Oda Russian Commercial Law 2007-1

is gone.38 This is particularly true when the debtor had been declared bankrupt. It is most likely that the effect of such an agreement would be denied by the bankruptcy administrator.

Substitute performance became an issue in the following case:

An open joint stock company, Company for the Assistance of Regional Development, brought an action at the Commercial Court of Primorskii Region against the Russian Tikhookeanskii Bank, claiming compensation of 1,595,417,775 roubles for the damage caused by an unlawful act by the Bank in taking away and disposing of the property of the company. The plaintiff also claimed that the contract of sale (substitute performance) of July 7, 1995 was null and void.

The court of rst instance acknowledged the claim. At the appellate and cassation instances, the judgment was upheld.

The Supreme Commercial Court quashed the judgment and referred the case to a new hearing on the following grounds. The plaintiff was a debtor of the bank in the loan agreement of October 14, 1994. The plaintiff defaulted, and the Bank received two notarised documents on which basis, a bailiff seized the property in question. The property was valued by an expert to be worth 857,765 thousand roubles. By the enforcement judgment of the Lenin District Court of Vladivostok of July 7, 1995, the property was transferred to the Bank as repayment of the debt. On the same day the Bank sold the property to a third party at the price of 857,759,445 roubles. However, this was before the judgment had taken effect and therefore, the Bank had acted unlawfully in selling the property. On the other hand, the Court noted that the lower courts failed to take into account that as a result of the sale, the debt of the plaintiff was reduced by 857,765 thousand roubles, and therefore, it was wrong to claim this amount as damages.

The Court referred the case to a new hearing in order to examine the lawfulness of the contact of substitute performance and other arrangements which served as a basis of the plaintiff’s claim.39

One way of securing a claim is by selling the property to the creditor at the outset. This is called a “REPO” – sale and repurchase operation. The creditor purchases a property from the debtor with an obligation to sell it back to the debtor. The payment for the rst sale is equivalent to the amount of debt, while the resale price, which is agreed in advance, is repayment of the debt, and therefore, interest is added. In case the debtor (the seller) failed to tender payment for resale, the second agreement is simply rescinded and the rst buyer (the creditor) will

38K.Sklovskii, “Zalog, arest imushchestva, isk kak sposoby obespecheniia prav kreditora”, RIu, 1997 No.2, p.26.

39Decision of the Presidium of the Supreme Commercial Court, March 31, 1998, Case 5624/97.

retain the title. Thus, theoretically, there are two different contracts of sale, but they are usually combined into a single agreement.

A variation of this arrangement is a preliminary agreement of sale with a condition precedent of the debtor’s repayment. If the debtor defaults, the condition is not ful lled, and therefore, the agreement of repurchase does not come into effect. Another variation is the use of a trust agreement. The debtor grants the title to the creditor by trust agreement and the creditor becomes a trustee.

However, there may be some problems concerning these arrangements, since these alternative means are designed to circumvent the cumbersome requirements of a statutory pledge.

The Civil Code provides that sham transactions, i.e. transactions which conceal another transaction, are null and void. In such cases, provisions for the transaction which the parties genuinely desired (the concealed transaction) are to be applied (Art.170). There is a likelihood that an unfaithful pledger, after defaulting, may claim that such an arrangement is a sham and therefore, null and void. If the above-mentioned alternative transactions are found to be sham, then provisions on statutory pledges, instead of sale, will be applicable and various restrictions which the parties intended to avoid will have to be applied.

There is also a problem concerning publicity. If the title over immovables shifts to the creditor, even provisionally, this has to be registered. Then, technically, the creditor is free to dispose of the property to a third party. There may be a dispute between the debtor seeking to retrieve the property once he has repaid the debt, and the third party who acted on the belief that the registered owner was the genuine holder of the right.

The Commercial Court used to be fairly cautious in dealing with the problem of validity of atypical security rights, but in the following case, the court found the sale to be a sham.

A closed joint stock company, “Evroresursy” (“the Company”), brought an action to court vis à vis a bank, “Diamant” (“the Bank”), demanding the return of shares which the latter held allegedly without grounds. The rst instance court dismissed the claim on the ground that the shares had been acquired on the basis of a contract of sale. The appellate instance upheld this, followed by the cassation instance.

The Supreme Commercial Court, however, quashed the judgment and remanded the case to the lower instance. The view of the Court was that the claim of the plaintiff should be acknowledged.

By virtue of the contract of sale of March 4, 1996, the Company sold 977,641 shares of another company to the Bank for 500 million roubles. The contract was performed, shares were registered, and the amount was paid.

At the same time with the contract of sale, the parties concluded a contract of repurchase to the effect that the same number of the shares of the same company were to be repurchased by the Company at the price of 700 million roubles after

By the judgment of December 16, 1998, the Bank was ordered to pay 20,210,691 roubles as the value of shares and 155,919,152 USD as damages.

Upon protest, the Supreme Commercial Court ruled as follows:

The shares in question were not returned to the Company, and therefore, this dispute has arisen. The lower court was right in applying Article 1105 of the Civil Code (unjust enrichment).

The Company claimed compensation for the lost income which allegedly resulted from the failure of the Bank to return the shares; namely the contract for the supply of oil of January 15, 1996 and the contract for the sale of shares of December 2, 1997. The latter was possible only if the shares were in the hands of the Company.

However, the rst contract was concluded before the shares were offered to the Bank as a security, and the second contract was concluded while the dispute involving the share was still pending.41

There is another example of such an approach:

An open joint stock company initiated an action against the Moscow Interregional Commercial Bank, asking the court to acknowledge a loan agreement and an agreement of pledge as null and void. The Bank had extended a loan of 100 billion roubles (before denomination) at 25% annual interest. In the accompanying contract of pledge, the company transferred to the Bank its own bills of exchange of the amount of 125 billion roubles. The court, with the perspective of applying Art.170 (sham transactions), reversed the case to the lower court for further examination of the intention of the parties.42

Thus, at least, this type of atypical security right failed to be endorsed by the court. However,Article 329 of the Civil Code which is a general provision on the means of securing the enforcement of obligations, lists suretyship, bank guarantees, pledges, and in addition, other means provided by law or contract. The Law on Banks and Banking Activities has a similar provision. The Civil Code guarantees freedom of contract. There seems to be room for atypical security rights. In the light of these open-ended provisions on the list of the means of securing obligations, it may be possible to argue that contracts involving atypical security rights are contracts which are not speci cally referred to in the Civil Code, but which are perfectly legitimate under the principle of the freedom of contract. The requirement of court procedure and public sale can be construed as being applicable only to statutory pledges.

41Decision of the Presidium of the Supreme Commercial Court, October 6, 1998, May 22, 2001, Case 7598/00.

42Decision of the Presidium of the Supreme Commercial Court, January 23, 2001, Case 8/97.

4SURETYSHIP AND BANK GUARANTEE

Under Russian Law, suretyship has been one of the traditional means of securing the performance of an obligation. However, under socialism, the use of suretyship was very much limited. The 1964 Civil Code provided for suretyship and guarantee. The latter was in fact a variation of suretyship, the basic difference being the latter having the governing body of the state enterprise as a guarantor. Even this institution was limited in scope. Guarantee was nally abolished by the 1991 USSR Fundamental Principles of Civil Legislation as something unique to the planned economy.43

In suretyship, the surety and the debtor are jointly and severally liable to the creditor in the case of non performance or inappropriate performance of an obligation by the debtor, unless the law or contract provides for the liability of the surety as supplementary (Art.363, para.1). In contrast to the 1964 Code, the present Code allows suretyship which guarantees an obligation which is to emerge in the future (ibid., para.2). Sureties that jointly secured a claim are jointly and severally liable to the creditor (ibid., para.3).

A contract of suretyship requires written form. Terms of suretyship can be agreed in a separate contract, or in the contract of the obligation which is secured by suretyship. The Supreme Commercial Court held a valid suretyship to be one in which the undertaking of the surety was entered in writing in the contract of loan.44 In any case, the acceptance of a surety by the creditor is required.45 In banking practice in Russia, the surety sends a letter to the bank-creditor, guaranteeing the repayment of the debt by the debtor. This practice is said to be valid under the current Code, since the subsequent act of the bank-creditor in extending the loan signi es the acceptance of suretyship by the creditor.46

The surety is entitled to a defence vis a vis the creditor which the primary debtor can raise. The surety does not lose this right even if the debtor waived the defence or acknowledged the claim (Art.364).

The right of the creditor is transferred to the surety once the latter performs the obligation. Upon performance by the surety, the creditor must provide the surety with documents certifying the claim and transfer the claim secured by suretyship to the surety (Art.365, paras.1 and 2).

43S.N.Bratus and O.N.Sadikov eds., Kommentarii k grazhdanskomu kodeksu RSFSR, Moscow 1982, p.257. Braginskii ed., supra, pp.448-449.

44Braginskii ed., ibid., p.452.

45Sadikov ed., supra, p.615.

46Braginskii ed., supra, p.452.

Suretyship is terminated if:

i)the obligation secured by suretyship is terminated;

ii)there was a change to the secured obligation which resulted in the increase of liability on the part of the surety or other unfavourable consequences without the consent of the surety;

iii)the secured obligation is assigned to a third party in the absence of the surety giving consent to the creditor in guarantee for the new debtor;

iv)the creditor refused to accept adequate performance offered by the debtor or surety;

v)the term of suretyship expires; if there is no such term, it expires if the creditor, within a year from the time the secured obligation became due, failed to initiate an action against the debtor (Art.367).

Acreditor brought an action against a surety, after failing to have his claim satis ed by the debtor. The surety and the debtor bore joint and several liability vis à vis the creditor. It was agreed between the creditor and the debtor that the creditor could unilaterally change the rate of interest. In accordance with this agreement, the creditor had informed the debtor and the surety of the increase in the rate of interest.

However, the argument of the creditor that the surety consented to the change by concluding the suretyship contract containing such terms was rejected by the court. The court ruled that an express consent of the surety to accept liability in accordance with the changed secured obligation was lacking.47

There is no requirement as to the quali cation of the surety in the Civil Code. However, in cases where entities related to the state are involved, care should be taken. The court found a suretyship contract null and void on the ground that the state unitary enterprise which acted as a surety exceeded its power in becoming a surety for an obligation of a debtor, with whom the enterprise had no production relations. Furthermore, state treasury enterprises or institutions may not be a surety, since it may result in the liability of the owner – the state – without its consent, since, by law, the owner bears supplementary liability for the debt of those entities.48

In the following case, the provincial administration guaranteed the debt of a company as a surety:

Bank Globeks brought an action in court against the administration of the Orenburg province claiming payment of 14,336,246 roubles. The Bank had extended a loan

47Item 6 of the Information Letter of the Supreme Commercial Court, January 20, 1998, No.28.

48Sadikov ed., supra, p.858.