New Procedure for Invalidating a Transaction in the Event of Abuse of Rights.

01.11.2011

Legal Update No. 282.

Goltsblat BLP advises that Resolution No. 1795/11 of 13 September 2011 of the Presidium of the Supreme Arbitration Court of the Russian Federation (the Resolution) has been published on a case brought by Stena RoRo AB (Sweden) for supervisory review of judicial acts following a lawsuit by Baltiysky Zavod shareholders against the Plant and Stena RoRo AB seeking to invalidate obviously detrimental transactions concluded by the Plant.

Resolution of the Russian Supreme Arbitration Court (the SAC) of 13 September 2011 cancelled the judicial acts on the case and dismissed the lawsuit.

The Resolution clarifies law enforcement practice pertaining to the possibility of invalidating transactions on the basis of articles 10 and 168 of the Russian Civil Code in the event that a party abuses its rights when entering into a transaction.
The Resolution somewhat develops the position discussed in the Overview of Court Practice on Application of Article 10 of the Civil Code (Information Letter No. 127 of the SAC Presidium dated 25 November 2008), in which the court used abuse of rights as grounds for invalidating the relevant transaction.

For instance, the SAC clarified that abuse of authority by the management of a transaction party does not necessarily make the transaction null and void pursuant to articles 10 and 168 of the Russian Civil Code, since, in order for the transaction to be invalidated, either collusion between the management acting in bad faith and the other party to the transaction or the latter’s awareness of such actions by the transaction party management must be proved.

In addition, the SAC developed a position under which a transaction being underpriced or unprofitable for the party acting in bad faith cannot, in itself, constitute grounds for invalidating the transaction, while entry into a transaction by a good faith entity on terms it deems most favourable is seen as reasonable business conduct and transaction price deviation from the average market prices (even many times over) may not, in itself, prove the abuse or constitute grounds for transaction nullification.

Unfortunately, the Resolution can hardly be perceived as a step towards proper protection of good faith businesses since the Supreme Arbitration Court’s position comes down, in essence, to the risk of adverse consequences of actions taken by the management of an entity being borne by participants or shareholders in the business entity itself.

In practice, this will pose even greater difficulties for participants and shareholders in businesses seeking to restore their rights, since the lawmakers have so far offered them only unproductive defence, i.e., recovery of damages from the company management and criminal prosecution under article 201, Abuse of Authority, of the Russian Criminal Code.

According to the Resolution, effective judicial acts of state arbitration courts relying on similar actual circumstances and adopted on the basis of legal provisions interpreted other than in compliance with the Resolution may be reviewed pursuant to par. 5, clause 3, article 311 of the Arbitration Procedure Code of the Russian Federation, unless other impediments exist.

For additional information, please contact: 

Ivan Veselov
Senior associate, Dispute Resolution Practice
Goltsblat BLP
T: +7 (495) 287 44 44,
E: info@gblplaw.com

Contact details

For all issues related to publications, news and press releases, please contact:

Ksenia Soboleva

Head of PR and Communications

Subscription

If you would like to receive our legal alerts and updates highlighting current legal issues relevant to your areas of interest and providing expert commentary by our lawyers, please click on "Sign Up" and fill out the form.