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COBALT successfully represented a creditor in legal dispute with an insolvency administrator

2018-06-29

After several years of litigation COBALT has obtained a final judgment that is favorable for its client - Danske Bank. According to the judgment the bank may recover damages (more than 1M EUR) from an insolvency administrator. In this notorious case the Constitutional Court for the first time in Latvian history submitted a request to the General Prosecutor to investigate facts about various serious violations in the insolvency proceeding of the borrower of the bank.

Although the court acknowledged that the bank has a secured claim in the amount of several millions of EUR, the administrator liquidated the debtor without awaiting for final judgement. Prior to that the administrator sold the property pledged in favor of the bank and all the proceeds (more than 1M EUR) were transferred to creditors who most likely are fictitious. Thus, despite the first rank  mortgage and commercial pledge, the bank was left without money. Therefore an action for damages was brought against the administrator.

On June 21, 2018, the Supreme Court gave a judgment by which the ruling of the court of appeal was fully confirmed. The Supreme Court made a number of important conclusions that will enhance the rule of law in the ​​insolvency proceedings:

  1. administrator cannot rely on the fact that the Insolvency Administration (from July 1, 2018 “Insolvency Control Services”) and the court dismissed complaints filed by a creditor without establishing unlawful actions of the administrator;
  2. the fact that the court has not established a dispute between an insolvent company and a creditor while deciding on complaints submitted by a creditor, does not deprive the creditor of the right to apply to the court with a claim for recognition of its claim;
  3. administrator is not entitled to use the proceeds from sale of pledged property in order to satisfy claims of other creditors while a dispute with a secured creditor is pending;
  4. decision of a creditors’ meeting according to which proceeds from sale of pledged property should have been used to satisfy the claims of other creditors, cannot serve as an excuse for administrator's unlawful conduct by paying the money to creditors before the legal dispute with secured creditor was completed.

By this judgment the Supreme Court has constituted a precedent that will allow to better protect interests of secured creditors in insolvency proceedings. The judgment can be found here.

Legal assistance to Danske Bank was provided by COBALT Partner Gatis Flinters and Specialist Counsel Sergejs Rudāns.