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Alexander Durnev comments for EG-Yurist on the Constitutional Court’s resolution concerning the sole dwelling of a bankrupt

Bankruptcy, labour and bank disputes – in the key legal positions of the Constitutional Court of the Russian Federation for Q2 2021, EG-Yurist.

Alexander Durnev, Junior Associate at Petrol Chilikov:

This issue came to light for the first time in 2003 (Ruling of the Constitutional Court of the Russian Federation No. 456-O dated 4 December 2003). Back then, the Constitutional Court identified no uncertainty in the existing regulation. It noted that only the sole dwelling used for residence shall be exempt from the enforcement of creditors’ claims, rather than all residential property owned by the debtor. In 2012, the Constitutional Court delivered well-known Resolution No. 11-P dated 14 May, in which it states that, to find the balance between interests of the debtor and the creditor, it is necessary to determine the limits of enforcement immunity. The Constitutional Court obligated the lawmaker to amend the law: to determine the criteria for a dwelling’s compliance with the level sufficient for a decent life, and to only allow enforcement against such a dwelling where the debtor’s income is evidently disproportionate to their liabilities, and such debtor has no other property. The lawmaker has never made such amendments.

At this time, the court also recognised the provision to be consistent with the Constitution, but only to the extent that it enables the court to declare the application of enforcement immunity as unjustified. The Constitutional Court ruled that, as a result of enforcement, the debtor shall possess a dwelling suitable for residence that meets the social rent requirements in terms of its area and is located within the same settlement. The Constitutional Court states that such a dwelling may be provided by the creditor in the procedure prescribed by the court, in which case such a dwelling may be located in another settlement, with the debtor’s consent.

In view of the Resolution adopted, the Supreme Court of the Russian Federation delivered Ruling No. 303-ES20-18761 dated 26 July 2021 in case No. А73-12816/201, which clarifies the procedure for enforcement against the sole dwelling. In particular, the Supreme Court states that a replacement dwelling may be acquired out of the proceeds from the sale of the debtor’s dwelling. In addition, the court specifies that a “settlement” does not always mean a single locality: in some instances, the entire agglomeration (of densely located settlements that use the same infrastructure facilities and are connected with intense economic, particularly labour, and social links) is deemed a settlement.

Creditors that haven’t received the repayment from the debtor will obviously be unwilling to acquire for the debtor a dwelling unit exceeding the minimum standard level even by a modicum. Therefore, one may suggest that the dwelling unit being acquired, speaking of a city, will be located on the first or second floor above a noisy or not very clean facility, with a view to a cemetery, with particularly problematic or even dangerous neighbours, etc. Furthermore, in purchasing dwelling for someone else, creditors will not be very meticulous about the legal integrity of the apartment being purchased.

Notwithstanding substantial progress, houses and apartments which are ‘problematic’ in legal terms still exist. Therefore, in some time, the practice is likely to face claims raised by debtors after the bankruptcy proceedings have been completed against creditors that decided to purchase a legally problematic dwelling unit (including that taken away based on owner’s lawsuit) for the debtor.

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