BY PAVEL GANIN, PARTNER OF A.T.LEGAL

The Supreme Court has recently addressed the issue of whether taxes can be paid from a pledged account in bankruptcy proceedings. Initially, the courts noted that it was not necessary to pay taxes from the pledged account, and initially it was necessary to settle accounts with pledged creditors. However, the RF Supreme Court sided with the Federal Tax Service, protecting the interests of the budget.​

Pavel Ganin talks about the ruling of the Russian Federation Supreme Court and about the balance of legitimate, bona fide interests of the debtor, its beneficiaries, creditors, including the tax authority. Is it possible to say that court practice is developing in such a way that the interests of the Federal Tax Service are more important than the interests of other creditors?

You can read the case background and the article here:  https://xn--c1abvl.xn--p1ai/news/bankrotstvo_kompaniy/s_zalogovogo_scheta_bankrota_sobirayut_nalogi_/

Pavel Ganin: "In this case, the question of fairness is not directly a subject of consideration of the court of higher instance, the question of fairness belongs more to that of ethics, philosophy. The key issue considered by arbitration courts in such disputes is to find a fine balance between legitimate, bona fide interests of the debtor, its beneficiaries, creditors, including the tax authority, and public interests, in particular the public interest in the field of social guarantees, etc. It is the observance of this balance that underlies the basic principle of bankruptcy law, as stated in the current legislation of the Russian Federation - the proportional satisfaction of claims of debtor's creditors. Based on the legal status of creditors, which they have by the time the debtor is declared bankrupt, they are not initially equal in the distribution of funds received from the sale of the bankruptcy estate of any debtor. Fixing one or another priority in the queue has always existed in the regulation of bankruptcy of debtors in the Russian Federation, starting from 1992. Bankruptcy creditors receive such priority through active work with the debtor in the period preceding the declaration of his bankruptcy, first of all by entering into security transactions aimed at encumbering the debtor's property with a pledge in their favor. State tax authorities, taking into account the protection of public interests, namely replenishment of the treasury through taxes and obligatory payments, also always had a certain priority over creditors by virtue of their legal status, in particular mandatorily fixed non-acceptance write-off of funds from the current account of the debtor.

Public and private interests always find their balance in constant interaction full of contradictions and struggles, by resolving disputes between them during court proceedings within the working judicial system. Obviously, in the current realities, businesses should assume that the courts will side with the authorized bodies in bankruptcy cases. Judicial practice of arbitration courts, the Supreme Court of the Russian Federation (the "RF SC") certainly reflect the trend over the past decade to tighten tax discipline, tax payments collection, administration of tax payments as a flawless working mechanism. So, this mechanism algorithms often fail when receiving money to the budget for the repayment of debts on taxes and fees, which have already been formed with debtors declared bankrupt.

The percentage of taxes and levies paid by bankrupt debtors has been definitely growing in recent years, which is confirmed by the statistical data of both the tax service and the unified federal resource of bankruptcy information.  At the same time, it is much lower than similar data on debtors outside bankruptcy procedures.

In addition, in practice of bankruptcy proceedings in the previous decade, there was a general impression that the bankrupt does not pay anyone including the tax authorities, and that bankruptcy procedures are a fertile ground for the development and active use of various "schemes" aimed at non-payment of taxes by the debtor or his contractors, and also return and offsetting amounts of obligatory payments. The legislator and the law enforcement practice for a long time has been methodically trying to eliminate violations and abuses in this area of legal relations related to the value added tax ("the VAT"). Although the process has been long, the major part of VAT abuses has been eliminated as a systematic practice in bankruptcy proceedings.

Among recent cases we can mention that the Supreme Court recognized the VAT paid during the lease of mortgaged property as an expense for the sale of mortgaged property, which by virtue of paragraph 6 of Art. 138 of the Bankruptcy Law results in the compensation of these costs in the first priority, that is, before settlements with the pledged creditor.

It should be noted that the practice on VAT is determinative in terms of the emerging general trend in the Supreme Court decisions on bankruptcy cases, when the court actually goes beyond the limits of regulation established by a literal interpretation of the law, and proceeds from the general principle of compliance with the above balance of interests of parties involved in bankruptcy, expansively "interpreting" the existing law on bankruptcy.

At the same time a number of controversial issues related to VAT recovery by the debtor being a bankrupt in situations of sale of bankrupt estate, when the payer of this indirect tax is not the seller, but the buyer, remains unresolved to this day.

There is the obvious success in terms of finding the sources of VAT payment in the situation of bankruptcy of its payer; and the tax authorities decided to build on the success in terms of payment of other taxes, in particular property taxes. Given the fact that the number of sources of bankruptcy estate has not increased, it still happened at the expense of another privileged group of creditors of bankrupt debtors, pledge holders of property.

The Supreme Court of the Russian Federation, in making another ruling, pointed out that property taxes on pledged property are also paid at the expense of the debtor's property holder.

It is obvious that at present, having a state body as a procedural opponent in the arbitration process, any participant in civil relations is aware that the court will assess the dispute itself in bankruptcy cases, in addition to the direct legal component of the judicial dispute; its consideration at the level of higher instances will ensure the interest of the state as a whole. 

The Supreme Court changes, sometimes quite dramatically, the practice of lower courts, builds systemic connections of the relevant norms of bankruptcy law, norms of tax law, norms governing public relations, operates in support of its position with more fundamental categories relating to the principles of the legal and state system of the Russian Federation.

The assessment of the positiveness of these trends certainly lies in the subjective views of the observer and evaluator, and depends primarily on whose interests he puts above - public or private. The practicing lawyer in this situation in his work should certainly take into account these trends in formulating tactics and strategies for litigation involving the tax authority, as well as in developing legal and organizational structures for entities that may potentially be declared bankrupt."