Construction is one of the most profitable, but at the same time risky market industries. When we all buy a house or apartment, we invest significant funds. In turn, companies that undertake real estate construction obligations also invest very large sums in this. Unfortunately, due to economic circumstances and a possible deterioration in the market situation, some development companies find themselves in a very difficult financial situation and declare bankruptcy of the developer. Since this procedure concerns absolutely all construction participants, it needs to be understood in more detail.
Transfer of housing after bankruptcy
After the court has made a decision on the bankruptcy of the developer, it can make several decisions regarding the right of shareholders to housing.
Option one
To approve by decision the rights of equity investors to housing, the construction of which was paid for by them. This will certainly happen provided that permission to put the multi-storey building into operation is obtained before the developer or his creditors file for insolvency of the construction company. An acceptance certificate was also signed, and its date is earlier than the one on the application to the arbitration court.
Option two
Also transfer the completed housing to equity investors, although the acceptance certificate has not yet been signed. With this option, it is important that at least a permit to operate the house is signed. And also compliance with the following conditions:
- There are enough finished apartments for all shareholders included in the register of creditors
- The building is not mortgaged
- After the apartments are allocated from the bankruptcy estate, there will be enough funds or property left to cover the obligations to the first and second stages
- The fourth priority creditors (or at least the majority of them) do not object to this decision
Option three
Transfer the building to creditors so that they can complete it themselves. If construction has just begun, this option is not beneficial to anyone.
Option four
Transfer the building to another developer, who will undertake to complete it and pay off all debts of the bankrupt developer. This option is used if the local government managed to come to an agreement with a strong construction company and allocated additional funds to it.
Register of defrauded shareholders
Some help for participants in shared construction will be registration in a special register of defrauded shareholders . Such registers are maintained by local authorities in each constituent entity of the Russian Federation in order to collect data on problematic objects in the construction industry and to centrally resolve these issues.
Officially, such registers are called “Register of citizens whose funds were raised for the construction of apartment buildings and whose rights were violated.”
In Moscow, for example, an application for inclusion in such a register can be submitted here (Moskomstroyinvest). In the Moscow region - see here and here (Minstroy MO).
Penalty in case of bankruptcy of the developer
By law, you have the right to demand its payment by appealing to the law on the protection of consumer rights (Federal Law No. 230-1). The amount of the penalty is one third of the refinancing rate. Such a claim should definitely be filed in arbitration court!
Whether you will be able to claim the penalty or not is a big question. In practice, this law is most often violated when developers go bankrupt. And, most likely, there simply won’t be any money left for this. But you have every right to demand.
Non-residential premises during bankruptcy of a construction company
For the transfer of residential premises to equity investors, the seventh paragraph of Federal Law No. 127 provides for a special register. But for non-residential premises such a register is not provided. Citizens investing in non-residential premises are included in the general list of creditors. That is, they can only count on monetary compensation. And then in the last, fourth place.
But there is one caveat. If the building is more than 75% complete, you can file a petition with the court to recognize your ownership of the non-residential premises. Usually the courts satisfy such demands of shareholders.
Features of presenting requirements to the developer
There are two main starting points for making demands on the developer. The first is the court's issuance of a ruling to impose surveillance on the developer. From now on:
- demands for the transfer of residential premises and (or) monetary claims of construction participants (with the exception of demands for current payments) can be presented to the developer only within the framework of the bankruptcy case of the developer (Clause 1 of Article 201.4 of Federal Law No. 127-FZ);
- the execution of executive documents on the demands of construction participants for the transfer of residential premises is suspended (clause 2 of the same article).
When considering claims for the transfer of residential premises, the shareholder is obliged to provide evidence of full or partial payment of the cost of the residential premises to the developer. If such a claim is recognized as justified, it is included by the arbitration manager in the register of claims for the transfer of residential premises (Article 201.6 of Federal Law No. 127-FZ).
It should be noted that some courts treat this rule of law very formally. Thus, the Resolution of the Federal Antimonopoly Service dated October 21, 2013 in case No. A57-14297/2012 states: the inclusion in the text of the agreement of a condition that funds are deposited before its signing does not exempt the parties from drawing up primary financial documents confirming the fact of payment of the share. The requirement for the transfer of residential premises cannot be established only on the basis of the developer’s certificate of payment issued to the shareholder, since this contradicts the essence of clause 2 of Art. 201.6 of Federal Law No. 127-FZ and can create conditions for the formation of a register of unscrupulous creditors, contrary to the interests of bona fide ones.
The second point is the opening of bankruptcy proceedings, which entails:
- termination of execution of executive documents on the transfer of residential premises (clause 2 of Article 201.4 of the law in question).
- the right of a construction participant to unilaterally refuse to execute an agreement providing for the transfer of residential premises (Clause 1, Article 201.5 of the same law).
The value of the property transferred to the developer and the value of the residential premises that were to be transferred to the construction participant are determined by an appraiser hired by the arbitration manager at the expense of the developer.
The responsibility for notifying construction participants about the introduction of supervision or the opening of bankruptcy proceedings and about the possibility of construction participants presenting claims against the developer rests with the arbitration manager (Clause 2 of Article 201.4 of Federal Law No. 127-FZ).
What will happen to the mortgage if the developer goes bankrupt?
Alas, nothing encouraging. You must continue to pay your mortgage. The bank will not give you any “relaxations” due to the bankruptcy of the developer. He doesn't care whether you lost your home or not. He gave the loan to you, not to the developer.
It makes sense to file personal bankruptcy and write off the loan only if you know for sure that you will not receive either money or an apartment as a result of bankruptcy, and there is nothing more to take from you. And also if you have given up hope of ever building your own home. Otherwise, you can get very badly burned. The bank that issued the mortgage will take away everything you receive as a result of your developer's bankruptcy. And no one will ever give you a new mortgage with a credit history that includes personal bankruptcy.
Developer bankruptcy in 2022: new in the law
The main legislative innovation concerning shared construction is the emergence of a new entity related to the bankruptcy of construction companies. We mean the Fund for the Defense of the Rights of Victims. This fund has been operating since October 2017. By law, each developer is required to transfer 1.2% of the cost of each DDU to it. And in the event of bankruptcy of the construction organization, the Fund will finance the completion of construction.
You can check whether your developer has transferred funds on the official website of the Fund for the Protection of the Rights of Victims. If you haven’t listed it, you can’t count on his help.
In general, this Fund has significant powers. If the construction company that contributed to him went bankrupt, he:
- Accredits financial managers
- Contests deals
- Has the right to apply to arbitration for bankruptcy of a construction company
- Finances the completion of construction, or returns money to equity holders for DDU
The second innovation is terminological. The term “participant in shared construction” now refers to individuals purchasing housing for themselves and their families, as well as the Fund for the Protection of the Rights of Affected Citizens. After the Fund returns to the affected shareholders the funds paid under the DDU, it, as a participant in shared construction, has the right to demand reimbursement of costs at the expense of the bankrupt.
We have already mentioned the third amendment. The stages of reorganization and supervision are excluded from the bankruptcy procedure for construction organizations. The acceptance by an arbitration court of a bankruptcy claim (from the company itself or from its creditors, it doesn’t matter) automatically means the start of the final stage - bankruptcy proceedings. Bankruptcy proceedings open for 12 months with the right to extend for another six months. Any interested party may submit a request for an extension.
The fourth innovation concerns the tightening of qualification requirements for bankruptcy (arbitration, financial) managers. To obtain accreditation giving the right to work in bankruptcy cases of construction companies, the manager must:
- Have at least three years of management experience in the construction industry, or three successful bankruptcy cases of construction organizations
- Have an impeccable reputation in terms of bankruptcy law. That is, not to have a single procedure for disqualification from the process at the request of creditors and other incidents.
We have already touched on the fifth point. We are talking about structural changes in the register of creditors. A special register has appeared for those shareholders who want to receive real estate, not money. Previously, all claims were entered into a single register and addressed directly to the arbitration court. Now the registers are compiled by the financial manager. It also notifies equity investors of what claims each may make.
The period during which a shareholder can declare his claims and be included in the registers of creditors has been increased. At the moment, it is three months after the arbitration manager notified the shareholders about the start of the bankruptcy procedure. Previously, the period was two months. And the “reference point” was the date of publication of information about bankruptcy in the Kommersant newspaper.
New rules for the relationship between the financial manager and shareholders have been approved. The manager is obliged to consider their claims within 30 days (unlike the previous norm, a bankrupt developer does not have the right to object to the claims of shareholders). If the shareholder does not agree with the actions of the manager, he has the right to submit a petition to the judge within 15 days. A complaint about the inaction of the financial manager may also be submitted to the judge.
The order of satisfaction of creditors' claims has changed. The third queue is divided into two sub-queues:
- Shareholders making financial claims
- Fund for the Protection of the Rights of Injured Citizens, which paid compensation to shareholders and is now demanding compensation from the bankrupt
Shareholders who claim, in addition to the return of money paid under the DDU, for compensation for damage, are additionally entered into the register of the fourth priority - all other creditors of the bankrupt.
Another innovation concerns the transfer to equity investors of the rights to apartments that have been built but not yet registered. If, before bankruptcy, more than a third of all apartments in a multi-storey building are registered in ownership, the remaining shareholders have the right to file a petition with the court to recognize their right of ownership of the housing. The court can also independently recognize the right of shareholders to apartments that have already been built but have not yet been transferred to share investors.
The procedure for declaring a developer bankrupt
A construction company may go bankrupt for various reasons: rising prices for work and building materials, costs of paying court decisions, force majeure, etc. Various parties can also initiate the recognition procedure: the developer himself, the shareholder or other organizations. However, only an arbitration court can finally recognize and approve such status. You can start the procedure if the developer is three months or more behind on payments, and has also accumulated debts in the amount of more than three hundred thousand rubles.
A legal entity is declared bankrupt in strict accordance with Federal Law No. 127 “On Insolvency (Bankruptcy)”. A separate chapter of the law of the same name is devoted to developers. The procedure may include 5 stages, but usually everything is done with observation (lasts up to 7 months) and bankruptcy proceedings (from six months to several years). At the observation stage, the court sends a temporary manager to the company: he calculates the balance of assets and liabilities, analyzing the financial condition. During bankruptcy proceedings, the developer is officially declared bankrupt, and the manager sent by the court begins to manage his affairs, the property is sold, the money goes to pay creditors, and the organization itself ceases to exist. If, as a result of the inspection, it turns out that the developer is able to pay off his debts, then he is allowed to continue working, albeit with some restrictions. T.N. “financial recovery,” when additional investments and sources of income are attracted, as well as existing loans are restructured, is impossible for development companies: the court can only appoint an external manager so that the construction of the house is completed.
You can follow the progress of the procedure in the Kommersant newspaper: this is an official source that publishes information about bankruptcies. Even if the case in court has just begun, a corresponding announcement will appear on the pages or website of the newspaper.
Support of real estate transactions
More details
200-60-91
General meeting of shareholders in bankruptcy
In case of bankruptcy of the developer, the decision on how shareholders will receive reimbursement of costs is decided by the general meeting. If the number of shareholders exceeds 500 people, the meeting is allowed to be held in absentia. The number of votes of each shareholder is determined based on the amount of his DDU.
To make a decision, it must be adopted by three quarters of the meeting participants. To maintain a quorum, the participation of one third of shareholders in the meeting is sufficient, provided that the sum of their votes exceeds 50%.
Switching to escrow accounts
Most likely, shared construction as we know it will soon cease to exist. It is planned to legalize the construction of housing with the involvement of equity investors (future residents) using escrow accounts. According to Government calculations, by 2022, 95% of DDU transactions will be carried out in this way.
The concept of escrow accounts is well known to those who frequently shop online. The buyer pays for the purchase, but the seller gains access to the account only after the buyer confirms that the goods have been received and their quality is satisfactory.
The same is true in shared construction. The developer will receive payment only after he delivers the house and transfers ownership of the apartments to the shareholders.
Of course, this will reduce the risks of shareholders. But it is not they who will receive the main benefit, but the banks. The use of escrow accounts will significantly increase housing prices under DDU, since developers will not be able to use the funds of equity investors for construction, and will be forced to take out loans. But on the other hand, it will be easier for the state to ensure that developers do not deceive equity investors and do not misuse their funds.
Since 2022, there is a new rule: “One construction company, one permit for shared construction = one invoice.” Moreover, accounts are allowed to be opened only in a limited number of banks that the state has specifically authorized to conduct such activities. The shareholders' funds received in the escrow account will be frozen until the finished building is put into operation. In addition, they are required to be insured by DIA, a deposit insurance agency.
All together this means that at present the shareholder simply cannot lose the funds invested in shared construction. They will definitely be returned in the event of bankruptcy of the developer. The maximum amount to be insured is 10 million rubles.
List of documents for inclusion in the selected register
Regardless of which specific path the shareholder has chosen, receiving compensation or taking ownership rights, his inclusion in the appropriate register is carried out after he submits an application . This procedure in the event of bankruptcy of the developer does not imply the presence of a strictly fixed form: the application is submitted in free form and sent not only to the developer himself, but also to representatives of the arbitration court. In order for it to be considered in a short time, and the shareholder himself is guaranteed to be included in the selected register, the application must be accompanied by a share participation agreement and all paid receipts confirming that the developer has financial obligations to the shareholder.
To speed up the resolution of the issue, it is recommended to submit this application within 30 days after the appearance of official information about the assignment of bankrupt status to the developer. Otherwise, consideration of all issues may be postponed for six months.
Cancellation of equity participation agreements in 2022
It is clear that the use of escrow accounts actually defeats the purpose of shared-equity construction as a source of affordable housing. But this is not an “oversight” of the state, but, apparently, a deliberate policy aimed at ousting this model from the construction market. The reasons for this are also quite understandable.
Although initially reasonable and beneficial for both parties, the “construcción de la equidad” model has not proven itself to be the best in Russia. The massive deception of shareholders continued for decades. Until now, in our country there are about one and a half thousand “long-term construction” of shared construction with not fully clear prospects. The register of “defrauded shareholders” includes more than eighty thousand families.
It is clear that a new type of relationship is required between builders and equity investors. This is what is called project financing.
Which is better to choose?
Both will be recorded in the “Register of Creditors’ Claims,” consisting of the “Register of Claims of Construction Participants” and the “Register of Claims for the Transfer of Premises.” The first part is needed by those who want to get their invested money back, the second – by those who are interested in getting an apartment.
If it is decided to receive the money, then the shareholder needs to renounce his DDU: in this case, he will no longer be able to apply for the apartment. It is entered into the above-mentioned register and they look at the terms for receiving the apartment specified in the contract. If they pass, then to the required amount you can also add a penalty for delay in completing the construction of the house. You can calculate it using one of the many calculators on the Internet. It must be borne in mind that it will not be possible to return the entire invested amount: taking into account all the requirements presented to him, the developer, at best, will be able to return about half of all funds, as often happens. The required payment of the penalty is also not always paid.
If the shareholder intends to receive an apartment, he is entered into the appropriate register. Further, his actions depend on the degree of completion of the house. If it has already been put into operation, then everything is simplified: the shareholder can claim the apartment that he is entitled to under the agreement with the developer. If the house still needs to be completed, then you can either attract a new developer to this, or create a housing cooperative yourself and complete the construction with your own resources and resources. However, in this case, it is worth considering that the completion of the house will take a long time - perhaps even for several years, and all this time you will have to live in another place.
You should choose what you want to get - an apartment or money - taking these factors into account. In a completed house, it makes sense to demand an apartment; if it does not go into operation for a long time, and there is not enough opportunity to complete it independently with other shareholders, it would be wise to choose money. It is worth deciding according to the situation. In any case, the shareholder has three months to do this (starting from the date of receipt of the mail notification from the manager). You can miss this deadline only for a good reason: serious illness, long business trip, military service, etc. (all this will need to be documented in court). However, it is better not to delay the inclusion of your claims in the register: those who do not have time to do this can claim the bankrupt’s property only on a residual basis. You can, of course, enter your demands into the register of defrauded shareholders at any time (they exist in all regions), but this will no longer give any guarantees.
If the property where the apartment was purchased was insured, then the bankruptcy of the developer is considered an insured event, and the buyer has the right to payment. But for this the following conditions must be met:
- the developer is declared bankrupt;
- the bankruptcy phase has begun;
- the shareholder's claims are included in the relevant register.
However, it is worth keeping in mind here that insurance companies rarely pay money voluntarily: usually the shareholder receives his compensation from them already by a court decision.
How will the deal work?
The investor (customer of the apartment) puts a certain amount into a special account
The account is frozen until construction is completed
The developer builds a house using his available funds, or (more likely) takes out a loan from the same bank
After the house is completed and the clients have received their apartments, money from the special account is transferred to the developer’s account
A very important point is that one developer can obtain only one permit to build one house. It is easier to monitor the progress of such construction and the possibilities of fraud with funds collected from small investors are, at a minimum, limited. In addition, the money of equity investors is insured. All together, this should stop the growth in the number of “defrauded shareholders” and, in the end, eliminate this problem completely.
DDUs will cease to exist in principle and will be replaced by escrow accounts. The maximum that will threaten an equity investor is an inadequate percentage of the increase in funds in the “frozen account.”
But, since the possibilities of deception on the part of the developer are minimized, this will not matter - after all, in a normal outcome, the equity investor will receive not the invested money, but the finished property.
In the coming years, there will be a complete transition from shared construction to project-based housing financing.
If you choose money
You sign a waiver of the DDU and put forward a demand for reimbursement of invested funds and penalties for late completion of construction. Next, you wait for the end of the auction with the sale of the developer’s property - they can last up to 12-18 months - and receive your share of the money.
Please note that first the manager will pay money for causing harm to health and life, then he will pay off the bankrupt’s former employees, and only then he will compensate the shareholders for losses. If the amount is not enough to pay all participants in full, you will only receive part of the invested funds.
Consequences of the transition to project financing
The most important positive consequence is the 100% safety of equity investment in housing. No one can steal funds invested in project financing from the shareholder. And that's certainly a good thing.
Another thing is that the bank’s participation in the construction process completely destroys the only advantage of shared construction, for which people, in fact, were willing to risk money. An apartment built using shared construction was approximately 30% cheaper than one purchased in the usual way from a developer. Now this attractive difference will not exist.
The liquidation of shared construction will most likely force small construction companies out of the market - they simply will not be able to cope with the percentage of bank loans. Maybe this is for the better. Since it was small developers who accounted for the lion's share of bankruptcies, which multiplied the army of “deceived shareholders.”
How much will the prices of new buildings rise?
It is impossible to answer this question - the project has just been launched, and it is too early to judge the results. But they will certainly rise. At a minimum, the amount of interest on the loan taken by the developer. Do the math for yourself. The average construction period for a high-rise building is 3 years. The annual interest on the loan is not less than 10. Logically, the price of each apartment should increase by 30%.
On the other hand, a further increase in housing prices does not make sense for the construction industry. Apartments in new buildings are not selling very well anyway due to the high cost. After all, Russians’ incomes are growing much slower than real estate prices. And unsold apartments - no matter how much they cost - do not bring any profit to the developer.
So we will not take the liberty of predicting anything. Only one thing is clear - the construction industry, due to the liquidation of the share segment of housing construction, will face difficult times. But on the other hand, there will be fewer “defrauded shareholders.”
In the meantime, they exist, and some are right now in the process of bankruptcy of their developer. The main goal of our article was to explain to them as much as possible the procedure for action in such a situation.
