15.06.2018 — Supreme Court Establishes High Standard Of Proof In Respect Of Claims Of Company’s Shareholders In Bankruptcy Proceedings

In one recent bankruptcy case the Supreme Court was to consider the shareholder’s claim to include his debt on the deposit in his bank in the register of creditors’ claims of the bank in the bankruptcy proceedings. Although the fact of depositing money was confirmed by incoming cash orders and was not contested by the other parties, what was a reason why the lower courts included the shareholder’s claims in the register, the Supreme Court decided that the courts had applied an insufficiently high standard of proof in assessing the reasonableness of this claim. In the opinion of the Supreme Court, the standard of proof in bankruptcy must be higher than in regular litigation, and if the claim is brought by the bankrupt company’s shareholder, he must prove not only the existence and amount of the debt, but also has to substantiate that the debt does not have corporate nature.

In this case, one of the bank’s shareholders claimed that the court should include the debt in the amount of 2.7 billion Rubles that the bank owed to the shareholder in accordance with the bank deposit agreement in the register of creditors’ claims (see case No. A40-163846/2016). The shareholder submitted primary accounting documents to prove the existence and the amount of the debt. However, the bankruptcy manager objected to the inclusion of this claim in the register arguing that the money from the deposit was transferred under the loan agreements to third parties, and after the third parties returned that money, the shareholder transferred it to his accounts in another bank. The bankruptcy manager also emphasized that by the date the insolvency administration was appointed in the bank, the balance of the shareholder’s accounts was lower than the amount claimed.

However, the courts of lower instances rejected these arguments and granted the shareholder’s claim. At the same time, the Supreme Court explained that in the dispute at hand the courts applied the standard of proof applicable to the ordinary creditor in civil dispute to the shareholder’s claim and did not take into account that in this case the creditor owned 19% of shares in the insolvent bank. Thus, the Supreme Court reversed the decisions of the lower courts and remanded the case for a new trial emphasizing that courts must apply a higher standard of proof when deciding whether the claims of non-minority shareholders of the debtor shall be included in the register of creditors’ claims in bankruptcy proceedings.

According to the Supreme Court, shareholders must not only provide convincing evidence of the existence and the amount of the debt, but must also prove that such debts are not of corporate nature, in particular, shareholders have to confirm that at the time the debt arose they did not enjoy the benefits associated with holding a share in the debtor (for example, the following may amount to such a benefit: availability of information about the debtor’s financial position that is not publicly available, providing additional funds to the company as a loan to bypass corporate procedures of charter capital increase, etc.). Thus, when such claims are examined in courts, shareholders shall prove without any reasonable doubt not only the existence and the amount of the debt, but also that the debt is of civil law (as opposed to corporate) nature.


14.06.2018 — Russian President Is Granted Special Right To Regulate Activities of Legal Entities and Execution of Transactions

On 4 June 2018 legislative amendments came into force, providing for the right of the Russian President in exceptional cases to establish the specifics of the companies’ activities, transactions, and of the securities market regulation. The law does not specify what exceptional cases it refers to and when the Russian President is entitled to exercise these specific rights to impose extraordinary regulation on business activities.

Federal Law No. 133-FZ dated 04.06.2018 (the text of the law is available on the official portal of legal information) has introduced certain amendments to Russian law, in accordance with which in exceptional cases, the President of the Russian Federation is entitled to establish the specifics of regulatory environment in certain areas. At the same time, at present the text of the law does not establish which cases are considered exclusive for the purposes of application of this law.

In particular, in exceptional cases, the President can determine the specific legislative requirements in respect of the establishment, reorganization, liquidation and legal status of business entities in certain areas of business (including the requirements on information disclosure), as well as the requirements in respect of the execution of transactions, including their notarization and record keeping. In addition, the President has been granted the right to specify the legal status of securities issuers and traders, as well as record keeping in respect of the information on securities in certain areas of business.

13.06.2018 — Supreme Court Decided, When Contractual Penalty Cannot Be Reduced

The Economic Chamber of the Supreme Court recovered penalty for the delay in the performance of the works from the contractor in the amount substantially exceeding the price of the contract. The Supreme Court emphasized that courts cannot reduce the amount of the penalty if the respondent has not filed the respective motion, even if the court believes that the amount of contractual penalty is disproportionate. Moreover, the Supreme Court stressed out that contractual penalties may be reduced only when the case is examined in the court of the first instance, and not on a later stage.

In this dispute (case No. 301-ES17-21397), the courts were to decide whether the contractual penalty may be reduced. The customer and the contractor concluded a contract following the results of the tender procedures. The contractor performed the works with substantial delay, and the customer imposed penalties on the contractor in accordance with the terms of the contract. The amount of such penalties significantly exceeded the price of the contract. Since the contractor refused to pay the penalties, the customer resorted to court.

Courts were of different opinions as to whether contractual penalty should be reduced. Particularly, the court of the first instance recovered the penalty from the contractor in full. Courts of appeal and cassation, on the contrary, decided that the amount of the penalty was excessive, and the customer’s actions constituted abuse of right, and therefore reduced the amount of penalty on the court’s initiative.

The Economic Chamber of the Supreme Court agreed with the court of the first instance and decided that the customer’s actions did not constitute the abuse of right. The Supreme Court emphasized that the contractor was aware of all the terms of the contract, including those relating to the deadline for the performance of works and penalties in case of delay, and was not forced to enter the contract on these terms. Furthermore, the Supreme Court reminded that respondents shall file a motion on the reduction of contractual penalty in the court of the first instance, and in this case the contractor failed to do so. Thus, the penalty was recovered from the contractor in full, despite the fact that its amount exceeded the price of the contract.

12.06.2018 — VAT Rate May Increase To 20% In 2019

The Government announced that from 1 January 2019, the VAT rate will be raised from 18% to 20%. This news was perceived negatively by the business community, and experts expect rise in prices and decrease in consumption. In such a way the Government once again violates the moratorium on the increase of taxes introduced by the President: in 2017, despite the repeated promises of the Ministry of Finance, the average tax burden on business increased.

On 14 June the Russian Prime Minister Mr. Dmitry Medvedev announced an increase in the value-added tax (VAT) rate by 2 percent from 18% to 20% from 1 January 2019. The final decision on raising VAT has not been adopted yet, but experts warn that the increase in the tax burden is not the best option to cover the budget deficit, as the rise of taxes will lead to higher prices, lower effective demand, and ultimately will negatively affect both businesses and ordinary citizens.

It should be noted that over the past year, the tax burden on business in Russia has grown from 9.6% to 10.8%, despite the repeated promises of the Ministry of Finance that in the coming years the tax burden would not rise.

11.06.2018 — Russian President Signed Counter-Sanctions Law Against US And Other States

Russian law on counter-sanctions provides for the right of the Russian President and Government to introduce retaliatory sanctions in response to wide range of policy and unfriendly acts of the United States and other foreign states. Restrictive measures can be established in respect of the governments, countries and individuals under their jurisdiction.

On 4 June 2018 the Russian President signed the Federal Law No. 127-FZ dated 04.06.2018 “On Measures for Reaction (Counteraction) to Unfriendly Actions of the United States of America and Other Foreign States” (the text of the law is available on the official portal of legal information).

The law does not in itself contain new sanctions or counter-sanctions, but authorizes the President and the Government of the Russian Federation to impose restrictive measures against foreign countries, their companies, officials and citizens. Such measures may include suspension of international cooperation, restriction of exports and imports of foreign companies’ products and a ban on the participation of foreigners in state procurement and privatization of state property.

The development and introduction of specific counter-sanctions is delegated to the executive authorities. Counter-sanctions shall be introduced by the Russian Government upon the decision of the President, which may be taken on the basis of proposals of the Russian Security Council.