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

by Quinn Emanuel Urquhart & Sullivan, LLP
Contact

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.

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.

© Quinn Emanuel Urquhart & Sullivan, LLP | Attorney Advertising

Written by:

Quinn Emanuel Urquhart & Sullivan, LLP
Contact
more
less

Quinn Emanuel Urquhart & Sullivan, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.