1. ON 1 SEPTEMBER, AUDIO RECORDING BECAME MANDATORY IN CIVIL PROCEEDINGS.
On 1 September2019, Federal Law No. 265-FZ (29 July 2018), On Amendments to Certain Legislative Acts of the Russian Federation, came into force. Changes were also made to the Civil Procedural Code of the Russian Federation: Now, when considering a case in courts of first and appellate instances, the secretary of the court session or assistant judge must make an audio recording of each court session, including preliminary ones, as well as of the procedural actions taken outside the court session. There is an exception for closed court sessions.
You may listen to the audio recording at any time, but you must submit your comments on it in the same time as on the written record: within five days of signing the last one. A person involved in the case or his or her representative has the right to receive a copy of the audio recording at his or her own expense. To do so, you must submit a written application.
It should be noted that from the day the new appellate and cassation courts of general jurisdiction begin their work, another important rule will appear. The superior court will not cancel the actions of the first or appellate instances due to the absence of a written protocol, if the materials of the case will be audio-recorded.
For more information (in Russian)
2. THE JUDICIAL CHAMBER FOR ECONOMIC DISPUTES OF THE SUPREME COURT OF THE RUSSIAN FEDERATION REINFORCES OF THE NEED TO COMPLY WITH THE PRINCIPLE OF PROPORTIONALITY IN THE RECOVERY OF DAMAGES CAUSED BY POOR QUALITY PERFORMANCE OF WORK.
The Supreme Court considered the case of a claim by a customer against a contractor for compensation of expenses to eliminate of defects revealed during the contractor’s repair work.
The court of first instance satisfied the customer’s claims in full, and the courts of appeal and cassation upheld that decision.
However, in the opinion of the Supreme Court, the lower courts did not take into account the fact that the costs required to remedy the deficiencies in the contractor’s work exceeded the price agreed upon by the parties for the entire contract. According to Paragraph 5 of Resolution No. 7 of the Plenum of the Supreme Court of the Russian Federation of 24 March 2016, On the Application by the Courts of
Certain Provisions of the Civil Code of the Russian Federation on Liability for Breach of Obligations, within the meaning of Articles 15 and 393 of the Civil Code, the creditor provides evidence confirming the existence of losses, as well as justifying with a reasonable degree of reliability their amount and causal relationship between the default or improper performance of obligations by the debtor and the said losses. The debtor has the right to object to the amount of losses claimed by the creditor and to provide evidence confirming that the creditor could have reduced such losses but did not take reasonable measures to do so (Article 404, Civil Code of the Russian Federation).
In the present case, the lower courts did not give due weight to the fact that the amount of damages claimed also included the cost of purchasing PVC tiles that were not agreed upon by the parties as material for the work. The courts also failed to consider the need to reimburse such costs in order to restore the rights of the customer.
In other words, the principles of fairness and proportionality of the responsibility for the breach of obligations were violated. The Supreme Court remanded the case for reconsideration.
Thus, the Supreme Court stopped the plaintiff's attempt to disproportionately benefit at the expense of the contractor, who performed the work poorly, but also reminded about the obligation of the courts to find a balance between the legitimate interests of the plaintiff and the defendant.
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3. THE SUPREME COURT CONFIRMS THAT AN AGREED BALANCING OF COUNTERCLAIMS ARISING DEFECTIVE PERFORMANCE OF A CONTRACT IS NOT A PREFERRED TRANSACTION IN BANKRUPTCY LAW.
The Judicial Chamber for Economic Disputes of the Supreme Court has considered a separate dispute contesting a bankruptcy set-off by the bankruptcy trustee.
A contract was concluded between the bankrupt debtor and the customer, under which the latter may reduce the amount payable under the contract by the amount of penalties due to him. In view of the contractor's delay, the client reduced the amount of penalty to be paid for the work performed by the contractor.
The court of first instance considered that the actions taken by the customer to withhold the penalty amount did not constitute a set-off of counterclaims of the same kind within the meaning of Article 410 of the Civil Code of the Russian Federation. The court pointed out that since there were no agreements on termination of obligations, nor were there any expressions of the defendant's intent to terminate unilaterally the counter-claims with a set-off, a reduction in the amount of the customer's payment under the contract did not constitute an action to terminate the debtor's obligations under Article 410 of the Civil Code.
However, the court of appeal agreed with the argument of the receiver that, although the customer's actions do not fall under the criteria of set-off of mutual claims of the creditor and the debtor, due to the lack of a set of qualifying features, as applied to the provisions of Article 410 of the Civil Code, they should be considered as a special way to terminate the obligations established by the parties to the contract (Article 407 of the Civil Code). Consequently, since the transaction was made during the period of suspicion and in the presence of claims of other creditors of the debtor with the due date, there are adequate grounds to recognize it as invalid under Art. 61.3 of the Russian Federal Bankruptcy Law.
The court of cassation left the appeals court decision unchanged.
The Russian Supreme Court overturned the appellate and cassation rulings, upholding the decision of the court of first instance.
The judges noted that the parties to the contract assumed that the customer's need to perform the work as quickly as possible had increased the price of the work. The Court also noted that, upon entering into the contract, the contractor had no reasonable expectation that the transaction price would have remained unchanged even if the client had arranged for a longer period of repair. In view of the reciprocal nature of the contractual obligations of the contractor to perform the work of good quality within the agreed time frame and the obligation of the client to pay the contractual price in the manner provided for in the contract, in the event of improper performance of the main obligation is assumed by the contractor. It could not receive, therefore, the amount which it could have expected if it had performed that work properly. Consequently, the contractor's delay in performing the work did not allow it to be recognized as the party to whom the entire contract price was actually due.
In the opinion of the Judicial Panel for Economic Disputes, the parties had agreed on the condition that the contractor's delay in carrying out the repair works would necessitate a recalculation of the total payment by the customer by reducing the contract price by the amount of the customer's losses incurred as a result of the delay (i.e., balancing). In this case, as a liability for delay in the execution of the works, the parties established a set-off penalty, which has the main purpose of covering the losses of the customer that are caused by the delay.
The establishment of such a balance of mutual assignments is not a transaction that can be challenged under the rules of Article 61.3 of the Federal Bankruptcy Law, because in the case of balancing there is no qualifying feature such as the receipt of the customer's preference. The total amount of money due to the contractor is reduced by the contractor itself by its improper performance of the main obligation, and not by the customer who has established the fact of the balancing. In itself (in the absence of proven bad faith), the use of forfeiture as a simplified mechanism for compensating creditor's losses caused by delay is not a reason for invalidating the balancing actions as a preferred transaction.
With this definition, the Judicial Chamber on Economic Disputes supported a position, which has not yet been fully formed in practice, by which the parties may stipulate in the contract the conditions under which the balance occurs, or, otherwise, an automatic set-off. This is not a set-off within the meaning of Article 410 of the Civil Code and, therefore, cannot be challenged under Article 61.3 of the Federal Bankruptcy Law.
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4. THE SUPREME COURT STRESSES THE NEED FOR A CRITICAL ANALYSIS OF THE RESULTS OF FORENSIC EXAMINATION IN DETERMINING THE ACTUAL VALUE OF A SHARE IN THE AUTHORIZED CAPITAL OF A COMPANY.
The Supreme Court has decided a case involving the estimation of the value of a share in the authorized capital of the company in anticipation of its bankruptcy.
After the refusal of the company's shareholders to give their consent to the sale of a share to a third party, the plaintiff applied to the company with a request to pay the actual value of the share determined on the basis of the data of the company's financial statements for the last reporting period preceding the date of the relevant request (i.e., in the order of subparagraph 3 of paragraph 2 of
Article 23 of the Federal Law No. 14, On Limited Liability Companies (hereinafter, the LLC Law). Following the refusal by the company to pay the requested amount, the participant in the LLC applied to the court.
Subsequently, after the filing of a claim for recovery of the actual value of the share, a case was initiated against the company to declare it insolvent (bankrupt). The bankruptcy register included the claims of creditors of the company that arose before the last obligation to pay the value of the share.
In response to the defendant's reference to the bankruptcy proceedings, the court of first instance cited the provisions of paragraph 4, paragraph 8, Article 23 of the LLC Law, and paragraph 5, paragraph 1, Article 63 of the LLC Law, and paragraph 1, paragraph 1, Article 63 of the Federal Bankruptcy Law. These legal authorities do not exclude the possibility that the court may consider and decide the claim for recovery (rather than payment) of the actual value of the share filed prior to the initiation of the insolvency proceedings. From the date of introduction of supervision over the debtor, the execution of the enforcement documents on property penalties is suspended. In other words, the court distinguished between a claim for payment and a claim for recovery of the value of the share, and it established that the present case deals with a claim for recovery of the specified amount of money made before the initiation of bankruptcy proceedings.
As a result, the court satisfied the plaintiff's claim in the amount established in the opinion of the forensic expert. The courts of appeal and cassation left the decision unchanged.
However, the Supreme Court of the Russian Federation drew attention to the fact that a short time after the plaintiff's departure from the company, insolvency proceedings were instituted against the latter.
Such a sharp deterioration in the financial position of the defendant, in the absence of evidence of any other extraordinary circumstances that could have caused the debtor's insolvency, indicates the doubtfulness of the financial well-being of society in general, i.e., before the bankruptcy. Moreover, the defendant drew the courts' attention to the fact that the forensic expert, in determining the market value of the share, based his conclusions on the book value of the property belonging to the company, without examining the inventory objectively, and he did not apply reduction factors (so-called discounts) on the uncontrolled nature of the claimant's share and insufficient liquidity. In this connection, the lower court decisions in the case were overturned, and the case was remanded for a new hearing.
Thus, the Judicial Chamber on Economic Disputes drew the attention of the courts to the fact that when assessing the value of a share, it is necessary to assess critically the expert opinions submitted by the parties and to study the actual circumstances of the financial position of the company in order to test those expert conclusions and eliminate the resulting contradictions.
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5. THE SUPREME COURT OF THE RUSSIAN FEDERATION HOLDS THAT THE ABSENCE OF AN EXECUTIVE BODY OF THE JOINT-STOCK COMPANY IS NOT AN OBSTACLE TO CONSIDERATION OF A PARTICIPANT'S CLAIM FOR RECOVERY OF LOSSES FROM A FORMER DIRECTOR.
A shareholder of a company applied to the Arbitration Court of the Kaliningrad Region with a statement of claim for recovery of losses in favor of the company from the its former general director. The court of first instance suspended the proceedings due to the impossibility of its consideration until the formation of management bodies authorized to act on behalf of the company.
After several unsuccessful attempts to convene and hold a meeting of shareholders to elect management bodies of the company, the applicant petitioned the court to resume proceedings on the case. In a substantiation of the petition, he referred to the fact that formation of management bodies of the joint-stock company is impossible due to actions of the majority shareholders of the company to interfere with the election of management bodies of the company.
The courts of three instances dismissed the petition due to the absence of an executive body, which was never formed.
The Supreme Court disagreed. The absence of a legitimate executive body cannot be an obstacle to the resolution of the dispute on its merits, since the shareholders are, by virtue of the law, representatives of the company and, consequently, are entitled to act on behalf of the company at all stages of the process. A member of the joint-stock company filing a claim in accordance with Article 53.1 of the Civil Code of the Russian Federation for recovery of damages from a member of the management body is a representative of the joint-stock company, including at the stage of execution of the court decision, and acts not only in his or her own interests, but also in the interests of the joint-stock company.
The question of reopening the proceedings has been remanded to the court of first instance for reconsideration.
The Supreme Court of the Russian Federation has corrected similar mistakes made by the courts of previous instances. The procedural status of the participant of the company, who acts as the applicant of the claim submitted in the interests of the company, is once again recognized under Article 225.8 of the Arbitration Procedure Code of the Russian Federation. The Supreme Court’s position confirms that the absence of a legitimate executive body in the company is not an obstacle to the consideration of the case of a dispute for compensation for damages caused to the legal entity, or for the subsequent execution of the judicial decision.
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6. THE SUPREME COURT OF THE RUSSIAN FEDERATION RULES THAT AN APPLICATION TO AN ARBITRATION COURT IN VIOLATION OF ITS JURISDICTION INTERRUPTS THE LIMITATION PERIOD IF THE CLAIM HAS BEEN ACCEPTED FOR PROCEEDINGS.
The companies signed a subcontractor agreement. The parties agreed that any disputes between them are would be considered by the arbitration court of the city’s construction organizations.
A subcontractor requested the arbitral tribunal to recover the contractor's payment arrears and interest on the use of the funds. The arbitration court granted the claim, but refused to issue a writ of execution (ASGM Case No. A40-125579/2017).
At that time, the subcontractor also filed a claim for recovery of the said debt and interest with the arbitration court (ASGM Case No. A40-50736/2018), but the court denied the claim, citing the statute of limitations.
The appeals upheld that conclusion. Courts have emphasized that the reference to an arbitration court with an infringement of jurisdiction is not a presentation of such a claim in due course, and it does not interrupt the running of the statute of limitations on such actions.
The subcontractor the lodged a complaint with the Supreme Court, asking for the decisions of the lower courts to be reversed. The applicant insisted that the limitation period did not run from the moment of filing the application with the arbitral tribunal, if it had been accepted for proceedings.
The Supreme Court agreed with the plaintiff's arguments, overturned the decisions of the lower instances and remanded the case for review by the original arbitration tribunal.
The Supreme Court of the Russian Federation has considered a private question about the grounds for suspending the limitation period. This approach will maintain confidence in the arbitration courts. The risk of expiration of the limitation period is excluded, even if the state court as a result will establish that the claim was considered by the arbitration court that did not have jurisdiction.
7. THE MOSCOW DISTRICT ARBITRATION COURT RULES THAT WHEN ASSESSING THE DOCUMENTS SIGNED BY A CHIEF ACCOUNTANT, IT IS NECESSARY TO ESTABLISH HIS OR HER AUTHORITY IN ACCORDANCE WITH THE REGULATIONS GOVERNING THE CHIEF ACCOUNTANT.
In Case No. A40-292067/2018, the court determined when the chief accountant could, on behalf of a legal entity, confirm the existence of a debt in favor of a counterparty. In this case, the contractor collected the debt for the payment of the contractor's work from the customer.
Two instances of the case refused to satisfy the claim for a number of reasons. One of them was the defendant's debt to the plaintiff for utilities and other payments. She was recognized by the chief accountant of the contractor in an e-mail, to whom she sent a reconciliation act. This debt was sufficient to offset any initial and counterclaims. The court found that the chief accountant was an authorized person and could perform legally significant actions to recognize the debt on behalf of the legal entity.
However, according to the Moscow District Arbitration Court, in order to answer the question whether the chief accountant is entitled to recognize the debt on behalf of the legal entity, the courts should have studied the regulation governing the chief accountant and internal documentation about how his functional duties are distributed. Due to the fact that "the courts did not examine the powers of the person to recognize such debt and, as a consequence, did not examine the grounds for the emergence and existence of such debt," the case was remanded for reconsideration.
The question of a chief accountant's authority to recognize a debt is a common one. However, there is not yet an unambiguous practice on how to evaluate the documents signed by this person. The approach of the district court seems to be correct, and the powers of the signatories should be established when analyzing the document. The universal approach is that if the chief accountant has signed the document, it comes from a legal entity and is an expression of the will of the latter, since the authority of each of the organization's employees is established by internal documentation. Meanwhile, this approach creates a risk of mistrust, as a result of which numerous acts of reconciliation and other accounting documents may lose their evidentiary basis. Moreover, the chief accountant's regulation is an internal document, which creates appropriate risks of its adjustment to the interests of the party in the process.