Conscientiousness and reasonableness in resolving the issue of releasing a citizen from debts in the bankruptcy procedure (statement of the problem)

Zatonov Rudolf Iurevich CEO of «Prolegal» LLC 199155, Russia, Saint Petersburg, Saint Petersburg, Embankment of the Smolenka River, 3, building 1, 100 rudolfzatonov@gmail.com

From the beginning of the bankruptcy procedure of individuals (from October 2015) to the end of 2022, 753,250 citizens were declared bankrupt, while the dynamics of the number of citizens recognized as insolvent remains positive ("Bankruptcy in Russia: results of 2022. Statistical release of Fedresource" [Electronic resource] // URL: https://fedresurs.ru/news/d569ceb1-1f1a-44dd-bec2-e11c8eb5ddac (accessed: 05.07.2023)). At the same time, the bankruptcy procedure, as a rule, is filed under two main screaming slogans: "Write-off of loans", "Debt relief". However, despite the fact that the release of a citizen from further fulfillment of obligations is a common rule upon completion of the bankruptcy procedure of an individual, arbitration courts "write off" debts not to all individuals who have used this procedure.

Thus, according to paragraph 4 of Article 213.28 of Federal Law No. 127-FZ dated 26.10.2002 "On Insolvency (Bankruptcy)" (hereinafter – the Federal Law "On Insolvency") the court will refuse to release from debts upon completion of the bankruptcy procedure if it is established that the citizen acted unlawfully during the occurrence or fulfillment of obligations.

It is worth noting that law enforcement officers have come to the conclusion that this norm is fundamentally connected with the institution of good faith, as evidenced, for example, by the following position expressed in the Decision of the Arbitration Court of the Moscow District of 02/21/2022 No. F05-28434/2021 in case No. A40-80585/2020: "in accordance with paragraph 4 of Article 213.28 The Bankruptcy Law does not allow the release of a citizen from obligations if he acted in bad faith during the occurrence or performance of obligations to creditors ...".

In 2015, when the institution of consumer bankruptcy was just beginning its development, the legal position expressed by the court in case No. A45-24580/2015 was textbook - in it, for the first time, the court refused to release the debtor from further fulfillment of obligations upon completion of the bankruptcy procedure. The circumstances are classic: debt on loans, which the debtor could not cope with in any way, in the absence of the last property for sale. The court recognized the citizen as unscrupulous and refused to "write off" debts, since the debtor had accumulated loans for which the amount of monthly payments significantly exceeded the monthly income. The resonant decision was made not only by the fact that it was the first refusal of the court to release a citizen from debts, but also by the thesis that the court based its position on: debt relief is the illegal purpose of bankruptcy.

Here the question cannot but arise as to why the court came to such a conclusion, especially in conditions when debt relief is a normal consequence of the completion of the bankruptcy procedure of a citizen? It can be assumed that the court had in mind the exclusivity of the bankrupt state of a citizen – consumer bankruptcy and the very release of a citizen from debts should be an exceptional measure, while debtors are trying to consider bankruptcy as a "write-off" of loans for which they did not intend to pay. This thesis can be illustrated by O.M. Sviridenko's statement that unscrupulous persons are those "who have something to pay their bills, but really do not want to do it" ^{[1, p. 71]}.

The main, dominant position in judicial practice until relatively recently, was reflected in the Ruling of the Arbitration Court of the West Siberian District No. F04-4210/2016 in case No. A45-24580/2015 of 13.10.2016, where the court found that the debtor, assuming more and more new credit obligations, gradually and consistently increased its debt to credit organizations, and therefore assumed obviously unenforceable obligations, which was the cause of the insolvency. The court pointed out that the sole purpose of the debtor was solely to get rid of debts, therefore, this behavior should be regarded as unfair, and therefore he should be refused to "write off" the debt upon completion of the bankruptcy procedure.

According to paragraph 28 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated 30.06.2011 No. 51 "On consideration of bankruptcy cases of individual entrepreneurs", when establishing circumstances indicating abuse of the debtor's right and other obviously unfair behavior to the detriment of creditors, the court has the right to refuse to release the debtor from fulfilling obligations upon completion of the bankruptcy procedure. At the same time, the Supreme Arbitration Court of the Russian Federation gave examples of such unscrupulous behavior: assuming knowingly unfulfilled obligations, providing the bank with knowingly false information when receiving a loan, concealing or intentionally destroying property, withdrawing assets, failure to comply with court instructions to provide information, etc.

A similar trend in Russian law enforcement practice persisted for a relatively long time, but at some point the course changed dramatically. The reason for this was the Ruling of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation dated 03.06.2019 No. 305-ES18-26429 in case No. A41-20557/2016 (hereinafter referred to as the Ruling of the Supreme Court of the Russian Federation dated 03.06.2019).

In the said judicial act, the Supreme Court agreed that citizens quite often give a biased assessment of their own financial capabilities and life circumstances, and therefore assume unsustainable debt obligations, including bank loans, but this behavior cannot serve as a basis for refusing to release such citizens from debts. The Supreme Court emphasized that, unlike bad faith, the unreasonableness of an individual's behavior is not such an obstacle in itself.

 The position expressed in the Definition of the Supreme Court of the Russian Federation of 03.06.2019 has become such a sharp turn in the history of the development of consumer bankruptcy that some law enforcers immediately declared the entire bankruptcy procedure of individuals "continuing" (Domnin, S. The unreasonableness of the debtor's actions when assuming obligations is not a reason for not releasing him from debts in the event of bankruptcy. Commentary on the definition of the Armed Forces of the Russian Federation. [Electronic resource] // URL: https://www.eg-online.ru/article/402365 / (Accessed: 04/20/2022)). The Supreme Court of the Russian Federation has ordered the release of debtors who have accumulated excessive loans in the absence of adequate income to make payments. At the same time, an attempt was made to give a legal justification to the new rule: the unreasonableness of the debtor does not mean its bad faith.

The presence of this phrase in the text of the Ruling of the Supreme Court of the Russian Federation of 03.06.2019 required rethinking the wording from earlier explanations of the higher courts. In particular, the legitimacy of the examples of unfair behavior of the debtor, which were presented by the Supreme Arbitration Court of the Russian Federation in paragraph 28 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated 30.06.2011 No. 51, has definitely ceased to be obvious: at least, the assumption of obviously unfulfilled obligations by itself can no longer be assessed as unfair behavior of the debtor.

At the same time, it should be noted that the position expressed in the Ruling of the Supreme Court of the Russian Federation of 03.06.2019, which is very often reproduced by arbitration courts when making rulings on the release of citizens from debts upon completion of the bankruptcy procedure, directly refers the law enforcement officer to one of the fundamental principles of civil law – the principles of good faith and reasonableness.

The concepts of good faith and reasonableness in Russian law are disclosed rather vaguely, which opens up a wide scope for interpretation. Article 10 of the Civil Code of the Russian Federation tells us that the integrity and reasonableness of participants in civil turnover is assumed by establishing a fundamental civil presumption. It should be noted that in the text the legislator divides the concept of "good faith" and "reasonableness", but the Civil Code of the Russian Federation does not specify how these two concepts relate to each other.

The same division can be observed in the provisions of Article 53.1 of the Civil Code of the Russian Federation, which describes the responsibility of a person authorized to act on behalf of a legal entity, members of collegial bodies of a legal entity and persons determining the actions of a legal entity: paragraph 5 speaks of the nullity of the agreement on the elimination or limitation of liability of persons specified in paragraphs 1 and 2 of this Article. articles for committing exclusively unfair actions, in a public society – for committing unfair and unreasonable actions. And if Article 10 of the Civil Code of the Russian Federation does not contain a clear separation of reasonableness and good faith, this division can be observed in the text of Article 53.1 of the Civil Code of the Russian Federation, although it must be recognized that this article is the only one that does not allow to identify good faith and reasonableness.

Neither judicial practice nor the legislator has yet given an answer to the question of what is the difference between conscientiousness and reasonableness, and therefore it is impossible not to agree with the opinion expressed in the literature that there is a problem of assessing conscientiousness in bankruptcy cases of citizens, and the legislator "has not established clear criteria for conscientious behavior, giving it completely to discretion of the court" ^{[2, p. 91]}.

Many researchers agree on one conclusion – a citizen is a weak side in lending. But it seems that such a position of the debtor in itself cannot be the basis for "writing off" debts. Although, for example, S.Yu. Gerusova justifies the need to release the debtor from debts already because citizens "cannot be attributed to an economic unit in its pure form ... due to legal illiteracy or insufficient knowledge of the law" ^{[3, p. 55]}. It is difficult to agree with this statement, since it seems that in this case the civil law principle of equality of market participants, including credit, is violated. In such conditions, as E.D. Suvorov correctly notes, debt relief turns into "shifting the risks of the debtor's insolvency to specific creditors" ^{[4, p. 46]}.

The need to establish standards of conscientious behavior of debtors is also evidenced by the numerous problems faced by law enforcement practice, which attempts to use the above-mentioned position of the Supreme Court of the Russian Federation to resolve cases of insolvency of citizens.

So, in the Resolution dated 10.12.2020 No. F06-40202/2018 in case No. A65-26705/2017, the Arbitration Court of the Volga District proceeded from an assessment of the reasonableness and good faith of the purpose of attracting borrowed/credit funds and concluded that "the debtor has not proved that the receipt of significant borrowed funds received from individual creditors and issued credit organizations, it was a necessary and necessary measure for him."

It is impossible to agree with this position of the court due to the following.

Firstly, such logic contradicts one of the fundamental principles of lending: banks issue loans to solvent persons, assuming that they have no "vital necessity".

Secondly, such arguments lead to the dubious assumption that the institution of consumer bankruptcy exists for the sake of social rehabilitation only of those citizens who assumed credit obligations in conditions of extreme vital necessity.

Thirdly, this judgment of the arbitration court contradicts the instruction of the Supreme Court of the Russian Federation on debt relief, including those borrowers who took on obviously unenforceable loans.

Fourthly, an interesting question arises – will the court release from the obligations of the debtor-a citizen who took out a mobile phone of the latest model on credit? On the one hand, the purchase of a phone on credit is not so vital and necessary for a citizen. On the other hand, the consumer goods and services market is closely linked to the lending market – the vast majority of products and services can be purchased on credit. For example, there are statistics according to which 64% of Russians buy a new iphone on credit, 15% borrow money to buy it from friends and relatives, and only 21% purchase smartphones at their own expense (Alekseevskikh A., "More than 60% of Russians buy an iPhone on credit" [Electronic resource] // URL: https://rg.ru/2021/11/25/bolee-60-rossiian-pokupaiut-iphone-v-kredit.html (accessed: 05.07.2023)). At the same time, the causa of such an "acquisition on credit" does not always indicate the impossibility of a citizen to independently purchase such goods (and any other goods). For example, a citizen buys on credit because a discount on the purchased goods is offered along with the loan, a citizen buys on credit because he wants to create a positive credit history in the BCI to raise his own credit rating, a citizen buys on credit because he has a credit card with an interest-free period of 120 days, etc.

The question also arises: if the position of the Supreme Court of the Russian Federation indicates that when a debtor-citizen takes on unsustainable loans, he is unreasonable, but this unreasonableness does not imply the dishonesty of the debtor, then why do the courts need information about what the debtor's property status was at the time of receiving the loan /loan? If he is unreasonable, then he is not yet unscrupulous – when a citizen unwisely takes out unsustainable loans, he unreasonably assesses his financial condition. From this point of view, the refusal of such a debtor to be released from debts upon completion of the bankruptcy procedure is unlawful.

Another urgent problem of law enforcement practice is the resolution of the issue of the release of a debtor-citizen from debts arising from a guarantee for business loans.

For example, according to the circumstances of one of the cases (Resolution of the Arbitration Court of the North-Western District of 22.09.2021 No. F07-11484/2021 in case No. A56-138387/2018), VTB Bank filed for bankruptcy of a debtor-citizen who was a guarantor under a loan agreement concluded between the bank and the company. At the same time, the court found justified the claims against such a debtor-citizen in the amount of 2.5 billion rubles, including the claims of JSC "Rosselkhoznadzor" in the amount of 500 million rubles.

Representatives of the bank insisted that the debtor assumed obligations to banks for large amounts, and therefore, this implied that the debtor had information about the source at the expense of which it was planned to fulfill such obligations. The Arbitration Court of the North-Western District recognized the erroneous conclusions of the courts that the assumption by the debtor of knowingly unfulfilled obligations (including as a guarantor for the obligations of third parties) may indicate the dishonesty of a citizen.

On the contrary, in the Resolution of 22.01.2021 No. F05-11931/2018 in case No. A40-87988/2017, the Arbitration Court of the Moscow District did not take into account the debtor's arguments that the debts are mainly related to the acceptance of a guarantee for a legal entity established by him. The courts of lower instances found that the debtor, acting both on his own behalf and as the head of a number of companies, continued to conclude loan agreements and surety agreements. At the same time, he assumed obligations in an amount that clearly exceeded the value of his property, and this cannot be regarded as conscientious behavior.

In another similar case, the courts noted that "a credit institution, concluding a surety agreement for a significant amount with an individual, must be aware of significant risks and assume prior receipt of information about the solvency of the guarantor" (Resolution of the Arbitration Court of the Volga District of 06.04.2022 No. F06-68690/2020 in case No. A55-11771/2019). Thus, there is also a "continuing" position, according to which it is the banks that bear the risk of non-fulfillment by the beneficiary of the business of surety agreements for business loans.

It should be noted that the amounts of sureties provided by the owners for the loans of their companies overwhelmingly amount to the amount of the loan for which the citizen is being sured. Thus, credit organizations "equate" the financial capabilities of the owners of companies (individuals) with the financial capabilities of the business conglomerates themselves, which these owners manage. Loans to companies are issued for the entrepreneurial needs of business, the amounts of such loans often do not correlate in any way with the financial capabilities of the owners of companies.

Credit organizations, when analyzing credit risks when lending to corporate clients, are guided by the fact that the owner's personal guarantee is least able to cover those losses that may arise as a result of the borrower's non-fulfillment of obligations under the loan agreement. These guarantees are used by banks to a greater extent as psychological pressure on the business owner – now he can become a debtor of the bank for such significant amounts that he can potentially be deprived of all his property. It is rather naive to assume that the guarantor-an individual can actually fulfill the requirements commensurate with the loans of his business structures.

The Central Bank of the Russian Federation is also aware of this, which indicates in clause 3.9.4 of the Bank of Russia Regulation No. 590-P dated 06/28/2017 "On the procedure for the Formation of reserves by credit institutions for possible losses on loans, loan and debt equivalent to it" that the availability of collateral for a loan is not considered as a factor affecting the category of loan quality. In addition, the amount of the formed reserve for possible loan losses will be affected only by a certain type of sureties, for example, sureties of governments and central banks, sureties of subjects of the Russian Federation with certain credit ratings, sureties of persons whose obligations are directly or indirectly guaranteed by the guarantee of the Russian Federation and others. In other words, the Central Bank of the Russian Federation is aware that the beneficiary's personal guarantee as a type of security has low efficiency in leveling the risks of lending to corporate clients.

It should be noted that the requirement to provide personal guarantees to business beneficiaries when structuring a transaction is a generally accepted banking practice when working with corporate clients. Of course, such a measure is capable of leveling at least part of the credit risk. But it seems that this, to a greater extent, psychological tool is used because of the specific perception of business structures by the banking sector: by issuing a loan to one company from a group of companies, the bank analyzes the financial situation of all companies included in the holding, individual elements of which are often inextricably linked by common business processes. That is why the generally accepted practice of corporate lending is to require the provision of guarantees to all interrelated persons of the business structure, including the final beneficiaries.

Thus, business owners (individuals) do not have the opportunity to refuse to conclude such surety agreements for business loans, since the very refusal of the beneficiary to conclude such a surety agreement is one of the factors that can become the basis for the refusal of a credit institution to issue a loan to a business.

The examples given illustrate the importance of establishing the economic causa of the behavior of the parties to each specific credit transaction. It is fundamentally important to find clear criteria for determining the debtor's bad faith, since the position expressed in the Definition of the Supreme Court of the Russian Federation of 03.06.2019 not only does not solve this problem, but also does not introduce into judicial practice a single systematic approach to the interpretation of paragraph 4 of Article 213.28 of the Federal Law "On Insolvency".

There is no doubt that it is necessary to take into account a large number of factors that in one way or another affect the behavior of citizens in the credit market. Thus, the excessive availability of consumer lending, the transformation of the attitude of consumers and credit institutions to banking services, the absence of direct prohibitions in the commission of high–risk credit transactions - these factors should be taken into account when assessing the integrity of citizens who assume excessive credit obligations. Taking into account, but not limited to these factors, identifying new trends in the lending and loans market, it is necessary to make attempts to form clear standards of behavior of the bona fide party to the credit transaction, which can significantly affect the quality of the application of the institution of debt relief by law enforcement officers.

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