Russian Supreme Court Ruling on damages (additional tax) to be recovered from the former owner of the taxpayer.

20.10.2011

Legal Update No. 280.

Goltsblat BLP advises that Ruling No. 41-В11-4 of the Supreme Court of the Russian Federation dated 19 July 2011 was published, in which the court confirmed the possibility of recovering damages from the seller and (or) guarantors under a share (ownership interest) sale and purchase agreement where the seller and (or) its guarantors undertook to indemnify the buyer for all losses in connection with operations of the company, including those resulting from the seller’s breach of any warranty or representation, arising before the end of the tax period in which the transaction is closed.

In the case concerned, the buyer filed a lawsuit because of collection from the company of tax arrears for periods prior to the transaction date. The seller’s obligation to indemnify the losses was guaranteed by two individuals. All elements of the transaction were governed by English law.

Since the seller failed to indemnify the buyer for the tax claims, the latter demanded indemnification from the guarantors. The guarantors objected to the claims relying on a number of procedural grounds (the general jurisdiction court being incompetent to hear the dispute, expiry of the guarantee term, etc) and liquidation of the debtor that constitutes unconditional grounds for terminating a guarantee under the Russian Civil Code.

Notably, by satisfying the buyer’s claims for damages in the form of additional tax assessed to the company whose shares were acquired by the buyer, the court not only entirely confirmed the reasonableness of the buyer’s claims, but also provided a detailed interpretation of the contractual provisions between the parties on the basis of the legislation of England and Wales and dismissed the guarantors’ arguments relying on the Russian civil law provisions.

This Supreme Court Ruling is a consequential precedent confirming the possibility of recovering damages from Russian entities with regard to the contractual purchase of Russian assets even if the recovery mechanism is not stipulated by Russian legislation but the Russian court applies the foreign (English) law.

For additional information, please contact:

Andrey Shpak,
Partner, Tax consulting/ tax litigation,
Goltsblat BLP,
T: +7 (495) 287 44 44,
E: info@gblplaw.com

Anton Sitnikov
Partner, Head of Corporate Practice/ Mergers & Acquisitions,
Goltsblat BLP
T: +7 (495) 287 44 44,
E: info@gblplaw.com

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