06.03.2020 — Russian Central Bank Reduced Key Rate to 6%

On 10 February 2020 the Board of Directors of the Central Bank decided to reduce the key rate from 6,25% to 6% per annum, which is a record low for the last five years. According to the bank, annual inflation is continuing to slow down and the economic growth has been lower than it expected.

Russia’s Central Bank cut its key interest rate to 6% from 6.25% (see the Central Bank’s notice as of 10 February 2020). The decision to lower the key rate was influenced by several factors, such as the fact that inflation levels have been dropping more rapidly than forecasted and the fact that Russia is experiencing a sharp economic slowdown.

It is expected that under such circumstances, taking into account the monetary policy, the annual rate of inflation for 2020 will be 3,5-4% and will be limited to 4% in the future.

05.03.2020 — Private Bailiffs Are to Be Introduced in Russia

The Ministry of Finance with the assistance of the Russian Union of Industrialists and Entrepreneurs is considering the option to introduce private bailiffs (enforcement officers) in Russia. Private bailiffs may conduct enforcement proceedings in disputes between the legal entities in order to increase effectiveness and the speed of enforcement of court rulings. At the same time, to avoid abuses, enforcement of court rulings in favor of the state and individuals (but not legal entities) will remain within the exclusive competence of the existing state Federal Bailiff Service.

According to the Russian Ministry of Finance, the introduction of private bailiffs will allow to reduce the workload of state bailiffs, increase their financing and distribute some of the work to the private sector.

With regard to payment for the services of private bailiffs, the authorities plan to introduce a success fee (contingent fee) in addition to the regular enforcement fee. It is necessary to note that in the current system of state bailiffs the debtor who did not repay the debt in due time is obliged to pay enforcement fee of 7%. With regard to private bailiffs the maximum percentage of this enforcement fee will be additionally established by the state.

04.03.2020 — Supreme Court Issued Clarifications on Subordination of Claims of Controlling Persons and Affiliated Creditors in Bankruptcy

The Supreme Court in its Digest of case law gave a number of major clarifications about the subordination of affiliated creditors’ claims in bankruptcy. In particular, the Supreme Court clarified that in case of reasonable doubt as to whether the claims of affiliated creditors are real, the burden of proof is shifted to the affiliated creditor. The Supreme Court also clarified the conditions under which the claims of the controlling person and the affiliated creditors should be excluded from the register or subordinated.

The Supreme Court issued the Digest of case law on the inclusion of the claims of controlling persons and affiliated creditors into the debtor’s bankruptcy register (see the Digest of case law issued by the Presidium of the Supreme Court of the Russian Federation dated 29.01.2020).

In this Digest the Supreme Court emphasized that the mere fact that the creditor is affiliated with the debtor or is a person controlling the debtor does not mean that its claims should be subordinated to other creditors’ claims. However, if the controlling person’s claim is based on the contract that was performed when the debtor already showed signs of insolvency (i.e. not long before initiating bankruptcy proceedings), such a claim is subordinated to the claims of all other creditors. The court may also lower the priority of the affiliated creditor’s claim if this creditor provided compensatory financing to the debtor under the influence of the controlling person. Similarly, the controlling person’s claims are to be subordinated if it purchased its claims from an independent creditor through assignment not long before the bankruptcy.

Moreover, the Supreme Court clarified that the claims of an affiliated creditor may be fully excluded from the bankruptcy register if the claims are based on the creditor’s repayment of the debtor’s debt before third parties. This is possible if the court finds that the affiliated creditor had already received reimbursement for the same amount (for example, via intra-group financing).

The Supreme Court also emphasized the need for the proper allocation of the burden of proof in this category of disputes. Taking into account the independent creditors’ limited abilities to receive information on the affiliated persons and their relationship with the debtor, it is sufficient for an independent creditor to prove reasonable doubts as to the reality and economic appropriateness of the behavior of the controlling persons and affiliated creditors prior to the bankruptcy and during the bankruptcy proceedings. If this is done, the court has to shift the burden of disproving these reasonable doubts to the persons affiliated with the debtor.

03.03.2020 — Parties to Court Disputes Will Be Able to Settle Disputes via Judicial Reconciliation

In the end of 2019, Russia adopted legislative amendments aimed at expanding the options of out-of-court dispute settlement. Before these amendments, the parties could only refer disputes to mediation to peacefully settle disputes outside the court system. After the reform, the parties may use the option of judicial reconciliation and engage a judicial reconciliator for dispute settlement. Judicial reconciliation will be carried out with the assistance of the court, and the retired judges of the highest-level courts will be reconciliators.

It is possible to request reconciliation at any stage of litigation subject to the consent of both parties. In that case the court will give the parties a period of time for judicial reconciliation which may be prolonged upon the parties’ motion. The parties may choose retired judges of the Supreme Court and Supreme Commercial Court as reconciliators. The list of such judges is issued by the Supreme Court.

As a general rule, information exchanged by the parties during judicial reconciliation will be considered confidential, and the parties will be prohibited to refer to it during litigation proceedings if the judicial reconciliation fails and the proceedings are resumed.

If the parties are able to settle the dispute by judicial reconciliation, the conciliation documents signed by them will be binding and will have an effect of a court-issued enforcement order
(see Ruling of the Plenum of the Supreme Court of the Russian Federation dated 31.10.2019 No. 41 “On adoption of the Judicial Reconciliation Regulations”).

02.03.2020 — Supreme Court Clarified Conditions of Liability for Bad Faith Termination of Negotiations

In one recent case the Russian Supreme Court considered pre-contractual liability in cases of simultaneous negotiations with several parties and abrupt termination of negotiations with one of the potential counterparties.  The Supreme Court clarified that, as a general rule, the parties are free to conclude contracts and are not obliged to inform the other party on simultaneous negotiations with another person. However, abrupt and unjustified termination of negotiations is deemed bad faith conduct of negotiations and may entail damages. This may be the case if a party has not timely informed its business partner about the loss of intention to conclude the contract, including due to its decision to conclude the contract with another person. In this case the other party is entitled to claim recovery of its losses incurred in connection with the negotiations, including legal fees.

In the case at hand, the sellers and the buyer had been negotiating the sale of a business (a fitness center). However, the sellers suddenly terminated negotiations and explained that they had found another purchaser for the business. The buyer filed a lawsuit against the sellers, claiming recovery of the losses incurred in connection with the failed negotiations (legal fees paid to lawyers that supported the negotiations). The lower courts of three degrees dismissed the buyer’s claims referring to the fact that the buyer had not proven the sellers’ bad faith.

However, the Supreme Court did not agree with the lower courts, reversed the courts’ decisions and remanded the case for reconsideration. The Supreme Court emphasized that, as a general rule, the parties are free to conclude contracts and independently bear the risk of failed negotiations. The mere termination of negotiations at an advanced stage as well as failure to inform the other party about ongoing negotiations with other purchasers do not constitute bad faith negotiations (except for the cases when the parties agreed on an exclusivity clause in the pre-contractual negotiations agreement).

The party may be held liable for bad faith negotiations only if it created an artificial appearance of negotiations while in reality it had no intention to conclude the contract or if it did not timely inform its counterparty on the loss of such an intention, for example, when it decided to conclude the contract with another person. In this case the non-breaching party is entitled to claim recovery of its losses, including legal fees. The amount of losses will depend on the time when the breaching party’s appearance of the intention to conclude contract becomes fake. If the party has not promptly notified its counterparty on loss of intention to conclude the contract, the court has to check whether it has imposed additional costs on the counterparty, which it would not have incurred in case of timely notification on termination of negotiations (Ruling of the Judicial Panel on Economic Disputes of the Supreme Court of the Russian Federation dated 29.01.2020 No. 305-ЭС19-19395 on the case No. А40-98757/2018).