SC Grand Chamber identifies effective ways to protect the violated right of a person who was not a party to the contract of sale of debtor's property concluded as a result of an auction in a bankruptcy case

If the debtor's property is owned by the debtor as a result of the bankruptcy auction, an effective way to protect the violated right of a person entitled to challenge the auction results is to file a claim for invalidation of the auction results.

If the auction results in a sale and purchase agreement with the winner, an effective way to protect the violated right of a person entitled to challenge the auction results is to file a claim for invalidation of the auction results and the sale and purchase agreement with the winner of the auction of the debtor's property and to apply restitution (if the property owned by the winner of the auction is returned).

If, as a result of the auction in a bankruptcy case, property owned by another person is alienated, the violated right of the owner of the sold property is restored by filing a vindication claim against the last purchaser of this property on the grounds provided for in Articles 387 and 388 of the Civil Code of Ukraine.

These conclusions were made by the Grand Chamber of the Supreme Court.

In accordance with the circumstances of the case, the debtor's liquidator sold the bankrupt's property by auction within the framework of the bankruptcy proceedings. In the course of organising the auction, the notice of the second repeated auction for the sale of real estate set the deadline for participants (potential buyers) to submit applications for participation in the auction at seven days (including weekends) from the date of publication of the notice, and one of the plaintiffs (JSC Asvio Bank) was not allowed to participate in the auction due to underpayment of the guarantee fee in the amount of 65 kopecks.

Disagreeing with the results of the auction, two companies challenged the results of the auction as creditors of the debtor, while JSC Asvio Bank, along with its claims for the invalidation of the results of the disputed auction for the sale of the debtor's property, also challenged the decision of the auction organiser to exclude this bank from the auction.

Considering the case, the Grand Chamber of the Supreme Court noted that since the announcement of the disputed auction was published on 17 October 2019, i.e. during the effective period of the Law of Ukraine "On Restoration of the Debtor's Solvency or Declaration of the Debtor's Bankruptcy", the assessment of the disputed legal relations is carried out in accordance with the provisions of this Law.

In legal relations related to the return of property alienated at an auction in a bankruptcy case, in order to decide who has the right to file a lawsuit and with what claims (to invalidate the results of the auction and the sale and purchase agreement or to reclaim the property), it is necessary to find out who owned the property at the time when the dispute arose, whether the debtor was the owner of the property alienated at the auction and, accordingly, how the plaintiff should protect his or her right in case of violation.

If the debtor's property is owned by the debtor as a result of the bankruptcy auction, an effective way to protect the violated right of a person entitled to challenge the auction results is to file a claim for invalidation of the auction results.

If the auction results in a sale and purchase agreement with the winner, an effective way to protect the violated right of a person entitled to challenge the auction results is to file a claim for invalidation of the auction results and the sale and purchase agreement with the winner of the auction of the debtor's property and to apply restitution (if the property owned by the winner of the auction is returned).

If, as a result of the auction in a bankruptcy case, property owned by another person is alienated, the violated right of the owner of the sold property is restored by filing a vindication claim against the last purchaser of this property on the grounds provided for in Articles 387 and 388 of the Civil Code of Ukraine.

In this case, at the time the plaintiffs filed their applications for invalidation of the results of the disputed auction and the sale and purchase agreements concluded as a result of it, the disputed property belonged to the winner of the auction, with whom the debtor entered into sale and purchase agreements. Therefore, in the opinion of the Grand Chamber of the Supreme Court, the chosen remedy in the form of claims for invalidation of the results of the disputed auction and the sale and purchase agreement of the debtor's property and the application of restitution meets the criterion of effectiveness and content of the plaintiffs' violated right.

The legal consequence of the court's satisfaction of the claim for invalidation of the results of the auction and the sale and purchase agreement is the return of the property alienated in violation of the Bankruptcy Law to the debtor's liquidation estate, even if such a claim is made by a plaintiff who is not a party to the agreement. At the same time, the court's satisfaction of the claim to return the property alienated at the auction to the debtor's liquidation estate also implies the recovery from the debtor in favour of the auction winner of the funds received under the transaction. Such recovery is not the satisfaction of a separate claim, but a necessary consequence of invalidating the transaction and satisfying the restitution claim, albeit formulated by the plaintiff in a truncated form that covers only the part relating to the return of the property alienated by the debtor.

In the present case, the auction organiser set a rather short deadline for potential bidders to submit bids for participation in the auction (five working days with four hours per day - from 09:00 to 13:00) and, despite the fact that the Bankruptcy Law does not prohibit informing a potential bidder of deficiencies in the submitted bid, together with the debtor's liquidator, failed to inform JSC Asvio Bank of the existence of such deficiencies. In light of the above, the Grand Chamber of the Supreme Court concluded that the exclusion of the bank as a potential bidder, which had underpaid the guarantee fee by 65 kopecks, from participation in the contested auction could not be considered reasonable and such that it made it impossible to limit the participation of as many potential buyers as possible and was aimed at alienating the debtor's property at the highest possible price.

Thus, the Grand Chamber of the Supreme Court agreed with the conclusion of the Commercial Court of Appeal that there were grounds to invalidate the decision of the auction organiser to exclude JSC Asvio Bank from the auction and the results of the disputed auction for the sale of the debtor's property. At the same time, the Grand Chamber of the Supreme Court found that the appellate court's refusal to satisfy the claims of one of the creditors to invalidate the contracts for the sale of the debtor's property at an open auction and the obligation of the auction winner to transfer (return) to the debtor the immovable and movable property sold at the disputed auction was erroneous.

The Resolution of the Grand Chamber of the Supreme Court of 13 February 2024 in case no. 910/2592/19 (proceedings no. 12-41гс23) - https://reyestr.court.gov.ua/Review/118520069.

This and other legal positions of the Supreme Court can be found in the Database of Legal Positions of the Supreme Court - https://lpd.court.gov.ua.