Russian courts have right to bankrupt foreign companies with businesses in Russia - Russian Supreme Court
MOSCOW. Feb 9 (Interfax) - Russia's Supreme Court is allowing for the possibility that Russian courts could introduce bankruptcy procedures in relation to foreign legal entities that "have a close connection" with Russia - their beneficiaries do business here, their property is located here, a significant number of transactions are conducted in the country, etc. The procedure can cover all of the debtor's assets, regardless of the country of their location, or it can be local, extending to property in Russia, the court ruling says.
These conclusions were made by the Supreme Court's Judicial Collegium for Economic Disputes following a complaint about the courts' refusal to introduce bankruptcy proceedings against Cyprus-based Westwalk Projects Ltd., which owned three shopping centers in the Moscow region. As part of the division of assets between Alexei and Konstantin Mauergauz, who, after selling the Paterson retail chain to retailer X5, began opening local shopping centers, these sites were transferred to the charter capital of another Cypriot structure, AMN Commercial Property Advisors Ltd.
Simultaneously with the real estate, all rights and obligations under the lease agreements were transferred to AMN, including Westwalk's obligation to transfer security deposit payments from its tenants, but it did not do so. Through the courts, AMN recovered more than 6 million rubles from Westwalk, and then filed a bankruptcy petition with the Moscow Arbitration Court, using the presence of a branch in Russia as a basis, the case materials show. It is possible that an argument was also made about the "difficulty" of conducting bankruptcy proceedings abroad. This was mentioned in the ruling on transferring the case to the Judicial Collegium for Economic Disputes.
However, the court of first instance terminated the proceedings at the request of AMN, and the appeal and cassation court agreed with it. They proceeded from the fact that Russian insolvency law applies only to legal entities, and the bankruptcy of a branch does not apply. The courts noted that the debtor is a foreign entity that does not operate in Russia, and no work is conducted by its Russian branch, while an application has been submitted to terminate its accreditation.
Meanwhile, they considered that the creditor and the debtor belong to the same group of persons who had chosen a business model with the registration of its organizations on the territory of a foreign state, and therefore cannot refer to their "difficult" bankruptcy procedure in a foreign jurisdiction. Article 1202 of the Russian Civil Code implies that the liquidation of a legal entity, including its forced liquidation, is conducted in accordance with the legislation of the country where the entity is registered, while the position of the courts in this case is noted in the case materials.
However, the Judicial Collegium for Economic Disputes, after consideration of the AMN complaint, did not agree with their conclusions.
"Current national legislation does not exclude the initiation by a Russian court of insolvency (bankruptcy) proceedings that are complicated by a foreign element both on the side of the creditor (in particular the applicant in a bankruptcy case) and on the side of the debtor," the Supreme Court said in its ruling.
The key point in resolving the issue of the competence of the Russian court is the presence or absence of a close connection between the debtor and the Russian Federation, the panel decided. Its definition provides an open list of circumstances that may confirm this. The following circumstances are indicated: the center of the debtor's controlling persons' main interest is located in Russia; commercial activities are focused on persons located in Russia; the property assets of the organization are located in Russia; a significant amount of the creditors are Russian persons; the debtor made a significant number of transactions with the place of execution in the territory of the Russian Federation, etc.
Depending on where the center of main interest of the foreign debtor is located, in Russia or abroad, the court will be able to initiate primary or local insolvency proceedings, as indicated in the definition by the Economic Disputes Collegium. The main proceedings have a cross-border effect, that is, they apply to all the property of the debtor, regardless of the country of its location, as well as to all creditors, including foreign ones. Local implies that it is valid only on the territory of Russia, that is, in relation to a separate property mass belonging to the debtor located in Russia or associated with it.
In the case under consideration, the Economic Disputes Collegium drew the attention of the Supreme Court itself; the applicant in the insolvency case referred to the fact that the registration of Westwalk in a foreign country is of a formal nature, and the company does not operate outside of Russia, and its only director and shareholder is Russian citizen Konstantin Mauergauz, whose son Philip is the director of the branch.
According to the Supreme Court panel, with documentary evidence of these circumstances and in the absence of refuting facts, the Russian court had the competence to initiate primary proceedings against the debtor in a cross-border bankruptcy case based on factors indicating that the center of the debtor's main interests is located in Russia.
In this regard, the Supreme Court's Economic Disputes Collegium overturned the decisions of the lower courts and sent the dispute for renewed consideration.