Pro-Debtor or Pro-Creditor Bias?

Are Russian courts biased against creditors? Olga Benedskaya from Muranov, Chernyakov & Partners discusses the matter in the view of some recent developments.

Olga Benedskaya
attorney, senior associate

Muranov, Chernyakov & Partners
+7 495 783-74-50

On the 1st of November this year, a law allowing early loan repayment without lender’s consent and without additional fee (penalty) has become effective.

The law applies to contracts concluded before its entry into force.

From the lender’s perspective (first of all, banks’) the novelty is economically imprudent: lenders give money in exchange for a steady income for a specified period. They also bear costs related to raising funds (e.g. banks pay interest on deposits). Thus, the new law is an example of a ‘pro-debtor’ bias.

However, this law only applies to personal loans and does not concern business.

Can we say that the Russian law and the court practice also have pro-debtor bias in relation to business loans?

The pro-debtor bias has been seen in the practice of commercial courts in disputes about debt recovery, especially with regard to enforcement of penalties, for a long time. Courts, in accordance with article 333 of the Civil Code and guided by the interests of debtors, often lower penalties to the smallest possible level.

However, on the 13th of January the Presidium of the Supreme Commercial Court in its ruling №11680/10 has taken a fundamentally different approach.

First, the court stated that reducing the penalty below the Central Bank’s base rate is only possible ‘in exceptional circumstances and, as a general rule, this should not be permitted’. Frankly, the base rate can only protect the interests of such lenders as banks because this sort of borrowing only available to banks: at this rate the Central Bank gives money to commercial banks. As for other entities, they usually cannot take money on such terms because banks themselves lend at substantially higher rates.

Second, the court stated that penalty reduction by a court on its own initiative ‘should not be allowed’. This also cannot be seen as the evidence of pro-debtor nature of the law. The court ruled that reducing penalty can be permitted only if a debtor is able to prove that the penalty is disproportionate to the violations of lender’s rights.

In addition, the court made a very important conclusion: ‘from an economic point of view, groundless reduction of penalty by courts allows a debtor to obtain funding from another person at non-market terms and at other person’s expense. This can encourage deceitful debtors to default and cause extremely negative macroeconomic consequences. Non-performance of monetary obligations by a debtor enables him or her to use other people's money. Nobody has the right to benefit from their illegal conduct’.

This approach of the Supreme Court does not prove that from now on the ‘pro-creditor’ bias has come into the Russian law and practice. And, in fact, it is not the case. Rather it moves closer to the ‘golden mean’.

We hope that lower courts will follow the position of the Supreme Commercial Court.

Muranov, Chernyakov & Partners