Dispute Resolution and Mediation newsletter (Issue 1, 2015)

Federal Law 482-FZ , On amending the Federal law "On insolvency (bankruptcy)" and the Code of the Russian Federation on administrative offences,  (29 December 2014)  went into effect on 29 January 2015 and has introduced important changes to Russian bankruptcy law. 

 

The amendments simplify the rules for the initiation of bankruptcy proceedings against debtors of credit institutions.  They also expand the rights of secured creditors and triple the minimum amount of debt needed for the bankruptcy proceedings to 300 thousand rubles (Articles 6 and 33 of the Bankruptcy Act). With regard to strategic enterprises and organizations, as well as natural monopolies, the minimum increases from one-half million to one million rubles (Articles 19 and 197 of the Bankruptcy Act).

 

Banks are now in a privileged position.  To initiate bankruptcy proceedings, they do not have to accept the debt in court. Banks have the right to go to court as of the date of occurrence of signs of the debtor's insolvency. (Article 7 of the Bankruptcy Act). Thus, the question of the validity of claims against debtors of credit institutions henceforth will be treated within the bankruptcy proceedings; and filing of a formal claim with the court against a debtor’s assets is no longer required. Credit institutions have the right to "slip" judicial confirmation of a debt upon at least 30 days’ prior written notice to the debtor.  From 1 July 2015, the creditor will be required to give notice of intent to apply to have the debtor declared bankrupt, by publishing it at least 15 days in advance in the Unified Federal Register of information about the activities of legal persons.

 

The court has the right to stop bankruptcy proceedings under certain circumstances, such as: (1) the debtor actually is solvent; or (2) the bankruptcy petition was filed for the purpose of obtaining an unreasonable unjust benefit from the bankruptcy (Clause 6, Article 63 of the Bankruptcy Act).

 

In such situations, the debtor must pay interest to be accrued under the terms of the obligation, in accordance with normal business procedures in bankruptcy cases.The court also may impose the same obligation on the debtor if the circumstances in Article 63, cited above, could arise upon the termination of the bankruptcy case on other grounds. The 

sum of demands of the creditors, as of the date of the introduction of observation, will accrue interest from that date at the refinancing rate of the Central Bank of Russia.

 

The new amendments also change the rights of a secured creditor. In particular, the mortgage lender now determines the initial selling price of the collateral, the order and conditions of tendering, as well as the procedure and conditions of safekeeping of the collateral. In addition, the mortgage lender now has the right to keep the collateral at any stage of the public offer on the price prevailing at this stage, if there are no other bids. Thus the persons participating in the bankruptcy case shall have the right to dispute the price of the arbitral tribunal.

 

On 26 February 2015, the Constitutional Court of the Russian Federation took up the complaint of Gazprom Neft OJSC.  The text of the complaint is not publicly available. However, based on earlier rulings on the issue, and the comments of the Gazprom Neft representatives, it reasonably can be assumed that the Court will examine the scope and effect of opinion letters and similar memoranda by government agencies as normative legal acts, pursuant to the Article 2 of the Federal Constitutional Act On the Supreme Court of the Russian Federation.

 

The substance of the dispute is whether the letter of the Federal Antimonopoly Service of Russia (FAS) No.-4-3/15165, On the tax on extraction of mineral resources, (21 August 2013) imposed a duty, not provided in the applicable legislation, on the taxpayer to change (by reduction or increase) the size of tax liabilities on tax rates for the fiscal periods for which the taxpayer's tax liabilities had already been executed.  Gazprom Neft contended before the Supreme Arbitration Court (SAC) that the FAS letter was a normative legal act and, thus, is of a compulsory nature.

 

The Supreme Arbitration Court disagreed. In its Order 894/14 (10 April 2014), the Court characterized the FAS letter as only a "clarification in connection with appeals of tax authorities."

 

Gazprom Neft petitioned for review by the Constitutional Court, recognizing that, from a formal point of view, the FAS letters are not the normative legal acts.  However, all divisions of the Russian Federal Tax Service are in fact guided by the explanations that such letters document. Gazprom Neft’s representatives pointed out that the notion of a normative legal act in law enforcement is still undeveloped.  Moreover, the concept of a normative legal act implicit in the SAC decision was based only on formal characteristics and eliminates the possibility of dispute or reference to other decisions of the authorities.

 

The legal community hopes that the Constitutional Court will finally resolve the dispute about the legal status and power of the letters by the tax authority and other agencies, to help to avoid such disputes in the future. Letters by the FAS de jure are not normative legal acts; but, by their nature and their impact on social relations, they are similar to them. In addition, as noted by the representatives of Gazprom Neft, the obligation of subordinate tax authorities to follow strictly the letters of a higher tax authority means that a letter in one case could affect the rights of a wide range of taxpayers.

 

The disputed status of letters of the Federal Tax Service of Russia often plays into the hands of unscrupulous officials who, in the event of disputes, can always refer to the fact that the rule or policy stated in a document is not mandatory, and can thereby evade implementation of the recommendations of the tax authority.  Gazprom Neft seeks to eliminate the questionable interpretation of tax legislation and related regulations regarding the calculation and the possible recalculation of the extraction tax.

 

Two Constitutional Court cases in 2014 questioned the objectivity of the decisions of arbitration bodies that are in any way affiliated with a party to the dispute. These are sometimes called "pocket arbitration courts," because of the perception that they are "in the pocket" of one of the parties.

 

In its widely-noted Order 30-P of 18 November 2014 on the complaint of Sberbank OJS, the Constitutional Court took an unfavorable view of these "pocket" arbitration proceedings on the grounds that they were inherently biased in favor of the party with which they were affiliated.

 

However, in a case brought by Yamalgazinvest ZAO, Order No. 2750, at the end of last year, the Constitutional Court pointed out this issues required that courts consider the legal connection between the dispute and the arbitrator. This case arose the fact that the provisions of the Arbitration Procedure Code and the legislation governing arbitration courts, concerning the impartiality and independence of arbitrators, leads to the conclusion that the establishment of the arbitration and the appointment of a chairman affiliated with one of the parties is perceived as a violation of the guarantees of objective impartiality.

 

Yamalgazinvest ZAO, being a subsidiary of Gazprom OJSC, raised the issue after the Supreme Arbitration Court had reversed the decision of the arbitration courts. According to the SAC, using Gazprom’s "pocket" arbitration court in a dispute between Yamalgazinvest and Institute Neftegasproject JAC violated the guarantee of objective impartiality, and, as a consequence, the principles of equality and autonomy of will for the parties to the dispute. The Gazprom arbitration court lacked jurisdiction to consider the dispute, because Gazprom was the sole shareholder of Yamalgazinvest and the instigator of the arbitration.  Moreover, the chairman of the presidium of the Gazprom arbitration court was the head of Gazprom’s legal department, which had close financial and logistic ties to Gazprom’s arbitration court. Thus, regardless of the composition of the Gazprom arbitration court in any given dispute, the structure was inherently biased in favor of one party.

 

The Constitutional Court refused to rule such that "pocket" arbitration proceedings were inconsistent with the Constitution, and held that the complaint by Yamalgazinvest was not subject to further consideration. However, the Constitutional Court noted that in reviewing the question of objectivity of "pocket" arbitration tribunals, courts must always assess the legal ties of their founders with one of the parties to a particular dispute. Thus, the Сonstitutional Сourt concluded that the "pocket" arbitration courts were not inherently prejudiced per se, and the question of actual bias had to be proven in each specific case.

 

These decisions of the Constitutional Court caused controversy in the legal community. After the ruling in the Sberbank case, many lawyers expressed their disagreement with the position of the Constitutional Court and considered that the Court approached the case from an intellectual bias against any structure in which the arbitration court was affiliated with one of the parties.  As became clear after the Yamalgazinvest decision, however, this criticism might have been unreasonable, because in the second case the Constitutional Court did assess the risk of actual bias before ruling that the Gazprom “pocket” arbitration court lacked sufficient impartiality and freedom from bias to allow it to have jurisdiction over the dispute with Institute Neftegasproject.  In the second case the Constitutional Court made it clear that in each case it was necessary to explore the issue of the actual impartiality of the court considering the dispute. This does not necessarily exclude the unconditional grounds for conclusions about the partiality court arisring from the institutional, financial, and logistic ties with a party to the dispute, as existed at Gazprom.  Instead, the Yamalgazinvest decision demonstrates the importance and relevance of those factors in a thorough evaluation to determine the actual risk to the impartiality of the arbitration.