Models for Challenging Transactions in Insolvency (Bankruptcy)

In Russian law today, various viewpoints exist regarding the legal effect of challenging a debtor’s transactions in insolvency. According to one approach, the effect does not differ from challenging a transaction on the grounds provided by the Civil Code of the Russian Federation and is absolute, or “in rem.” According to another approach, the consequence of challenging a transaction is the debtor’s counterparty’s obligation to compensate the loss caused by the transaction to the bankruptcy estate. This position is known as the obligational theory; in Russian doctrine it is also referred to as relative contestation or relative invalidity. The article analyses problematic issues of the theory and practice of challenging a debtor’s transactions in bankruptcy through the prism of the construct of relative invalidity, drawing on comparative legal experience. In examining the theoretical foundations in the “parent” legal order—here, German law—the author notes that the so-called obligational theory lacks strict dogmatic foundations and represents a doctrinal response to practical challenges. At the same time, the theory is not without shortcomings; therefore, in recent years the liability theory has gained increasing relevance in German law, enabling avoidance of difficulties that the obligational theory addresses less successfully. When analysing practical issues in Russian law, the author concludes that paragraph 2 of Article 174.1 and paragraph 5 of Article 334 of the Civil Code of the Russian Federation constitute effective tools for achieving balanced outcomes in practice, contrary to the approach taken by the Supreme Court of the Russian Federation. Moreover, the construct embodied in these provisions, when properly understood, reflects the German liability theory within Russian law. Given that lower courts have, in effect, already introduced the construct of relative invalidity of transactions into practice, the author proposes taking German doctrinal developments into account for the purpose of resolving practical problems in Russian law. 

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