Supreme Court: debt collection and replacement of debtors in enforcement proceedings

The Grand Chamber of the Supreme Court of Ukraine has figured out the issue of who is legally obliged to pay off debts when replacing the original debtor with two – the main and subsidiary at the stage of execution of the court decision.

“The replacement of the parties does not relieve anyone from responsibility, enforcement actions are performed in relation to both debtors!” – expressed the Supreme Court, promulgating on 26.06.19 the corresponding legal conclusion in case 905/1956/15 (proceedings 12-62cc19).

A legal entity applied to the court with a request to replace the debtor in enforcement proceedings – an additional liability company (ALC) with its legal successor, a limited liability company (LLC).

The first instance court (appeal also) refused the applicant!

They pointed out that the ALC, in fact, cannot leave the disputed material legal relationship, since the current liabilities and receivables transferred by it to the newly formed company significantly exceed the amount of assets that potentially satisfy the accounts payable.

Replacing the debtor in such circumstances makes it impossible to fulfill the court decision that has entered into force on the case, and accordingly, the collection of receivables, which is already in enforcement proceedings. The case “went” to the BP-SCU!

“The situation became the reason for the departure from the legal withdrawal of the Armed Forces of Ukraine dated 02/07/2019 in case No. 805/677/17-a, which regulates aspects of law enforcement in similar legal relations, cases when the defendant leaves material legal relations in connection with the reorganization of the debtor by separating to the created legal entity of disputable obligations “.

BP-Supreme Court of Ukraine considered the case and published conclusions useful for protecting interests in court:

1. Procedural legislation regulates the legal mechanisms for replacing a party to enforcement proceedings with a legal successor in the event that this party leaves the disputed legal relationship and allows another person to enter it as a debtor, even if the original party does not leave.
2. The law also establishes that if the creditor-recoverer in enforcement proceedings received satisfaction of his claims in whole or in part at the expense of the subsidiary debtor, then the latter has the right to demand from the main debtor to fulfill the obligation by way of recourse.
3. Both prescriptions are legal, but the exiting of the subsidiary debtor – the party to the enforcement proceedings due to his replacement by the legal successor with the transfer of debts after the entry into force of the court decision, may in some cases be considered his evasion from the will of justice or complication of its implementation.
4. In the presence of a valid court decision in the analyzed situation, the law does not allow the creditor, from whom the debt is already being recovered, to apply to the subsidiary debtor with a separate claim by virtue of the prescriptions of paragraph 2 of Part 1 of Art. 175 EPC.
5. Such collection of debts should be carried out by analogy with the law by replacing one (original) debtor as a party to enforcement proceedings in a substantive legal relationship with two – the main and subsidiary.