09.11.2018 — Supreme Court: Seller Must Inform Buyer About All Known Land Use Restrictions, Even If They Are Not Indicated In Register
In one of the recent cases the buyer purchased the land plot, which had restrictions on its use, that were discovered later on. When the contract was signed the seller assured the buyer that the use of the land plot was not restricted, and there were no records of land use restrictions in the register either. The buyer filed a claim against the seller on the termination of the contract and on the recovery of losses. The Supreme Court ruled in favor of the buyer and explained that the seller must provide the buyer with information about any legal and factual land use restrictions, even if there are no respective records in the public register. The failure to comply with this obligation entails the buyer’s right to terminate the contract and recover losses from the seller.
In this case (case No. 127-КГ18-20) a dispute arose between the buyer and the seller of the land plot regarding termination of the contract, because after the contract was concluded, the buyer found out that it was impossible to use the land plot for its intended purpose. At that when the parties entered into the contract, the seller assured the buyer that the land plot was free from any encumbrances and third-party rights. There also were no records on any restrictions in the public register. However, after the buyer purchased the land plot, he realized that it was impossible to use the land blot to build residential premises thereon, because the land plot was located in the territory of the military base of the Ministry of Defense of the Russian Federation, and it was even impossible to access the land plot, since the Ministry of Defense of the Russian Federation prohibited to enter through the security control point. Thus, the seller concealed the fact that the land plot was located in the territory of the military base, what made it impossible to use the land plot for the intended purposes. The buyer filed a claim against the seller seeking to rescind the contract, get the refund of the purchase price paid and recover losses.
The Supreme Court explained that according to the provisions of the land law and the general principle of good faith, the seller had to provide the buyer with the information about all the restrictions on the use and encumbrances regardless of the fact whether they were registered in the public register or not. The Supreme Court also noted that the buyer had the right to terminate the contract and recover losses from the seller, who had failed to fulfill the obligation to provide the buyer with reliable information regarding the restrictions on the use of the land plot.
08.11.2018 — Amendments To Bankruptcy Law: Restructuring Companies’ Debts And Tightening Control Over Insolvency Managers’ Activities
The bill concerning amendments to the bankruptcy law was introduced to the State Duma, whereby it is planned to implement the new bankruptcy procedure - company’s debt restructuring, to extend the rights of the tax authorities and to tighten the control over insolvency mangers’ work. The Russian Union of Industrialists and Entrepreneurs (RSPP) met the aforementioned amendments with skepticism. The right to issue additional shares in the process of debt restructuring without shareholders’ consent caused the utmost concerns among business community. RSPP believes that such restrictions of shareholders’ rights in the bankruptcy proceedings may lead to intentional dilution of the creditor’s shares in the debtor’s charter capital and create grounds for corporate raids.
In August 2017 the Government of the Russian Federation introduced the bill amending the Federal Law “On Insolvency (Bankruptcy)” to the State Duma, at the moment the business community discussed this bill. One of the main and the most discussed innovations of the bill is the procedure of debt restructuring. Despite of the legislator’s intent to enhance the effectiveness of the mechanisms of maintaining the debtor solvent, business leaders met the proposed amendments with caution. Particularly, the Russian Union of Industrialists and Entrepreneurs (RSPP) criticized the provisions of the bill, in accordance with which the debtor’s shareholders holding more than 1% of shares are not entitled to participate in allotment of additional shares within the debt restructuring procedure. According to RSPP, such legal developments will allow unfair creditors to use provisions of the bankruptcy legislation for corporate raids.
In its comments to the bill RSPP also noted that the legislator unreasonably extended the procedure for satisfying the claims secured by pledge to claims of tax authorities. According to business and legal community, such regulation violates the principle of balance between the creditors’ interests in the bankruptcy proceedings and unreasonably creates a preponderant position of the tax authorities over other creditors.
Furthermore, RSPP criticized the amendments concerning tightening of control over insolvency managers’ activities. The business community disagreed with the introduction of new rules for payment of the insolvency managers’ remuneration, namely that the remuneration shall be paid not on a monthly basis, but at the end of the debt restructuring procedure, because this will lead to disappearance of those insolvency managers who conduct a small number of cases, and will promote the establishment of the monopoly of market majors. In order to avoid such an outcome, RSPP experts propose to introduce provisions on advance payments of the insolvency managers’ remuneration in the bill.
07.11.2018 — Supreme Court: In Case Claimant’s Goal Is Obvious, Court Has To Apply Proper Remedy Even If Improper Remedy is Sought by Claimant
The Economic Chamber of the Supreme Court considered a case in which, after the real property was purchased, it turned out that in reality the real property with such characteristics does not exist, and there is a similar object on the land plot, owned by a third party. The Supreme Court explained that in such a case the courts should establish the actual owner of the disputed real estate object, and if it is owned not by the seller, but by a third party, the buyer has the right to claim that the seller returns the paid purchase price and reimburses losses. At that the fact that improper remedy is sought by the claimant, cannot be a ground for dismissal of the claim: in this case the court shall apply the proper remedy.
In one of the recent cases (case No. А45-8173/2015), the company purchased real estate objects, including a land plot and access railway tracks located thereon. However, later the buyer found out that despite the railway tracks were registered in the public register, in fact there were no railway tracks with the respective characteristics at the land plot, instead there were different railway tracks owned by a third party. Thus, the company filed a claim to court on the invalidation of the contract and on the recovery of the purchase price paid for the railway tracks. The courts of three instances dismissed the company’s claim, arguing that the claimant chose an improper remedy and that he should have had either filed a claim for declaring that the third party’s ownership right to railway tracks was absent or a claim on the termination of the sale and purchase contract.
The Supreme Court decided that having dismissed the claim, the lower courts approached the matter formally, since it is obvious that the buyer’s goal was to restore his violated rights, namely, to receive back the consideration paid for the real estate object. In such a situation, given that the issues of legal qualification are within the competence of the court, the courts that had been considering the claim for more than two years cannot simply dismiss the claim with the reference to the fact that the claimant had chosen an improper remedy and shall file a new claim. The Supreme Court remanded the case for a new trial, explaining that the lower courts should have established who is the real owner of the access railway tracks. In the event that the third party is and the buyer could not have known about it, the buyer has the right to recover the purchase price paid for the railway tracks and the losses arising from the withdrawal of the facilities from the buyer by a third party, as provided by Articles 460-462 of the Russian Civil Code.
06.11.2018 — Russia May Be Excluded From Council Of Europe In June 2019
The Secretary General of the Council of Europe said that if Russia fails to pay fees to the budget of the Council of Europe, it will be excluded from the organization in June 2019, after the expiry of two years since the last payment of fees in 2017. In response, the Russian parliamentarians stated that Russia may voluntarily leave the Council of Europe, without waiting for the decision forcing it to do so.
At the session of the Parliamentary Assembly, the Secretary General of the Council of Europe once again warned Russia that if it does not resume payment of the fees, the Council of Ministers will be obliged to force it out from the organization. Russia refused to pay fees in 2017 in protest against the suspension of the voting rights of the Russian delegation to the Parliamentary Assembly of the Council of Europe in 2014-2015 after the Crimea joined the Russian Federation. In accordance with the Statute of the Council of Europe, if a member state fails to fulfill its financial obligations for two years, the Committee of Ministers may suspend its membership. Russia stopped paying fees in 2017, and thus the respective two-year term will come to an end in June 2019.
The Russian parliamentarians responded by saying that Russia no longer intends to be a member of the Council of Europe and could possibly voluntary leave the organization. The termination of membership in the Council of Europe will also mean that the European Court of Human Rights will no longer have jurisdiction over Russia.
05.11.2018 — Supreme Court: To Establish Appropriate Creditor Court Shall Take Into Account Contract Terms On Prohibition of Assignment
In the case recently adjudicated by the Supreme Court, the receivables under supply contract were assigned several times, and finally were reassigned to an individual. When the initial creditor filed a lawsuit against the buyer on the recovery of the debt, the individual filed an application on procedural succession. The application was filed at the stage of adjudication of the case by the court of appeal. The courts dismissed both the initial creditor’s claim to the debtor for the recovery of debt, and also the individual’s application on the procedural succession. Thus, a controversial situation arose, because the courts have not established whether the assignment of receivables was lawful and effective. The Supreme Court reversed the decisions of the lower courts and remanded the case for a new trial, during which the courts shall establish the appropriate creditor.
In this case (case No. А40-115657/2017) the two companies entered into a supply contract, afterwards the supplier assigned the receivables under the contract to the third party (despite the provision of the agreement that the rights and obligations under the contract can only be assigned with the consent of the other party). Subsequently the receivables were reassigned to an individual. The debt has never been paid, and the initial creditor (supplier) filed a lawsuit on the recovery of the debt from the buyer. The court of the first instance granted the claim and recovered the debt from the buyer in favor of the supplier. After that, the individual, to whom the receivables were assigned, filed an application on procedural succession to the court of appeal, arguing that since the receivables under the supply contract had been assigned to him, he should be the proper claimant in this dispute. The court of appeal reversed the decision of the court of the first instance and dismissed the claim, explaining that at the time the claim was filed, the supplier did not have the debt recovery claim anymore, since the respective receivables had already been assigned. However, the appellate court also dismissed the statement on procedural succession, because the necessary consent for the assignment had not been obtained. The cassation court upheld the decision of the appellate court. Thus, a controversial situation arose, because the buyer did not object to the debt, but it was unclear whether the debt shall be paid to the initial creditor or to the individual, to whom the receivables were assigned.
The Economic Chamber of the Supreme Court ruled that in this case the procedural succession could not have taken place, because the supply contract prohibited assignment without the consent of the other party, and such a consent has never been obtained (thus, assignment had no effect). The Supreme Court overturned the decisions of the lower courts and remanded the case for a new trial to the appellate court with the instructions to establish whether the assignment complied with the terms of the contract and was effective and determine the appropriate creditor under the contract.