10 December 2019

Is it long enough for an administrator to keep the documents of a bankrupt company for seven years? The creditor argues this period is not sufficient, because the controlling persons may be brought to justice within 10 years. He lodged a complaint against the administrator who had destroyed the documents too early. Three judicial bodies, however, decided that seven years are enough to review the documents and to use them. Then the case was presented to the Supreme Court. It ruled out that the approach is perfunctory and provided explanations. The decision of the Supreme Court was analyzed by experts.

Financial and accounting documents of a bankrupt company play vital role in bankruptcy process. They enable to evaluate the insolvency estate and to add to it, to challenge transactions, to identify controlling persons and to determine whether subsidiary liability may be invoked towards them. The management of a bankrupt company should hand these documents over to a judicial administrator who is supposed to keep them. The Insolvency Law however does not clearly indicate the period these documents must be kept.

Oleg Loginov, the administrator of Renaissance Leasing Company, destroyed its documents after seven years, in 2018, when the bankruptcy case was opened (No А40-108749/2011). Alexander Ozhogin, the insolvency creditor, wasn’t happy about that. It seemed too suspicious to him that the administrator got rid of all papers two months after the court accepted the subsidiary liability complaint against controlling persons. Mr Ozhogin filed a complaint against Mr Loginov. In it, the creditor claimed that the destruction of documents prevents him from collecting evidence and determining the guilt of controlling persons.

Three judicial bodies found no grounds to punish the administrator. Over seven years, Mr Loginov made all necessary arrangements. His actions (or lack of these) and reports were not appealed against, and there was no sense to keep the documents longer, the courts stated. According to the decisions of the courts no one violated the rights of creditors. They had an opportunity to review the documents interesting to them, but did not do it.

Mr Ozhogin appealed to the Judicial Chamber on Economic Disputes of the Supreme Court of the Russian Federation. The Chamber shared the concerns of the creditor and rule out that the lower courts did not conduct a thorough review of the case. The Chamber reminded that in liquidation of a legal entity, including for the reasons of bankruptcy, the case law does not allow the unconditional destruction of records even if the retention period is expired. This is also indirectly stated by paragraph 5 of article 61.14 of the Insolvency Law which determines the time limits for recourse to courts with applications for subsidiary liability. According to this article, this time limit must not exceed 10 years from the date the actions (or lack of these) that may be used as reason for subsidiary liability take place.

“The law does not allow the judicial administrator to destroy at his discretion the documents of the debtor which potentially may constitute evidence in the case while the insolvency proceedings are ongoing, even if the creditors do not object to that”, the Supreme Court stated. Especially if the case involves the pending application for subsidiary liability of controlling persons, the Chamber on Economic Disputes noted. Therefore the decisions of the lower courts were defined as premature.

Olga Goncharova, a partner of law firm Khrenov&Partners, notes the behavior of the complainant. She sees the indications of abuses of law in it. The creditor complains that the absence of documents impedes the subsidiary liability proceedings against the former management of the debtor. But these attempts had been twice made long before the destruction of documents Olga Goncharova insists. And both times no actions were taken due to lack of evidence.

The full article may be viewed here (in Russian).