Restructuring and Insolvency Bulletin Issue 2 - 2017: U.S. Court recognizes a Russian bankruptcy case

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The Bankruptcy Court of the Southern District of New York recently addressed objections to the recognition of a Russian bankruptcy case as a foreign main case under Chapter 15 of the U.S. Bankruptcy Code and to the recognition of the financial administrator appointed by the Russian court as the foreign representative. In re Poymanov, 2017 WL 3268144 (Bankr. S.D.N.Y. July 31, 2017).

The case involved the insolvency of Sergey Poymanov, a Russian citizen and resident who was a majority shareholder in a Russian granite company. After borrowing through an investment vehicle over US$200 million to fund the acquisition of nearly all of the remaining outstanding shares of the granite company, and personally guaranteeing the debt, Poymanov and his investment vehicle defaulted on their payment obligations and a Russian court entered judgement against them in litigation brought by their lenders. Separate insolvency proceedings ensued for the granite company, Poymanov's investment vehicle, and for Poymanov personally. A Russian commercial court appointed Aleksey Bazarnov as financial administrator over Poymanov's personal insolvency.

Mr. Poymanov apparently believed, however, that the various actions taken against him by his creditors were essentially a corporate raiding scheme that is common in Russia (“reiderstvo”), designed to strip him of any value associated with his assets, and that the Russian financial administrator was part of the scheme as well. When the financial administrator filed a chapter 15 petition in New York seeking the U.S. court’s recognition of the foreign proceeding, PPF Management, to whom Poymanov assigned his claims, opposed the recognition. Although not stating so directly, it is clear that the objection’s core was that the Russian case, proceeding and the administrator are part of an illegal scheme to strip Poymanov of his assets. PPF presented expert testimony concerning corporate raiding schemes in Russia in general, but not as to the specific facts of the case. That was not enough to defeat recognition.

Applying the mechanical and straightforward test for recognition under chapter 15, the Court found that the Russian insolvency proceedings qualified as a foreign main proceeding and that the financial administrator, having been appointed by the Russian court, qualified as a foreign representative. The Court rejected the argument that because the Russian administrator is arguably conflicted and not disinterested he should not be recognized as a foreign representative, holding that Chapter 15 does not include a requirement that the foreign representative be disinterested or lack a conflict of interest. As long as the foreign representative was duly appointed by a foreign court, recognition in the U.S. is in order.

In the same vein, the Court rejected the objection to the recognition of the Russian case based on the alleged corporate raiding scheme. First, these allegations were not relevant to the definition of a foreign proceeding in Chapter 15. Second, the allegations, which included that the Russian case involves money laundering, corporate raiding and other illegal activities, were insufficient to deny recognition based on the public policy exception. Section 1506 of the Bankruptcy Code, allows U.S. courts to refuse to take actions, when the actions would be manifestly contrary to U.S. public policy. The court held that the PPF allegations did not rise to the required level to trigger the public policy exception.

It is important, however, to view the Court’s ruling in context of the facts of the case. The Court held that PPF simply failed to present any evidence concerning the allegations it made. How U.S. Courts would rule when sufficient facts are presented to support similar allegations, is yet to be seen.

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