10.03.2017 — Bank Guarantees May Be Used to Secure Non-monetary Obligations

In one of the cases, an energy company demanded payments under bank guarantee issued to secure its contractor’s obligation to perform works by the deadline. Lower courts rejected this claim, finding that a bank guarantee may only secure monetary obligations, but may not be used as a security for the obligation to perform works in kind. However, the cassation court disagreed with this approach and remanded the case for reconsideration on the merits.

Bank “Zenit” issued a bank guarantee in favor of power generating company “Federal Grid Company of Unified Energy System” to secure the performance of obligations by “Rusengineering” as its contractor for the construction of power lines. However, the power lines have not been constructed, and bankruptcy proceedings have been initiated in respect of the contractor. The power generating company asked the bank to repay the monies in accordance with the bank guarantee, since the contractor did not finish the construction works by the deadline and did not provide the power generating company with a bank guarantee for a new term.

The courts of the first and of the appellate instances dismissed all the claims of the power generating company. The courts’ reasoning was as follows: the bank guarantee cannot secure a non-monetary obligation, such as an obligation to provide a bank guarantee for a new term. However, the cassation court disagreed with this approach and explained that law does not limit the scope of the bank guarantee by monetary obligations only. Therefore, bank guarantees may also secure performance of an obligation in kind. The court decided that the case should be reviewed by the court of the first instance, which should find out why the bank refused to pay and did not examine, which obligations were covered by the scope of the bank guarantee.

09.03.2017 — Supreme Court: Statutory Interest on Late Payments (Art. 395 of the Civil Code) for Debts in Foreign Currency Should Be Calculated Based on Average Interest Rates for Short-Term Loans in Respective Currency

In its Digest of Case Law the Supreme Court eliminated the uncertainty associated with calculation of interest for delayed payments in foreign currency. The Court explained that by default the debtor should pay the interest according to the average interest rates for short-term loans issued in the respective foreign currency. The information on the average interest rates (for major currencies) is provided by the Central Bank of Russia. If official data is not published on the Central Bank’s website, the average interest rate should be determined according to a statement issued by a leading foreign bank at the creditor’s location.

Previously, the courts and creditors experienced significant hardship in determining the applicable interest rates for delayed foreign currency payments, because Article 395 of the Russian Civil Code was reformed on several occasions, with different basis for calculation chosen each time. Initially, the interest rate for late payments was to be determined according to the refinancing rate of the Russian Central Bank. Since the refinancing rate was not economically relevant for foreign currency payments, in 1996 the Supreme Court and Supreme Arbitrazh Court explained that average interest rate for short-term loans in foreign currency should be used instead.

However, in 2015 the legislative rules were changed to using the average bank deposit interest rate for individuals as the basis for calculation. As a result, the Supreme Court issued another explanation: the average interest rate for deposits at the creditor’s location should be used for foreign currency payments.

Finally, in 2016 Article 395 was reformed again: the key rate of the Central Bank is now used for the calculation of interest, which is also not applicable for debts in foreign currency. However, formally the previous explanation of the Supreme Court has not been revoked. As a result, different courts and creditors applied different approaches to the calculation of interest in foreign currency.

In order to solve this issue, the Supreme Court explained again that statutory interest on late payments for debts in foreign currency should be calculated based on average interest rates on short-term loans in foreign currency, which are published on the official website on the Central Bank of Russia and in the “Vestnik of the Bank of Russia” journal. In the event that the interest rate for a specific period is not privided, the latest interest rate published for each period of late payment should be used. Should the above-mentioned sources lack information on average interest rates, the interest in accordance with Article 395 shall be calculated based on average interest rates on short-term loans, provided by one of the leading banks in the place of the creditor’s residence.

08.03.2017 — Tax Risks in Intra-group M&A Transactions Have Increased

The latest practice of tax authorities shows that mergers and acquisitions within the same group can be deemed a method of tax evasion by transferring external debt onto a profitable and prosperous company to reduce the taxable base for the corporate profit tax. As a result, tax liability can be imposed on the company. Due to this, it is recommended that all corporate transactions within the same group of persons be carefully structured to substantiate the economic reasonability thereof to tax authorities.

The Federal Fax Service shows interest towards merger transactions performed within the same group and which may be viewed as carried out for drawing up the balances of the companies and transferring one company’s expenses onto a profitable company to reduce the taxable base.

The practice of charging additional tax in such circumstances has been upheld by the Arbirtazh Court of Vladimir Region in the case of MondelezRus LLC, where an intra-group restructuring was regarded as a means of tax evasion. This creates a risk that even legitimate merger transactions may be qualified as concealed dividend distribution by the tax authorities. To avoid claims from the tax authorities it is advisable that the companies structure their transactions with due care, so that they are able to prove the economic purpose behind them and to show that the transactions led to the increase in operating revenue and income.

07.03.2017 — Supreme Court: Mortgage Remains in Force Even If Owner Changes Technical Characteristics of Mortgaged Property

In the case at hand lower courts found the mortgage to cease because the technical characteristics of the mortgaged land and building were different from the ones described in the mortgage agreement. However, the Supreme Court disagreed and emphasized that the mere incorrect description of mortgaged property or subsequent change in its technical characteristics does not terminate the mortgage. This position was included in the Digest of Case Law, which is likely to make it highly influential on future court practice.

The Supreme Court’s latest Digest of Case Law includes a case, in which the claimant demanded termination of mortgage of a building and a land plot. The claimant argued that at the moment when the sale and purchase agreement was concluded, the pledged immovable property did not exist, because in fact it had other technical characteristics, different from those, indicated in the mortgage agreement and the Unified State Register of Real Estate. The courts of first and appellate instances agreed with this position and ruled that the mortgaged object did not exist.

However, the Supreme Court disagreed and found that it could be easily inferred that the mortgage was concluded in respect of the same property that was the subject matter of the sale and purchase agreement. The mere fact that the property may have been incorrectly described in the mortgage agreement does not prejudice its validity. The Supreme Court also noted that changes of technical characteristics of real estate do not automatically terminate the respective mortgage, because it does not amount to the destruction of the subject of the mortgage. Moreover, in such cases it is not necessary to amend the agreement to preserve the pledge in effect.

06.03.2017 — Former Shareholders May Challenge Sale of the Company’s Assets to Secure Repayment of Fair Market Value of Their Shares

In one of the cases, a company’s former shareholder attempted to challenge its sale of the company’s primary asset (real estate object) at unfair price and on suspicious terms, what made it impossible for the company to repay fair market value of shares to the shareholder. Lower courts rejected this claim, stating that only existing shareholders may challenge transactions of the company. However, the cassation court, reversed these decisions and instructed the courts to assess the validity of the transaction on the merits.   

A majority shareholder of a limited liability company (99,9% of shares) left the company. As a result, the shareholder became entitled to compensation of fair market value of its participatory interest. The former participant filed a lawsuit for the recovery of this amount (case А41-60620/2015), asking the court to grant asset freeze and in respect of the company’s only valuable property, an administrative and warehouse complex. However, the court considered the interim relief excessive. Soon afterwards the complex was sold to a sole entrepreneur at the price considerably lower than market value. Moreover, all the agreements were registered on the date of the transaction. The purchase price has not been paid in full, the term of payment had been prolonged several times by additional agreements, no security has been provided.

The former participant tried to challenge this transaction in court (case А41-16480/16), indicating that the terms of the transactions were suspicious, but the courts of the first and of the appellate instances dismissed the claim, because, in the courts’ opinion, the challenged transactions did not violate the claimant’s rights, since the shareholder is not a party to these transactions and can still claim the compensation from the company. Moreover, the appellate court noted that the law does not provide for the former shareholder’s right to challenge the transactions of the company.

The Federal Arbitrazh Court of the Moscow Region (cassation court) disagreed, noting that former shareholder could challenge the transaction, since the company had refused to provide compensation to the shareholder for a long time, while the sale of the company’s only marketable asset made such a compensation impossible given its significant amount. The court remanded the case for reconsideration, during which the courts should assess the challenged transaction in light of possible abuse of rights.