The Supreme Court agreed with the decisions of the courts of lower instances which refused to declare illegal the Federal Tax Service’s tax reassessment, performed as a result of the inspection. The taxpayer was trying to challenge the additionally charged tax for the “artificial increase of credit debt”. In the course of the inspection the tax authorities were concerned about the fact that the Russian entity provided substantial grace period for payments for its purchasers, at the same time under the terms of the agreement with the manufacturers the company itself was to pay within a short time, therefore it had to borrow infra-group loans. The tax authorities believed that the company did not have sufficient economic reasons to get loans, and the above scheme was made up intentionally to create capital constraints, transfer out the moneys abroad and evade taxes.

In the course of the inspection the Federal Tax Service discovered that the Russian distributor got loans from the parent company-manufacturer to make up for the cash reserves which arouse because the company provided its purchasers long grace periods for payment of the purchase price for the goods. The tax authorities considered that the company’s expenses to service the debt to the parent company were unreasonable and argued that the loans concealed the transferring out the moneys abroad. The company tried to challenge the tax service’s decision on charging additional tax, but the courts of three instances agreed with the views of the Federal Tax Service.

Despite the taxpayer’s arguments that this scheme is reasonable from the economic point of view, since the manufacturer cannot provide for long grace periods, as it would interrupt the continuity of the manufacturing cycle, the Supreme Court upheld the reasoning of the tax authorities and of the courts of the lower instances and refused to re-examine the case. Thus, the representatives of business and the legal community are concerned about the fact that instead of assessing reasonableness of the expenditures the tax authorities and the courts assess economic expediency of the transactions under the guise of review of the business purpose of the deal. 

The Supreme Court ruled that the seller, who has not received the purchase price for the immovable property under the sale and purchase contract from the purchaser in full has the right to repudiate a contract and claim back the sold property. This is a landmark decision of the Supreme Court, because it recedes from the earlier established court practice according to which in such a case the seller could only claim damages (the debt principal and the interest incurred), but not the sold property. The Supreme Court argued that if the purchaser fails to pay, the seller is entitled to repudiate a contract on the ground of material breach (Article 450 (2) of the Russian Civil Code) and get back the sold immovable property.

In the case at hand the purchaser bought a detached house and a land plot in a prestigious area of Saint Petersburg. The title to the immovables was transferred to the purchaser, still in 1,5 years the purchaser did not pay the purchase price, despite numerous reminders on the debt from the seller. Finally, the seller resorted to court.

The seller argued that since the purchaser had not paid, he was deprived of that which he had the right to expect at the conclusion of the contract. The court of the first instance granted the claim and ruled that the title shall be transferred back to the purchaser. Yet the appellate court disagreed with this decision and said that the failure to pay the purchase price was not a material breach that gives the right to repudiate the contract. The appellate court’s judges indicated that under Article 486 (3) the seller is entitled to claim the principal amount of debt and the interest incurred only.

However, the Supreme Court upheld the decision of the court of the first instance and indicated that while Article 486 (3) of the Civil Code entitles the seller to claim damages, it does not prohibit for the seller to repudiate the contract and get the sold property back. Therefore, the case was remanded for re-examination (Ruling of the Russian Supreme Court No. 78-KG 17-21).

In the case recently adjudicated by the Supreme Court the judges were to decide whether disputed claims may be set off, if one of the parties objects to the existence of the debt and its amount. In this case there was a disputed debt arising out of the short delivery. Despite the purchaser’s claims to the supplier to return the respective part of the purchase price, the supplier objected. Thus, the purchaser decided to set off his claim towards the lesser and paid less than required for the next lot of goods and delivered the document confirming the set off to the supplier. The supplier claimed for the recovery of the unpaid purchase price in court, and the courts of three instances granted the motion. Still, the Supreme Court disagreed with the supplier’s arguments and refused to declare that the set off had been illicit.

In this case (case No. А40-112506/2016) the purchaser paid less than required under the supply contract and referred to the supplier’s debt which arose several years ago as a result of short delivery. In response to the document confirming the set off the supplier filed a motion on the recovery of the unpaid amounts for the supplied goods. The courts of three instances granted the motion and argued that since the claim was under dispute, there were no grounds for set off. The purchaser filed a counter claim, bit since by the moment it was filed the limitation period in respect of the major part of the claimed amount had elapsed, the court granted the claim, but reduced the set off amount substantially.

The Supreme Court disagreed with the courts of lower instances. The Economic Chamber of the Supreme Court emphasized that the law does not provide that the set off claims shall be indisputable. The judges noted that the mere fact that the person that received a notification on set off objects against the debt may not be ground for declaring the set off illicit. Therefore, the Supreme Court ruled that the set off was made in accordance with law and dismissed both the main claim and the counter claim. 

The criminal case files in respect of William Browder, the head of the Hermitage Capital fund were a reason for the reopening of the Dalnaya Step LLC’s bankruptcy case 8 years later. On the basis of various consequential evidence the newly appointed bankruptcy trustee managed to establish that in fact the bankrupt company had been controlled by HSBC Bank (PP) LLC and the offshore HSBC Management (Guernsey) Limited, which participated in transferring the assets out of Dalnaya Step LLC, what led to the company’s bankruptcy. In mid-August the Arbitrazh court of Kalmykiya Republic ordered to collect more than $1,4 bln. of debts to the Federal Tax Service and other creditors from the bankrupt company’s beneficiaries.

Dalnaya Step LLC was declared bankrupt and liquidated in 2007, still in 2015 the Arbitrazh court of Kalmykiya Republic re-opened the bankruptcy case on the motion of the Federal Tax Service upon newly discovered evidence with reference to the criminal case files in respect of William Browder and the previous bankruptcy trustee of Dalnaya Step LLC.

The newly appointed bankruptcy trustee took measures to identify the company’s assets and managed to prove in court that the reason for Dalnaya Step LLC’s bankruptcy was the intentional action of its controlling persons, namely HSBC Bank (PP) LLC and the offshore company HSBC Management (Guernsey) Limited. To substantiate his argument the bankruptcy trustee referred to the facts that the bank and the bankrupt company were affiliated and the bank executed transactions aimed at transferring out the company’s assets without any compensation, while it was on the verge of bankruptcy with major violations (the payment documents lacked stamps and signatures of the authorized persons). At the same time, the offshore company was the Hermitage Capital fund’s management company, which managed the day to day activities of the fund and its controlled entities. The following evidence was presented to the court: the HSBC’s prospectus (the parent company of HSBC Bank (PP) LLC), the extracts from the register, information from the companies’ official websites and the witness’s reports. The court also dismissed the bank’s arguments that the limitation period for claims has expired and noted that the limitation period has not expired since the bankruptcy trustee discovered the operations in dispute only in January 2016.

The court, guided by the concept of piercing the corporate veil, emphasized that it was the fund’s manager – the offshore HSBC Management (Guernsey) Limited’s will to transfer out the assets of the  Dalnaya Step LLC without any consideration, while HSBC Bank (PP) LLC illicitly transferred and disposed of the monetary funds. Therefore, the court established that the controlling persons led the company to bankruptcy and imposed joint liability on them. The court of the first instance ordered to collect more than $1,4 bln. of debts form the bankrupt’s controlling persons. HSBC Bank (PP) LLC has already filed an appeal (case No. А22-941/2006).

In a case adjudicated by the Supreme Court the judges decided whether the unfinished and unregistered construction erected on the land plot pledged to the bank, is also encumbered with pledge. The views of the courts of different instances were varied:  the courts of the first and of the appellate instance ruled that the unfinished construction is pledged, while the court of cassation revoked their decisions indicating that immovable property cannot be an object of civil rights and cannot be encumbered until it is registered. The dispute was resolved by the Supreme Court, which declared that both the land plot and the unfinished building were pledged in favor of the bank.

In the case adjudicated by the Supreme Court (case № А12-12549/2015) the lease right of the land plot, where the unfinished building was erected, was pledged to the bank. When the developer became insolvent, the bank filed an application for including his claims to the registry of the creditors’ claims as a secured creditor. The bank argued that his claim was secured by the pledge of the land plot and of the unfinished construction located thereon. The court of the first instance and the appellate court granted the claim in full. Still, this decision was challenged in the court of cassation by another creditor, which referred to the fact that since the building was an unfinished construction, and the title to it was not registered, thus it could not be pledged to the bank.

The Supreme Court ruled for the bank and pointed out that that if the creditor presents evidence to prove that the unfinished building matches the criteria of immovable property (that can be proven by various evidence, including cadastral and technical certificates, photos, etc.), the court may declare that such a immovable property is encumbered with pledge. Besides, judges has recalled that if the developer fails to register his title over the immovable property, and, consequently, the pledge was not registered either, the court may rule that the record to the Unified Stare Register of Immovable Property is made under the court decision.