07.07.2017 — Supreme Court Protects Good-Faith Purchasers of Pledge Rights

The Supreme Court adjudicated the case on whether the mortgage may be declared absent, while there is the respective entry in the Unified State Register of Real Estate. In the case resolved by the court the parties terminated a mortgage agreement, but failed to make the respective entry to the state register on the termination of the mortgage, therefore according to the Unified State Register of Real Estate the mortgage was effective. Later on the pledge right was assigned in a sequence of transactions and finally was purchased by a good-faith purchaser, who relied on the information on the mortgage in the registry. Although the decisions of the courts of lower instances diverged, the Supreme Court declared that the mortgage cannot be terminated automatically by mere agreement of the parties – to terminate the mortgage the parties should have filed an application to amend the respective entry to the register. Therefore, the mortgage is effective, and the good-faith purchaser of the pledge rights shall be protected by law.

In the case, adjudicated by the Supreme Court the bank and the company have concluded a credit facility agreement and secured the obligations thereof in the mortgage agreement in respect of some elite detached houses and land plots. Later on as a result of a sequence of transactions the mortgage right was transferred to a foreign company that relied on the information in the Unified State Register of Real Estate when it purchased the mortgage rights.

However, afterwards it was discovered that the parties have concluded an agreement on termination of the mortgage agreement, but never filed the application for its termination to the Register. To terminate the mortgage and obstruct to the execution of the pledge rights by the foreign company the owner of the immovable property resorted to court with the claim to declare that the mortgage rights are absent. But the Supreme Court noted that to terminate the mortgage the parties should have filed an application to the Rosreestr to eliminate the entry on the mortgage from the Register. Since the parties failed to do it, the respective risks shall be borne by the owner, while the good-faith purchaser of the pledge right shall be protected by law.

06.07.2017 — Russia Refused to Pay Council of Europe Membership Fee

The Russian authorities have suspended the third part of the yearly membership fee to the Council of Europe amounting to €11 million. This decision was taken due to the long-term prohibition for the Russian parliamentary delegation to participate in the Parliamentary Assembly Committee of the Council of Europe.

Russia is one of the main contributors to the budget of the Council of Europe, and its fee paid to the budget of the Council of Europe amounts to almost 10% of the total contributions, what is comparable to the contributions made by France, United Kingdom, Germany and Italy. However, the Parliamentary Assembly of the Council of Europe (PACE) decided to bar the Russian delegation from the participation in the PACE statutory bodies after the Crimea became the part of the Russia Federation in 2014. Moreover, the national delegation of the Russian Federation was deprived of the right to vote at the PACE session.

In these circumstances Russia suspended the last third part of the yearly fee for 2017 until the powers of the Russian delegation are fully restored. However, the Russian Parliament members hope that in the nearest future Russia resumes to the full-fledged participation in the activities of the PACE. The PACE President also reiterated his appreciation for the policy aimed at resuming Russia’s membership in the Assembly.

05.07.2017 — Supreme Court: in Case of Bankruptcy Companies Are Not Obliged to Pay for Services Rendered Prior to Bankruptcy in Priority Order, Even if Invoices Were Issued Afterwards

In one of the recent decisions, the Supreme Court clarified that services rendered prior to a company’s bankruptcy, even if the respective invoices were issued after the bankruptcy proceedings commenced, were not to be repaid in priority order (as current payments, prior to other claims). In order to receive such payments, the creditor should instead seek inclusion into the general list of creditors and such claims have to be satisfied in accordance with the regular priority of debts established by law.

In the case at hand, Transaero and Aeroport-Service concluded a services agreement. In 2015, Transaero had to undergo bankruptcy proceedings. The services were rendered by Aeroport-Service before Transaero went bankrupt, but the invoices were issued at a later stage. Therefore, the courts had to decide how these claims could be satisfied.

Aeroport-Service insisted that these claims constitute current payments and should therefore be satisfied before the claims of other creditors, because the invoice was issued after the bankruptcy proceedings commenced. However, the Supreme Court disagreed with this position, stating that the determination of current payments has to be made depending on whether the services themselves were performed prior to bankruptcy. The formal invoice date is irrelevant for this determination. Due to this, the Supreme Court ruled that Transaero had to immediately repay only current claims for services rendered after the bankruptcy proceedings started. All other claims have to be satisfied in accordance with the list of creditors and based on the priority order established by the legislation, regardless of the invoice dates. 

04.07.2017 — Federal Tax Service Excluded British Virgin Islands from Offshores List

The Federal Tax Service approved a new draft list of offshore jurisdictions, which does not include the British Virgin Islands and South Korea. In relation to the British Virgin Islands the decision of the Federal Tax Service was induced by the amendments to the local legislation aimed at promotion of transparency. At the moment the tax authorities of foreign states, including the Russian tax authorities, are entitled to receive information on the registered beneficiaries from the unified register of the companies’ beneficiaries of the British Virgin Islands, which is currently being developed.

In 2016 the amendments to the legislation of the British Virgin Islands entered into force aimed at promoting transparency of the financial operations and at the disclosure of the information on the activities of the companies, registered in this jurisdiction. In particular, from April 2016 all the companies registered in the British Virgin Islands shall file information on the directors and beneficiaries to the registration authority and keep the documents, confirming the financial operations. Moreover, as a party to the multilateral agreement on automatic exchange of financial information, the British Virgin Islands will take part in the automatic information exchange that is expected to start form September 2017.  

Therefore, the Federal Tax Service excluded the British Virgin Islands from the updated draft list of the jurisdictions that do not ensure the exchange of information with the Russian Federation for tax purposes. This list was composed in pursuance of the law “On controlled foreign companies” (CFC) with the purposes of binding the beneficiaries of the offshore companies to notify the Russian tax authorities on their business abroad and make them pay faxes from the CFC profits to the Russian budget. Now the Federal Tax Service will receive information on the financial operations and beneficiaries of the companies registered in the British Virgin Islands in the course of cooperation between the tax authorities, what will simplify the imposition of liability on Russian taxpayers in this case. 

03.07.2017 — Supreme Court: Early Termination Fee Can Be Reduced By Court

The Supreme Court has adjudicated a dispute between a major retailer, which leased non-residential premises for a long term, and the landlord. The retailer terminated the lease agreement prematurely, and the landlord refused to return prepaid rental fees, stating that their retention constitutes an early termination fee according to the lease agreement. Lower instance courts had different opinions on whether this early termination fee could be reduced as disproportionate to repay at least certain advances to the tenant. The Supreme Court ruled that the amount of early termination fee could only be reduced in exceptional circumstances, if it is both manifestly disproportionate to the negative consequences incurred by the adverse party due to early termination, and its recovery would be inconsistent with the fundamental principle of good faith.  

In the case at hand, the major retailer leased premises for a supermarket for 15 years. Under the lease agreement, a significant amount of rental fees had to be prepaid (almost 60 million rubles). The lease agreement provided that the tenant was entitled to terminate the lease for convenience, before the expiration of the agreed lease period. In this case the prepaid rental fees were to be retained by the landlord as a fine. After 4 years of lease, the tenant terminated the agreement, and as a result the landlord retained the prepaid rental fees in full (in the amount of 43 million rubles). However, the tenant considered such retention disproportionate and demanded judicial recovery of these amounts.

Courts of three instances scrutinized the legal nature of this contract term on the retention of prepaid rent, and considered the issue whether the early termination fee could be reduced. The first instance court considered this fee a penalty and reduced it in accordance with Art. 333 of the Russian Civil Code. The court of appeal stated that this amount was a contractual compensatory sanction, but agreed that its amount was disproportionate and should be reduced. However, the court of cassation rejected the claim in full, stating that the parties to this transaction are entrepreneurs and, consequently, the tenant should have understood that the prepaid rental fees were subject to retention in case of early termination, and should have assessed its risks in advance. 

The Supreme Court referred to the obligation to act in good faith (Art. 10 of the Russian Civil Code) and explained that the early termination fee may be reduced. However, this is only permissible in extraordinary circumstances, i.e. in cases when the early termination fee is manifestly disproportionate to the consequences of such termination. The case was remanded to the first instance court for determination of the accurate amount to be recovered, which has to be proportionate to the losses suffered as a result of contract termination.