Taking counsel

  • 2005-10-05
  • By Larisa Sokolova [ LOZE, GRUNTE & CERS ]
Auctioning real estate of an isolvent company

One stage in a company's insolvency is the organization and implementation of a real estate auction by a court-approved administrator. After the highest bidder has paid the set price for the real estate, the administrator drafts and signs the purchase agreement. As a rule, registration in the Land Registry is conducted on the basis of a purchase agreement; however, in the case of an auction, approval of the auction certificate by a court is also required.

Certain problems arise if the court does not approve the auction certificate of real estate of the insolvent company, as such a situation is not regulated by law. Laws relating to the auction procedure (the Law on Insolvency of Undertakings and Companies, the Civil Procedure Law and the Civil Law of the Republic of Latvia) have created contradictions, and the fact that the auction certificate is not approved does not constitute a basis for annulment or invalidation of the auction and the purchase agreement.

Notwithstanding the intention of all parties involved in the auction (the buyer, seller, creditors, etc.) to approve the auction certificate and to have the title of the new owner registered, it can happen that the court does not approve the auction certificate. This denies the buyer the possibility to register the purchased estate in the Land Registry.

In such a situation, according to records of the Land Registry the title to estate remains with the seller, while the buyer, who has become the owner of real estate pursuant to the provisions of the Civil Law, has limited possibilities to handle the newly acquired property 's it may not be mortgaged, no loan can be taken for its improvement, etc. The seller of the property cannot complete the insolvency procedure, as the property is still registered in the name of the seller. What's more, the buyer is entitled to use it.

A resolution of such an absurd situation may drag on for years if the buyer does not want to cancel the auction and the purchase agreement. He has, after all, the right to bring a claim to court requesting that his title to the property purchased at the auction be acknowledged and registered with the Land Registry.

Currently, no established court practice exists for such cases. If a court judgement is negative, this means that the auction and the purchase agreement have to be cancelled, and a repeated auction has to be arranged, the result of which is hard to predict.

In order to avoid such a predicament, prior to participation in an auction, it is advisable to assess the auction organization procedure and all possible reasons for non-approval of the auction certificate. However, it often happens that court decisions are based on small formalities that cannot be forecast in advance. Only amendments and supplements to laws might regulate this situation, since currently the legislator has not clearly defined the consequences of non-approval of an auction by court. Simply put, no one knows what to do if the auction certificate is not approved.

In my opinion, one of the solutions might be changes in the laws that would prescribe that, in those cases where the court does not approve the auction certificate, then it also has to concurrently declare the auction invalid.
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