A Ministry of Justice bill could blow up Russian society

In January of last year the Ministry of Justice proposed amendments to the Civil Code of the Russian Federation and to the law on enforcement proceedings. Those new provisions would, in particular, have allowed a debtor's only home to be sold at auction if his obligations exceeded 5% of the value of the property and the area of the property was two or more times the social norm (on average across Russia, from 14 to 18 square metres per person). That was, of course, on condition that the debt had been confirmed by a court and that no other property had been found against which to enforce.

The expert community criticised these innovations. Analysts noted that, under the proposed version of the law, citizens with a housing-and-utility debt of 50 thousand roubles who live in flats worth from 1 million roubles would have been hit. The Ministry of Justice promised to make a number of corrections to the bill. For example, housing would not be taken for debts on loans or for housing-and-utility debts, and the scope of the document would be extended to maintenance debts, to compensation for harm to health or in connection with the death of a breadwinner, and to compensation for harm caused by a crime. Enforcement against housing would be imposed only where a person has more than 36 square metres and the debt exceeds 200 thousand roubles.

As 2018 drew to a close, the Ministry of Justice rewrote the bill from top to bottom. In particular, it is now proposed to seize an only home for any debts, but only within a case on declaring a person bankrupt, if the debt has gone past half a million roubles and the obligations have been overdue for 3 months or more.

It is notable that this time the ministry did not set clear parameters of a home's "luxury". It did, Interfax reports, include the following proviso: until the contrary is proved, a home whose value manifestly does not exceed 30 million roubles is not treated as luxurious. Or, the document also says, each member of the debtor's family who lives in it has no more than 30 square metres. The creditor who wants the only home seized is the one who must prove that it is nevertheless "luxurious", and the court is required to "take into account" the number of people living with the debtor and certain "other circumstances". It is also envisaged that seizure of the only home must be refused where the claims are clearly disproportionate to the value of the disputed home, where the debt does not exceed 1 million roubles, or where it comes to less than 5% of the value of the disputed home.

The new bill obliges the creditor, before the home being seized is sold, to buy the debtor a new one, on the basis that it has already been built and is in the same settlement, that it has not been declared unsafe, that each member of the debtor's family would have at least 10 square metres of living space and 20 of total space, and that the number of separate rooms would be at least half the number of members of that family. The court also receives the right to set further criteria for the debtor's new home, taking into account the place of work and of study, the illnesses of family members, and other circumstances.

SP asked several experts to assess the prospects of the new version of the "Ministry of Justice" law. Despite some disagreement on a number of points, they all agreed on one thing: this bill is capable of blowing up the whole of Russian society.

First of all, the publication asked those who know the subject whether, if this bill enters into force, one should expect personal bankruptcy proceedings to be started on a mass scale.

"The level of household debt is high now," stressed Maria Litinetskaya, managing partner of Metrium and a member of the CBRE partner network. "Around 30% of the income of the poorest borrowers goes to servicing various debts. In the group of Russians with middle incomes, 25% of receipts is spent on the same purpose. Although these figures are gradually falling, one has to understand that the economic situation can deteriorate sharply, and even debts that are relatively easy to bear will become overdue. At the same time, bankruptcies that are already under way will be reopened, because creditors will try to sue for the 'surplus' living space."

Olga Kirillova, managing director of the law firm Heritage Group, clarified the point: "The Ministry of Justice was responding first of all to the ruling of the Supreme Court of the Russian Federation in the case of Anatoly Frushchak, which sent the case on seizure of the defendant's only expensive flat back for a fresh hearing. The court of first instance must therefore hear the case again, taking into account that there is a judicial act of the Moscow Region Court which established, in 2016, that Anatoly Frushchak had artificially created a situation in which the disputed flat remained his only home."

"Previously the five-room flat was not the defendant's only one," she recalls, setting out the substance of the case. "But he deliberately transferred all the property out, and the court treated these 'manoeuvres' as an abuse of right, the aim being to avoid paying the creditor. That is, there is an act, which has entered into force, by which Frushchak was refused recognition of this living space as his only home."

The immunity of an only home, established by Article 446 of the Civil Code of the Russian Federation, cannot be applied to him. Anticipating the question of whether Frushchak could, for example, have exchanged this flat for a smaller one plus a cash payment, and settled with the claimant, I would note that, from the moment the bankruptcy procedure began, he cannot dispose of his property himself. In fact he had no intention of servicing his debt to the creditor, Andrey Kuznetsov: he transferred all the property out precisely in order to cause the creditor harm. The defendant's bad faith was proved by Kuznetsov's lawyers on the basis that, before the creditor began to collect the debt, Frushchak had every opportunity to resolve the problem amicably, and he owned other real estate.

The consequence of the ruling handed down by the Supreme Court, the expert stresses, may be that the debtor's flat is included in the bankruptcy estate and sold at auction. This should not be regarded as an attempt to overcome the quite logical position of the Constitutional Court of the Russian Federation on the property immunity of an only home. In Frushchak's situation the point is deliberate harm to the creditor, as a result of which the flat became the only home purely as a formality.

"Will there be precedents in other cases?" Olga Kirillova reflects. "At the moment this depends in large part on the decision of the court of first instance at the fresh hearing. It is quite likely that, in cases where the debtor deliberately disposes of property (including by sheltering behind Article 446 of the Civil Code) in order to cause harm to creditors, such precedents will appear. If the Ministry of Justice bill is adopted, you and I should expect new personal bankruptcy proceedings to be started, or homes to be seized in cases of bankrupts like Frushchak."

SP: Since the parameters of a home's "luxury" are not clearly written into the new law, can one assume that citizens with small flats will still be hit? For example, if only one person is registered in the flat, might his standard flat be recognised as luxurious for him, even if he lives there with his wife and children?

"The very fact that the term 'luxurious' is disputed," Maria Litinetskaya is sure, "already puts absolutely every debtor at risk. First, genuinely wealthy debtors are not the bulk of the borrowers who have failed to justify the trust placed in them. As a rule, these are people of modest means. But they do have something that can be taken: flats. Given the low 'social norm' (18 square metres per person), a good many people may lose their homes. Roughly speaking, a court can easily recognise as 'luxurious' a two-room flat in the centre of Moscow if a debtor who lives alone has to be evicted from it. I believe the vagueness of the wording will itself be the catalyst for mass evictions."

Olga Kirillova, for her part, believes that the preliminary bounds of "luxury" will not allow that.

"Let us imagine," she suggests, "a typical Russian family. A husband and wife and 1-2 children. Most often they have no other housing. For their home to be included in the bankruptcy estate, it would have to have an area of more than 120 metres. Such a family would have to be rehoused in a two-room flat with 40 metres of living space and 20 metres of total space, that is, a minimum of 60 square metres. And most of us live in standard Soviet flats of 38, 48 or 54 metres."

SP: How likely is it that, if the bill is adopted, it will soon start to be rewritten, as now happens almost constantly, for example with compulsory motor third-party insurance (OSAGO) and the Housing Code, towards lowering the requirements for seizure of an only home? Can one assume that, as it goes through, the bill will pick up additions that are dangerous for ordinary citizens?

"Of course the bill almost certainly has many lobbyists, and the 'utility companies' are among them," Maria Litinetskaya believes. "They have long been looking for instruments of pressure on debtors who in practice have no way to pay their debts. Creditors, large and small, also have an interest in tougher measures against borrowers. What matters most to them is to obtain an instrument for a radical solution of the debt problem, one that can be 'adjusted' through legislative lobbying if the economic situation worsens. So the parameters of 'luxury', and likewise the norms for providing housing, the guarantees on resettlement and the other criteria, can be lowered."

"Amendments to the bill will certainly be made," Olga Kirillova is sure, "because the law itself is very serious and mistakes in it are dangerous. A measure of this kind must be carefully calibrated, and all the parameters of 'luxury', of 'debts' and of the financial position of bankrupts must be brought as close as possible to real life, and must show no sign of vagueness or of conflicting readings."

And it does seem that amendments really cannot be avoided, as follows from the comment of Consul Group managing partner Sergei Pivovarchik.

"First, in this form [as it stands now] the rule will hardly work in the regions, because there are not that many properties that meet the proposed threshold," the expert believes. "For example, finding a flat worth more than 30 million roubles in remote settlements of the Russian Federation is, to put it mildly, problematic, and so the rule will not work there."

In this context, he continued, it is important to note that the real estate market on the territory of the Russian Federation is so uneven that it is simply impossible to set a fair value of real estate, one and the same for every constituent entity of the Russian Federation, above which a property can be treated as an item of luxury. For that reason any fixed threshold will be unfair: too low for large settlements, or too high for all the rest.

"Second," Sergei Pivovarchik clarified, "a clear problem in applying this rule will be the way property is sold. It is no secret that, during an auction, the price of the lot usually falls by 30-50% from the initial value (even where the property is highly liquid). A separate question arises about the prospects of challenging a sale of property whose value was initially set at 30 million roubles but then fell during the auction. Formally, that will be a breach of the proposed rule, because the final sale price will be below the threshold laid down by the law."

In addition, the justification for the figure itself also raises questions: above 30 million roubles. Is a flat in Moscow worth 30.1 million roubles a luxury, while a country residence, for example on the shore of Lake Baikal, worth 29.9 million roubles, is not? It turns out that, for example, in Moscow the proposed new rule can be applied and will work quite effectively, whereas in the regions it will remain inoperative, a "dead rule".

SP: What, in principle, are the merits and the drawbacks of this form of the bill on seizure of an only home?

"In my view," Maria Litinetskaya states, "the idea itself, and the direction in which the legislation is developing, raises the risk of a social explosion. The bill will hit, above all, the least protected and at the same time the largest sections of the population. That is dangerous for social stability. The vagueness of the wording opens the way to an unlimited increase in pressure on debtors. Seizure of an only home for debts will inevitably become mass practice under economic stagnation, falling incomes and a rising cost of credit."

Olga Kirillova, for her part, hopes that the lawmakers will without fail take the interests of ordinary citizens into account as well. Given how indebted Russians are, the fall in living standards over the past 5 years, and the wave of enforcement by banks and the Federal Bailiff Service over the past 2 years, "unfair" changes in the draft law would cause a social explosion, because millions of citizens risk ending up on the street. That will lead not only to a revolution in the legislation and in bankruptcy cases, but also to mass protests in the streets of our cities, she believes.

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