21.12.2017 — Strengthening Guarantees of Creditor’s Rights and Preventing Abuse of Rights

The court practice of the Supreme Court in 2017 promotes strengthening guarantees of the creditors’ rights and interests and expanding the mechanisms aimed at preventing the abuse of rights. In particular, the Supreme Court declared that unregistered property may be pledged if it is necessary for the protection of the creditors’ rights. On the other hand, to implement the principle of equity of the creditors in bankruptcy proceedings and to prevent the abuse of rights the Supreme Court excluded the shareholders’ loans from the list of the creditors’ claims to the insolvent company. Further, the Supreme Court declared that the asset freeze is not equal to pledge and does not entitle the creditor to bankruptcy priority.

In the Decision No. 306-ЭС17-3016(2) the Supreme Court pointed out that the court may declare that the pledge is valid even if the property has not been registered yet. This is permissible so that the creditor does not miss the procedural timeframes established for presenting the claims in bankruptcy and can receive the status of a secured creditor. For these purposes the creditor shall prove that the property meets the criteria of real estate, what can be evidenced by various facts (in particular, by the cadastral or technical passport, photos, etc.).

In another case the Supreme Court explained the controversial rule on the so-called “pledge arising out of the asset freeze” in accordance with Article 334 (5) of the Russian Civil Code that arises when the bailiff executes a freezing order. The Supreme Court concluded that asset freeze does not entitle the creditor to priority satisfaction of the claims during bankruptcy as pledge in the true sense of the word (Case No. А11-9381/2015).

Moreover, to protect creditors form the abuse of rights by the company’s shareholders in bankruptcy proceedings the Supreme Court explained that the shareholders that provided an intra-group loan to their own company shall not have the right to file the respective claims with the register of the creditors’ claims alongside with other creditors. Otherwise the principle that the company’s shareholders shall bear the risk of the company’s bankruptcy in case of ineffective business management would be violated. Thus, such claims shall be satisfied after all other debts are repaid (case No. А32-19056/2014). 

20.12.2017 — Court Practice Implements Principles of Good Faith and Reasonableness into Contractual Relations

In the year ending the courts persistently incentivized the economic actors to implement the principles of good faith and reasonableness into contractual relations. The Supreme Court allowed the courts to assess the reasonableness of contractual terms in business relations. In particular, the Supreme Court decided that courts shall have the right to review and decrease the termination fee depending on the circumstances of the case. In another case the courts awarded damages for the bad-faith negotiations to compensate the losses of the good-faith party that believed that the contract would be signed, relying on the other party’s conduct and suffered loss due to unexpected disruption of negotiations by the prospective tenant.

In a case adjudicated by the Supreme Court the courts declared that the termination fee which the parties have agreed upon may be decreased by court taking into account the circumstances of the case. In particular, in the case at hand the termination fee has been reduced due to the fact that as a result of the contract termination the landlord had the right to retain a significant part of the rent paid in advance, that was apparently inconsistent with the consequences of the early termination of the contract for the landlord. In its decision the Supreme Court incentivizes the courts of lower instances to find a balance between the interests of the landlord and the necessity to compensate his losses from the early termination of the contract, on the one hand, and the tenant’s interests, on the other hand, so that unreasonably high termination fee shall not be recovered (case No. А07-27527/2015).

In another case the landlord managed to prove that during the negotiations with the prospective tenant he relied on the seriousness of the counterparty’s intentions, and therefore terminated the contracts with the current tenants to vacate the premises for the new tenant. Still, the prospective tenant suddenly disrupted the negotiations, therefore the courts awarded damages to the landlord in the amount of Rubles 15,6 mln. (approx. Euro 220 thousand) to compensate his lost profit (case No. A41-90214/2016).  

19.12.2017 — Providing Incentives for Transparent Business: Extension of Controlling Persons’ Liability

In 2017 new landmark decisions of the courts of higher instances on the issue of piercing the corporate veil were rendered. The Supreme Court broadened the legal opportunities to bring controlling persons to liability in bankruptcy proceedings. In its turn the Constitutional Court declared that the company’s tax arrears may be recovered from the employees, whose illegal actions lead to the company’s failure to pay the respective taxes to the budget.

The Decree of Plenum of the Supreme Court dated 21.12.2017 “On certain issues in connection with brining the debtor’s controlling persons to liability in bankruptcy proceedings” recommends the courts that adjudicate the issues of the controlling persons’ subsidiary liability in bankruptcy proceedings to take into account their degree of involvement in the company’s affairs. At that to provide incentives for transparent business schemes the Supreme Court explained that as a general rule nominal directors shall bear subsidiary liability as well as the de facto directors. Still, if a nominal director provides information on the beneficiary that contributes to the repayment of the creditors’ debts, the nominal director may be released from liability in full.

In its turn the Constitutional Court in its Decree No. 39-П dated 08.12.2017 supported this trend on the transparent business in the field of public law. Particularly, the Constitutional Court supported the practice on the recovery of damages inflicted by tax crimes amounting to the respective tax arrears and delay penalties from the company’s employees responsible for payment of taxes. As a general rule the tax arrears may be recovered from the employees only if other remedies on the recovery of the debt from the company itself are exhausted. Yet, if the company is de facto an alter ego for the illegal actions of its controlling persons, the tax authorities shall be entitled to file the claim to such controlling persons directly even before it is proven that the company is unable to perform its tax duties. 

18.12.2017 — Simplification of Registration Procedures in Real Estate and Starting Business

In 2017 various reforms of the registration procedures in different spheres were implemented aimed at simplification and acceleration of state services. The legal developments concerned registration of title and cadastral registration of real property and obtaining construction permits. The procedure for starting a business was also improved. Nowadays in case the tax authorities refuse to register a legal entity or an individual entrepreneur, the applicant may correct the mistakes in the documents submitted in a simplified procedure, and does not have to submit all the set of documents again. Further, the amendments provide for the electronic document flow instead of the documents in hardcopies.

Since 2017, the Federal Service for State Registration, Cadastre and Cartography (Rosreestr) responsible for registration of rights to immovable property and the Cadastral Chamber, which has been previously responsible for the cadastral registration (i.e. description of real estate object), are merged into one integrated state authority. Such a merger will simplify and accelerate the procedure of cadastral registration and registration of ownership title to real estate. The timeframes for processing the documents submitted to obtain construction permits were also reduced. On average the turnaround time required for processing requests for the state services in connection with real property reduced by 1-5 days.

Moreover, the procedure for starting a business was also improved. Particularly, the new legal developments provided the opportunity for the applicants to correct mistakes in the documents submitted for state registration. According to the new rules after the applicant receives a refusal to register a business, he shall have 3 months to submit the corrected documents. At that there is no need to re-submit the documents that were drafted and formalized properly, and no additional state duty shall be paid. These amendments are particularly important to foreign companies that formalize the documents to be submitted to the tax authorities abroad, and thus the execution and formalization of the new full set of documents is often quite inconvenient.

Furthermore, amendments concerning the electronic document flow were introduced to the federal law on registering a business. Nowadays as a general rule the tax authorities shall send the documents by email (using the email indicated in the application), while the documents in hardcopies will only be provided on request.