The Supreme Court of the Russian Federation (SC) recognized the existence of a crisis situation in the field of liability insurance of arbitration managers (AI). The decision of the Supreme Court was made on a dispute regarding the possibility of removing the manager if he might not get additional insurance to manage the bankruptcy of a large debtor. The problem arose due to the large amount of insurance coverage of 167 million rubles, which no insurer might provide. The Sun stood up for the managers, urging them not to approach this issue formally and suggesting that they insure themselves from several companies at once. Bankruptcy specialists believe that this will not solve the problem, and consider it necessary to reform the legislation.
On August 18, the Supreme Court published its decision on one of the most urgent problems of Russian bankruptcy, concerning the liability insurance of the AC. The situation became especially aggravated following the revocation in 2020 of the license from the company RICS, which insured at least a quarter of all managers, according to their own estimates.
The fact is that the bankruptcy law obliges managers to insure their liability – this way it will be possible to cover the damage if suddenly the AC by its actions harms the bankrupt company or its creditors. However, the law does not oblige insurers to issue such types of insurance. And if the value of assets on the debtor’s balance sheet exceeds 100 million rubles, then the manager also needs additional insurance. The bankrupt LLC Intellect Drilling Services had a book value of assets of 15.7 billion rubles, so its manager, Kirill Ruin, had to insure an additional amount of more than 167 million rubles. He received such insurance just from the RICS company.
After the license was revoked from RIKS, the validity period of the insurance was reduced, but the AC did not conclude a new contract. VTB Bank (one of the debtor’s creditors) decided that Kirill Ruin’s behavior was illegal and demanded that he be removed from his duties. But the arbitration courts of three instances refused the bank.
The courts noted that AU applied to various insurance companies, but none of them agreed to sign a contract for such an insurance amount. Mr. Ruin appealed, among other things, to SK VTB Insurance LLC and VTB, but did not receive a response. He even applied to the Central Bank, which replied that work was underway to “improve the legislation governing the financial provision of the liability of arbitration managers.”
Therefore, the courts concluded, the insurance company “acted in good faith and took all measures in its power”, and the refusal to conclude the contract “was caused solely by the state of affairs in the liability insurance market”.
However, VTB was not satisfied with this decision, and he turned to the Supreme Court. The bank insisted that for the removal of the manager it was not necessary “to establish the presence of guilt in his actions or the possible infliction of losses to creditors”, rather “the fact of non-compliance with the initial requirements for the purposes of his approval.” The complaint also claimed that the insurers’ refusals were due to the “personality, will or actions” of the manager himself. The Supreme Court considered the issue worthy of attention of the Economic Board, which canceled all decisions.
The Sun agreed that insurance companies’ refusals “as a rule depend on the personality, will or actions of the manager himself, and therefore the negative consequences of these refusals cannot be passed on to creditors and reduce the level of protection of their rights.” At the same time, it may turn out that the absence of an additional insurance contract “is due to objective factors, in particular, the economic situation prevailing in the insurance market for a specific property interest.” In this case, the court noted, a “crisis situation” arose, because the internal rules of insurers do not allow issuing AU insurance for 167 million rubles.
The appointment of another manager “will not resolve the disputed situation”, since he, too, will not be able to insure liability, the Sun noted. Therefore, if the manager has taken all measures depending on him, he cannot be removed, the board recognized.
However, the lower courts did not find out whether Kirill Ruin had an “objective opportunity” to conclude several insurance contracts for smaller amounts with different companies. They also did not explore the possibility of increasing the amount of the main insurance and the fact that the book value of the debtor’s assets may be significantly higher than the market value and the need for additional insurance may disappear. In this regard, the Supreme Court sent the dispute for a new consideration.
Lawyers believe that the position of the Supreme Court will have a great impact on judicial practice, the behavior of creditors and the managers themselves. “The Supreme Court acknowledged that the problem of AC liability insurance is objective,” notes the head of the Olevinsky, Buyukyan and Partners legal bureau, Eduard Olevinsky. “I am glad that the Supreme Court decided not to stand aside from the existing global problems, directly pointing to the existence of a crisis situation with AC insurance,” says arbitration manager Sergei Domnin. In his opinion, the reform in this area “is long overdue.”
“The Supreme Court forms a certain standard of good faith for managers in situations where insurers refuse to conclude contracts,” says Gleb Gavrilin, senior lawyer at the Gurichev, Malinin and Partners law firm. Also, Mr. Domnin draws attention, the Supreme Court establishes the possibility in court to establish an overstatement of the book value of property over the market value, and if it is below 100 million rubles, this will cancel the need to issue additional insurance. “This in itself is an important tool to reduce the excessive financial burden of the AC,” states Sergey Domnin.
Valeria Gerasimenko, General Director of the Union of Autonomous Institution SRO “Northern Capital” is perplexed why the courts do not ask how legal and fair the internal rules of insurers are in a situation where the law obliges the Autonomous Institution to issue additional insurance. Lawyers believe that we should wait for new positions of the Supreme Court on this issue, but it is better to amend the legislation. “Now there are only four or five insurance companies on the market that deal with AC insurance, according to the internal rules of each of which the maximum amount of insurance is limited to 25–30 million rubles,” Ms. Gerasimenko points out. And it may also not be possible to “spread out” the total insurance coverage of one and a half hundred million on these insurers. “Under the conditions when the conclusion of an appropriate contract is a right, and not an obligation of insurance companies, insurers are unlikely to be interested in taking on such risks,” Mr. Gavrilin believes.