailiffs) and cannot be changed at the discretion of the bailiff. With the provision of the law for the safekeeping of the sums of money, the effective control of their receipt and payment is guaranteed and the interests of the participants in the enforcement proceedings are protected. The amounts received on the bailiff's account are as intended. They serve to satisfy creditors, but until they are paid, they belong to the debtor³. Therefore, diverting them from the special account, converting them into euros and keeping them in cash by the bailiff is lawfully accepted as culpable failure to fulfill his obligations under the law and sanctioned in accordance with Art. 67 et seq. of the PEAA. Therefore, even with an effective distribution, the untransferred amounts available in the bailiff's account are part of the bankruptcy estate of the debtor in bankruptcy proceedings, which fully corresponds to the provision of art. 638, para. 2 CA.

The payment according to the effective distribution

Apparently it would be illegal, after the court has confirmed the distribution of the bailiff, and the same according to the express order of the law is subject to execution (actual delivery of the amounts), for the same not to transfer the amounts to the claimants, since bankruptcy proceedings have been opened. In this regard, it can also be assumed, not without reason, that since the distribution under Art. 460 of the Civil Code and the payment thereunder are not executive actions, according to item 10 of Interpretative decision No. 2 of 26.06.2015 of the Supreme Court of Appeal on the matter No. 2/2013, OSGTC, the same are not affected by the suspension of the executive case, with an emphasis on making payment according to the effective distribution - this is a factual action. However, the practice⁴ perceives that the collected sums cannot be transferred to the claimant when the enforcement proceedings are suspended, but they are not returned, but remain on the account of the bailiff until the case is resumed.

But also, when implementing the distribution, the provision of Art. 638, para. 2 of the Commercial Code, according to which, if a payment is made to the claimant from the suspension until the entry of the decision to open bankruptcy proceedings, the payment is returned to the bankruptcy estate. The norm concerns the hypothesis of a payment made to a claimant in the period from the suspension under Art. 638, para. 1 of the CA until the entry of the decision to open bankruptcy proceedings, but it is also applicable in this case a fortiori. After the claimant has no right to receive payment and should return the received in the period from the opening of the bankruptcy proceedings with the issuance of the relevant decision until its registration on the basis of Art. 622 of the Commercial Code in the Commercial Register, on even greater grounds, he should not receive payment not simply in a suspended enforcement case, but also at a time subsequent to the decreed and announced decision to open bankruptcy proceedings and to announce the latter in relation to the debtor. The only payments that can be made after the opening of bankruptcy proceedings are according to Art. 639, para. 1 of the TK, those relating to claims that arose after the date of the decision to open bankruptcy proceedings, which are not the claims included in an effective distribution. After declaring the debtor bankrupt and depriving his governing bodies of powers, payments can only be made by the receiver. Otherwise, the order for satisfaction of claims, provided for in Art. 722 CA (Decision No. 4960 of 07/06/2017 under City Administrative Order No. 8222/2017 of the General Administrative Court).

In the norm of Art. 638 of the CA, the competition between individual enforcement and bankruptcy proceedings is resolved in favour of the latter as a means of universal enforcement. According to para. 4 of Art. 638 of the CA, the suspended proceedings are terminated if the claim is presented and accepted under the conditions of Art. 693 of the CA, i.e. the creditor with an accepted claim cannot be satisfied according to the order of individual enforcement, but only in bankruptcy proceedings. He cannot receive payment from the sums already collected in the enforcement proceedings, even if the bailiff has distributed them among the claimants in accordance with Art. 460 of the CPC - in this sense, the norm of Art. 638, para. 2 of the CA, which does not allow payment to the claimant, including in the period between the suspension of the enforcement proceedings and the entry of the decision to open bankruptcy proceedings, in which case the amount paid is subject to return to the bankruptcy estate (Resolution No. 1450 of 29.05.2015 of the SAC pursuant to City Decree No. 4782/2014.).

Fees for individual enforcement

According to Art. 2, para. 1 of the PEAA, the private bailiff is a person to whom the state has assigned the enforcement of private claims. The fact that the state has entrusted him with the exercise of one of its most important functions - the function of the compulsory execution of required civil property rights, does not cancel the character of the private bailiff of a private person, and he exercises this function assigned to him precisely in his capacity as a private face. Because it is a private entity, the fees that the private bailiff (PEA) collects, although called fees, are not government fees. They are a reward for the procedural actions performed by him. It should be noted that in Art. 79, para. 3 of the PEAA expressly stipulates that for unpaid fees and expenses, the private bailiff may request the issuance of an execution order under Art. 410, para. 1 of the CPC, regardless of the amount of the claim, both the claimant and the debtor can be the defendant under it.

The foregoing necessitates the conclusion that the private bailiff may have the capacity of both a creditor and a claimant in relation to the debtor, when the latter has not voluntarily paid the due fees for the enforcement proceedings, representing remuneration for the procedural actions carried out under it and on the basis of Art. 410, para. 1 of the CPC was provided with an execution order.

The fees under the Tariff for the fees and expenses of the PEAA are part of the forcibly collected amount in the enforcement case, which amount belongs to the debtor, and as such is part of his property and hence of the bankruptcy estate, i.e. it would come out of his bankruptcy table. According to Art. 614, para. 1 CA the bankruptcy estate covers the property rights of the debtor as of the date of the decision to open bankruptcy proceedings and those acquired after that date. In the given case, the insolvent debtor has property rights over the Tariff of fees and costs to the Private Bailiffs Act fees to the PEAA in full, since the latter come out of his bankruptcy table and thus harm it, resp. prejudice the rights of creditors of the insolvent trader. Therefore, in this case, the bailiff cannot be satisfied by deducting the amount for the fee for the execution of a monetary claim directly from the amount collected in the enforcement case, and as a creditor of the debtor, it is necessary to present his claim on a general basis as a creditor according to the procedure provided for in the ToL (Decision No. 6790 of 12.10.2017 of the SGS under City Administrative Order No. 7467/2016.).

A brief conclusion

The bankruptcy estate covers the property rights of the debtor as of the date of the decision to open bankruptcy proceedings and those acquired after that date. This also includes all sums not transferred to claimants in enforcement cases, even in the presence of an effective distribution under Art. 460 of the CPC. The norm of Art. 638, para. 2 of the CA guarantees preservation and replenishment of the bankruptcy estate, in compliance with the principle of equal treatment of creditors in bankruptcy proceedings and distribution of the liquidated property in accordance with the procedure and under the conditions of Art. 722 of the CA, in view of the purpose of the proceedings – universal enforcement.

Ivan NIKOLAEV, attorney-at-law