Re Section 199 (2) of the Insolvency Act - Reasons for denial of an enforceable receivable within insolvency proceedings

Re Section 199 (2) of the Insolvency Act

Reasons for denial of an enforceable receivable within insolvency proceedings

We would like to draw your attention to an interesting decision of the Supreme Court on the issue of adversary proceedings within the insolvency proceedings, specifically the limitations for denial of an enforceable receivable. 

The section 199 (2) of the Insolvency Act, as amended (hereinafter as “InsAct”) stipulates that: “As a reason for denying the authenticity or the amount awarded by final enforceable decision of the competent authority may apply only the facts that were not raised by the debtor in the proceedings that preceded the release of this decision; reason for denial cannot be other matters of law.”

The Supreme Court in its decision dated March 31, 2014 file no. 29 ICdo 2/2011 elaborated on the interpretation of the said provision with regard to a registered enforceable receivable arising from a promissory note/bill of exchange.  This decision reflects the specifics of a promissory note as a security which usually fulfils role of collateral to secure other so-called “causality obligation”, such as a claim for payment of purchase price, repayment of loan etc.

In this particular case a creditor registered into insolvency proceedings a receivable from promissory note awarded by a final enforceable decision of an arbitration court which had been issued after the debtor had failed to defend against the arbitration action (he had not proved neither the non-existence of the promissory note obligation as such nor its termination due to causality objections); we must add that the debtor in fact had not exercised any causality objections at all.

The Supreme Court stipulated that since the insolvency trustee in the adversary proceedings claimed that the provision on contractual penalty (secured by issuance of the said promissory note) is invalid (due to violation of good manners principle) then the use of this reason for denial of registered receivable does not contravene Section 199 (2) of the Insolvency Act because:

•the debtor had not used this causality objection within the arbitration proceedings, and

•matters of law had not been in this case reviewed differently since the decision in the arbitration proceedings had not been based on the evaluation of the contractual penalty in respect of its compliance with the law but on the existence of valid (abstract) obligation from the promissory note represented by the debtor’s signature on the note.

We may therefore conclude that despite exercise of promissory note claim instead of a claim arising from contract (secured by such promissory note) having undeniable advantages for creditors in legal proceedings (given that the burden of proof is in such cases borne by the debtor), even an enforceable decision of a regular or arbitration court  on the promissory note claim can be successfully (under the terms described by the Supreme Court) challenged during the review process of registered claims within insolvency proceedings.