CIS Legal Update - September 2013: Summary of Key Changes to the Russian Civil Code

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The Russian Civil Code (the “Civil Code”), one of the fundamental laws underlying most Russian legislation, is now undergoing a number of important changes that will likely affect all companies doing business in Russia. Due to the number and complexity of the amendments, it was decided to introduce them gradually. The majority of changes introduced by the first set of amendments came into effect on 1 March 2013, the second set entered into force on 1 September 2013 and the third set will be effective from 1 October 2013.

The amendments will only apply to rights and obligations that arise after the amendments come into force.

Below is a summary of the key changes introduced to the Civil Code to date.

First set of amendments

The first set of amendments to the Civil Code was introduced by Federal Law No. 302-FZ, dated 30 December 2012. The majority of amendments came into force on 1 March 2013 and include the following:

  • The concept of good faith has now been defined as one of the fundamental principles of Russian civil law. The relevant amendment imposes an obligation on individuals and legal entities to act in good faith and prohibits them from benefiting from their own unlawful or bad faith behaviour.
  • The term “abuse of rights” is now defined as “an act of bad faith that causes harm to another person, evasion of the law, or any other intentional exercise of civil laws in bad faith”. Liability for such an abuse of rights now also includes compensation of damages incurred. 
  • Where stipulated by law, it is now possible for companies and individuals to be compensated for damage to their property caused by lawfully-sanctioned activities of state and municipal bodies (in addition to unlawful activities that were previously lawful).
  • A new procedure for registering rights to real estate has been implemented. The Russian real estate registration authorities must now verify the legal grounds for any transfer of rights to be registered in the real estate state registry. The individual or legal entity listed in the registry is now considered to be the title holder. Any person may challenge registered rights in court and may request that the Russian real estate registration authorities make a special note in the register if there is a legal dispute over property.
  • The following types of agreements are no longer subject to state registration: (i) sale of an enterprise; (ii) sale of residential property; (iii) a gift of real estate; and (iv) annuity agreements providing for the disposal of real estate. The first amendment provided that all real estate lease agreements concluded for a term of more than one year were exempt from registration. However, on 4 March 2013, three days after the first amendments came into force, it was decided to reinstate the requirement for such leases to be registered. It is therefore unclear whether real estate lease agreements concluded during the period 2-3 March 2013 (when the first amendment was in effect) are subject to state registration.

Second set of amendments

Federal Law No. 100-FZ dated 7 May 2013 introduced the second set of amendments listed below.

Form of transactions

  • The requirement that cross-border transactions be concluded in writing has now been removed.
  • Where a party fails to register or notarially certify a transaction where those actions are required, the counterparty to the transaction is entitled to file a claim declaring the transaction valid (where notary certification was required) or obliging the court to register the transaction with the Russian real estate registration authorities (where state registration was required) within a year.

Invalidity of transactions

  • A transaction violating mandatory legal requirements is now deemed to be voidable rather than void (previously, the opposite was the case).
  • A claim to declare a transaction invalid or void may not be made simply by any interested party but only by those legally deemed to be a party to the transaction or by those parties stipulated by law. The possibility of challenging a transaction has been further limited by the introduction of a concept similar to that of the estoppel principle under English law, wherein parties who previously approved or confirmed through their actions their intention to perform a transaction are not entitled to seek invalidation of that transaction. This principle has also been applied to rules for curing voidable transactions, which now stipulate that if a party’s conduct implies a willingness to execute a transaction, then the party is not entitled to challenge the transaction on grounds it was or should have been aware of when indicated its willingness to execute the transaction.
  • The statute of limitations for challenging null and void transactions as well as for implementing the consequences of such transactions (such as restitution) remains three years. However, for claimants who are not parties to the transaction, the statute of limitations runs from the time the claimant learned or should have learned of the transaction, rather than the actual date of the transaction.
  • A court acting in its discretion may implement the consequences of a transaction having been declared null and void only where required for the protection of public interests or as stipulated by law. It remains to be seen how Russian courts will interpret the notion of “protection of public interests” when applying this provision of law.
  • New grounds for the invalidation of transactions have been introduced. In particular, it is now possible to challenge a transaction if it was concluded (i) without the required approval of a third party or a governmental/municipal or corporate body, and the other party to the transaction knew or should have known about the absence of such approval; (ii) by a representative acting beyond the authorities vested in him or her by the company’s internal documents, and the other party to the transaction knew or should have known about such limitations; (iii) by a representative under a power of attorney or by a corporate body to the detriment of the represented party if the other party to the transaction was aware or should have been aware of the obvious damage caused to the represented party, or (iv) in breach of the prohibition on the disposal of assets, as stipulated by law (including bankruptcy legislation).

Resolutions of meetings

  • A completely new chapter has been introduced in the Civil Code that sets forth rules governing resolutions passed at all types of meetings (including meetings of shareholders, co-owners of real estate assets, and creditors in bankruptcy proceedings). These rules should be applied unless otherwise provided for by a different law.
  • In general, resolutions are to be adopted following a vote by a simple majority of participants of a meeting where there is at least a 50% quorum. The results of the meeting should be noted in the meeting’s minutes, which should be signed by both the chairman and secretary of the meeting. There must be a separate resolution for each item of the agenda, unless otherwise unanimously agreed by the participants during the meeting. The minutes of the meeting are required to contain, inter alia, information regarding the (a) participants who took part/voted in the meeting, and (b) persons who counted votes during the meeting. The minutes of the meeting containing the results of a voting session carried out in person must also contain information about the participants who voted against the decision and requested that this be noted.
  • A resolution of a meeting is voidable if it is issued in violation of law, including in (a) violation of the procedure for summoning, preparing and holding a meeting if this violation resulted in manipulation of the will of the meeting’s participants; (b) the absence of authority by a representative during the meeting; (c) violation of the principle of equality among the participants of a meeting; or (d) significant violation in the preparation of the minutes of the meeting. A resolution of a meeting is deemed void if it (i) is passed on an issue that is not on the agenda and not all participants of the relevant group attended the meeting; (ii) is passed at an inquorate meeting; (iii) does not fall within the competence of the meeting; or (iv) contradicts principles of public order and morality.
  • A resolution of a meeting may be challenged by a person (i) who did not take part in the voting or who voted against the resolution, or by (ii) a person who voted for the resolution or who abstained from voting due to a violation of a right to express his or her will during the meeting. Any claim should be filed within 6 months from the time the claimant became or should have become aware of the violation of rights during the meeting. However, a resolution will not be considered invalid if the vote of such participant could not have had any impact on the resolution and if the resolution does not result in any materially adverse consequences for the participant making the claim.
  • A participant intending to challenge the resolution must give all other participants advance notice in writing before filing a claim with the court, thereby giving the other participants the opportunity to join the claim. This provision will most likely increase the number of class actions in Russia as well as provide better advance notice to participants of any potential litigation resulting from a meeting.

Representation and powers of attorney

  • The maximum term of three years for a power of attorney has been cancelled. A power of attorney may now be issued for any term.
  • There is no longer a requirement to place a seal on a power of attorney issued on behalf of a legal entity.
  • Powers of attorney for filing applications with the real estate state registry or for administering rights registered in other state registers must be notarized.
  • It is still required to notarize the sub-delegation of powers under a power of attorney. However, legal entities or heads of branches/representative offices may now sub-delegate rights without having to notarize the relevant powers of attorney.
  • In addition to a power of attorney, authority may be granted by a contract or a resolution of a meeting. In this case, provisions regulating powers of attorney will apply.
  • It is now possible to issue an irrevocable power of attorney, which can only be prematurely revoked following the performance of the delegated duties or in the event of improper use by the agent. This power of attorney must be notarized.
  • An announcement regarding the cancellation of a power of attorney may now be published in an official release on bankruptcy issues (in Kommersant newspaper). In such cases, third parties will be deemed to have been duly notified of the cancellation of the power of attorney after a month following the publication of the announcement.
  • If a transaction is concluded by a representative without proper authority and this representative does not duly obtain approval from the principal, then a bona fide third party, who is not aware or could not have been aware of the limited powers of this representative, may either require that the representative perform the transaction or cancel it, thereby allowing for claims to be made for the recovery of damages caused by the representative.

Statute of limitations

  • Although the statute of limitations is still three years, the commencement of that period now runs from the moment a party has identified the proper defendant against whom an action can be brought as well as from the time the claimant learned or should have learned of a breach. In any event, the statutory limitation period cannot exceed 10 years from the date when the breach occurred.
  • Unilateral action (e.g. set-off, out-of-court enforcement of pledge etc.) with the aim of exercising a right, whose limitation period has expired, is not allowed.

Third set of amendments

Federal Law No. 142-FZ dated 2 July 2013 introduced the third set of amendments listed below.

Real estate

  • The third set of amendments introduce into Russian law the concept of an “integrated real estate complex”, which is defined as a set of buildings, construction objects, and other immovable property (including railways, communication lines, power lines, pipelines) that are inseparably connected (whether physically or by other technological means) with each other or located on the same land plot. In order for an integrated real estate complex to be recognized as such under Russian law, titles to all of the immovable property assets of which it is comprised must be registered in the real estate state registry as a single immovable property. Integrated real estate complexes are assigned to the legal category of “inseparatable objects”, which may now not be foreclosed upon in parts, unless the law or a court resolution provides for its separation.
  • The general rule on the ownership of the benefits from the use of an asset has been changed. Now all benefits from the use of an asset will belong not to the individual or legal entity legally entitled to use it but to the owner of the asset. However, this general rule will only be applicable to situations in which another outcome is not provided for by either statutory law, an agreement or from the nature of the relations between the parties.

Defamation

  • The statute of limitations for filing a claim to defend the goodname of an individual or goodwill of a legal entity following a defamatory statement in the mass-media is one year following the date of publication of the defamatory statement.
  • In the event of a breach of goodname or goodwill by a defamatory statement in the mass-media, an individual or a legal entity is entitled to claim not only the publication of a rebuttal or a written answer to the defamatory statement but to sue for any damages caused. Amendments specifically mention that now only individuals may claim for compensatory damages for the moral harm incurred by a defamatory statement (previously legal entities were also entitled to sue for such damages).
  • Special provisions addressing the protection of an individual’s private life were introduced into the Civil Code. Unless provided by statutory law, consent from the individual is now required in order to collect, store, distribute or use any information about a private life of an individual, including his/her origin, place of residence, domestic and family life.

Certificated Securities

  • There is now no definition for the term “security”. A clear distinction has been made between certificated securities and uncertificated securities.
  • Certificated securities are documents certifying rights that could be performed or transferred only upon presentation of documents. The amendments name three types of certificated securities: (i) bearer securities granting rights to a party holding these securities in its possession, (ii) order securities granting rights to a security holder, provided that these securities were issued in its own name or were endorsed in its favor, (iii) registered securities, granting rights to a party recorded in the relevant registry or who possesses such securities, which were issued in its own name or were assigned to its favor.
  • Should the certificated security be issued in violation of the required formalities, then it shall not be considered a security; however, this document will be regarded as written evidence (previously such securities were treated as void).
  • A principle of public credibility for certificated securities was introduced. This principle implies for a possibility of a debtor to raise arguments against the bona fide security holder only on issues arising from the certificated securities themselves and the relations between the debtor and the security holder, including in situations where the bona fide security holder obtained such securities without the consent of the debtor.
  • Persons with rights to a security are no longer entitled to remove the rights of a bona fide securities holder to any type of bearer security, including order and registered securities, by filing monetary claims. However, certificated securities can be recovered in any case even from a bona fide securities holder, who has fraudulently or otherwise illegally contributed to the loss of the security by its lawful holder, or who was aware or ought to have been aware that other persons had rights to the security.
  • Rules for recovery of rights with respect to lost certified securities have now been introduced to the Civil Code (previously only Russian procedural legislation covered this issue). It is now also possible to recover not only bearer or order securities, but also registered securities.

Uncertificated Securities

  • Uncertificated securities are defined as the rights specified in the resolution on the issue of securities or other act of the issuer.
  • All rights to uncertificated securities (including pledge and transfer) should only be recorded by an independent registrar holding a relevant license. All issuers that now maintain registers of uncertificated securities (including registers of shareholders) must transfer them to an independent registrar before 1 October 2014. This new development will mostly affect unlisted Russian joint stock companies with 50 or fewer shareholders considering listed companies or companies with more than 50 shareholders are required to keep their shareholders’ register with an independent registrar.
  • The registrar and the issuer shall bear joint responsibility for any damages caused by any breach to the recording procedure of rights to uncertificated securities, loss of registered data or providing incorrect information about the registered data.
  • An individual or a legal entity, from whose account uncertificated securities have been unlawfully debited, is entitled to (i) recover the same quantity of uncertificated securities from an individual or legal entity to whose account such securities were credited, (ii) to demand that an individual or legal entity who is responsible for causing the loss to either purchase such securities at their own expense through an exchange or provide compensation for the cost of acquiring the securities (in the event that uncertificated securities similar to those that had been unlawfully debited can be acquired through an exchange), or (iii) demand and obtain converted securities (in the event that uncertificated securities, which were initially illegally debited, were later converted into other securities).
  • It is now impossible to recover any uncertificated securities attesting monetary claims and any uncertificated securities acquired through an exchange from bona fide securities holders, except in cases where uncertified securities are obtained free of charge by bona fide securities holders from an individual or a legal entity who was not entitled to alienate them.
  • An individual or a legal entity who has been unlawfully deprived of uncertified securities may now be entitled, after regaining control over those securities, to challenge any corporate resolutions that were adopted and on which the unlawful holder voted provided that (i) corporate resolutions violated the rights of such security holder, (ii) the legal entity itself or other shareholders, whose voting may affect the results of the meeting, knew or should have known about the dispute over the uncertified securities involving this security holder and (iii) the votes cast by the security holder in question could affect the results of the meeting. The limitation period for filing such a claim is three months starting from the date on which the lawful securities holder learned or should have learned about the unlawful debiting of the securities from its account; but in any event no later than one year after the relevant corporate resolution was adopted.
  • General rules for the recovery of rights to lost uncertificated securities were also introduced to the Civil Code. According to these rules, rights to uncertificated securities that were recorded in the registry, and subsequently lost, are to be restored through court proceedings.

The above amendments are undoubtedly aimed at improving Russia’s business environment, introducing a commercial approach to resolving legal issues, and reducing the formal restrictions imposed by current Russian legislation. However, it is difficult at this stage to assess the effectiveness of these amendments (particularly as they apply to the invalidity of transactions and rules governing resolutions of meetings) until they have had a chance to be implemented in practice.

In the years to come, if these amendments are applied in the face of inconsistencies and contradictions with an array of subordinate laws and regulations, they may well be the source of difficulties for companies doing business in Russia.

It should be noted that Russian civil law is still undergoing a process of reform and the above changes are only the beginning of a large-scale reform of Russian civil legislation. Unfortunately, the detailed timeframes for further amendments are unknown but we expect that they will be introduced at the end of 2013. We will continue monitoring this issue and will update you accordingly.

Topics:  Proposed Legislation, Russia, Russian Civil Code

Published In: Civil Procedure Updates, General Business Updates, Personal Injury Updates, Residential Real Estate Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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