July 2013: Russia Litigation Update - Case Study: Russian Courts Adopt Practical, Less Formalistic Analysis of Activities of Foreign Entities in Russia

In two recent cases, the Presidium of the Supreme Arbitrazh Court of the Russian Federation (the “Presidium”) addressed important issues concerning activities of representative offices of foreign companies in Russia and disclosure of beneficial owners of offshore companies.

Both cases could be of great importance for Russian business and foreign investors. They demonstrate Russian courts’ recent inclination to depart from formalistic tests and apply more flexible approaches to transnational commercial disputes.

Olympia LLC v. Parex Banka AS & Citadele Banka AS. Olympia LLC (“Olympia”) filed a claim with the Moscow Arbitrazh Court seeking recovery of US $21 million from two Latvian banks, Parex Banka SA (“Parex”) and Citadele Banka (“Citadele”). Parex, facing bankruptcy, was reorganized in 2008 and ceased trading in 2010. Olympia purchased debt under deposit agreements with Parex from a Latvian national and depositor of Parex, and filed a claim in March 2011. Olympia argued that Parex acted in bad faith when it transferred assets to Citadele, while leaving liabilities with Parex itself.

Parex contested jurisdiction. The court ruled that its jurisdiction should be determined based on a bilateral treaty between the Latvian Republic and Russia. The treaty envisages three instances in which Russian courts are competent to hear commercial cases against Latvian entities:

(1) If the respondent’s executive body is located in Russia;
(2) if the respondent has a branch in Russia; or
(3) if the respondent has a representative office in Russia.

The Moscow Arbitrazh Court terminated the proceedings, since Parex and Citadele did not have local branches or representative offices. The 9th Appellate Court affirmed.

The case finally went to the Presidium. The Presidium found that both Parex and Citadele were operating in Russia in violation of local legislation, running their business through offices acting on their behalf. The offices were formally accredited as representative offices of third parties with almost identical company names, Citadele Asset Management and Parex Asset Management, and had not obtained permissions from the Bank of Russia as required under local law. However both offices de facto delivered banking services in Russia and enabled clients to conclude transactions with Parex and Citadele in Russia without direct contacts with main offices in Latvia. This scheme allowed Parex and Citadele to avoid Russian supervision laws. As a result, the Presidium ruled that the offices in Russia should be treated as representative offices of Parex and Citadele.

The Presidium ultimately concurred with findings of the inferior courts regarding lack of jurisdiction, but for different reasons. The Presidium noted that Parex and Citadele in fact had representative offices in Russia, but these offices were not parties to deposit agreements in question and therefore there was no factual or legal connection between the dispute and Russian jurisdiction.

TSJ Skakovaya 5 v. Arteks Corporation LLC. A Russian entity, TSJ Skakovaya 5 (“Skakovaya”) initiated proceedings against Arteks Corporation (“Arteks”), a Dominican company, seeking transfer repossession of non-residential premises registered to Arteks. Skakovaya’s title to the premises was previously confirmed by Russian courts upon Skakovaya’s claim against KomEx LLC (“KomEx”), a Russia company. However, KomEx sold the premises to Arteks before the judgment against KomEx (the “KomEx Judgment”) was enforced. As a result, Skakovaya had to file a new claim against Arteks.

Arteks argued that it had purchased the premises from KomEx as a bona fide purchaser. The lower courts agreed and dismissed Skakovaya’s claim.

The judicial panel of Supreme Arbitrazh Court referred the case to the Presidium. The panel noted, inter alia, that there were indications of affiliation between KomEx and Arteks, and that Skakovaya could not access information on Arteks’ beneficial owners, since the latter was an offshore company. As a result, the panel ruled that the burden to prove good faith should shift to Arteks. The panel also concluded that if a Russian law provision protecting third parties is to be applied in relation to an offshore company, then the latter bears the burden of proving that it is a separate entity not affiliated with other participants in the dispute. Ultimately, this means that an offshore company might have to disclose its principal.

On 26 March 2013 the Presidium reversed the judgments of the lower courts and returned the case to the court of first instance for reconsideration. Although the reasoned decision of the Presidium is not yet available, this case shows that the Russian courts are becoming reluctant to respect asset ownership structures with offshore companies that might infringe rights of third parties.

These decisions can have a significant impact on various types of disputes involving foreign parties in Russian courts. The courts’ positions will be further clarified and expanded in the guidelines of the Supreme Arbitrazh Court—the Review of Case Law Involving Foreign Parties—to be issued in the coming months. The Review will address approaches of the Supreme Arbitrazh Court to public policy defense, jurisdictional and arbitration clauses, conflicts-of-law and recognition and enforcement of foreign judgments and arbitral awards.

Topics:  Burden of Proof, Foreign Corporations, Jurisdiction, Offshore Companies, Russia, Third-Party

Published In: Bankruptcy Updates, Business Organization Updates, Civil Procedure Updates, General Business Updates, International Trade 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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