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Private case of foreclosure on bankruptcy proceedings.

Author: Gagik Grigoryan

On a Private Case of Realization of the Pledge Assets during Moratorium of Creditors’ Claims Satisfaction.
In this work some legal and practical issues arising during realization of the right of priority satisfaction of the assets pledged as collateral for the third person during moratorium of creditors’ claims satisfaction in insolvency case will be discussed and some suggestions aimed to solve them will be presented.
Clauses 1 and 2 of the Article 39 of Insolvency Law (hereinafter referred to as IL) provide for the regulation of moratorium on the satisfaction of the Creditors’ claims from the period since initiating the insolvency case till declaring insolvency and the relations and issues concerning it.
The aforementioned norm prescribes types and framework of the claims the moratorium covers as well.
The importance of moratorium shall not be underestimated in the scope of implementing the issues and purposes of insolvency proceedings especially concerning to financial recovery of a legal entity debtor taking into account their role in ensuring the development of economy of RA and solution of employment issues.
At the same time, however, it should be noted that operation of Moratorium does not always have absolute significance, thus, although the Legislative body prescribed moratorium to cover assets owned by the debtor with specific legal regime, however, it didn’t restricted the opportunity to dispose assets in the cases prescribed by the law.
Those cases are, for instance, the case of pledging assets as collateral for a third person, but imposition of this regulation brings to some problems quietly often, and the reason is not only in the practice sphere but in the legislative regulation as well.
So, Article 13.4 of IL provides the temporary insolvency office holder (hereinafter referred to as IOH) with a right to file a motion to the court to seize the debtor’s property until the decision on declaring insolvency is adopted which is aimed to ensure moratorium complete operation and exclude the possibility to dispose a debtor’s property beyond insolvency case. In fact, this approach is practiced almost always and continues to be used after debtor is declared insolvent under point (ը) of the Article 19.1 of IL.
On the same purpose Article 13.5 of IL prescribes that Judicial Acts Compulsory Enforcement Service shall suspend all the enforcement proceedings concerning to confiscation of the debtor’s property as it receives the court decision on acceptance of the insolvency application (a relevant norm is prescribed by point (գ) of the Article 39.1 which provides for general and uncertain definition, however, it does not apply to this article’s subject).
The Debtor’s assets, pledged as collateral to ensure other creditors’ duties, shall be involved in the Debtor’s insolvency property as well.
Considering this regulation, in practice, both judicial and out of court processes initiated by the creditors intermit, especially in the loan relations arising between banks, credit organizations and individual entrepreneurs aimed to confiscate the assets pledged by the Debtor in order to ensure third parties’ obligations fulfillment.
In those cases the realization of creditor’s, especially banks and credit organizations, rights to satisfy his/her claims from the collateral unnecessarily delays, which cannot be considered to be well-grounded from legal, logical and financial-economical points of view, inasmuch as other persons’ creditors with a collateral pledged by the debtor’ assets have a priority right of claim satisfaction from the subject of pledge upon articles 226.3 , 2431.1 of Civil Code, compared to other debtors’ claims regardless whether moratorium was imposed and seizure of property was carried out or not. Disturbance of this right realization hinders the normal course of civil circulation leading to the disruption of a number of processes promoting the development of the economy.
Undoubtedly, the seize imposition when insolvency application is accepted and the decision on declaring bankruptcy is adopted is absolutely lawful and has lawful purposes but, however, Article 2431.1 of Civil Code prescribes that in these cases the seizures shall not hinder the realization of the right to satisfy the claim from the subject of collateral.
If until 17.06.2016, when Civil Code of Armenia was accomplished with that article the aforementioned seizures could have been hindering the realization of the right to satisfy the claim from the subject of collateral, then, after it entered into force the legislator seemed to solve the problem, however, in practice we cannot consider it as a solved one because neither Judicial Acts Compulsory Enforcement Service nor State Committee of Real Estate do implement that norm and impose the activities concerning the subject of collateral they are empowered to.
Thus, Judicial Acts Compulsory Enforcement Service considers the seizures as an obstacle to impose confiscation in enforcement proceedings commenced towards the debtor whose property was pledged but if somehow in a “magic” way confiscation is implemented then State Committee of Real Estate avoids to make relevant registration after that confiscation (State Committee of Real Estate makes reference to Article 30.1.2 of Law “On State Registration of Rights on Real Estate” while Article 2431.1of Civil Code prescribes that in the discussed case the seizures implemented shall not exclude the relevant registration when the claim is satisfied as a result of confiscation). As a result the pledgees’ right to get priority satisfaction from the pledge subject is violated.
In the case observed it is obvious that the seizures applied towards the subject of pledge are not obstacles for Judicial Acts Compulsory Enforcement Service and State Committee of Real Estate to perform their duties envisaged by article 243.1 of Civil Code.
This approach directly contradicts to the requirements of the clause 3 of Article 226 and clause 1 of article 243.1 of Civil Code. The obstacle to get unhindered satisfaction from the pledge subject violates the principle to unhindered exercise of civil rights prescribed by article 3 of Civil Code as well.
The issue on suspension of enforcement process shall be discussed as well. The point is that after suspension of the enforcement processes when the debtor is declared insolvent, upon article 39.2.5 of IL the enforcement processes referring only to the Debtor shall be terminated while there is no legal norm prescribing the regulation of enforcement processes that haven’t been commenced towards the debtor but refers to his/her property and were suspended upon article 13.5 of IL.
In any case if we consider that the enforcement processes concerning the Debtor include all enforcement processes concerning confiscation of debtor’s property (including property pledged for third party), however, pledgee’s right to get priority satisfaction from the pledge subject still has obstacles because in that case and upon article 39.2.5 of IL enforcement process referring to confiscation of the pledge subject shall be terminated.
As it follows, clause 5 of Article 13 and clause 5 of article 39.2 of IL need some editions to be made. The content shall be formulated the way so that the enforcement processes on confiscation of property pledged for third person shall not be suspended and shall not be terminated in the future.
At the end I would like to highlight that in spite of some practical and legislative issues some regulations prescribed by the Armenian legislation on insolvency and compulsory enforcement of judicial acts provide opportunity to conquer them in some way. However, the existence of that opportunity shall not discredit and does not discredit the necessity to solve the issues discussed in this article because the main purposes of these institutes is not regulation of the discussed questions: implementation concerning the outlined issues does not have unified and precise practice.

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