Creditors cite Clause 2 of Article 60 of the Civil Code of the Russian Federation, which grants them the right to demand early fulfillment of their obligations in the event of a reorganization, demanding payments toward early repayment. However, court practice is inconsistent: arbitration courts uphold the claims of legal entities, while courts of general jurisdiction deny those of individuals, due to ambiguous interpretation of the provision. Arbitration courts consider this provision unconditional, allowing for the possibility of filing claims during any reorganization. Courts of general jurisdiction hold that creditors cannot demand early fulfillment if it is proven that the reorganization does not lead to a deterioration in the debtor's financial situation.
Background of the Dispute
The bonds were issued in 2018 with a par value of 1,000 rubles, a coupon of 6.75% per annum, and a maturity date of 2035. The reorganization merged FGC-UES with other grid companies, creating FGC-Rosseti, as disclosed.
Positions of the Parties
FGC-Rosseti:
1) The reorganization improved the company's financial position (profits increased, management expenses decreased by 6 billion rubles), the business model remained unchanged, the reorganization was essentially intra-group in nature, and the credit rating of the issuer and securities remained at AAA, indicating no risk of default on the bonds.
2) The stated claims are a clear example of "speculation" on two levels:
a) the reorganization served as a convenient formal pretext for withdrawing funds and investing them in more profitable financial instruments;
b) purchasing bonds at market price after news of the reorganization in order to recover the par value and generate profit.
3) The reorganization procedure is legal and socially significant. The reorganization itself does not constitute a violation of creditors' rights.
4) The right to demand early repayment should not be unconditional; courts must consider the debtor's financial position, the burden of proving its reliability falling on the debtor.
Investor Ponomarev:
1) Persons purchasing securities at market prices are not speculators; secondary market transactions at anything other than the market price are impossible.
2) The company should have held a general meeting of bondholders to discuss the waiver of the right to demand early repayment.
3) Information inequality prevents the creditor from proving the possibility of deterioration in the creditor's financial position.
4) The company does not see any illegality in the actions of investors purchasing securities below par value when they are presented for redemption under the offer in 2030, but does see bad faith in collecting the par value in the event of early repayment.
Conclusions of the Representatives
Representatives of the State Duma, the Federation Council, the President of the Russian Federation, the Prosecutor's Office, and the Ministry of Justice noted that the provisions of Section 2 of Article 60 are constitutional, but require interpretation taking into account the creditors' good faith conduct and the nature of the reorganization.
Representatives of the Bank of Russia and the Arbitration Court also supported the constitutionality of the provisions, but did not see the need for additional clarification, citing the balanced nature of the provisions. Their arguments included the need to protect the "weaker" party represented by bondholders, without whose investments the country's economic development is impossible, as well as the legally provided opportunity for the debtor-issuer to stipulate favorable borrowing terms within the framework of the agreement of the parties (in the resolution on the issue), including waiving the application of Section 2 of Article 60 to the obligations and conducting a general meeting of shareholders. It is also possible to terminate the right to demand early performance by providing sufficient collateral. This option does not require the consent of the creditor and can be exercised unilaterally.
The representatives also agreed that the reference to the provisions of Federal Law No. 292-FZ is not directly related to the specific dispute; the contested provision of the law is a special regulation aimed at protecting against the actions of unfriendly persons in relation to our country, and therefore cannot be considered unconstitutional.
Summary
The positions voiced at today's hearing lead us to the following conclusions.
Clause 2 of Article 60 of the Civil Code of the Russian Federation is aimed at protecting creditors. Due to a literal interpretation of this provision, the fact of reorganization itself, and not its consequences, constitutes the basis for the right to demand early termination of the parties' contractual relations. Thus, during reorganization, a violation of creditors' rights is presumed, while the right to demand, in itself, does not constitute a measure of culpable liability. However, is this always true?
A noteworthy argument is the stated thesis regarding the need to find a balance of interests in such cases, as the explanatory note to draft Federal Law No. 47538-6, which limits the exercise of a creditor's right to early performance exclusively through judicial proceedings, stated that "a reasonable balance has been found between the interests of the creditors of a reorganized legal entity and the interests of its founders (participants) by somewhat weakening the right of a creditor of such an organization to demand early performance of its obligations."
In this regard, an unconditional right of claim, and its satisfaction based on a formal interpretation, violates the debtor's rights and may be deemed unfair. The goal of legislative regulation in this case should be to protect the debtor's interests only if there is a reasonable probability of non-fulfillment of the obligation. When considering a dispute, courts must evaluate and determine the possible violation of one party's rights based on all the circumstances of the case, in particular by assessing the debtor's financial position.
It is impossible not to agree with the representatives' expressed positions on the need for the debtor to communicate with creditors, a detailed description of the preconditions and potential consequences of the reorganization, and the initiation of general meetings to resolve all future disputes. However, the practical implementation of these proposals (especially regarding holding general meetings with tens of thousands of bondholders) may be greatly hampered in practice, making conflicts of interest inevitable in the courts.
I would like to pay special attention to the arguments raised during the hearing regarding the possibility of including provisions in the text of a bond issue resolution limiting the right to demand early redemption of bonds during a reorganization. In our practice, we increasingly encounter such conditions. Specifically, bond terms that waive early redemption during a reorganization are considered permissible if: (a) a company within its group merges with the issuer as part of the reorganization; and (b) the reorganization does not entail a change in the assets and liabilities of the issuer's group, as determined in accordance with IFRS.
In summary, achieving constitutional equality is only possible through a uniform interpretation of legal norms by the courts. Judicial practice clearly demonstrates that the interpretation and application of this norm is ambiguous, which, we hope, will be resolved after the Constitutional Court announces its position.
Background of the Dispute
The bonds were issued in 2018 with a par value of 1,000 rubles, a coupon of 6.75% per annum, and a maturity date of 2035. The reorganization merged FGC-UES with other grid companies, creating FGC-Rosseti, as disclosed.
Positions of the Parties
FGC-Rosseti:
1) The reorganization improved the company's financial position (profits increased, management expenses decreased by 6 billion rubles), the business model remained unchanged, the reorganization was essentially intra-group in nature, and the credit rating of the issuer and securities remained at AAA, indicating no risk of default on the bonds.
2) The stated claims are a clear example of "speculation" on two levels:
a) the reorganization served as a convenient formal pretext for withdrawing funds and investing them in more profitable financial instruments;
b) purchasing bonds at market price after news of the reorganization in order to recover the par value and generate profit.
3) The reorganization procedure is legal and socially significant. The reorganization itself does not constitute a violation of creditors' rights.
4) The right to demand early repayment should not be unconditional; courts must consider the debtor's financial position, the burden of proving its reliability falling on the debtor.
Investor Ponomarev:
1) Persons purchasing securities at market prices are not speculators; secondary market transactions at anything other than the market price are impossible.
2) The company should have held a general meeting of bondholders to discuss the waiver of the right to demand early repayment.
3) Information inequality prevents the creditor from proving the possibility of deterioration in the creditor's financial position.
4) The company does not see any illegality in the actions of investors purchasing securities below par value when they are presented for redemption under the offer in 2030, but does see bad faith in collecting the par value in the event of early repayment.
Conclusions of the Representatives
Representatives of the State Duma, the Federation Council, the President of the Russian Federation, the Prosecutor's Office, and the Ministry of Justice noted that the provisions of Section 2 of Article 60 are constitutional, but require interpretation taking into account the creditors' good faith conduct and the nature of the reorganization.
Representatives of the Bank of Russia and the Arbitration Court also supported the constitutionality of the provisions, but did not see the need for additional clarification, citing the balanced nature of the provisions. Their arguments included the need to protect the "weaker" party represented by bondholders, without whose investments the country's economic development is impossible, as well as the legally provided opportunity for the debtor-issuer to stipulate favorable borrowing terms within the framework of the agreement of the parties (in the resolution on the issue), including waiving the application of Section 2 of Article 60 to the obligations and conducting a general meeting of shareholders. It is also possible to terminate the right to demand early performance by providing sufficient collateral. This option does not require the consent of the creditor and can be exercised unilaterally.
The representatives also agreed that the reference to the provisions of Federal Law No. 292-FZ is not directly related to the specific dispute; the contested provision of the law is a special regulation aimed at protecting against the actions of unfriendly persons in relation to our country, and therefore cannot be considered unconstitutional.
Summary
The positions voiced at today's hearing lead us to the following conclusions.
Clause 2 of Article 60 of the Civil Code of the Russian Federation is aimed at protecting creditors. Due to a literal interpretation of this provision, the fact of reorganization itself, and not its consequences, constitutes the basis for the right to demand early termination of the parties' contractual relations. Thus, during reorganization, a violation of creditors' rights is presumed, while the right to demand, in itself, does not constitute a measure of culpable liability. However, is this always true?
A noteworthy argument is the stated thesis regarding the need to find a balance of interests in such cases, as the explanatory note to draft Federal Law No. 47538-6, which limits the exercise of a creditor's right to early performance exclusively through judicial proceedings, stated that "a reasonable balance has been found between the interests of the creditors of a reorganized legal entity and the interests of its founders (participants) by somewhat weakening the right of a creditor of such an organization to demand early performance of its obligations."
In this regard, an unconditional right of claim, and its satisfaction based on a formal interpretation, violates the debtor's rights and may be deemed unfair. The goal of legislative regulation in this case should be to protect the debtor's interests only if there is a reasonable probability of non-fulfillment of the obligation. When considering a dispute, courts must evaluate and determine the possible violation of one party's rights based on all the circumstances of the case, in particular by assessing the debtor's financial position.
It is impossible not to agree with the representatives' expressed positions on the need for the debtor to communicate with creditors, a detailed description of the preconditions and potential consequences of the reorganization, and the initiation of general meetings to resolve all future disputes. However, the practical implementation of these proposals (especially regarding holding general meetings with tens of thousands of bondholders) may be greatly hampered in practice, making conflicts of interest inevitable in the courts.
I would like to pay special attention to the arguments raised during the hearing regarding the possibility of including provisions in the text of a bond issue resolution limiting the right to demand early redemption of bonds during a reorganization. In our practice, we increasingly encounter such conditions. Specifically, bond terms that waive early redemption during a reorganization are considered permissible if: (a) a company within its group merges with the issuer as part of the reorganization; and (b) the reorganization does not entail a change in the assets and liabilities of the issuer's group, as determined in accordance with IFRS.
In summary, achieving constitutional equality is only possible through a uniform interpretation of legal norms by the courts. Judicial practice clearly demonstrates that the interpretation and application of this norm is ambiguous, which, we hope, will be resolved after the Constitutional Court announces its position.