Ruling of the Russian Supreme Court with its statement of reasons in the Sovcombank vs Citibank case
Evgeny Oreshin, Partner of the Dispute Resolution Practice, prepared a legal alert with the main conclusions of the Russian Supreme Court in Case No. А40-167352/2023 on the joint and several liability of a Russian company for the obligations of a foreign group company.
Previously, the Russian courts would impose joint and several liability in many cases on Russian companies for the debts of foreign companies from the same company group. The courts proceeded from the principle that the Russian company was harming the plaintiff by not paying the foreign company’s debt. The Russian Supreme Court (hereinafter as “SC RF”) changed this approach.
1. On the one hand, the SC RF did not explicitly state that Russian companies affiliated with foreign entities (their subsidiaries, etc.) are categorically exempt from joint liability for the debts of foreign companies. On the other hand, this conclusion (that 'subsidiaries' are not liable for 'parent companies') can be inferred from several lines of reasoning in the Supreme Court’s ruling.
For example:
"…in exceptional cases, company group participants and other controlling persons (clauses 1–3 of Article 53.1 of the CC RF) may be held liable to a creditor of this legal entity [BIRCH comment: Russian companies (subsidiaries) are not participants in foreign companies or their controlling companies] if the inability to satisfy the creditor's demands is provoked by the realization of the will of controlling persons whose behavior did not meet the criteria of good faith and reasonableness and does not correspond to market-related or other objective factors, or ordinary business risks inherent in commercial activities”.
Furthermore, the SC RF calls attention to the fact that foreclosure on the property of a Russian company is possible under certain circumstances: if it is formed at the expense of the property of a foreign company (see below), i.e., not in connection with joint and several liability, but on other grounds.
2. It is necessary to investigate the circumstances related to the possibility of unblocking frozen funds
”For this case, it was important to verify the arguments of Citibank that the plaintiff currently has the opportunity to return/receive funds that are not lost, but were extrajudicially blocked when transferred by a foreign bank according to the procedure provided for by US law".
3. It is necessary to discuss the issue of involment the Russian Central Bank as a third party of the dispute
"Since the relevant issues [BIRCH's comment: issues on the possibility of unblocking funds] are within the competence of the Russian Central Bank as a regulator, it is necessary to raise for the parties’ discussion the issue of involving the Russian Central Bank in this case in accordance with Article 51 of the Commercial Procedural Code of the Russian Federation".
4. The plaintiff must prove, like in any other dispute, that harm was caused to them by the Russian company. The mere fact that a Russian company belongs to the same company group as the actual foreign debtor of the plaintiff does not automatically establish the causation of harm, contrary to what some current cases suggest
"…the court should assess the degree of participation of each of the defendants in causing the relevant losses as well as qualify the legal relations on the basis of which the claims against different defendants were filed, taking into account that by joining the defendants on the principle of solidarity, the plaintiff actually bases the claims against N.A. Citibank on the non-performance of the transaction and against Citibank on the construction of a non-contractual tort obligation.
At the same time, the plaintiff's arguments that its claims were brought against both defendants for their violation of the public legal order of the Russian Federation, and not for Citibank N.A.’s non-performance of the transaction as a result of which Citibank N.A. has an obligation to SMR LLC, did not exempt the plaintiff from proving the criteria for each of the defendants’ violation of such public order...".
5. In order to resolve the issue of the possibility of foreclosure on the property of a Russian company, it is necessary to establish whether this property (which can be foreclosed) was formed by a foreign company
"...in order to resolve the case, the court must determine and evaluate the extent of control exercised by Citibank N.A. over 'Citibank' LLC, including under the asset-based criterion (in particular, the amount of Citibank N.A.'s investments in 'Citibank' LLC; the value of Citibank N.A.'s assets used by 'Citibank' LLC; and the existence and ownership of funds transferred from Citibank N.A. to 'Citibank' LLC".
6. It is also necessary to find out whether the property of the Russian company is the property of a foreign company
"When considering the claim, the court should also have raised for the parties’ discussion the legal question of whether the claim filed by the plaintiff against Citibank is a claim for the application of the mechanism provided for by Article 77 of Federal Law No. 229-FZ of 2 October 2007 "On Enforcement Proceedings" [BIRCH's comment: this article is about the foreclosure of the debtor's property held by third parties] on the foreclosure of the debts of Citibank N.A. on the property held by Citibank given that third parties' lawful possession and use of a debtor's property does not preclude the possibility of levying execution on such property...".