F4CL(Rus)RQB-As_d09

REVISION QUESTION BANK – CORPORATE AND BUSINESS LAW (RUSSIA) (F4)

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Tutorial note: Answers to past exam questions are those of the examiner at that time. In some cases the answer to a question or part thereof is minimal, whilst others are very extensive. Do not be deterred by the length of the longer answers as they are intended to be informative and illustrative of the range of valid answer points that could be made.

Answer 1 SYSTEM OF LAW

(a) The system of the law and the system of legislation

System of law is the inner structure of law expressing the co-ordination and unity of legal norms and at the same time dividing these norms between branches and sections.

The hierarchy of the system of law includes the branch of law, sub-branch, institute of law and legal norm (provision).

Branch of law is a separate complex within a major system of similar legal norms regulating one field of civil relations (e.g. substantive and procedure branches of law).

A branch may divide into smaller complexes – sub-branches (e.g. law of estate; contractual law (includes norms regulating contract and torts); hereditary law (norms regulating inheriting property), etc.

Institute of law is a complex of interrelated legal norms pertaining to one or several branches of law, which regulates individual sections of civil relations.

Legal norm is the basic element of the system of law, a rule of conduct obligatory for everyone established or admitted by the State and enforced by it (non-observance of the legal norm entails judicial responsibility).

While the system of law is actually the law’s inner structure, the system of legislation is the external expression of the law (the form of the law).

(b) Major characteristics and examples of public and private law

Private law mostly concerns the interests of individual persons, their legal status and proprietary relations, while public law deals with state interests, legal implications to the state, its bodies and officials and regulates relations of public interest.

The following characteristics are typical for private law: the object of the law – relations based on legal equality of participants, autonomy of their will and their proprietary independence (possessing with set-apart property). Application of “residuary” rules norms is typical for private legal relations (e.g. the Civil Code of the Russian Federation stipulates that parties may conclude a contract either in the form set by the law (other legal acts) or in other form.

Civil law is one of the branches of private law. The Civil Code of the Russian Federation sets legal foundations of private law:

equality of participants to proprietary relations; inviolability of property; contractual freedom; inadmissible arbitrary interference into private affairs; necessity to freely exercise civil rights and the guarantee of their protection in court.

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) – REVISION QUESTION BANK

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As for the branches of public law, their typical characteristic is that they regulate relations based on subordination of one party to another. Public law regulates the structure and operating of the state, foundations of the state system, law-making and law enforcement.

Branches of public law include constitutional law, administrative law, finance law, etc.

(c) The role of international legal acts in the Russian legal system

In accordance with of the Constitution of the Russian Federation (art. 15), universally accepted principles and provisions of the international law and international treaties are the part of the legal system – including international treaties with the Russian Federation as the successor of the USSR.

Today international law is presented by pacts, treaties, declarations and resolutions of international organisations (first of all, the United Nations). According to the Constitution of the Russian Federation, the Russian Federation admits and guarantees civil rights and liberties established by norms of international law and by the Constitution of the Russian Federation.

The procedure of application of the norms of international law is diverse and usually is agreed upon in Russian Federation treaties with foreign states, in international conventions and charters of international organisations.

As sources of law, regulations of international treaties hold advantage over the law of the Russian Federation. Such regulations act directly unless the treaty stipulates that application of its regulations in the Russian Federation requires a separate legal act to be adopted.

Individual international legal acts are regarded as recommendations. That concerns, in particular, recommendations of the International Labour Organisation that are viewed by states as standards to follow in labour legislation.

Answer 2 LLC RUSSIAN STYLE

(a) Branches of law

With respect to the given situation one may apply the following branches of law:

Labour law, since Mr Ivanov worked under labour contract. The labour law is a legal branch that regulates relations arising under a labour contract between the employee and employer.

Civil law, since Mr Stepanov worked under a civil law contract for the performance of work. Civil law is the law branch that determines the legal status of subjects of civil turnover, grounds for arising and the procedure of implementation of the right of ownership and other rights of estate, regulates contractual, proprietary and non-proprietary relations related to them based on equality, autonomy of will and proprietary independence of the participants.

Social security law, since the reimbursement for the damage inflicted to the health of the employees by a work-related injury (accident at work) is regulated by provisions of compulsory state social insurance.

(b) Change in situation

If it is supposed that the injured filed their claims to court for compensation for the damage to health, norms of procedural law will be applied (in particular, civil procedural law). Procedural branches of law regulate relations arising under settling disputes in court.


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(c) Which legal source?

Federal law is the regulatory legal act of higher legal force in comparison to an act of the Supreme Soviet of the Russian Federation, and in the event of contradiction between these two legal acts, the law has the supremacy.

(d) Is the lawyer correct?

Court rulings on specific cases are not sources of Russian law. Therefore, in the given case the lawyer is wrong when stating that the court should be guided by court decisions made before. However, that does not mean that the judge may not base his decision on already available court rulings on similar cases. Still, in any case the court substantiates its decision by referring to regulatory legal acts and other sources of Russian law, but not to decisions previously made.

Answer 3 LEGISLATIVE INITIATIVE

(a) Labour team

The right of legislative initiative implies that a person may introduce draft legal acts for consideration by the State Duma or the Federal Assembly. The Russian Federation Constitution determines the list of subjects possessing that right, including the Russian Federation President, the Federation Council, members of the Federation Council, deputies of the State Duma, the Government of the Russian Federation, and legislative (representative) bodies of Russian Federation subjects. The right of legislative initiative also belongs to the Constitutional Court of the Russian Federation, the Supreme Court of the Russian Federation and the Highest Arbitration Court of the Russian Federation with respect to issues in their competence.

As it follows from the Constitution of the Russian Federation, trade unions do not have the right of legislative initiative.

(b) Application of provisions

According to the Constitution of the Russian Federation (art. 15), the latter has the supreme legal power, direct action and is effective throughout the entire territory of Russia. Laws and other legal acts adopted in the Russian Federation cannot contradict the Constitution. That means that, first, in case of contradiction between a legal act (like Labour Code) and the Constitution, the latter has supremacy, and secondly, that provisions of the Constitution are applied directly and do not require a special legal act aimed at the implementation of a provision of the Constitution.

(c) Procedure of amending the Constitution

The supremacy of the Constitution is ensured by the special procedure of adoption and amending.

Firstly, the number of subjects that may claim to amend the Constitution or adopt a new one instead is restricted to the Russian Federation President, the Federation Council, the Government and a number of other subjects (art. 134).

Secondly, provisions of certain charters (1, 2 and 9) – may not be amended in the usual procedure of amending the laws. If a proposal on amending these chapters is supported by 3/5 of votes of the total number of members of each chamber of the Federation Assembly, a Constitutional Assembly is convened where either the invariability of the present Constitution is confirmed or a draft of the new one is elaborated.


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Thirdly, there is the special procedure for introducing amendments into the Constitution’s chapters 3-8, which simultaneously restricts the range of subjects entitled to amend the Constitution.

Fourthly, amendments to art. 65 of the Russian Federation Constitution (where the composition of the Federation is determined) may be introduced only on the basis of appropriate federal constitutional law on a new subject entering the Russian Federation and on the constitutional status of such subject. Changes to the name of a subject of the Russian Federation require a Decree of the Russian Federation President.

(d) Major characteristics of the Constitution

Supremacy – The Constitution, that is the principal law of the country, is effective throughout the entire territory of the Russian Federation and is to be observed by all state bodies and other subjects. The Constitution also occupies the supreme position in the system of legislation and directly stipulates that all legal acts are not to contradict the norms of the Federal Constitution (art. 15).

The Constitution is the legal basis for other regulatory legal acts. The Constitution mainly establishes general principles and regulations, while current legislation deals with implementation of the constitutional norms in specific legal relations. The Constitution also determines the process of law-making itself. The Constitution names types of legal acts adopted by state bodies (art. 90, 105) and, in a number of cases, the level of a regulatory legal act that must be adopted to regulate certain public relations (art. 39 and others). The Constitution also sets the hierarchy of such acts.

Answer 4 JURIDICAL SYSTEM

Tutorial note: The aim of the question is to test the candidates’ knowledge of the courts of the Russian Federation, with particular reference to their hierarchy and jurisdiction.

(a) Courts of general jurisdiction

The courts of general jurisdiction are structured on the basis of a three tier hierarchy:

lowest level – the district courts that serve cities and towns; middle level – the supreme courts of the constituent republics of the Russian Federation; highest level – the Supreme Court of the Russian Federation.

The courts of general jurisdiction preside over cases and claims in relation to criminal, civil and administrative matters that fall outside the mandates of the constitutional and arbitration courts. Inter alia, cases and claims heard before them include:

civil, family and labour relations where at least one party to the action is an individual (unless otherwise stipulated by the law);

cases involving land where at least one party is an individual;

cases involving cooperatives where at least one party is an individual;

issuing and revocation of licences to mass media bodies;

administrative legal relations;

cases as provided for in the Civil Code;

international transportation agreements;

disputes relating to religious organisations.


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The term “general” is key to understanding the nature of these courts. Essentially, they deal with matters that fall outside the respective roles of the courts of arbitration and the Constitutional Court.

The court of first instance is the district court, except for those cases that are deemed too sensitive, too complex or too serious, in which case the higher level courts serve as courts of first instance. The second and third level courts also fulfil a supervisory function in respect of decisions of courts subordinate to them, as well as an appeal mechanism.

(b) Arbitration courts

In common with the courts of general jurisdiction, the courts of arbitration have a three tier structure:

the first level is made up of the courts of first instance in matters concerning commercial activity and economic disputes these serve specific districts and areas;

the second level is the courts of the federal regions, serving as courts of appeal;

the third level is the Supreme Arbitration Court – this is the highest level and as well as dealing with final appeals has the role of interpreting and ruling on matters relating to commercial activity.

The types of dispute considered by the courts of arbitration are mainly concerned with economic relations and activity. They include:

disputes and claims between individual entrepreneurs, economic entities and legal entities;

dispute and claims between the Russian Federation and its subjects;

matters relating to contracts, including interpretation, variation, breach, legal remedies;

matters relating to ownership, possession and rights over property;

civil wrongs (torts) and remedies in respect of economic entities.

(c) Four rules of geographic position

(1) Jurisdiction in personam

A case relating to property in personam (generally, property other than real estate) is dealt with at the location of the defendant.

(2) Alternative jurisdiction

If the defendant’s location is unknown or indeterminate, the case is dealt with by a court in the same locality as the defendant’s property or last known address.

(3) Jurisdiction in rem

The term “in rem” mainly applies to immovable property, which comprises mainly real estate. Claims in relation to property held in rem are dealt with at the same locality as the property itself.


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(4) Agreed jurisdiction

This is self-explanatory. The parties may agree to the location of the case, either by a clause in the contract between them or otherwise by mutual express consent. Agreed jurisdiction cannot apply to disputes in rem however.

Answer 5 IMPLEMENTATION

Tutorial note: This question aims to test your knowledge and understanding of concepts relating to the implementation of law in the Russian Federation, and to give practical examples of these concepts.

(a) Accomplishment

This term refers to individuals and legal entities taking the opportunities afforded by the law to take actions or fulfil their obligations. In this respect, the law may be enabling or restrictive. As Russian laws are mainly based on statute, it is generally accepted that actions that do not cause harm to others and are not forbidden in law are permitted. Some laws prescribe the actions that individuals and juridical bodies may take and the manner of accomplishing them.

There are many examples of accomplishment. The individual’s right to sell his or her personal possessions is an accepted feature of the law, though certain possessions may be divested only in a specified manner. Real estate, for example, has to be sold or transferred by means of a written contract and the ownership vested in the new proprietor by State registration before the action can be legally completed.

(b) Execution

This term refers to the discharge of the legal obligations of citizens and legal entities as laid down in the various laws and regulations that are imposed by government and municipal bodies.

The most important examples of execution relevant to individuals are the fulfilment of obligatory returns in the form of statutory records, including registrations of births, marriages and deaths and the payment of monies due, such as taxes and other mandatory payments. Another example is compulsory military service.

To the enterprise, it is necessary to make returns to the government in respect of constitutional matters such as formation of companies, reorganisation, insolvency and dissolution. Companies also execute obligations by paying taxes and mandatory payments to their staff.

(c) Observance

This term refers to compliance with the limits laid down in relation to the activities of individuals and organisations. It is a more negative concept in that it involves not taking certain actions that are forbidden by law.

The restriction on the active capacity of young persons is a good example of observance, especially in respect of activities that are prevented by the Civil Code before the individual reaches the age of 18 years. The criminal (penal) law lays down instances in which specified actions are deemed to break the conventions of society, the intention being to prevent behaviour of which the State, acting vicariously on behalf of citizens, disapproves.

Individuals and legal entities must observe certain legal provisions when entering into most types of contract, and even outside the scope of contract law can be held accountable if by their actions they inflict loss or harm on others.


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Legal entities are also constrained by their own constitutions (Charter and other documents), which under the provisions of the law must lay down specified parameters within which they may act.

(d) Enforcement

This term refers to actions that ensure that individuals and legal entities comply with the law. Where this is not the case, the law specifies the manner in which penalties, other sanctions or other remedial actions may be taken against those whose behaviour is at odds with the law.

The clearest example of enforcement is the imposition of punishment or penalties against criminals. However, enforcement is a broader concept in that any competent body may take action to enforce the law within its specified terms of reference. The courts are integral players in enforcing the law, such as in matters requiring the resolution of contractual disputes and confirmation of the entitlements of citizens (such as payments from the State or from their employers).

Legal entities incur certain obligations in the course of economic activity. One example is the enforcement of the rights of creditors when the sums due to them become payable, such as on maturity of the debt, on default by the debtor, on reorganisation or on insolvency.

Answer 6 RUSSIAN LEGAL SYSTEM

(a) Main sources

The primary source of law is legislation, enacted by central government and subordinate bodies. This legislation is created within the overall framework established by the Constitution. Legislation must be consistent with the Constitution, and any inconsistencies may potentially be set aside by the constitutional court. The statutory legal framework is hierarchical in nature, with the Constitution at the apex.

Federal laws are created by the government of the Russian Federation. These laws apply to all subjects of law within the state and are superior in the hierarchy to laws adopted by subordinate bodies. Under the Constitution, any inconsistency between federal laws and subordinate laws is resolved with reference to the former.

As Russia is a federal state, it is appropriate that various bodies are empowered to make laws that apply within their stated jurisdictions. Examples of such bodies include regional governments, municipal territories, cities and towns. Laws enacted apply only within the jurisdiction of each body. The principle underlying subordinate legislation of this kind is often referred to as subsidiarity. Under this principle, legal authority should be devolved to those who exercise regional or local power and authority when this can be achieved more efficiently than through federal measures.

Under the Constitution, the President of the Russian Federation has the power to enact laws by issuing decrees. Again, any such decree may not contradict the provisions of the Constitution. This power of the President has been significantly reinforced in recent years. It enables the President to fill voids in the law or resolve issues that require high level intervention (see (b) below).

In an international context, the universal principles of international law and the provisions of international treaties entered into by the state are deemed to apply and are therefore binding on the government and other subjects of law. This aspect of the legal framework is becoming increasingly important as international trade expands and the forces of globalisation continue to erode territorial barriers.


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There are two other minor influences that may be regarded as sources of law:

(1) In common with many other large countries the Russian Federation has regions that display different traditions and cultural stereotypes. To some extent, the customs and traditions of each area may from time to time be reflected in the decisions of judicial bodies.

(2) As a legal system more closely aligned to the Germano-Roman model than the Anglo-American common law model, it could be argued that the doctrine of judicial precedent has no role in the Russian Federation. Although there is no formally developed equivalent to judicial precedent in Russian law, the decisions of the courts are documented and serve as a source of reference for judges presiding over current cases. This is particularly important for the courts of arbitration which deal with matters relating to entrepreneurial activity. To this extent, therefore, there is some reliance on the previous decisions of courts as a source of law.

(b) Absence of written law

A void in legal provision is often referred to as a “law lacuna”.

If there is no written law, the courts may have to resort to analogy whereby they consider similar circumstances in which a law actually exists.

Alternatively, the court has to consider the existing legislation and apply a decision that is consistent with the purposes and principles of the legislation.

The role of the courts in resolving a law lacuna is quite common in codified legal systems such as in the Russian Federation. This is inevitable, as it is unlikely that the legislative process can ever keep up with the pace of change in the commercial environment and society as a whole.

At government level, an absence of law may be resolved by Presidential decree. The President is empowered under the Constitution to make decrees and edicts to resolve any law lacuna. Intervention at executive level was extremely common in the years immediately following the end of the Soviet era.

It should be noted that there are limits to applying analogies to resolve voids in the law. Penal and administrative laws cannot be interpreted or extended in any manner other than their literal meanings.

Answer 7 NEW LEGISLATION

(a) Submission of draft laws

Most of the new legislation implemented in the Russian Federation is devised and proposed by the serving government. The programme of new laws reflects the commitments of the government over a specified period of time. Given that by definition the government has a majority of deputies, this legislation will normally be enacted with some debate but little prospect of it being overturned on its way to becoming actual law.

However, the Constitution of the Russian Federation empowers various individuals and bodies to propose new laws. These include deputies of the Duma, members of the Federation Council, the President, legislative bodies of the subjects of the federation and the highest courts in the judicial system. Among the courts that can propose legislation, strictly within their terms of reference, are the Constitutional Court, the Supreme Court and the highest level of the Arbitration Court.


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(b) Process of adoption

The process through which a draft law becomes legislation is laid down in the Constitution of the Russian Federation.

Once a draft law is promulgated by its authors, it requires a simple majority of deputies in the Duma and a simple majority of members of the Federation Council to vote in its favour. However, the draft legislation cannot proceed to becoming law until it is signed by the President.

The President has a right not to sign the draft law and to re-submit it to the Duma together with his concerns. The Duma then reconsiders the draft law. If it is deemed appropriate, it may overturn the President, but this is subject to a vote of not less than two-thirds of the deputies and members of the Federation Council being in favour of this course of action. The President must then sign the law.

The formal enactment of the legislation takes place 10 days after publication in the official “Rossiyskaya Gazeta”, though the legislation may specify future dates on which the measures to be implemented actually take effect. As a general principle, legislation is not enacted retrospectively.

(c) Powers of the President

The President of the Russian Federation has substantial powers to create legislation. These powers have increased since the Constitution was introduced.

Subject to the parameters laid down in the Constitution, the President may issue decrees to fill voids in the existing legal framework (law lacunae) and also to resolve contradictions or dilemmas caused by existing laws if these cannot be resolved by the judiciary. This power was extremely important in the years immediately following the end of the Soviet era, when the law making process could not keep up with the rapidly changing needs of society.

The powers of the President to make laws are also invoked when it is necessary to resolve a crisis.

Answer 8 LEGAL ENTITY

(a) Organisational unity

The first characteristic of any legal entity is the entity’s organisational unity that implies a clear internal structure and the establishment of certain management bodies. Such a structure is fixed by the statutory documents of the given organisation. The form of the organisational unity is the organisation’s statutory document:

− the Statutory Agreement; − the Charter; − in individual cases, provisions adopted on the basis of general provisions

concerning organisations of that type.

The content (implementation) of organisational unity is clearly set by the law and its structure, by the organisation’s statutory documents. The Civil Code of the Russian Federation and federal laws on individual types of legal entities both set general rules concerning statutory documents and administration management and determine peculiarities of application of these rules with respect to each type of legal entity.


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(b) Property separation (set-apart property)

The second most important characteristic of the legal entity is possession with set-apart property. The form of such possession is an independent balance or an estimate of the legal entity. The content (implementation) of that characteristic is the legal provision required from founders in order to form the entity’s aggregate (for economic companies) or statutory (for other legal entities) capital. No legal entity may be set up without aggregate or statutory capital, since its absence would mean the impossibility to meet creditors’ claims or the lack of any commercial risk for founders. It should be emphasised that the entity must be the owner of its set-apart property or possess it by right of economic disposal of operative management. Disposal of set-apart property by other rights (e.g. the right of lease) is not allowed.

(c) Proprietary responsibility

Proprietary responsibility is the third characteristic of the legal entity. Legal entities (with the exception of institutions) financed by their owner are answerable for their obligations with the entire property in their possession.

The founder (the participant) of the legal entity or the owner of its property is not answerable for the legal entity’s obligations, and the legal entity is not answerable for the obligations of the founder (the participant) or of the owner, with the exception of cases, stipulated by the Civil Code of the Russian Federation or by the statutory documents of the legal entity.

Founders or participants of an entity are answerable for the entity’s debts only in case the legal entity’s property proves to be insufficient. This type of responsibility is called additional or subsidiary. The law assigns this type of responsibility to full partners in general or commandite partnerships, participants in superadded liability companies and production co-operatives, founders of federal (treasury) enterprises and an organisation’s property owners.

At the same time, it should be borne in mind that if the legal entity’s property proves to be insufficient and the insolvency (bankruptcy) of the legal person has been caused by:

the founders (participants);

the owner of the legal entity’s property;

other persons who have the right to issue obligatory instructions for the given legal entity or may determine its actions in any other way;

then subsidiary liability under the legal entity’s obligations may be imposed upon such persons.

(d) Acting in civil turnover on one’s own behalf

The fourth characteristic of a legal entity is the ability to act in civil turnover on one’s own behalf. A legal entity’s ability to act on its own behalf is implemented by the fact that each entity has its own official name, which is stipulated in its Charter or other statutory documents as of the moment of state registration (art. 54 of the Civil Code of the Russian Federation). The official name of the entity specifies its type of activity and the legal-organisational form, and thereby specifies the entity and singles it out as a subject of civil turnover.


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Answer 9 STUDENT PETROV

(a) Parental approval

Minors from 14 to 18 years old can effect certain deals with the written consent of their legal representative: parents, adopters or guardian. The consent may be given before or after the deal is effected.

Among the actions named in the case-study, student Petrov could effect the following on his own:

Buy study materials, since minors from 14 to 18 years old may dispose of their salary, grants or other income without the approval (consent) of their parents, adopters or guardian;

Receive an author’s fee for the published article, since minors from 14 to 18 years old may exercise author’s rights to a work of science, literature or art, to an invention or to another legally-protected result of their intellectual activity without the approval (consent) of their parents, adopters or guardian. This includes the receipt of the author’s fee.

Since the purchase of computer (due to its price) may not be regarded as disposal of a student’s grant, salary or petty everyday deal, Petrov could not effect it without the consent of his parents.

(b) Circumstances

Civil legislation envisages such an institution as emancipation. That means that a minor who has reached the age of 16 years may acquire full active capacity if (s)he has been declared emancipated (i.e. if (s)he works by a labour agreement), or engages in business activities upon the consent of the parents, adopters or guardian. Thus, after Petrov reaches the age of 16 years and providing he works by a labour agreement, he will be able to effect all the deals listed on his own, without the consent of his parents.

Furthermore, full active capacity is acquired by a minor of less than 18 years in case (s)he marries – from the moment of entering into a marriage. Active capacity, acquired as a result of entering into a marriage, is retained in full in case the marriage is dissolved before the citizen reaches the age of 18 years.

A minor is declared as having acquired full active capacity (emancipation) by the decision of the guardianship and trusteeship body – upon the consent of the parents, adopters or guardian, or, in the absence of such consent – by court decision. Parents, adopters and guardians do not bear responsibility for the obligations of an emancipated minor, in particular for those obligations, which have arisen as a result of the inflicted damage.

(c) Labour contracts and minors

According to effective labour legislation, a person becomes a subject of labour relations at the age of 16. Before that age minors may be employed only with certain restrictions. In particular, minors older that 14 years studying at schools or colleges may be employed to perform work in their spare time with the consent of their legal representatives (parents, adopters or guardian).

As employees, minors up to 18 years old have equal rights with adults, and besides – with respect to work protection, working time, leaves and some other labour conditions enjoy privileges set by the Labour Code of the Russian Federation.


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Minors younger than 18 years old may not be employed for hard or hazardous work (e.g. mining). They may neither work night shifts, over-time or at the weekends.

Thus, Petrov may enter into a labour agreement providing all the above-mentioned privileges are observed.

Answer 10 MRS KLUSHKINA

(a) Gift of car

It is quite possible to transfer the car to the boy of 12 years old. The minor of 6–14 years old may accept the gift himself, but in case the transfer of property needs state registration (e.g. immovable property) the deed of accepting the gift must be concluded in the minor’s name by his parents. The contract must be made in writing, notary form must be observed and the contract must be registered with state authorities.

(b) Sale of apartment

It is quite possible to transfer the apartment to the boy of 15 years old. The underage person may accept the gift himself, but in case the transfer of property needs state registration (e.g. immovable property) the deed of accepting the gift must be concluded in the minor’s name by his parents by the minor with a written consent (approval) of his parents. The contract must be made in writing, the contract must be registered with state authorities.

(c) Gift of bicycle

The bicycle may be transferred to the girl of five years old but all the transactions in favour of the minor under six years old must be concluded by her parents. In order to make the gift valid no special form is to be observed, the bicycle must be physically accepted by the child’s parents.

(d) Empowering

The best way to empower an individual to exercise any actions and/or deeds in the name of another individual is to issue a power of attorney. This power of attorney must directly provide for the actions/deeds that the individual is empowered to exercise.

Russian legislation also provides for trust management as means of management of another person’s property, but trust management is not appropriate in the described situation because only legal entities may be trust managers.

(e) Testament

No. Testament must be done by the individual in person. The deed of empowering another person to do a testament is invalid.

Answer 11 ANNA

(a) Personal capacity

The relevant provisions of the Civil Code relate to the personal capacity of the individuals involved. All citizens of the Russian Federation have passive capacity which confers general civil rights. However, the active capacity of natural persons is determined in most instances with reference to their age. Active capacity related to the extent to which each individual can act on his or her own behalf, enjoy rights or incur obligations.


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The trigger dates for increasing levels of active capacity are six, 14 and 18 years of age.

A child under six years of age has no active capacity. Therefore, as Oleg is only four years old, he has no active capacity. In practice, there is no problem in setting money aside for him, or indeed for him to legally own the money, but he will not be able to make transactions on his own behalf for the time being.

Mikhail is seven years old and so enjoys partial active capacity. He also can acquire property and carry out everyday transactions of nominal value. He can accept the gift from his grandmother and become a legal owner of the money. Although he has a limited ability to enter into transactions, it is probable that an adult would have to carry out transactions on his behalf with the bank. As the scenario suggests that Mikhail’s father may be irresponsible with money, it is questionable whether enabling transactions to be carried out on Mikhail’s behalf by Alexei is a wise course of action.

The oldest two grandchildren are both over 14 years of age. They are entitled to manage their funds to a greater extent, including deposits, transfers and withdrawals at the bank.

It should be noted also that should any of the children marry after reaching 16 years of age, this confers full active capacity.

(b) Transfer of car

Lilia is 16 years old and cannot therefore drive the car legally. However, under the Civil Code Lilia does have property rights including the right to own the car, even if she cannot use it. Lilia can therefore accept the car, though the acceptance requires the participation of her parents as the gift is an item of moveable property that requires State registration. The transfer must be executed in written form and notarised. The contract and the particulars of ownership must be registered with the State authorities.

(c) Transfer of dacha

The gift of the dacha can be made to the four children. The only difference between giving the car to Lilia and giving the dacha to the four grandchildren is that the latter is immoveable property whereas the former is moveable property.

It would be necessary to make a legal conveyance of the dacha to transfer it into the joint names of the new owners. This must be effected in writing and notarised. This would require the participation of the parents, who would for the time being have to act on behalf of the younger three grandchildren. Particulars of ownership would also be subject to State registration.

One practical difficulty that Anna should consider is that it could be troublesome to change the terms of ownership in the near future while some of the children are young. She should also consider the possibility that she may be disenfranchising other grandchildren if Alexei and his wife have more children in the future.

(d) Actions to be taken

Anna could execute a general power of attorney to enable Katerina to act on her behalf. This is a legal document that creates an arrangement of voluntary representation.

It would not be possible to establish a permanent arrangement, as the maximum duration of the power of attorney is three years. However, provided she remains of sound mind, Anna can renew the power of attorney on a rollover basis in the future.


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The power of attorney would entitle Katerina to carry out any transactions on behalf of her grandmother. However, Anna should be aware that conferring such rights on another family member affords absolute discretion in favour of the attorney.

Therefore, Anna has to be certain that Katerina can reliably discharge those responsibilities with which she is trusted.

As a power of attorney is a contractual arrangement of representation, Anna will only be able to enter into a new power of attorney in future years if she remains of sound mind.

Answer 12 PERFORMANCE OF CONTRACTUAL OBLIGATIONS

(a) Non-performance, partial performance, undue fulfilment of contractual obligations

The debtor is be obliged to reimburse to the creditor the losses, caused to him by the non-fulfilment or by an undue fulfilment of the obligations.

Losses are understood to include:

the expenses, which the person whose right has been violated, made or will have to be made to restore the violated right;

the loss or the damage done to his property (the compensatory damage); and

the undeceived profit (i.e. missed profit) which this person would have derived under the ordinary conditions of the civil turnover, if his right were not violated.

If the person who has violated the right of another person has derived profits as a result of this, the person whose right has been violated has the right to claim, alongside with the compensation of his other losses, the compensation of the missed profit in the amount not less than such profits.

If for the non-fulfilment or an undue fulfilment of the obligations the fines have been ruled, the losses should be recompensed in the part, which have not been covered by the fines.

The law or the contract may stipulate the cases when:

only the fines, but not the losses should be paid; the losses may be exacted in full above the fines; according to the creditor’s choice, either the fines or the losses may be exacted.

In the cases, when a limited responsibility for the non-fulfilment or an undue fulfilment of the obligations has been established, the losses, liable to compensation in the part, not covered by the fines, or above it, or instead of it, may be exacted up to the limit, fixed by such a restriction.


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(b) Non-performance or partial performance of some types of obligations

For the non-fulfilment or/and undue fulfilment of monetary obligations such as using of the other person’s money as a result of its illegal retention, of the avoidance of its return or of another kind of delay in its payment, or as a result of its groundless receipt or saving at the expense of the other person, the interest on the total amount of these means will be due. The interest rate is defined by the discount rate of the bank interest, existing by the date of the discharge of the monetary obligation or of the corresponding part thereof at the place of the creditor’s residence (the place of legal entity location). If the debt is exacted through the court, the court may satisfy the creditor’s claim, proceeding from the discount rate of the bank interest on the date of filing the claim or on the date of its adopting the decision. These rules are applied unless the other interest rate has been fixed by the law or by the contract. This kind of interest is exacted by the date of payment of the amount of these means to the creditor, unless the law, the other legal acts or the contract have fixed a shorter term for the calculation of the interest.

If the losses, caused to the creditor by an illegal use of his money, exceed the amount of the interest mentioned above he has the right to claim that the debtor recompense him the losses in the part, exceeding this amount.

The payment of the fines and the compensation of the damages in case of undue fulfilment of the obligation do not absolve the debtor from the fulfilment of the obligations in kind, unless otherwise stipulated by the law or by the contract.

The compensation of the damages in case of the non-fulfilment of the obligation and the payment of the fines for its non-fulfilment absolves the debtor from the discharge of the obligation in kind, unless otherwise stipulated by the law or by the contract.

In case of the non-fulfilment of the obligation to transfer a specific thing into the ownership, into the economic or the operation management, or into the gratuitous use of the creditor, the latter has the right to claim the forcible withdrawal of this thing from the debtor and its transfer to the creditor on the terms, stipulated by the obligation. This right ceases to exist if the thing has already been transferred to the third person possessing the right of ownership, or of economic or operation management. If the thing has not yet been transferred, the right of priority belongs to that creditor with respect to whom the obligation has arisen at an earlier date. If this is impossible to establish, then to that creditor who filed the claim at an earlier date.

Instead of the claim for the transfer to him of the thing, which is the object of the obligation, the creditor has the right to claim the compensation of his losses.

(c) Overdue performance of a debtor or creditor

The debtor who has failed to perform the obligation on time is answerable to the creditor for the losses inflicted by the delay, and also for the consequences of the performance having accidentally become impossible during the period of the delay.

If, because of the debtor’s delay, the performance has lost all interest for the creditor, he has the right to refuse to accept the performance and to claim the compensation of the involved losses.

The creditor is regarded as guilty of the delay, if he has refused to accept the proper performance offered to him by the debtor, or if he has not performed the actions (stipulated by the law, the other legal acts, or by the contract, or those stemming from the customs of the business turnover or from the substance of the obligation) before the performance of which the debtor could not have discharged his obligation.


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The creditor’s delay gives the debtor the right to the compensation of losses caused to him by the said delay. The exception to this is if the creditor proves that the delay occurred through circumstances which neither he, nor the persons to whom by force of law (or other legal acts or the creditor’s commission), the acceptance of the discharge has been entrusted, are answerable.

The debtor is not regarded as guilty of the delay during the period of time when the obligation could not have been performance because of the creditor’s delay.

(d) Responsibility for non-performance and/or partial performance

The person who has not performed the obligation (or who has undue performed it) bears responsibility for this, if it has happened through his fault (whether intentional or due to carelessness on his part). The exception to this is, when other grounds of the responsibility have been stipulated by the law or by the contract.

The person is recognised as not guilty if, taking into account the extent of the care and caution which has been expected from him in the face of the nature and the terms of the circulation, he has taken all the necessary measures for properly discharging the obligation.

The absence of guilt must be proven by the person who has violated the obligation.

Unless otherwise stipulated by the law or by the contract, the person who has failed to non-performance (or has undue performed it), while performing the business activity, bears responsibility, unless he proves that proper performance was impossible because of a force majeure (i.e. because of extraordinary circumstances, which made it impossible to avert under the given conditions). To such kind of circumstances shall not be referred, in particular, the non-performance of obligations on the part of the debtor’s counter-agents, or the absence on the market of commodities, indispensable for the discharge, or the absence of the necessary means at the debtor’s disposal.

An agreement on eliminating or limiting the liability for an intentional violation of the obligation, concluded at an earlier date, shall be insignificant.

Answer 13 TERMINATION OF CONTRACT

(a) Setting off similar obligations

The obligation will be terminated in full or in part by setting off a similar claim of regress, whose deadline has arrived or has not been fixed, or has been defined by the moment of the demand. For the set off, the application from one of the parties is sufficient.

Cases of impossibility of set off

If, by the application of the other party, the term of the limitation of actions is applicable to the given claim and the said term has expired.

For the compensation of harm inflicted to life or health.

On the exaction of alimony.

For life maintenance.

In other cases directly stipulated by the law or by the contract.


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(b) Novation of an obligation

The obligation is terminated by an agreement between the parties on replacing the primary obligation, which has existed between them, with another obligation between the same persons, stipulating a different object or a different way of the discharge (the novation).

The novation is not admissible with respect to the obligations on the compensation for harm inflicted to life or health, and also with respect to those on alimony.

The novation terminates the additional liabilities connected with the primary obligation unless otherwise stipulated by the agreement between the parties.

(c) Compensation for termination of a contract

By an agreement between the parties, the obligation may be terminated by way of paying an indemnity (“otstupnoe”) instead of the discharge (the payment of money, the transfer of the property, etc). The parties must establish the amount, the term and the procedure for paying the indemnity.

Answer 14 CONTRACTS OF SERVICE

(a) Responsibility for providing materials

Unless otherwise stipulated by the contract, the work must be performed by the contractor’s maintenance – from his materials and with his own forces and means. This means that in case nothing is specially provided for in the contract all materials are to be provided by company B who is also responsible for their quality.

(b) Can Group X transfer responsibilities?

The fulfilment of the obligation under the contract may be imposed by the contractor (Group X) upon the third person only with written permission of the customer (Company A).

In case the contract or the law does not provide for the personal execution of contract by the contractor; the contractor may involve third persons to execution of the contract. In this case the contractor acts as general contractor and the third persons involved by him as sub-contractors.

In the described case the obligations of Group X are to be fulfilled by Group X in person as the services (concert) is closely connected to the personality of the Group.

(c) Has Group X fulfilled its obligations?

As under general rules the contract for the repayable rendering of services, the contractor is obliged to render the services in person, unless otherwise stipulated by the contract. The discharge of the obligation by the third person without the customer’s written permission is considered as undue fulfilment.

(d) Demands by Company A

As Group X refused to execute duly its obligations under the contract the Company A is entitled to demand:

the return of the paid up remuneration; full recovery of the losses inflicted upon the Group X; (and the forfeit if it has been stipulated in the contract).


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(e) Demand for reimbursement

According to the general rules, Company A entitled to demand to recover only direct losses inflicted upon the contract between Company A and Company X.

If the scene construction was directly provided for as the Company A’s obligation in front of Group X, the sum of contract of scene construction may be subject to reimbursement.

If nothing was specially provided for and as the stage could be used for different purposes, Company A is not entitled to demand from Group X to reimburse the sum of contract of scene construction, as it is not the direct loss of non-fulfilment of Group X’s obligations.

(f) Can Company C transfer responsibilities?

The fulfilment of the obligation may be imposed by the Company C upon the third person, unless the duty to discharge the obligation in person follows from the contract. In the above-mentioned case does not provide for the personal execution of contract by the contractor; the contractor may involve third persons to execution of the contract. In this case the contractor acts as general contractor and the third persons involved by him as sub-contractors. As a general contractor Company C will be responsible for due fulfilment of obligations by the sub-contractor and also be responsible in front of the sub-contractor for due exercising of payment.

Answer 15 LLC PRIBOY, LLC SYSTEMSNAB AND BANK BKR

(a) Right to restrict powers

The statutory documents of the limited liability company (LLC) are the statutory agreement, signed by its participants, and the Charter, approved by them. The statutory documents of the LLC must contain the terms on:

the amount of the company’s capital; the size of the shares of every participant; the size, the structure, the term and the procedure of contributions; the structure and the competence of the executive bodies; and the order of adopting decisions, including issues, the decisions on which should be

adopted unanimously or by a qualified majority of votes.

The statutory documents also contain other information, stipulated by the Federal Law “On Limited Liability Companies”.

The procedure of operating of the sole executive body of the company and decision-making by it is set by the Charter of the company, its inner documents and by the agreement concluded between the company and the person who executes the duties of its sole executive body. Thus, founders (participants) may establish restrictions of the powers (competence) of its executive body in comparison with the powers of that body set by the law.

(b) Statutory documents

According to the Federal Law “On Limited Liability Companies”, in case of contradictions between provisions of the Statutory Agreement and the Charter of a LLC, the provisions of the Charter have priority.


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(c) Contract of surety

Proceeding from that said above, there are no grounds to consider the contract of surety as void.

Answer 16 AUDIT COMPANY PETER PETERSON

(a) Sale of premises

Krasnaja Ploshad as the owner of the premises could freely possess, consume and dispose of the premises, including sale of the premises under a corresponding contract. At the same time, in case of the sale of property, where the right is abridged by the rights of third persons (the tenants), the seller should have informed the purchaser of such an abridgement.

(b) Rights of the tenant

The contract of sale does not influence the rights of the tenant stemming from a duly registered contract of lease. At the same time, if the bank had agreed to purchase the premises, where the right was abridged by the rights of third persons, the conclusion of the contract of sale would have meant the change of the lessor under the contract of lease.

(c) Court’s decision

If the bank goes to court with the claim on forcing the tenant to move out of the premises, the court should reject the claim. At the same time, if the bank did not know or was not to know about the fact that the premises purchased by it were fully or partially leased (i.e. was abridged by the rights of third parties), the bank may demand to reduce the price of the purchase or to dissolve the contract of sale.

Answer 17 ZAO PEIDODNA

(a) Advertisement

The advertisements containing all the essential terms of the contract (in which is seen the will of the person, who is making the proposal, to conclude the contract on the terms indicated in the proposal with any responding person) shall be recognised as an offer (the public offer).

The advertisements and the other proposals without essence of contract and addressed to an indefinite circle of persons are regarded as an invitation to make the offers. The letters, telegrams and any other documents sent by a person and based on the advertisement and as a response thereto are considered an offer (oferta).

(b) Conclusion of contract and payment

The contract should be concluded by way of forwarding the offer (the proposal to conclude the contract) by one of the parties and of its acceptance (the acceptance of the offer) by the other party. The acceptance will be recognised as the response of the person, to whom the offer has been addressed, about its being accepted. Under general rules silence is not regarded as the acceptance. As there was no contract between ZAO Peidodna and W, ZAO Peidodna does not have the right to demand payment for the wine sent.


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(c) Validity of contract with Z

In the case when the term of acceptance has been fixed in the offer, the contract is regarded as concluded if the acceptance has been obtained by the person who has forwarded the offer (within the term stipulated in it). If the term has been fixed for the performance of a certain action, it may be performed before the expiry of 24 hours of the last day of the term.

In the cases when the duly forwarded notification about the acceptance is received with a delay, the acceptance is not regarded as belated unless the party, which has forwarded the offer, immediately notifies the other party about the arrival of the acceptance with a delay. So the silence of the offeree is regarded as accept of the acceptance that was received with a delay. The contract is not concluded if the offeree notifies the other party about the arrival of the acceptance with a delay.

(d) Conclusion of contract with Y

The contract of purchase and sale of wine between ZAO Peidodna and Y was not concluded because the answer, indicating the consent to conclude the contract on the terms other than those indicated in the offer, cannot be regarded as the acceptance.

Such an answer should be recognised as the refusal of the acceptance and at the same time as a new offer.

(e) Conditions and price by Y

If ZAO Peidodna agrees to sell wine at the conditions and price indicated by Y, it has within 30 days from the moment of receiving the new offer to:

send to Y the full and unconditional acceptance; or

perform the actions involved in complying with the terms of the contract pointed out in the offer (the dispatch of commodities, the rendering of services, the performance of works, the payment of the corresponding amount of money, etc) that will also be regarded as the acceptance.

(f) Conclusion of contract with U

The contract of purchase and sale of wine was not concluded between ZAO Peidodna and U because the advertisement addressed to an indefinite circle of persons is only the invitation to make the offers.

(g) Conditions and price by U

ZAO Peidodna has within 30 days from the moment of receiving the offer from U send to U the full and unconditional acceptance or to perform the actions involved in complying with the terms of the contract pointed out in the offer (the dispatch of commodities, the rendering of services, the performance of works, the payment of the corresponding amount of money, etc) that will also be regarded as the acceptance.


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Answer 18 FOUR-STOREY OFFICE

Tutorial note: The question tested the candidates’ understanding of the law relating to torts (civil wrongs) and the consequences of civil wrongs to those culpable.

(a) Can C sue F & G?

Under the Civil Code, a person or persons who cause damage to another person or his property is obliged to reimburse the injured party for the damage caused. Company C can therefore sue Federov and Galkin for the losses inflicted by their actions or inactions, though it would undoubtedly be better served by taking action against their company as being vicariously liable for the actions or inactions of the employees (see below).

The ability to recover damages from the individuals may be limited by the financial resources of the individuals concerned. This may be recognised by a court – if, for example, hardship would arise from full payment, the court may impose limits on payments due or order payments to be made over a period of time.

(b) Can C sue D?

An economic entity such as a limited company can be held accountable for the damage caused to third parties by its employees in the normal course of their duties. This is the concept of vicarious liability.

Therefore, Company C can sue Company D for the damage caused by Federov and Galkin. This is probably a better means of deriving financial recompense if the employees are of limited financial means.

(c) Rights of Company D

If Company D is held accountable for the damage caused by its employees as set out above, the company may in turn sue its employees for the damage inflicted on the company by way of regress action. They could recover monies due by way of deductions from salary, though the extent to which this may be done is limited by legal and practical considerations.

(d) Damages

It is necessary to distinguish between the damage caused directly by the actions of Federov and Galkin and the expenses associated with the accident though not directly caused by it. The former are subject to reimbursement whilst the latter are not.

The repairs and the need to buy new furniture were direct consequences of the accident. They are therefore subject to reimbursement.

The furniture in the General Director’s office was not damaged and was therefore still usable. Although it may have been desirable to replace this furniture, its replacement was not caused by direct damage as a result of Federov and Galkin’s actions.

The amount of damages due to Company C = 500,000 + 250,000 = 750,000 roubles.


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Answer 19 SURETY

(a) Meaning

The term “surety” applied to one of the six obligation security means permitted under the Civil Code.

A surety is a person who personally guarantees to discharge the debt of another person. Therefore, if in a debtor–creditor relationship the debtor defaults on the contractual obligation, the surety becomes jointly and severally liable with the principal debtor for the sum due.

The legal nature of a surety is contractual. When a loan is made conditional on a surety agreement, two contracts come into existence. The first of these is the contract between the debtor and the creditor. The second contract is a collateral contract that creates an obligation of the surety to the creditor in the event of default of the debtor.

(b) Rights and obligations

In the event of a surety being called upon by the creditor to pay under his obligation, the surety has the right of regress action against the debtor. This means that the surety can claim back monies paid as well as interest running on the debt.

The surety has a right to put forward any objections that could have been raised by the principal debtor.

As mentioned above, both the debtor and the surety are contractually obliged to the creditor, though the creditor’s rights against the surety only trigger in the event of default. It is important to point out that the eventual sum owed by a surety may exceed the original debt, as the creditor can claim the costs of recovery or realization of the debt as well as interest for the relevant period.

(c) Termination

A surety agreement may be terminated in several ways:

Once the sum due to the creditor is discharged in full, the surety is released from the obligation, whether this is paid by the debtor or the surety himself.

The surety contract exists for a specified period of time. On expiry of this period, the obligation is terminated. The claim against the surety is also time-limited to a maximum of one year from the end of the term of the principal debt. If the debt is open ended, the claim against the surety must be filed within two years of conclusion of the surety agreement.

If the terms of the debt are varied to the detriment of and without the prior consent of the surety, the obligation of the surety is extinguished. This also applies if the debt is securitised or otherwise transferred without reference to the surety.

If the creditor refuses to accept due discharge of the debt by the principal debtor, the surety cannot be called upon to contribute.


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(d) Rights and obligations of a creditor

Rights

The creditor has the right to enforce any condition of the pledge that does not run contrary to the law. This often involves not only the right to demand capital and interest due but also charges and fees associated with management and administration of the agreement. The creditor may also reserve a right to inspect pledged property and impose any other non-financial covenants to protect his position.

On default by the debtor, the creditor may realize the pledged property by selling and repaying the sum due. Any sale must be by open auction with a price set by the court or by agreement between the parties. The pledger has the right to petition the court to defer sale for up to one year. If there is no buyer, the pledgee has a right to acquire the pledged property for a price of no more than 10% less than the agreed or imposed price.

The outstanding debt may be repaid from the proceeds of sale. If there is a surplus, this must be paid to the pledger. If there is a deficit, the pledgee can pursue the debt further against other property owned by the pledger.

Obligations

The creditor is responsible for proper execution of the terms of the pledge in the event of realisation of the pledged property.

Failure to do so may terminate the pledge.

Depending on the terms and conditions applicable to the pledge, the creditor may be liable for loss or damage to the pledged property and may be responsible for insurance.

The creditor is liable for loss or damage if the pledge object is transferred to him and the loss or damage arises from his actions, whether accidental or otherwise.

Once the debt is discharged the conditions relating to the object of pledge are terminated.

Answer 20 DISCHARGE OF A CONTRACT

The Civil Code lays down specific requirements for the proper discharge of a contract.

The contract must be discharged by the proper person. This relates to privity, under which the person charged with the responsibility of fulfilling the contract is held to be accountable for proper discharge. This duty may extend to third parties if the terms of the contract so dictate. In some cases, a potential loss that may be incurred by a third party gives the right to the third party to honour the contract. If the third party discharges the contract, the rights under the contract are subrogated to the third party.

The monetary value of the contract is determined with reference to its value in roubles. In the case of obligations denominated in foreign currencies, this is set with reference to the official exchange rate on the date of remittance unless otherwise specified in the terms of the contract.

The contract must be discharged in the manner specified. So if there is a variation between the means of fulfilment and the prescribed means of fulfilment, the contract may not necessarily be regarded as having been discharged.


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The contract must be discharged in a way that is consistent with the subject of the contract. It must be performed completely and precisely in keeping with the conditions agreed. Part performance of the contract by one party does not give rise automatically to discharge as by definition the contract has not been performed in its entirety, and will therefore not generally result in pro rata entitlement to consideration. For example, if an author agrees to write a book for a publisher and completes only half the book, the author may not be entitled to half of the payment due for the completed work.

In relation to debtor-creditor contacts, the creditor has the right to accept discharge of the obligation in instalments, even though the debtor may not be entitled to pay by instalments unless agreed in the contract. Such funds can be paid into court in the event of legal incapacity of the creditor, where the precise identity of the creditor is unknown or where acceptance of monies due has been refused or delayed.

The contract must be discharged at the proper place. For property transactions, this is the location of the property itself. For transactions in commodities, this is the place where the property is first placed in the hands of the distribution company or agent.

For other obligations in relation to the supply of goods, this is the place of manufacture or storage. For monetary liabilities, it is the location of the creditor as at the time the obligation is legally incurred. For other obligations, it is the location of the debtor.

The contract must be discharged on or before the due date of discharge. If no term is specified, the obligation becomes due within a reasonable period. Once a reasonable period has elapsed, the creditor can demand payment within seven days of presentation of a demand.

Answer 21 FORFEIT AND EARNEST MONEY

Tutorial note: This question tests knowledge of forfeit and earnest money in the context of contract law.

(a) Forfeit

A forfeit is a financial fine or penalty that may be levied by one party to a contract on the other party to the contract in the event that the latter fails to discharge the contract, or if the contract is discharged improperly.

It is usual practice in the Russian Federation for written contracts to specify a forfeit to be paid in the event of non-performance or improper performance.

A contract may make various stipulations in respect of forfeit:

Offset forfeit may be specified for losses not covered by the forfeit. Penalty forfeit may cover losses suffered by the party over and above the forfeit. Alternative forfeit entitles the claimant to impose forfeit or losses incurred. Exclusive forfeit entitles the claimant to the forfeit but not losses incurred.

In turn, losses may be regarded as de facto losses caused by the breach of the contract, or missed profits, which are the reductions in profit suffered as a result of the breach of contract.

(b) Earnest money

Earnest money is another form of security for an obligation in a contract. It is a sum of money paid by one party to the other to offset the payment due. It serves as proof of existence of the contract and forms a means of security for payment on discharge.


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Earnest money fulfils several functions:

It fulfils a payment function, offsetting payments that will become due in the course of time.

It is a form of security in that the payment lowers the risk to the recipient of the monies paid. It fulfils an ascertaining function, confirming that the contract has been entered into by the parties, thereby ascertaining that an obligation has been created.

It is compensatory, in that the party in breach of the contract is obliged to compensate the other party with the offset of the earnest money.

If the recipient of earnest money fails to discharge his or her side of the contract, then payment of double the earnest money becomes payable to the other party once the breach has occurred.

A contract that stipulates the payment of earnest money must be concluded in written form. If this is not the case, the payment of one party to the other is treated as a simple deposit representing payment ahead of schedule.

Answer 22 ALEXANDER

Tutorial note: This question tests your ability to resolve a scenario in which damage has been inflicted through contractual and non-contractual relations.

(a) In which court?

In the case study, Alexander has suffered loss and damage due to two separate incidents. These are the traffic accident involving Igor and the subsequent accident, which appears to have been caused by defective workmanship on his car.

Alexander wishes to pursue legal action for damage inflicted by Igor. At face value, it would seem that Igor is liable for driving through a red traffic signal. The strength of the case would depend on the evidence available and would be affected by the presence and testimonies of witnesses. If Alexander believes he has a sufficiently strong case, he must pursue this through the courts of general jurisdiction. The reason for this is that although Alexander is an entrepreneur and Igor is a commercial driver, the incident did not take place in the course of entrepreneurial activity between them.

For similar reasons, Alexander’s case against OOO Carfix would also be dealt with in the courts of general jurisdiction.

In reality, Alexander would probably be insured, even though it transpires that Igor is not insured. This means that Alexander’s insurance company may take action on his behalf under its power of subrogation, instead of Alexander taking action on his own behalf. Such action would be dealt with through the arbitration court.

(b) Factors the courts will take into account

The courts would have to consider the case with reference to the provisions of the Civil Code in respect of non-contractual obligations.

The losses arising from the first accident emerge from a non-contractual situation. It is likely that Alexander and Igor do not know one another, but the law does provide protection in instances where one party inflicts damage on another.


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The court would first have to consider whether damage occurred. This is straightforward, as Alexander’s car has obviously been damaged and has required expensive repairs as a direct consequence of the accident. The next considerations are the alleged unlawful conduct of the other party (Igor) and the causation behind the incident – the court would have to consider what actions were taken by the third party that inflicted the damage. It is then necessary to establish fault, though not necessarily intent. The Civil Code imposes a liability on then owner of the property that inflicts damage, so Igor’s employer is likely to be the defendant in the action as it would be vicariously liable for Igor’s actions or inactions.

The case against OOO Carfix arises from a contractual arrangement, in that Alexander entered into a contract for the company to repair his car.

A third case may involve the owner of the building and his or her action against Alexander. As Alexander is the owner of the car, there is a potential liability, though it would seem that Alexander would have a claim against OOO Carfix for any damages payable to the owner of the building. The process that the court would follow is similar to that described above.

(c) Rights and obligations

Alexander

Alexander has the right to pursue legal action against Igor’s employer or Igor personally for the damage inflicted in the first accident. He has a greater prospect of success if he sues the employer, as the latter would be vicariously liable if the case is proven.

He also has the right to sue OOO Carfix for the improperly completed work on his vehicle, the damage caused to the vehicle and any monies that he has to pay to the owner of the building, provided that it can be established that the steering failure was a consequence of the work. He may also sue the company for the extra money that he has paid for the flight, but he is unlikely to succeed in this action as the loss is remote and could not be foreseen by OOO Carfix.

Alexander may be obliged to recompense the owner of the building for the damage caused to the building.

Igor

As an employee of his company, Igor may be liable to make good any losses arising from Alexander’s claim against the company if his company takes a regress action against him.

Igor may be criminally liable for driving without insurance, though the responsibility may fall to the employer. If it can be established that Igor drove through a red signal, he will be criminally liable for careless driving.

Igor’s employer

The employer is the owner of the commercial vehicle and as such bears responsibility for any loss inflicted by the property under the provisions of the Civil Code. As mentioned above, it may choose to take a regress action for recovery of the losses from Igor, though the amount he would be expected to pay is limited by the law. In practice, it would also be limited by his personal ability to pay.

The employer would probably be liable under criminal law for failing to insure its driver.


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OOO Carfix

If it can be established that defective work was a the direct cause of Alexander’s second accident, the company has liability for damage caused to Alexander’s car and to pay Alexander damages for any payments made to the owner of the building.

It would not be liable for the extra expenditure on Alexander’s rescheduled flight. The company has a right to take action against the individual employee to recover any monies paid to Alexander in respect of damage to the building.

Engineer employed by OOO Carfix

The engineer is in a similar position to Igor. Provided he is employed under a labour contract, the employer will be liable for his actions in the ordinary course of business but can sue him if it has lost money as a result of his defective work.

Owner of the damaged building

The owner of the building can sue Alexander as the owner of the vehicle that caused the damage.

Answer 23 BANK GUARANTEE

(a) Nature, rights and obligations

A bank guarantee is one of the six means of securing an obligation set down in the Civil Code. It is a written contractual arrangement through which the bank undertakes to make a payment that is legally due to be paid by one person to another if the principal debtor fails to pay. Guarantees are common in banking practice to underpin transactions carried out by customers who are deemed to be sufficiently creditworthy.

Under a bank guarantee, there are three parties. The debtor is the party who borrows the funds. The creditor is the party who makes funds available. The guarantor is the party that secures the debtor’s obligation to the creditor. Therefore, a minimum of two contracts exist: there is a credit agreement between the debtor and the creditor and a collateral contract between the creditor and the guarantor. There may be a third contract between the debtor and the guarantor if they choose to execute such a contract.

Guarantees are not transferable to a third party.

The right of the creditor is to seek repayment of all monies due, in the first instance from the principal debtor and then from the guarantor if the debtor cannot (or will not) pay. The credit contract will normally lay down a right to recover fees and expenses incurred in relation to recovery of the debt as well as capital and interest due. It may also provide for missed profits. Institutional lenders often lay down additional financial and non-financial covenants to reinforce their position should default arise once the credit is in place. The creditor may also have obligations under the contract.

The right of the debtor is to use the funds borrowed and to repay the borrowing according to the agreed schedule. In some instances the debtor may be able to pay ahead of schedule, though this may be subject to penalty. The obligation is to repay all monies due in accordance with the conditions of the contract. As mentioned above, there may be additional obligations.


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The guarantor has few rights unless these are stipulated in the guarantee or in a separate agreement with the debtor. It is therefore a serious commitment that will be rigorously assessed before it is sanctioned. Normally, the guarantor will have a right of subrogation over any collateral provided by the debtor, so that if the debtor fails to pay and the guarantor is called upon to make good the debt, the guarantor has a claim over the collateral. Unless specified in a contract, a guarantor has no automatic right to information in relation to the debtor’s conduct towards the creditor.

The guarantor’s main obligation is to pay if the debtor does not do so. This is usually irrevocable, as it is impossible to walk away from a contractual obligation unilaterally. The guarantor may refuse to meet a claim by the creditor if it is inconsistent with the terms of the guarantee or if the claim is made out of time.

(b) Termination of guarantor’s obligation

A guarantee is usually given to support the fulfilment of an obligation over a fixed period of time. Therefore, if the obligation is fulfilled by the debtor, the guarantee will no longer be required. Likewise, if the term of the guarantee expires, the guarantor is released from obligation. As it is not certain that the debtor will discharge the obligation in a timely manner, the creditor may insist that the guarantee is in place for a longer period than that for which the credit is granted.

Under certain circumstances, the creditor may release the guarantor from the obligations under the guarantee. This may arise when the level of financial commitment has reduced to a certain threshold, or where the debtor’s perceived ability to clear any obligations is confirmed beyond doubt.

A guarantee may be terminated if it has been executed in a manner inconsistent with contractual requirements.

Answer 24 OOO GOURMAND

The purpose of this question was to test the candidates’ knowledge of contract law in the context of mercantile transactions and their ability to apply this to the scenario.

(a) Cases of caviar – parties and enforcement of rights

Andrei ordered the caviar from a commissioner representing the distributor in October 2008. As the order was placed three months before the company was scheduled to come into existence, it is a pre-registration contract for which he is personally liable. Andrei could not bind the company by his actions as at the time he entered into the agreement to buy the caviar the company did not exist as a separate juridical person. At that time, he could not be an agent for the company as it is impossible to be an agent when there is no principal.

The commissioner is a representative of the supplier but entered into the contract in his own name under the laws of representation. Therefore, the other party to the contract is the commissioner and not the company he represents.

These two parties can enforce the rights and obligations under the contract. However, civil law also states that the producer of the goods may have a liability if there is resultant harm to others. In practice, as the product was rare caviar from Azerbaijan it would be difficult (but not impossible) to litigate against the producer unless it had a Russian subsidiary company.


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(b) Andrei’s communication

In order for a binding contract to come into existence, there must be an offer and acceptance. An offer is a statement that a person is willing to be bound on specific terms while an acceptance is an unconditional agreement to all of those terms.

The law distinguishes between an offer and a representation to the public at large. Once an offer is accepted, a contract is formed. A representation to the public is not an offer but is regarded as an invitation to persons with knowledge of this representation to make offers. Examples of this are general advertisements in the newspaper, leaflets and goods displayed in a shop window.

A communication may be regarded as an offer if it is addressed to one or more specific persons and is sufficiently detailed in relation to the terms of the proposal, including the terms and conditions of the bargain.

There is sometimes a thin dividing line between these two concepts. In the scenario, Andrei has written to 50 clients stating that a maximum of two boxes will be made available to each client at a specified price. If the communication had been addressed to 500 potential clients, there would be little doubt that this would be an invitation to do business and not a formal offer. It would be quite impossible from a practical point of view to hold stock indefinitely while replies were awaited from all 500 clients, some of whom would never reply. In this particular case however it could be argued that the 50 persons that Andrei has contacted have received a very specific proposal, with the content of the offer proposing a maximum quantity and a specific price.

Andrei’s communication with the 50 clients would probably be regarded as an offer, which the prospective clients are free to accept or reject. However, the ability of the client to rely on this would depend on other factors, such as:

how specific the proposal was;

whether the invitation to buy was time limited; and

whether the communication indicated any actions that had to be taken to secure the goods (e.g. proposing a method of acceptance).

(c) Arrangements created by Helena – parties’ rights and obligations

Helena has entered into an agreement to purchase five bottles of rare French truffles. Under the Civil Code, she has therefore a contractual obligation to purchase the truffles and make the appropriate payment to the supplier. The obligation is a personal one, as Helena has negotiated the transaction before the company comes into existence. Therefore, the same rationale applies in this situation to Andrei’s purchase of the Azeri caviar.

Helena’s transaction was probably motivated by her knowledge that five clients would be prepared to buy the product if it came to the market. However, this does not mean that she can bind them contractually, as the law requires acceptance to be communicated to the person making the offer. Her action involves an element of risk and makes little commercial sense, as the product is of high value and to despatch it without confirming an order or terms of payment is foolhardy in the extreme.

There is little doubt that Helena’s action in sending a box of truffles to each client is an offer, but the recipients of the product are not obliged to complete the transaction as they have not accepted the offer. If the prospective clients do accept Helena’s offer, then it is on the basis of a personal contract between her and the clients and not the company.


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It follows that the invoice is of token value only as a delivery note, as the recipient of the boxes of truffles can choose to accept or reject Helena’s offer of the goods.

(d) Buffalo steaks – 10% discount

Leonid has entered into an agreement to purchase the Asian buffalo steaks and this is binding on him personally and not the new company that he has formed with his colleagues.

The Civil Code prevents him from escaping from the provisions of the contract on the basis of a subsequent discovery that the product is an unpopular type of meat. The general principle that applies here is that the risk lies with the buyer. The Latin phrase caveat emptor (“let the buyer beware”) is often used to describe this. As a purchaser, it was up to him to satisfy himself as to the credentials of the product before buying it. He cannot argue that because he is wiser now the situation has changed.

Leonid cannot insist on a 10% discount if the terms of the original contract included a specific price. The supplier can therefore claim full price from him.

As in the above situations, the company does not have liability for the contract. However, if the goods are sold on to its own customers, it could be argued that the company has concluded a contract by its actions. By accepting the goods and selling them, it is acting in a way that tacitly confirms its acceptance of a contractual arrangement.

Answer 25 SECURING OBLIGATIONS

(a) Meanings

Pledge

A pledge is a secured contract for credit through which two parties enter into a series of rights and obligations. The two parties are the lender and the borrower. The lender secures a right over the property of the borrower, usually for a specified period of time, in return for making funds available to the borrower. The borrower agrees to pay capital and interest according to the schedule agreed in the contract.

A pledge must be executed in notarial form and registered in the unified State register.

Pledges may be used to enable commercial investors to purchase real estate. Marketed as mortgages, they are likely to become increasingly popular for the purchase of residential property.

A pledge always includes a set of rights in favour of the lender and obligations incurred by the borrower. These are designed to safeguard the position of the lender should the borrower fail to meet the obligations. As well as the obvious requirement to repay the capital and make interest payments on the outstanding sum due, the contract may also require the borrower to maintain the subject of the pledge (usually real estate) in good repair and to insure it.

Surety

A surety is an example of a collateral contract. It is an arrangement whereby a third party enters into a commitment that if a debtor does not repay a creditor, the surety will bear subsidiary responsibility for the obligation. This includes all of the obligation specified in the contract, which may comprise not only capital and interest but also forfeits, costs and other charges.


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It is important to note that when a loan is backed by a surety two contracts come into existence. The first contract is between the creditor and the debtor: the second contract is between the creditor and the surety. Unless they choose to do so, there is no need for a contract to be completed between the debtor and the surety.

(b) Actions by a creditor when a debtor fails to meet the obligation

Pledged property

In the event of default by a borrower, the lender can sell the pledged property to repay the debt. This may be achieved by agreement with the debtor or by petitioning the court. In order to realise the security it is necessary to sell the object of the pledge by open auction. If the parties agree to the sale of the object of pledge without going to court, they agree an initial (reserve) selling price. If the sale is sanctioned by the court it is up to the court to fix the selling price.

If the auction fails to attract a purchaser, the object of the pledge may be sold at a subsequent auction. If all attempts to sell at auction fail then the creditor has a right to take ownership of the security, having first served one month’s notice that the sale has failed and of the intention to retain the object. In satisfying the obligation in this way, the lender may not value the property at an amount lower than 10% below the reserve price at auction.

Realisation of pledged property may result in a surplus or deficit situation. If the sale results in a surplus, the creditor must pass any surplus to the debtor once the debt and associated costs are satisfied. If there is a deficit and the debtor owes an outstanding amount to the creditor, the latter may take action against the former for the monies due. This may be futile, of course, as the major reason for default is that the debtor may not have monetary resources or other assets.

Surety

In relation to surety, the surety is only called upon to pay the debt, or part of the obligation where applicable, if the principal borrower fails to do so. Therefore, if the borrower is in default on the obligation to pay, the lender will notify the surety that this is the case and will hold the surety accountable for the sum due.

In the event that a surety has to make a payment to the creditor on behalf of the debtor, the surety may have a subsidiary claim against the debtor. This is sometimes reserved as a power of subrogation.

Answer 26 ZAO BOOK

(a) Igor – rights and obligations

Igor entered into a contract with ZAO Book and committed himself to appear at the exhibition in person. The scenario suggests that Igor has sufficient celebrity status to attract those attending the exhibition to visit the stand and have books signed by him.

Igor would argue that he has engaged a substitute author to attend the exhibition and that this author would provide a very similar service. However, the right to sub-contract the provision of his personal service to a third party is limited in this instance because the services of two different authors are not homogeneous. All authors are different and attract different readers. If ZAO Book has publicised its presence at the exhibition by using Igor’s name, prospective customers would probably not be impressed by seeing a different author there on the day of the exhibition. It is also likely that ZAO Book would have bought in copies of Igor’s books for sale at the exhibition.


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It is clear from the facts of the case that ZAO Book would have a strong case for arguing that Igor’s substitution of another author is undue fulfilment of the obligation. From this would flow a right of ZAO Book to be compensated.

(b) Claims by ZAO Bank against Igor

There are numerous consequences of Igor’s failure to attend the exhibition and his undue fulfilment.

ZAO Book would be entitled to reimbursement of the up-front fee paid to Igor and to withhold the outstanding fee, even if Igor promised to pay the fee to the substitute author.

The company would also be able to claim forfeit on the grounds of Igor’s absence. The forfeit would probably be stipulated in the contract. In addition ZAO Book may claim for missed profits arising from its inability to sell Igor’s books at the exhibition, or at the very least, missed profits from the reduced level of sales due to the author not being present to sign copies of his books.

It is questionable whether ZAO Book would be able to claim for other costs of exhibiting at the convention unless it could successfully prove to the court that the whole point of exhibiting was to provide a showcase for sale of Igor’s books and no others. It is unlikely that any company would take a stand at an exhibition to provide a platform for just one author. Therefore, it would not be able to claim for the costs incurred in engaging the services of OOO Show or OOO Move. This is not an absolute certainty however, as the issue turns on just how big an attraction Igor would be to the visiting public.

The problems in the scenario may have been avoided by drafting the contract with Igor much more precisely, and in particular specifying that only personal attendance by Igor would be regarded as due fulfilment of the contract.

(c) Effect on outcome of “force majeure”

Many contracts include a force majeure clause that enables the party that breaches the contract to withdraw from the contractual obligations without penalty. Therefore, if Igor’s absence was brought about by force majeure and he could prove this to the court he would be able to escape from the commitments in the contract.

To argue that his non-attendance at the exhibition was due to a genuine force majeure, he would have to establish that there was some supervening incident or circumstance that was so profound or important that it genuinely prevented him from providing the service for which he was committed and that the incident or circumstance was completely outside his control. For example, if Igor was under the influence of drugs or had been arrested for a serious violation of traffic rules this is not force majeure. A circumstance more likely to be accepted would be the sudden death of a near relative that occurred sufficiently close to the date of the service to be provided.

The fact that Igor had time to engage the services of a replacement author does suggest that the action was not underpinned by circumstances that would be regarded as a force majeure.


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(d) Entitlement to sub-contract

The absence of a provision stating that OOO Move should provide the services without contracting to a third party may mean that it could transfer the obligation to another company. OOO Move may be regarded as a general contractor, in which case it will have sub-contracted the duty to perform the obligation to another company. However, as a general contractor, OOO Move would be responsible for ensuring due fulfilment of the obligation and could be sued by ZAO Book if the contract was not properly performed. In turn, OOO Move would be able to sue the third party provider for undue fulfilment of the obligation. It follows that the duty to reimburse the third party falls to OOO Move and not ZAO Show.

It could be argued that there is little difference between the duties of personal fulfilment imposed by contract law on Igor and OOO Move. However, the two services are entirely different, assuming that services for safe and secure moving of the equipment could be provided by many companies, whereas the service to be provided by Igor is unique.

Answer 27 CONSTRUCTION COMPANY X

(a) Obligation to return goods

X is obliged to return the goods he did not order as the obligation to return unjust enrichment. Under general rule a person who has acquired or saved property (purchaser) without the grounds, established by law, other legal acts or the transaction, at the expense of another person (victim) is obliged to return to the latter the property acquired or saved unjustly (unjust enrichment). Assets comprising the unjust enrichment of the purchaser must be returned to the victim in kind.

(b) Responsibility for safekeeping

The purchaser is liable to the victim for any fortuitous shortage or deterioration of the groundlessly acquired or saved property, which has taken place after he knew or should have known about unjust enrichment. Until this time he is answerable for intent or gross negligence. In this case X was aware of the unjust enrichment as he had not ordered the goods, thus he was responsible for safekeeping the goods and in case he did not have a special place for keeping this kind of goods he was obliged to rent a warehouse (these goods could not have been kept in the yard without damage caused to them).

(c) Reimbursement of expenses

In case of return of the property groundlessly received or saved or in case of the reimbursement of its value, the purchaser has the right to demand that the victim compensate for the necessary expenses on the maintenance and upkeep of property since the time from which he is bound to receive income with the off set of the received benefits. The right to compensation is lost if the purchaser deliberately retained property subject to return.

In this case X did everything possible to inform the supplier about the goods received and was ready to give them back at any time. And it was only upon the supplier’s will that the goods were not given back to him immediately. X also did everything he could to safe keep the goods and to prevent all kinds of losses to the goods. That is why his expenses in regard of renting a warehouse are to be reimbursed by the supplier in full.


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(d) Consequences of non-return

If it is impossible to return the groundlessly acquired or saved property in kind, the purchaser compensates to the victim for the actual value of this property at the time of its acquisition and also for the losses, caused by the subsequent change in the value of property, if the purchaser has not reimbursed its value at once after he knew about unjust enrichment.

A person who groundlessly used the property of other people for the time being without his intention to acquire it or used the services of other people is required to recompense the victim all that he has saved owing to such use at the price existing at the time when this use ended and in the place where the use took place.

In this case X was aware of the unjust enrichment but failed to return the goods in full. The missing part of goods must be reimbursed in kind, or as X failed to do that in monetary form at the price at the moment of acquisition (July 10) and also to reimburse the losses caused by the price fluctuation (in this case 20%).

Answer 28 OOO ABC

(a) Rights of the owner

The general rules on property should be applied to the animals , unless otherwise stipulated by the law or by the other legal acts. The injury inflicted on the property of an individual is subject to full compensation by the person who inflicted the damage.

While satisfying the claim for redressing injury, the court of law, in keeping with the circumstances of the case, binds the person responsible for the infliction of injury to recompense for the losses caused. Losses includes:

the expenses which the person, whose right has been violated, made or will have to make to restore the violated right;

the loss or the damage done to his property (in this case it could be the expenses on medical treatment, the acquisition of medicines); and

compensation for the moral damage (which the owner of the dog has right to ask for). Moral damage should be compensated regardless of the property damage subject to compensation.

(b) Conclusion of contracts

The contract may be concluded in any form, stipulated for making the deals, unless the law stipulates a definite form for the given kind of contracts.

The purchase and sale of the office building is the subject to the state registration and this contract is regarded as concluded in written form and from the moment of its registration, unless otherwise stipulated by the law.

The contract of sale of office furniture and computers must be in written form.

(c) Risk of damage

The risk of an accidental destruction of the property or of an accidental damage inflicted on it is borne by its owner, unless otherwise stipulated by the law or by the contract.


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Under the contract of sale of office furniture the risk of accidental destruction or damage of the property is transferred to the buyer since the time when in keeping with the contract the seller is deemed to have performed his duty of handing over the property to the buyer.

Under the contract of purchase and sale of the office building the alienation of the property is subject to the state registration and in this case the right of ownership arises with the buyer from the moment of such registration, unless otherwise established by the law.

(d) Owner of building

If it is stipulated by the contract of sale of office furniture which was signed on 1 October 2008 and it was the moment of its transfer that the right of ownership arise from this moment and the owner of office furniture at the moment of fire was OOO EFG.

Under general rules the building is subject to the state registration the right of ownership arise with the buyer from the moment of such registration. In the case the parties to the contract of purchase and sale of the office building signed documents proving transfer of property to the buyer on 25 October 2008 that the owner of building at the moment of fire was also OOO EFG.

(e) Dissolving contract

OOO EFG has no right to demand dissolving of contract of purchase and sale of the building and office equipment because at the moment of fire the contracts were signed by the parties and the property under this contract were transferred to OOO EFG.

Under general rules the contract may be dissolve only by an agreement between the parties. Upon the demand of one of the parties, the contract may be dissolved or cancelled by the court decision only:

(1) in case of an essential violation of the contract by the other party; (2) in the other cases, stipulated by the Civil Code of the Russian Federation, by the

other legal acts or by the contract.

An essential violation is recognised, as violation of the contract by one of the parties entails losses for the other party the losses, to a considerable extent depriving it of what it could have counted upon when concluding the contract.

(f) Demand for payment

OOO ABC has the right to demand the payment in full because this payment forms his obligation (the obligation of buyer) under the contract of purchase and sale and, as discussed above, there are no grounds for dissolving or non-execution of obligations under the contract.

(g) Duties of owner

The owner of a building that is of cultural and historical value has to take care under such kind of property and In the cases, when the owner carelessly maintains these values, as a result of which they may lose their importance, such values may be withdrawn from the owner in accordance with the court decision, by way of their redemption by the state or by their sale at an open auction.

In case of the redemption of the cultural values, the owner is recompensed their cost in the amount, fixed by the agreement between the parties, and in the case of a dispute arising between them – by the court. If the values are sold at an open auction, the owner receives the earnings from the sale, less the outlays for holding the auction.


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Answer 29 MR IVANOV

(a) Circumstances

Mr Petrov and Mr Sidorov have the right to claim reimbursement for damage inflicted by Mr Ivanov, since according to the Civil Code of the Russian Federation the person who inflicted the damage should reimburse, in full, damage inflicted to a citizen or citizen’s property as well as damage inflicted to the property of a legal entity.

Legal entities and citizens whose activity is related to enhanced danger for others (use of transport vehicles is one of activities) are to reimburse the damage inflicted by a source of such enhanced danger unless they can prove that the damage occurred due to force majeur or the victim’s intention. Therefore, Mr Petrov and Mr Sidorov have the right to claim reimbursement for damage inflicted by Mr Ivanov providing there was unlawful conduct, damage inflicted and causal relationship between the unlawful conduct and the infliction of damage. There is no need to determine the fault of the person who inflicted the damage.

(b) Who should reimburse?

The damage will be reimbursed by a legal entity or a citizen, who possesses the source of enhanced danger (owns it, has the right of economic disposal of operative management or disposes of it by the right of lease, by power of attorney or by an order of an appropriate body, etc).

Proceeding from that mentioned above, in the three given cases the defendant for the damage is:

(1) Company X, that owns the car and hires Mr Ivanov as a driver, since it is Company X who owns the source of the enhanced danger;

(2) Mr Ivanov, who drove the car according to power of attorney issued by Mr Sysoev;

(3) Mr Sysoev, who allowed Mr Ivanov to drive his car although Mr Ivanov had no driving licence. Mr Sysoev may be exempt from the responsibility only in case Mr Ivanov took the car from Mr Sysoev without the consent of the latter and in violation of the law. In case it was Mr Sysoev’s fault that Mr Ivanov took the car in violation of the law, responsibility will be borne jointly. But if Mr Sysoev wittingly passed the car into the possession of Mr Ivanov who had no driving licence, responsibility for the damage inflicted is wholly and exclusively borne by Mr Sysoev.

Answer 30 TYPES OF OBLIGATION

(a) Damage to an individual

In case of maiming an individual (or of any other damage caused to his health) compensation will be extended to:

the earnings (i.e. income) which has been lost by the injured person and which he had or could definitely have; and

the expenses incurred by damage caused to his health (including the expenses on medical treatment, additional nutrition, the acquisition of medicines, prosthesis, care by other people, the sanatoria and spa treatment, the acquisition of special transport vehicles, retraining, if it is found out that the injured person is in need of aid of these kinds and care and has not the right to receive them free of charge).


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In estimating the lost earnings, the disability pension (awarded to the injured person in connection with mutilation or any other damage caused to his health) and other pensions, benefits and other similar payments (awarded both before and after the infliction of damage caused on his health) are not taken into account and do not result in a reduction of the amount of the compensation for the injury (i.e. are not be counted towards the redress of the injury). The earnings received by the injured party after the impairment of his health is also not counted towards the redress of injury.

The extent and amount of the redress of injury due to the injured party in keeping with this rule may be increased by the law or the agreement.

The amount of the earnings lost by the victim and subject to compensation is determined as a percentage of the average monthly earnings before maiming or any other impairment of health or before the loss of the capacity for work, which corresponds to the degree of the loss by the victim of his professional ability to work and, in the absence of professional ability to work, to the degree of the loss of general capacity for work.

The lost earnings of the victim includes all types of taxable payment for his labour under labour and civil-law contracts in the place of his main work and in case of holding more than one office. Settled apart are lump-sum payments, in particular compensation for the non-used leave of absence and the retirement benefit in case of dismissal. The paid benefit is reckoned over the period of temporal physical disability or of maternity leave. Income from business activity, and also the author’s fees is included in the lost earnings, with income from business being included on the basis of the data supplied by a tax inspection team.

All types of earnings are reckoned in amounts charged before tax.

The average monthly earnings of the injured person is reckoned by dividing the total sum of his earnings for the 12 months of work that preceded the impairment of his health by 12. If the victim had worked for less than 12 months by the time of the infliction of injury, the average monthly earnings is reckoned by dividing the total sum of earnings for the actually worked number of months that preceded the impairment of his health by the number of these months.

The months during which he has worked not in full measure are replaced at the wish of the victim by the preceding months in which he worked in full measure or are excluded from the counting if it is impossible to replace them.

In case where the victim of injury account is taken at his wish of his earnings before the dismissal (or of the usual amount of labour remuneration for the worker of his qualification in the given locality) but not less than five-fold statutory minimum amount of the wage or salary.

If stable changes improving the property status of the victim (a rise in the wage according to the post held, the transfer to a high-paid job, employment after the graduation from an educational establishment with full-time instruction and in other cases when changes are stable and when it is possible to alter the payment for the victim’s labour) took place before the maiming or other impairment of his health, account is taken only of the earnings which he received or should have received after the appropriate change in case of estimating his average earnings.

(b) Health of minors

In case of maiming or any other injury inflicted on the health of a minor who has not attained 14 years-of-age and who has not got earnings, the person responsible for the inflicted injury is obliged to reimburse the expenses incurred by the damages caused to his health.


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Upon the attainment by a minor of 14 years-of-age, and also in the event of the infliction of injury on a minor from 14 to 18 years-of-age, who has not got earnings, the person responsible for the inflicted injury is obliged to redress the injury caused by the loss of, or decreased in, capacity for work in addition to the reimbursement of the expenses incurred by the impairment of his health by proceeding from the five-fold statutory minimum amount of the wage or salary.

If by the time of the impairment of his health a minor had earnings, the injury is redressed on the basis of their amount, but not less than the five-fold statutory minimum amount of the wage or salary.

After the minor begins his labour activity after the injury was inflicted on his health, he has the right to demand an increased amount of compensation for the injury on the basis of his earnings, but not less than the amount of labour remuneration, fixed according to the post he occupies or the earnings of the worker of the same qualification in the place of his work.

(c) Death of a bread-winner

In the event of the death of the victim (bread-winner) the right to the redress of injury belongs to:

the non-able-bodied persons who were dependants of the deceased person or who had by the time of his death the right to receive maintenance from him;

the infant of the deceased person which was born after his death;

one of the parents, the spouse or any other family member, regardless of his ability to work, who does not work and takes the care for his dependent children, grandchildren, brothers and sisters who have not attained 14 years-of-age or although have attained the said age but are in need of care by other people because of poor health according to the finding of medical bodies;

the persons who were dependants of the deceased person and who have become non-able-bodied during five years after his death.

One of the parents, the spouse or any other family member, who does not work and takes care of the children, grandchildren, brothers and sisters of the deceased person and who has become non-able-bodied during the period of this case, retains the right to the referred of injury after the end of the care for these persons.

Injury is redressed for the following persons:

minors – until the attainment of 18 years-of-age;

students of over 18 years-of-age – until the graduation of educational establishments with full-time instruction and at least until 23 years-of-age;

women of over 55 years-of-age and men of over 60 years-of-age;

invalids (disabled persons) – for the time of disability;

one of the parents, the spouse or another family member who take care of his dependent children, grandchildren, brothers and sisters – until the attainment by them of 14 years-of-age or the change in the state of their health.


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Answer 31 LIABILITY IN TORT

(a) Tests of liability

Even where there is no contractual arrangement between persons or entities, liabilities can arise in respect of their actions to one another. Such obligations arise from a duty not to do harm to others. Therefore, if the actions of one person lead to consequential harm, this can give rise to a civil action for financial compensation.

These non-contractual obligations are sometimes described in terms of “torts”, or civil wrongs. They include negligence, trespass, slander, libel and deception.

There are four tests that are normally applied when cases of this nature are brought:

(1) Actual damage must have occurred. This damage may be monetary in nature, such as the loss of stock caused by a fire which in turn was caused by carelessness on the part of an individual. The damage may be moral or non-pecuniary in nature. It may also be physical damage to a person.

(2) The damage must have arisen from the unlawful conduct of the person alleged to have caused it. The conduct may involve taking actions that should not have been taken, or alternatively omitting to take actions that would have prevented the damage.

(3) There must be a causal link between the damage and the conduct of the person. In practice, this must be both reasonably proximate and foreseeable. For example, the failure to drive a car with due care may cause an accident and may result in a claim for compensation, but if the injured person failed to check in for a flight as a result of the accident and that resulted in the loss of a contract to his business, the claimant may not necessarily succeed in a claim for loss of business arising from the missed flight as this may not be regarded as sufficiently foreseeable or proximate.

(4) There is fault, either through intent, carelessness or oversight on the part of the person inflicting the damage. This does not necessarily require proof of intent to cause damage: it may arise from pure carelessness or oversight.

(b) Circumstances of absolving an individual from responsibility

It is a principle of law that an individual acting in a “master-servant” relationship under a labour agreement may be absolved from responsibility to the third party by the organisation employing him being responsible for his actions. This is sometimes called vicarious responsibility. The employer takes responsibility for the employee’s actions. This is illustrated by a company being responsible for damage caused in a car accident if the company owns the car.

This principle is not without boundaries. If the employee is in the course of his duties but is acting in a manner inconsistent with those duties, the individual and not the company may be held liable. Similarly, the company can sue the employee for harm caused.

The individual causing the damage may also be absolved if the damage arose with the express or implied consent of another person or entity.

If a government official causes damage, that damage is redressed by the appropriate government body, with compensation met from public funds.


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Activities that are subject to special hazards and that cause harm are usually redressed by the owner or the resources or those responsible for them rather that the individual who directly inflicted the damage.

(c) Right of regress

The Civil Code provides for the owners of resources incurring strict liability for damage caused by application of those resources. Therefore, if a tile or brick falls from a damaged building and injures a pedestrian, the owner of the building is liable. Similarly, if damage is caused by a company vehicle, the company is liable.

Regress arises where the employer incurs a liability to compensate a third party and then takes action against the employee to recover monies paid.

The right of regress may be included in the labour agreement. However, the Civil Code sets limits on the amount that may be claimed from the employee with reference to a maximum proportion of his remuneration.

Answer 32 EMPLOYMENT RELATIONS

(a) Grounds for termination of the labour contract

(1) Agreement between the parties.

(2) Expiry of the labour contract, except for the cases when the labour relations actually continue and none of the parties demanded their termination.

(3) Discontinuation of the labour contract at employee initiative.

(4) Discontinuation of the labour contract at employer imitative.

(5) Employee transfer to another employer at his request or with his consent or transfer to an elective work (position).

(6) Employee refusal to continue to work because of the change of the proprietor of the organisation, change of the agency affiliation (subordination) of the organisation or its reorganisation.

(7) Employee refusal to continue to work because of the change in essential conditions of the labour contract.

(8) Employee refusal to transfer to another job because of the health condition as specified in the medical statement.

(9) Employee refusal to transfer because of the employer relocation to another locality.

(10) Circumstances beyond the will of the parties.

(11) Violation of the rules of conclusion of the labour contract specified in the Labour Code or another federal law if this violation rules out an opportunity to continue to work.

The labour contract may be discontinued also for other reasons envisaged in the Labour Code and other federal laws.

In all cases, the day of employee dismissal is considered to be the last day of his work.


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(b) Labour contract concluded for a certain term

The labour contract concluded for a certain term will be terminated upon its expiry, with the employee being warned of it in writing no later than three days before the termination.

The labour contract concluded for the time of fulfilling certain work will be terminated upon termination of this work.

The labour contract concluded for the time of execution of the duties of the absent employee will be terminated with the arrival of this employee to work.

The labour contract concluded for the period of fulfilling seasonal works will be terminated upon expiry of the certain season.

(c) Labour contract terminated upon the employee’s initiative

The employee may terminate the labour contract having warned the employer of it in writing two weeks in advance.

At the agreement between the employee and the employer, the labour contract may be terminated also before the expiry of the time of warning of the dismissal.

If the employee application of dismissal at his initiative (own will) is stipulated by the impossibility to continue the work (admission to educational institution, retirement and other cases), as well as in cases of established violation by the employer of the laws and other normative legal acts containing the norms of labour legislation, the terms of the collective contract, agreement or labour contract, the employer is obliged to terminate the labour contract within the time period indicated in the employee application.

The employee may withdraw his application any time before the expiry of the time of warning of the dismissal. The dismissal in this case is not effected if another employee has not been invited for this job in writing who, according to the Labour Code and other federal laws, may not be refused to conclude the labour contract.

Upon expiry of the time of warning of the dismissal, the employee may stop fulfilling his work. On the last day of work, the employer must hand out the work-book to the employee, other documents pertaining to work if there is a written application of the employee, and clear the final payments.

If the labour contract has not been terminated, and the employee does not insist on the dismissal upon expiry of the time of warning of the dismissal, the labour contract is not terminated.

(d) Labour contract terminated upon the employer’s initiative

(1) Liquidation of the organisation or termination of activities of the employer out of natural persons.

(2) Redundancy or staff cuts in the organisation.

(3) Employee failure to correspond to the occupied position or fulfilled work because of:

(a) health condition as specified in the medical statement; (b) insufficient qualification as confirmed by the results of the certification.


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(4) Change of the proprietor of the organisation (with respect to the manager of the organisation, his deputies and the chief accountant).

(5) Numerous failures to fulfil labour duties by the employee without justifiable reasons if he has a reprimand.

(6) Single severe violation by the employee of the labour duties:

(a) absenteeism (absence at the work place without justifiable reasons for more than four straight hours within a working day);

(b) reporting for work in the state of alcoholic, narcotic or other toxic impairment;

(c) disclosure of the secret protected by the law (state, commercial, service and other) that became known to the employee as a result of execution of the labour duties by him;

(d) committing a pilferage at the place of work (including a minor one) of others’ property, embezzlement, wilful destruction or damage to the property as determined by the court ruling that entered into legal force or decision of the body in charge of administrative sanctions;

(e) violation by the employee of the safety requirements if this resulted in severe consequences (industrial accident, disaster) or is known to have created a real hazard of such consequences.

(7) Committing culpable actions by the employee directly serving the monetary or commodity values if these actions provide grounds to lose confidence in him on the part of the employer.

(8) Committing an immoral deed by the employee engaged in educational functions that is incompatible with the given work.

(9) Adoption of an unjustifiable decision by the manager of the organisation (branch, representation office), his deputies and the chief accountant that resulted in the damage to the property, its illegal use or other damage to the property of the organisation.

(10) Single severe violation by the manager of the organisation (branch, representation office), his deputies of their labour duties.

(11) Presenting of faked documents or information known to be false by the employee to the employer at the conclusion of the labour contract.

(12) Revocation of the clearance for state secrets if the fulfilled work requires being cleared for state secrets.

(13) Cases envisaged in the labour contract with the manager of the organisation, members of the collegial executive body of the organisation.

(14) In other cases specified in the present Code and other federal laws.

Dismissal for reasons mentioned above in (2) and (3) are permitted if it is impossible to transfer the employee to another job with his consent.


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It is not be permitted to dismiss the employee upon the employer’s initiative (except for the cases of liquidation of the organisation or termination of activities of the employer out of natural persons) in the period of his temporary disability and leave.

In case of termination of activities of the branch, representation office or other separate structural division of the organisation located in another locality, discontinuation of the labour contracts with employees of these structural divisions will be carried out according to the rules envisaged for the cases of liquidation of the organisation.

Answer 33 GULNARA

Termination of labour agreement

The closure of the business at the airport, due to lack of orders, means that the business is to close down in its entirety. This means that all of the jobs in the company are de facto redundant – the job cannot continue to exist if the company no longer exists.

Redundancy is therefore a just ground for the termination of the labour contract. The contract can be terminated at the employer’s initiative.

In the event of redundancy, the employee is entitled to:

alternative employment if available; severance pay; pay in lieu of leave not taken.

If the business at the airport is part of a larger whole, the employees are entitled to be offered alternative employment elsewhere.

If the whole company is closing down this will not be possible. Failure to provide alternative employment entitles the workers to severance pay of up to one months pay. They are also entitled to remain on the payroll for up to two months or until new employment is secured, depending which occurs first.

In relation to annual leave, employees are entitled to a minimum of 28 days paid leave each calendar year. The individual labour contract may provide for longer leave entitlement but not shorter.

Provided Galina has worked at the company for more than six months, she has the right to this leave. If Galina has not taken the leave from work that is due to her, she has two practical options – either to take the leave due to her during the statutory notice period or to demand monetary compensation on a pro rata basis for the leave that has not been taken.

Answer 34 LABOUR CONTRACT

The rights and obligations under a labour contract are laid down at the outset by a set of conditions to which both parties agree. These are governed by the normal general provisions of contract law but are also specifically governed by the provisions of the Labour Code. By contrast, the conditions of a contract with an independent contractor are for the supply of a given service within the parameters defined in the contract. The Labour Code does not apply to services that are outsourced, as the contractor is not an employee.


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The terms of a labour agreement are generally more prescriptive than those applicable to a contract for services provided by an independent contractor. They lay down the times and place of work and the manner in which the work must be performed. They may also lay down specific conditions relating to personal conduct, including sometimes conduct outside of working hours. The contract provides for the method of remuneration and the basis of remuneration (e.g. flat rate per hour, week or month).

Unless they are fixed term agreements, labour contracts are open-ended in nature, providing for termination of the contract by a specified period of notice by either party. Contracts for service are usually time-limited or terminate on conclusion of the provision of the relevant services.

By entering into a labour agreement, the employee obtains rights, such as maximum hours, minimum breaks and minimum leave, all prescribed by the Labour Code. Additional rights pertain to certain individuals, such as single mothers and those caring for others. These rights are not applicable to a contract with an independent contractor.

Labour contracts may provide for obligations outside the working day. For example, it may be a condition of employment that the individual undertakes professional studies. In relation to obligations of the employer, these may extend beyond the period of employment, such as the duty to remunerate in the event of redundancy. These factors do not apply to contracts with outside providers.

The nature of the contracts also differs in relation to disputes. The Labour Code provides for individual and collective disputes to be resolved through specific processes. A dispute in relation to a contract with an independent contractor is normally resolved with reference to the terms and conditions of the contract itself and general contract law.

Lastly, under a contract of employment the employee may be indemnified for damage caused to third parties. The independent contractor bears full responsibility for damage caused in the course of his duties.

Answer 35 ZAO TEACH

The purpose of this question was to test the candidates’ understanding of matters relating to employment law. The Labour Code governs relationships between the employer and the employee.

(a) Redundancy – meaning and implications

Redundancy is a term used in employment law to describe the dismissal of an employee when the job no longer exists, or where the nature of the job has changed significantly. This occurs when a whole business or part of it is closed down or if the business relocates to another region or town. Redundancy is also caused by the nature of a job changing due to new technological processes being introduced, or by general downsizing of the workforce.

In the context of company ZAO Teach, the closure of the training centre will result de facto in the redundancy of the twelve persons employed there. The Labour Code requires the company to offer alternative employment if opportunities exist elsewhere in the company. This will of course depend on the manning level of other centres and the geographical dispersal of the different centres owned by the company. It is unlikely that all twelve of the employees would be offered opportunities or be prepared to relocate.

If no such alternative prospects exist in the company, the redundant employees are entitled to severance pay of one month’s remuneration (in addition to what they are owed). They are also entitled to remain on the payroll of the company for up to two months or until they commence new employment elsewhere, whichever occurs sooner. The redundant employees are also entitled to pay for any holiday leave that they have not taken prior to their release from duties.


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(b) Legal implications

A labour agreement is a formal contract, governed specifically by the Labour Code. It contains a set of rights and obligations of the two parties to the agreement – the employer and the employee.

According to the facts of the scenario, the earnings that have not been claimed were set aside voluntarily to help the company to address its financial difficulties. These earnings remain an obligation of the company as the workers have agreed to delay the payments, not to forfeit them. The company is therefore legally obliged to pay these, and as it is only one centre and not the entire company that is being closed down, the liability to the workers cannot be avoided by the company.

In similar manner, the right to redundancy (or severance) pay is a legal entitlement under the provisions of the Labour Code.

This cannot be set aside by the proposed actions of the company, which effectively seek to hold the employees to ransom by withholding the salaries due to them.

The workers should refuse to sign the declaration giving up their rights to redundancy pay.

(c) Implementation of change in terms

Like other forms of contract, a labour agreement can only be altered with the consent of both signatories. Generally, a contract cannot be changed unilaterally, unless it contains clauses permitting one party or the other to introduce such variations.

The labour agreement of the lecturers specifies the terms and conditions of employment, including inter alia their hours of work, place of employment, method of remuneration and principal duties. The agreement is regulated by the provisions of the Labour Code, which lays down entitlement to the maximum number of hours worked, annual leave, rest periods, etc. Sergei cannot change the terms of the labour agreement without consulting the lecturers. It appears that the lecturers are aware of the company’s difficulties, as some of the staff have actually postponed their salary entitlements to help out. Some of the lecturers may therefore be willing to switch to part-time work, even at a reduced salary. This will be more likely if their skills are in demand and they can offer their services elsewhere to supplement the reduced income from ZAO Teach.

Another course of action that Sergei may contemplate is to declare the role of the full-time lecturer redundant. This may be justifiable if he is correct in his assertion that the only viable business model is to use less full-time employees and switch to part-timers and outside contractors. This course of action will have a short-term cost in that the company will have to continue paying salaries for two months plus any entitlement to severance pay. The company could then recruit part-time lecturers with an entirely different labour contract. It is possible that some of the existing full-time lecturers would apply for these positions.


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(d) Legal status

The full-time staff of the company have a contractual relationship with the company governed by the Labour Code. As such, they have extensive legal entitlements. The company must adhere to the minimum terms of the contract as well as abide by all the provisions of the Labour Code. The workers are protected from having to work excessive hours without interruption and are entitled to rest days and holidays. They are entitled to have any disputes resolved through the mechanisms created by the Code in relation to individual and collective disputes. The Code also imposes obligations on the employer in the event of redundancy or dismissal. Workers with young children and those caring for elderly relatives have additional protection.

By contrast, the individual contractor has little protection other than general contract law as set down in the Civil Code. The individual contractor delivers the agreed service under the stated conditions and for the remuneration negotiated between the parties. There is no long-term relationship here, as both parties can walk away once the service has been delivered. The great advantage to the company is that it only has to pay for what it gets. Contrast this with the situation in which full-time lecturers have to be paid whether the college is busy or not. However, the college has less consistency in its approach to repeat clients, especially if the preferred outside provider is not readily available. Those engaging outside contractors tend to have less control over the quality of output and can find it difficult integrating the efforts of many outsiders towards the company’s objectives.

The company may also encounter some practical difficulties in forming contracts with outside providers in this field of work. For example, it may be considered inappropriate for an outside lecturer to work for two or more competing organisations in the same city or town, but it is difficult to prevent this in practice. With full-time and part-time employees such a prohibition may be included in the labour agreement.

Both a labour contract and a civil contract may include a confidentiality clause, but this is more difficult to impose and monitor in relation to the latter.

Answer 36 TERMINATION OF LABOUR AGREEMENT

(a) Ways of terminating

A labour agreement is a formal contract between an employer and an employee. The content of the labour agreement and the exercise of certain rights under the agreement are governed by the Labour Code.

From a legal perspective, labour agreements are rather different to other types of contract. Most commercial contracts have a beginning and an end. However, a labour contract is often open-ended and therefore ongoing until either party chooses to terminate the agreement. Secondly, labour contracts are divisible, so partial performance may be partially remunerated. This contrasts with many commercial contracts, in which a failure to perform all the obligations in the contract may result in no payment being due.

A labour contract may be terminated by the employer or the employee.

The employer may terminate the contract at the end of a fixed period stated in the labour agreement. This is a common feature of labour contracts for individuals in senior positions, such as chief executives and finance directors. It enables the organisation to anticipate the need to change key personnel.


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In the event of serious contravention of internal rules the employer may summarily (instantly) dismiss an employee without the contractual period of notice and without pay for the equivalent period of notice. This would occur in the event of gross misconduct such as physical violence against others, misuse of alcohol or drugs whilst in the workplace or disclosure of strategic information to competitors.

The employer may also dismiss an employee by giving the contracted period of notice, or by asking the employee to leave immediately and remunerating the employee for the contracted period. This is common where a new employee fails to meet the standards required for the job by the end of a probationary period, or where a more established employee fails to perform to the required level.

Redundancy is a special form of dismissal recognised in the Labour Code. Here the employer dismisses the employee because the business is closing down or radically restructuring, where the job becomes obsolete, perhaps due to the introduction of new technology or processes or where the organisation decides to spin off or otherwise divest a particular part of its operation.

The employee may also terminate the labour agreement. The most common ground for doing so is of course when the individual secures alternative employment and gives the required period of notice to the employer. It is then up to the employer as to whether the individual is asked to fulfil the period of notice. If the individual is moving to a competitor, the employer may choose to pay off the worker for the period of notice and ask him or her to leave immediately.

The employee may breach the contract by walking away from the job without giving notice.

Lastly and obviously, the labour agreement is also terminated on death or loss of legal capacity.

(b) Employee protection under the Labour Code

Employees are protected by the Labour Code in the event of dismissal under certain circumstances.

The Labour Code establishes the right of both employees and ex-employees to file for resolution of disputes through a commission for labour dispute and through the courts. The grounds on which former employees can file such disputes include a petition for reinstatement following dismissal or reconsideration of grounds for dismissal, compensation for injury suffered in the workplace, compensation for being transferred to a lower paid job and claims in respect of discrimination.

Under the labour agreement employees have certain rights protected by law, which if contravened may entitle the employee to take action against the employer. These include the rights to be paid for the work performed, to be allocated work that is consistent with the terms and conditions in the labour agreement, an entitlement to specified minimum rest periods, days off and maximum overtime limits and to be paid compensation for injuries arising from work and moral damage suffered.

Additional rights are conferred by the Labour Code in respect of expectant mothers, single parents with young children, teenage workers and those who care for sick or elderly relatives. The Labour Code limits the grounds for dismissal of such persons and in some cases lays down specific dismissal procedures.


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If a worker is made redundant, the Labour Code compels the employer to offer another job in the organisation if this is possible. Clearly, if the company is closing down completely this is not possible. If no other job can be offered the worker is entitled to severance pay of one month’s salary and to remain on the payroll for two months or on acceptance of a new job, whichever occurs earlier.

Employees dismissed on the grounds of poor health are entitled to severance pay of two weeks wages.

Answer 37 COMMANDITE PARTNERSHIP

(a) Characteristics

A partnership is a form of business entity that comprises two or more persons working together in pursuit of common business objectives. It is a specific type of legal entity recognized in law, and as such has to be registered in order to participate in entrepreneurial activity.

Partnerships are not subject to minimum capital requirements. The founding and any further additional capital is contributed by the partners and is not sub-divided into shares.

There must be a minimum of two partners in either type of partnership.

The unlimited partnership carries out its business under the written terms agreed between the partners. The rights and obligations pertaining to the partnership are inseparable from those of the individuals involved. This contrasts sharply with the obligations of the contributors to a limited liability business, whose liabilities are confined to the financial contribution that they have made to the company.

The partners can distribute any profits between themselves in proportion to the contributions made to the business or in any other manner stipulated in their agreement. They are jointly and severally liable for any financial or other obligations incurred to third parties.

In dealings with others, the partnership must identify itself as such.

The partnership business form empowers each partner to act individually on behalf of the partnership, unless the contrary is stipulated in the agreement between them. Any actions taken by the individual on behalf of the partnership binds the partners.

Any clause in the contract that excludes a partner from entitlement to profits or obligations is void in law.

Any partner who gives notice of resignation from the partnership remains liable for obligations that arose before his or her partnership was terminated.

The limited or commandite partnership is a modified model of the unlimited version. It shares numerous similarities with the unlimited version, including the requirement to register the business with the State and the need to represent itself openly as a partnership in its dealings with third parties. The fact that the business is a limited partnership must be made clear in its formal dealings with others.


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The law separates the obligations of two types of partner in this type of enterprise. Firstly, the general partners who are directly involved in business activities are responsible for the obligations they incur on an unlimited basis. Secondly, there may be one or more participant-investors who put capital into the partnership but are only liable to the extent of their financial contributions. The participant-investors can fund the partnership but may not take part in the performance of business activity. Therefore they can invest in the business knowing the maximum degree of risk that they incur.

A general partner can only participate in one limited partnership. A general partner in an unlimited partnership may not participate in a limited partnership or vice versa.

(b) Advantages and disadvantages

Advantages

The main advantage of ceasing to operate as a limited partnership and establishing a limited liability company (LLC) is that all partners, general and participant-investors, would enjoy limited liability as defined by the Federal Law “On Limited Liability Companies”. This means that the company thus established has a separate identity in law and is therefore separable from its owners in relation to ownership of its assets and obligations.

This offers little further advantage to the participant-investor but significant advantage to the general partner who participates fully in the business.

The LLC offers the opportunity to attract investments from up to 50 shareholders and as a result it may be possible to attract additional capital more readily. Although in theory the partnership can also do this, it may be less difficult to involve others in the business under the mantle of a LLC, especially in situations where a prospective shareholder is prepared to make contributions in specie rather than in cash.

In the event that the LLC becomes less attractive to some investors at a subsequent date, they are able to withdraw their capital for fair value. This may be more difficult to establish on the resignation of a general partner.

The act of forming a LLC may be seen by trading partners as a desire to put the business on a more professional and permanent footing.

Unlike the partnership, the LLC is a permanent separate legal person unless dissolved. This has connotations for succession and transfer of shares in the future.

Disadvantages

There are numerous disadvantages of pursuing the LLC route. The partners have to spend time and money putting together the Charter and statutory agreement, as well as taking advice from appropriate professional persons. They have to undertake the registration formalities necessary to establish the company.

The new company has to comply with the requirements of law in relation to statutory capital and management. There are additional responsibilities of the management of a LLC, including the need to comply with the legal formalities for holding meetings and reporting requirements.


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Answer 38 ANDREI AND NATASHA

(a) Commitment to business transactions

A partnership agreement, if formulated lawfully, is a binding agreement between the parties to the agreement. In other words, the partners are committed to comply with the terms of business to which they have agreed. The agreement should set down the rights and obligations of the parties to it and should be prepared on the basis of commonly agreed business objectives that will be pursued once the business is registered.

In this case there is a fundamental disagreement between the partners. Andrei’s ambitions are clearly at odds with Natasha’s view of how the business should develop. Andrei has therefore proceeded unilaterally with his plans without the initial knowledge and consent of his partner.

Although the partnership agreement is binding on the partners, it is certainly not binding on third parties who choose to do business with the partnership, or either one of the general partners. Provided the suppliers acted in good faith when selling their goods to the partnership, and had no prior knowledge of the restriction contained in the partnership agreement, they can enter into a contract with either partner. Andrei is however in breach of his agreement with Natasha.

(b) Withdrawal from contract

There are several potential outcomes in respect of the contract with the suppliers.

If the two general partners cannot reach consensus on the matter, the sensible outcome would be for Andrei to pursue his new venture independently or to form a business with Vladimir, who seems tacitly in favour of Andrei’s ideas. He could then take responsibility for the goods that have been ordered at his own risk.

The suppliers may be prepared to have the goods returned, thereby terminating the contract by agreement.

If Natasha insists that the payment for the goods is withheld and Andrei refuses to return the goods, this creates problems for the partnership, especially if mandates for payment require the signatures of both parties. The suppliers can then enforce the contract against the partners jointly or severally, with the right to claim the costs of doing so. In such a scenario, the general partners bear unlimited liability and Vladimir bears liability up to his contribution to the business as an investor.

(c) Extent of action by partners

As Andrei is in breach of the original partnership agreement, Natasha would be entitled to take action against him should the partnership incur costs or losses as a result of his actions.

Natasha may also be able to take action against Vladimir, who as an investor in the partnership should have played no active part in the management and administration of the business. The law provides that the investor enjoys limited liability but should not participate in the business affairs of the partnership. Therefore, Vladimir has acted improperly in giving advice to Andrei and encouraging him to proceed with the new development.


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(d) Implications for Vladimir

As an investor, Vladimir has a right to put risk capital into the business and to receive a return on his investment. That is the full extent of his involvement in the business. He is not permitted to have his name included in the name of the partnership, nor is he entitled to take executive decisions on its behalf. In return for these rights and restrictions, he is able to enjoy limited liability and, unlike Andrei and Natasha, cannot be called upon to make good unlimited losses from his personal financial resources.

From the case it is clear that Vladimir has acted unlawfully. He has discussed the new venture with Andrei and has agreed to encourage and support him in his arguments with Natasha. These actions suggest that he is actively involved in management.

The potential consequence of this, if it can be proven, is that Vladimir risks losing his limited liability and incurring the same obligations as a general partner. In reality, of course, this would be difficult to establish beyond doubt if his discussions with Andrei were of a purely informal nature.

Answer 39 ANDREI AND NIKOLAI

(a) Rights and obligations

A simple partnership is the simplest business form that involves more than one person. It relies on a formal agreement between the partners in the business, and anything not covered in the partnership agreement relies on a high degree of trust between the business principals.

Arguably, the situation of trust has already broken down between Andrei and Nikolai. Nikolai has been making a secret profit. If this has been done using partnership resources in the partners’ working time, Andrei has a case against Nikolai as the partnership agreement has been breached. Andrei can claim for lost profits as a result of the undeclared work and income. In turn, Nikolai may have an obligation to make good any monies withheld from his partner.

The second major issue in the case relates to the uncompleted work on the hotel. Andrei cannot simply walk away from the project without incurring obligations. At the outset the partners would have entered into a contract with the hotel for the work to be done, thereby binding the partners jointly and severally to the terms of the contract. Under the partnership agreement they would be entitled to half the profit each, and so Andrei would be responsible for half the costs of the work. It is likely that Andrei would be entitled to a proportion of the profit but would be responsible for the same proportion of the costs, including some costs incurred after walking out of the business.

Andrei may not necessarily be responsible for contributing to the costs of general stock. Some stock may have been ordered in anticipation of future business to be carried out after Andrei’s departure. However, Andrei is likely to be responsible for the costs of the stock used in the completion of the hotel project.

(b) Termination of partnership obligations

From the point at which a partnership is terminated, the partners bear joint and several responsibility for the failure to perform any outstanding common obligations to third parties.

The best way for Andrei to escape further obligations arising from the former partnership is to serve three months notice of the severance of their arrangement by making a statement of repudiation. In doing so, he will escape any liabilities incurred after the expiry of the three month period.


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(c) Legal termination

Tutorial note: Note that the question specified “apart from …” therefore no marks will be awarded for consideration of dissolution.

A partnership may be dissolved if either of the partners lacks dispositive capacity, has limited dispositive capacity or disappears unless the contract provides specifically for such instances.

The partnership is dissolved in the event of the death of either partner or on the insolvency or either partner.

If a juridical person is a participant in the partnership, the reorganisation of the juridical person terminates the partnership.

Some partnerships are created for a fixed term, so on expiry of the term the partnership is dissolved forthwith.

A partnership may also be terminated by the State authorities if the business of the partnership is for an illegal or improper purpose.

(d) Trading form

Andrei and his brothers wish to minimise the risk of their new venture and maintain control of their affairs. This suggests that they may consider a limited liability company (LLC). This corporate form would confer limited liability on all of the participants, meaning that any obligations are limited to the contributions made to the business. They would also have absolute control of their business affairs, as any individual can withdraw from the company but the remaining participants would be able to veto any third parties from joining the enterprise.

The LLC would enable the participants to invite new members provided the maximum number of participants did not exceed 50 persons.

The LLC would also enable the participants to make monetary and non-monetary contributions to the starting capital, provided the non-monetary contributions are capable of valuation.

An alternative corporate form is the closed company limited by shares. This would give them less control over the ownership of the shares and would be more complex in terms of compliance issues relating to constitution, management and administration.

Answer 40 ZAO INVESTOR

(a) Withdrawal of a participant

According to provisions of the Civil Code of the Russian Federation, a participant may withdraw from a company irrespective of the consent of other participants of the company. In case of the withdrawal of a participant, its share transfers to the company from the moment of submitting the application for the withdrawal. The company must pay out the actual value of the participant’s share, the value is determined on the basis of accounting data for that year when the application for withdrawal was filed, or – upon the consent of the participant – to give the property in kind to the same value. If the participant had not paid its share to the statutory capital in full, it receives, upon withdrawal, the actual value of its share pro rata the portion of the statutory capital paid.


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The above-listed provisions are compulsory and do not allow interpretation, that is, may not be changed by the statutory documents of the company. Any provisions of the company’s statutory documents that contradict these provisions are void.

Thus, LLC Levadia must pay ZAO Investor 20,000 roubles (100,000 × 20%) or give it the property of the same value.

(b) Ownership of property contributed

The owner of the property and monetary means contributed to the statutory capital is the company itself. In the event of withdrawal of a participant, that participant is paid the actual value of its participatory share or, with its consent, property of the same value. Thus, the company is not obliged to return the very same property that was contributed to the capital, but may do that by agreement with the participant.

(c) Payments to a withdrawing participant

The actual value of the participatory share of the withdrawing participant is paid at the expense of the difference between net assets of the company and the amount of its statutory capital. If that difference proves to be insufficient for payment, the company must reduce its statutory capital.

Answer 41 PEXO

(a) Documents

The founders of the company enter into a contract in writing regarding the formation of the company, which determines:

the procedure for their engaging into the joint activity of the founding of the company;

the amount of the charter capital of the company

the categories and types of shares subject to placement among the founders and amount and procedure for the paying therefore; and

the rights and duties of the founders in connection with the formation of the company.

A contract regarding the formation of a company is not the foundation document of the company.

The foundation document of the company is the charter of a company.

All company bodies and company shareholders must comply with the requirements of the company charter. The company charter must contain the following information:

the full and abbreviated names of the company;

the location of the company;

the type of company (open or closed);

the number, par value, and categories (common, preferred) of shares, and types of preferred shares to be placed by the company;


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the rights of the holders of shares of each category (or type);

the amount of the charter capital of the company;

the composition and authority of the governing bodies of the company and the procedure for the adoption of resolutions by them;

the procedure for the preparation and conducting of the general meeting of shareholders, including decisions on matters to be resolved by a qualified majority or unanimous vote of the governing bodies of the company;

information concerning branches and representative offices of the company;

The company’s charter may impose limits on the quantity and total par value of shares held or the maximum number of votes cast by any one shareholder.

(b) Date of creation

A company is regarded as established from the moment of its state registration (with the body exercising the state registration of legal entities) under such procedure as may be determined by federal law on the state registration of legal entities.

The date of creation of Pexomal is 16 July 2009 the date of its state registration by Moscow Registration Chamber.

(c) Appraiser’s remuneration

When payment for shares is effected in non-monetary form, an independent appraiser must be invited to determine the market value of such assets. The valuation of assets in terms of money produced by the founders of the company and the board of directors of the company cannot exceed the valuation produced by an independent appraiser.

Thus in case the contributions to the charter capital are made in non-monetary form, the services of the independent appraiser are necessary for the process of formation of the company. That is why the founders or the company itself are to pay for the appraiser’s services, and in case these are the founders who have paid, the company may further on reimburse the amount due.

(d) Purchase and sale of goods

As the contract of purchase and sale of goods was concluded by Mr Kovalenko before the date of Pexomal registration and due to the general rules that a company is not liable for the obligations of its shareholders (founders), the only person who is responsible for due exercise of obligations under this contract is Mr Kovalenko.

(e) Can creditors sue Pexo?

The creditors cannot sue Pexo LLC under the above-mentioned contracts because Pexo LLC is one of the shareholders of the Pexomal and, under federal law of the Russian Federation, the shareholders are not liable for obligations of the company.


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(f) Sale of shares to Pexo

As a general rule there are no restrictions on a person disposing of his property (including sale of shares, but in this situation it is not possible for Mr Kovalenko to sell his shares in the initial share capital of Pexomal to Pexo LLC because in the case of this kind of transaction Pexomal will be a company having one shareholder Pexo LLC which also have only one founder (Mr Leikin) and a company may not have as a sole founder (or shareholder) another business company consisting of one person.

(g) Sale of shares to Mr Leikin

Mr Kovalenko may sell his shares in the initial share capital of Pexomal to Mr Leikin because the shareholders are entitled to alienate the shares they own, without the consent of the other shareholders and the company. But the shareholders of the closed company limited by shares have a right of priority to acquire shares sold by the other shareholders of the company at a price offered to a third person pro rata to the quantity of the shares owned by each of them. The charter of a company limited by shares may envisage the company’s priority right to acquire shares sold by its shareholders if shareholders did not use their priority right to acquire the shares. A shareholder of the company who intends to sell his shares to a third person must notify accordingly the rest of the company’s shareholders and the company proper including indication of the price and other terms for the sale of the shares. If the shareholders of the company and/or the company do not use their priority right to acquire the shares offered for sale the shares may be sold to a third person at the price and on the terms of which the company and the shareholders have been informed.

Answer 42 ZAO A

(a) Contribution by transfer of property

The charter capital of a company limited by shares is divided into a definite number of shares. Payment for the shares distributed among the founders of the company at its formation may be effected in money, securities, other assets or property rights or other rights that can be appraised in terms of money. The form of payment for shares of a company at its formation is set out in founders’ agreement.

An independent appraiser must be invited to assess the market value of assets transferred as payment for shares. The final monetary valuation of the non-monetary property estimated and stated down by the agreement between the founders must not be less than that estimated by the independent appraiser.

Thus Mr X may make his contribution to the share capital in non-monetary form in case it is provided for in the shareholders’ agreement. In order to estimate the value of his contribution an independent appraiser must be invited.

(b) Ownership

A company has separate assets in its ownership, which are reported in a separate balance sheet, and the charter capital of a company determines the minimum amount of the property of a company securing the interests of its creditors.

A company may at its own discretion use, possess and dispose of the property that it owns.

Thus the property transferred to the initial share capital of the company becomes the company’s property and the shareholder who has transferred it loses all rights in respect of this property (except the case of liquidation of the company).


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(c) Disposal of property

Yes, it is quite possible to dispose of the property that belongs to the company (property initially transferred to the share capital) provided that all the restrictions of law concerning major transactions are duly observed.

(d) How to sell the property

In the above-mentioned case the amount of property that the General Director decided to sell forms 60% of the assets of the company and the transaction in respect of this property will be considered as a major one. In order to conclude and duly execute the transaction the following requirements of law are to be respected:

A decision to approve a major deal of which the subject matter is assets worth 25 to 50% of the balance sheet value of the company’s assets must be adopted by all the members of the board of directors (supervisory board) of the company unanimously, with the votes of former members of the board of directors (supervisory board) of the company not being taken into account. The decision to approve a major deal of which the subject matter is assets worth over 50% of the balance sheet value of the company’s assets must be adopted by a general meeting of shareholders by a majority of three quarters of the votes of shareholders owning voting shares and attending the general meeting of shareholders.

Thus, the executive body of the company (in this case General Director) must demand to convene the general shareholders’ meeting in order to approve the above-mentioned transaction.

(e) Shareholders’ consent

A major deal must be approved by the board of directors (supervisory board) of a company or the general meeting of shareholders. Thus in the described case the consent of three quarters of shareholders present at the meeting will be necessary. As the quorum is formed by 50% and more of shareholders, it can be supposed that, in order to get the approval of the general shareholders’ meeting, the consent of the major shareholder(s) will be enough.

(f) Shareholders’ rights

The shareholders that did not take part in the voting or voted against the major transaction have the right to demand redemption of all or some of shares belonging to them. The relevant demand must be presented to the company within 45 days since the moment when the respective decision (on major transaction) was taken and contain information on name, permanent residence of the shareholder and the amount of shares subject to redemption. The redemption must be executed within 30 days upon expiration of the above-mentioned term.

Answer 43 COMPANY REGISTER

(a) Register of shareholders

A register of the shareholders of a company comprises information on each person registered, the quantity and categories (types) of shares recorded in the name of each registered person, and other information as might be required under legal acts of the Russian Federation.

The company must ensure the keeping and storing of the register of shareholders in compliance with the legal acts of the Russian Federation starting from the time of the company’s state registration.


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(b) Responsibilities

Either the company or a professional participant in the securities market licensed for the activity of keeping registers of the owners of registered securities (a “registrar”) holds the register of the shareholders of a company.

The register of shareholders of a company having more than 50 shareholders must be held by a registrar.

A company that has entrusted the keeping and storing of its register of shareholders to a registrar is not relieved from the responsibility for keeping and storing it.

A person registered in the register of shareholders must promptly notify the holder of the register on changes occurring in his personal data and details. If he fails to present information on such changes, the company and the registrar will not be responsible for the losses inflicted in connection therewith.

(c) Introducing records

Records are introduced to the Register at the demand of the shareholder (or nominee holder of shares) not later than three days after the submission of the documents provided for by statutory acts of the Russian Federation. A shorter term may be established by legal acts of the Russian Federation.

A refusal to make records to the Register of a company is not permitted, unless it is directly provided for by the laws of the Russian Federation. In the event of a refusal to make records to the Register, the holder of the register must send to the person demanding the making of the entry a reasoned explanation concerning the refusal to make the records not later than five days from the presentation of the demand.

The refusal to make records to the Register of a company may be appealed in court. By decision of the court the Register holder may be obliged to make the respective entry in the Register.

(d) Extracts

The Register holder of a company is obliged, at the demand of a shareholder (or nominal holder of shares) to confirm the shareholder’s rights in respect of the shares by means of the issuance of an extract from the shareholders’ register.

Answer 44 LIMITED LIABILITY COMPANIES

(a) Steps to establish

A limited liability company (LLC) is a registered legal entity comprising a group of individuals coming together to form an association with common business objectives. The owners are the shareholders, who put up the risk capital of the enterprise. Once formed the company has a separate legal personality and perpetual succession.

A LLC can be formed by no more than 50 persons. These persons can be private individuals or legal entities.


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Prior to formation it is necessary for the founders to agree common business purposes. Unless the company is established by one person, the founders enter into a statutory agreement, which forms the basis for creation of the enterprise and the rights and obligations of the founders to one another, their contributions to capital, management and administration and the right to withdraw.

It is necessary for the LLC to have a Charter. This defines the essential characteristics of the company and must include information required by statute law – name, location(s), statutory capital, management bodies and their authority, size and nominal value of shares, how shares may be alienated and matters relating to the custody and access to records and documentation. The law is generally less prescriptive in relation to the content of the Charter than for companies limited by shares.

The company is not compelled but may choose to prepare inner documents governing administrative procedures and company policies. These may set out matters relating to decision taking and meetings. They cannot conflict with the minimum requirements laid down by statute.

The founders must agree the structure and composition of management bodies and their terms of reference, including mandates and limitations on authority.

The company must comply with the requirements for minimum statutory capital. The contributions to this are set out in the statutory agreement and the number and denomination of shares will be contained in the Charter. The statutory capital may be contributed in monetary amounts or in specie, provided the latter is capable of monetary valuation.

The company cannot come into existence until it is registered. Until then, any obligations incurred are the responsibility of those who enter into them. Registration is effected by submitting a formal application, together with the appropriate fee. The authorities will then register the company if the application is in order, or alternatively issue refusal of registration. The latter can be appealed.

(b) Circumstances of ceasing to exist

A LLC ceases to exist with the cancellation of its registration by the State authorities. This can arise from various circumstances.

The company may be liquidated on a voluntary or compulsory basis. Voluntary liquidation occurs when the participants choose to wind up the company of their own volition. If solvent, the process is simple with minimal involvement of the creditors. If compulsory, this usually arises from pressure or action by the creditors and subsequent litigation.

A company may be liquidated on expiry of a term specified in its Constitution. This occurs when the company is established for a specific purpose or for a specified period of time.

A company can also be reorganised. It may change its corporate form to a company limited by shares or an artel . It can also merge with another company to form an entirely new company, with the constituent companies ceasing to exist, or demerge into companies spinning off the original entity. Lastly, the company may be taken over by another.

Tutorial note: A production cooperative, or artel, is a special form of commercial organisation described in the Civil Code. This commercial form has its origins in Soviet times, most visibly in the collective farm, or “kolkhoz”. The omission of references to cooperatives in the Federal Law “On Enterprises and Entrepreneurial Activity” in 1990 caused some to doubt the future of the cooperative as a future trading model and prompted some cooperatives to reorganise.


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Answer 45 LEGAL ENTITIES

(a) Main difference between OOO and company limited by shares (ZAO/OAO)

Tutorial note: The generic characteristics of business entities are laid down in the Civil Code and more detailed provisions are set out in the Federal Laws “On Companies Limited By Shares” and “On Limited Liability Companies”.

Ownership

Both types of company are owned by the shareholders, who put forward the risk capital for the enterprise. In a limited liability company (LLC) and a closed company limited by shares the number of shareholders may not exceed 50 persons, whereas in an open company limited by shares there is no such limitation, with many companies having well in excess of this number of shareholders.

Regulation

As the shareholder of a company limited by shares tends to be separated, or rather more remote, from the management and administration of the company, the federal law is more prescriptive in relation to this corporate model than for the LLC.

Constitution

Both types of company have a Charter and internal rules governing capital, shareholder democracy, meetings, voting protocols and officers. In addition to these sources of authority, the LLC has a founding statutory agreement between the participants.

Management

A company limited by shares must have a board of directors. This is not mandatory in a LLC.

Capital

There are different statutory capital minima for the two types of company. Only the company limited by shares is compelled to maintain a reserve fund.

Shares

The shareholders of a LLC may purchase, transfer and alienate their shares subject to many limitations. For example, they can prevent shares being sold to certain persons or entities without prior approval. Under stated circumstances, they can block a transfer even when the shareholder dies. If a shareholder wishes to divest his holding of shares, these must be purchased by the other shareholders or the company itself. Fair value for the shares is assured.

The shareholders of a company limited by shares can only redeem their shares in instances dictated by federal law. Shares may be gifted, transferred, sold or bequeathed, though in the ZAO model there is a right of pre-emption for existing shareholders.

Shareholders of a LLC may be removed under certain circumstances. This is not possible for shareholders of a company limited by shares.


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(b) Differences between open and closed companies limited by shares

Companies limited by shares may be of an open or closed type. One practical distinction is that of size – open companies tend to be larger both in relation to the scale of their operations and the number of participants.

An open company limited by shares issues share capital that may be transferred relatively free from restriction. If a shareholder wishes to purchase or sell shares there are few impediments to this. It is not necessary to consult other shareholders, so there is an element of transience in relation to ownership of the company. Shares may be sold to the public, subject to the laws on securities. There is no restriction on the number of shareholders of an open company limited by shares.

A closed company limited by shares may have a maximum of 50 shareholders. They own the company and can exercise a high degree of control as they have pre-emptive rights to purchase shares of which other shareholders choose to dispose.

Unlike an open company in which the share capital may be distributed by open subscription, the closed company distributes shares to the founders or to persons of the founders’ choice. This is a major distinguishing feature, and any closed company that wishes to make shares available to the broader public must be reorganised as an open company.

Answer 46 MR CHAIKIN

(a) Validity period

In case the validity period is not indicated in the power of attorney, the validity period is considered to be equal to one year since the date of issue. In this case the power will expire on October 2, 2009.

(b) If date of issue not indicated

A power of attorney that does not contain date of issue is invalid.

(c) Right to conclude

The power of attorney empowers the person only for execution of deeds and/or actions directly provided for in the power of attorney. The examined power of attorney empowers Mr Boiko for receiving goods and production due to OOO ABC but not for concluding contracts. OOO ABC will be responsible on the contract with OOO Y only in case of subsequent approval of the contract concluded by Mr Boiko by OOO ABC. Otherwise the contract will create rights and obligations directly for the person, who signed it, and namely Mr Boiko. And that will be Mr Boiko in person who will be responsible for fulfilment and non-fulfilment of obligations under the contract (exercise of pre-payment included).

(d) (i) Powers as general director

No. The fact of change of owner of the company does not directly influence the personality of General director. However, appointment of General director is the competence of general participants’ meeting, and the new 100% owner has a possibility to convoke the meeting and cease Mr Chaikin’s powers as a general director. But the director will be in any case changed by the general participants’ meeting decision.


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(ii) Validity of power of attorney

No. The power of attorney was issued by the company OOO ABCand the change of owner of the company does not influence the validity of deeds executed and concluded by the company.

(e) Validity of power of attorney

No. The power of attorney was issued by the company OOO ABC and the change of owner of the company does not influence the validity of deeds executed and concluded by the previous director of the company. However the power of attorney may be dissolved by the person who issued the power of attorney, namely by OOO ABC.

Answer 47 NIKITA

(a) Contract of commission

Contracts of commission are one form of voluntary representation in the Russian Federation. They are governed by the provisions of the Civil Code.

The case describes a contract of commission in which the two parties are Nikita and company OOO CAET. Nikita is the commitant and OOO CAET is the commissioner. Under a contract of commission the parties enter into transactions in their own names, so it follows that when selling the goods the commissioner is liable for the quality of the goods.

The terms of the contract for the sale of the goods can therefore be legally enforced by company OOO CAET and the purchaser of the goods.

(b) Liability of shortfall in price

A contract of commission provides for the instructions to be carried out precisely by the commissioner. The commissioner must act personally unless otherwise provided for in the agreement with the commitant.

If a sub-contracting arrangement is then agreed, the commissioner retains responsibility for carrying out the instructions of the commitant unless the contrary is expressed in the agreement of commission.

The scenario states that sales of computer software packages are slow. If this is the case and it can be established that a sale for a lower price was necessary in order to prevent greater losses by the commitant, then OOO CAET may be able to escape liability for the shortfall in revenues brought about by the lower price. If this is not the case, then the company will be liable to make good the deficit. Company OOO CAET may therefore be sued for the shortfall.

(c) Liability to Nikita

Generally, the commissioner is responsible for entering into the contract of sale for the goods but not for the execution of the contract unless the arrangement is of a del credere nature. Nikita cannot therefore enforce the terms of the contract by claiming against OOO CAET.

The situation is different if the goods are sold by OOO CAET in the open market, in which case the company would incur a liability to Nikita.

In addition, if it can be established that OOO CAET did not act reasonably in identifying a buyer, then the company may be liable to Nikita.


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(d) Sums of money due in respect of the transactions

OOO CAET owes Nikita for the sale of 4,000 manuals at 1,000 roubles per manual, total 4 million roubles, as specified in the contract. It also owes Nikita for the sub-contracted sale of 6,000 software packages at 2,000 roubles per package, total 12 million roubles. This liability may be reducible if it can be demonstrated that by not selling at the lower price there would have been a prospect of greater losses to Nikita.

The sub-contractor, OOO TEAC, owes OOO CAET the sales revenue from the packages (6,000 packages × 1,500 roubles, total 9 million roubles) plus the difference between the specified sale price and the actual sale price, which is 6,000 packages × (2,000 – 1,500), total 3 million roubles.

From the total revenue due from the sale of the manuals of 5 million roubles, Nikita must share the difference between the price obtained and the specified price with OOO CAET, which is 4,000 × (1,250 – 1,000), total 1 million roubles.

The commission fee of 10,000 roubles must be paid by Nikita to OOO CAET.

Answer 48 LAW OF REPRESENTATION

Tutorial note: This question tests knowledge of the general principles of representation as laid down in the Civil Code and the provisions of law relating to powers of attorney.

(a) General characteristics

The Civil Code provides for both obligatory representation and voluntary representation. Obligatory representation arises where one person or entity must be appointed to act on behalf of another. The simplest manifestations of this occur when a guardian represents a child or a person who suffers a mental incapacity. The latter occurs when one person or entity chooses to have another represent his or her interests. Voluntary representation may be effected through a power of attorney and also through contracts of commission and mandate.

Generally, a representative acts on behalf of the person or entity he or she is representing. As such, the actions of the representative are considered in law to be the actions of the donor of the power to act. Any action of a representative that forms a contract with a third party is deemed to be an action of the principal.

It is the duty of a representative to act in the best interests of the principal and not in his or her own personal interest.

The powers and duties of a representative are not without limit. Such arrangements are contractual and as such can be limited by the conditions contained in the contract. If the representative exceeds his or her authority, the principal has a right to either ratify the action or to disclaim it. In the latter case, the actions become the personal responsibility of the representative. However, special rules apply to commercial representation through a contract of commission.

In some instances the law requires the individual or entity to act in person. In such cases it is not permitted for a representative to act on behalf of the person or entity responsible.


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(b) Power of attorney

Definition

A power of attorney is a contract of agency through which a person, natural or juridical, confers powers on another to act on his or her behalf. It is a legally binding arrangement that persists for the duration and within the scope of the power, for the representative to act on behalf of the other party.

Powers of attorney are commonly used by individuals to enable transactions to be made by another individual. For example, an elderly person may decide that it is desirable for a younger or more mobile family member to make financial transactions or discharge other obligations or duties. A person who is to work outside the Russian Federation for a protracted period may also delegate some or all financial affairs to another person. In all instances, the creation of a power of attorney implies a high degree of trust.

Types of power of attorney

There are three types:

A general power of attorney confers a general power to act on behalf of the donor for a given period of time.

A special power of attorney enables a series of repeated transactions, again for a specified period of time.

A one-time power of attorney enables the donor to sanction a single transaction precisely defined in the power of attorney document.

To be valid, powers of attorney must always be executed in writing, and for some transactions require execution in notarial form. If the document does not indicate a time limit, it is valid for one year from its creation. All powers of attorney are time limited to a maximum of three years.

(c) Termination of rights

A power of attorney is terminated in the event of revocation by the donor (issuer) or refusal of the donee (attorney) to act.

Any power of attorney automatically lapses after three years, even if the document specifies a longer period of time. Powers of attorney that specify a shorter period terminate according to the date specified.

In all instances, a power of attorney is terminated on the death, personal incapacity or disappearance of the donor. This extends to the dissolution of a business organisation where that organisation is the donor.

Answer 49 CONTRACT OF COMMISSION

(a) Meaning

A contract of commission is one form of voluntary representation identified in the Civil Code through which one person can act on behalf of another, usually in the course of commercial trade. This method of representation is especially suitable for businesses dealing with overseas counterparties.


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A contract of commission involves two parties. The commissioner undertakes to carry out specified responsibilities under the instructions of the principal. The duties are carried out for remuneration at the expense of the principal.

The contract may be general or specific in relation to the time for which the service will be performed or territorial limits. It may include or exclude the right to execute contracts of sub-commission.

(b) Rights and obligations of parties to a contract

Tutorial note: The rights of one party are the equivalent obligations in respect of the other party.

Obligations of the commissioner

The commissioner is obliged to execute the instructions of the principal on the most favourable terms possible. In the absence of specific details relating to terms of dealing, the performance must be consistent with usual requirements that are typically established in the field of operation.

If the commissioner carries out transactions in a manner that is inconsistent with the principal’s instructions, the commissioner will be liable under the contract unless it can be demonstrated that his actions were taken to reduce greater losses that would otherwise have been suffered. This could arise, for example, if the commissioner sells perishable goods for a price lower than that specified by the principal.

Conversely, if the transactions undertaken by the commissioner yield a surplus, then this surplus is divided between the commissioner and the principal.

The commissioner may be liable to the principal for loss or damage to goods held on the principal’s behalf.

The commissioner must submit a report to the principal on his dealings.

Unless the contract of commission stipulates otherwise, the commissioner may enter into a contract of sub-commission, instructing a third party to act in the necessary transactions.

Obligations of the principal to the commissioner

The commissioner must be paid a fee by the principal for the services rendered.

The principal is obliged to accept all goods received and to honour all commitments given that are consistent with the contract of commission. The principal must examine goods received and must report any deficiencies or discrepancies to the commissioner without delay.

Once the services to be performed under the contract of commission are concluded, the principal must release the commissioner from his obligations under the contract.

(c) Rights and obligations in relation to third parties

Under the terms of a contract of commission, when dealing with a third party the commissioner becomes a party to the transaction and acquires rights and obligations that are then transferred to the principal. There are two separate contracts – the contract of commission and the contract with the third party. Therefore, the principal is not a party to the transaction with the third party, even though the principal may be named in the agreement.


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As a consequence, the commissioner obtains rights and obligations under the contract with the third party.

If a third party does not fulfil contractual obligations to the commissioner, the commissioner is not liable to the principal unless the commissioner has not taken due care in dealing with the third party or where the commissioner has given surety for the transaction. The commissioner should however inform the principal and transfer the rights under the transaction on the principal’s demand.

Answer 50 MISTERS IVANOV, PETROV AND SIDOROV

(a) Obligation to pay announced dividends

The company is obliged to pay announced dividends to its shareholders. In case of a delay in the payment of dividends, a shareholder may file a claim to the court on recovery of the due dividends.

However, in cases, when dividends for a certain period (a year, six months, a quarter) are not announced (the decision on dividend payment is not made), holders of ordinary shares or of preference shares not envisaging dividends of a fixed amount set by the Charter, may not claim their dividends with recourse to court. It is the right of the company to decide upon the feasibility of accrual of dividends in a certain period under such shares.

(b) Decision not to pay preference dividends

Yes, it may if there are valid reasons for such a decision. In case the General Meeting decides not to pay or to pay not in full the dividends under preference shares that envisage the receipt of dividends of a fixed amount set by the Charter, holders of shares of that type may neither apply to court to recover their dividends.

(c) Symptoms of bankruptcy

No, it may not. The law “On Companies Limited By Shares” lists cases when a company has no right to decide upon payment of the dividends or to pay the announced dividends. In particular, such decisions may not be taken if a company has the symptoms of bankruptcy as of the moment of payment or these symptoms may appear as the result of the payment of dividends by the company.

(d) Court’s decision

In all given cases claims of the shareholders may not be recognised valid, therefore the court decision to reject claims of Mr Ivanov, Petrov and Sidorov is lawful.

Answer 51 SHARE CAPITAL

Tutorial note: The question tested the candidates’ understanding of the law relating to preference shares and distributions.

(a) Restrictions on the amount of preferred shares

Under the law “On Companies Limited By Shares” the company is permitted to issue preference shares of one or more types. The only restriction is that the nominal value of the issued preference shares must not exceed 25% of the capital of the company as laid down in its Charter.

The company is therefore compliant with the law.


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(b) Who is entitled to take decisions?

Decisions on matters relating to retention of profits and distribution of dividends are taken by the general meeting of shareholders.

(c) Dividend payment due

The dividend to be paid to holders of preference shares of each type is 100 roubles, as set out in the Charter. The dividends would be payable to the holders of shares as follows:

300 roubles to the holders of the cumulative shares (100 roubles × 2 years cumulative, plus 100 roubles for 2008);

100 roubles to the holders of the non-cumulative preference shares as set out on the Charter;

12·5 roubles to the holders of the ordinary shares as the dividend rate cannot exceed the value recommended by the Board (50,000 less 40,000 divided by 800), where:

− 50,000 = total dividend recommended; − 40,000 = dividends due to preference shareholders; and − 800 = the number of shareholders).

(d) Cumulative or not?

The Charter of a company may set down a provision that a dividend that has not been disbursed or has been partially disbursed on preference shares of a particular type may be accumulated within a term as also set down in the Charter. Such shares are deemed to be cumulative preference shares. If there are no such provisions in the Charter, any preference shares issued are deemed to be non-cumulative in respect of dividends payable to their owners.

(e) Mandatory audit?

A decision by a company to pay dividends is taken by the shareholders in general meeting, often subject to executive recommendation. This decision in itself has no bearing on whether an annual audit is mandatory.

(f) Situations in which the payment of a dividend is prohibited

The company may not adopt a decision on payment of a dividend in the following circumstances:

if the share capital as set down in the Charter is not paid up in full;

if all of the stock has not been purchased;

if the company displays signs of insolvency as laid down in the law “On Bankruptcy”, or will do so if the dividend is paid;

if the net assets of the company is less than the Charter capital, plus the value of the reserve fund, plus the excess over nominal value of the liquidation value of the issued preferred stock, or if the payment of the dividend will result in such a deficit.


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The company may not adopt a decision on the disbursement of a dividend unless a decision has been made to pay the dividend in full, including the dividend due on cumulative preference shares.

The company may not adopt a decision to disburse dividends on preference shares of a particular type unless a decision has been taken to disburse dividends in full on all types of preference shares that confer priority over those subject to the disbursement.

Announced dividends may not be disbursed if the company displays signs of insolvency as at the date of disbursement or will do so as a result of the disbursement. The disbursement is also prohibited if the company’s net assets is less than the sum of its authorised capital, its reserve fund and the surplus of the liquidation value of issued preference shares over nominal value, or if this deficit will arise as a consequence of the disbursement.

Answer 52 OAO Z

Tutorial note: The question tests the candidates’ understanding of the rights of shareholders by reference to the percentage of shares owned in a company limited by shares. The rights set out in this answer are cumulative – shareholders described in part (ii) have all the rights of shareholders in part (i); those in part (iii) have all the rights of shareholders in parts (i) and (ii)etc.

(a) Rights to information and participation in management

(i) 1% shareholding

A shareholder with at least 1% of the voting equity in a company has the following rights:

information on the registered owner, the number of shares, the category of shares and nominal value of shares belonging to them;

the list of persons entitled to attend the general meeting, though the addresses may only be furnished with consent of the relevant shareholders;

to vote at the general meeting on the basis of one vote per share;

to litigate for losses caused to the company against a director, general director, member of the management board or directorate, management organisation or manager.

(ii) 2% shareholding

A shareholder owning at least 2% of shares in a company has the following additional rights:

to propose matters to be considered by the general meeting of shareholders and have these placed on the agenda;

to nominate candidates for the Board, collective executive body, internal audit commission and accounts commission;

to nominate a candidate for sole executive body.


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(iii) 10% shareholding

A shareholder owning at least 10% of shares in a company has the following additional rights:

to convene an Extraordinary General Meeting, subject to the ownership threshold being in place as at the date of the request;

to require an audit of financial and economic activity of the company at any time.

(iv) 25% shareholding

Shareholders with at least 25% of the voting shares of a company are entitled to access to the accounting documents of the company and to sight of the minutes of meetings of the collective executive body.

(v) 50% shareholding

The general meeting of shareholders is deemed to be quorate if it is attended by shareholders owning in aggregate more than half the issued voting shares of the company.

(vi) 75% shareholding

A majority of at least 75% of holders of voting shares is necessary to float new ordinary shares in excess of 25% of existing issued shares. This same threshold applies to securities convertible into ordinary shares.

A majority of at least 75% of holders of voting shares is also required to approve a major transaction where the subject matter is valued in excess of 50% of the balance sheet value of the company’s assets.

(b) Significant shareholdings

A person intending to acquire more than 30% of the total number of ordinary or preference shares of an open company limited by shares, considering the shares belonging to such person and its affiliated persons, must forward a public offer concerning acquisition of the said shares addressed to the owners of the shares of the corresponding types (voluntary offer).

A person who acquired more than 30% of the total number of ordinary or preference shares of an open company limited by shares or other emission securities convertible into shares, considering the shares belonging to such person and its affiliated persons, must forward a public offer concerning acquisition from other owners of the shares of the corresponding types and owners of emission securities convertible into shares, addressed to the owners of the shares of the corresponding types and owners of emission securities convertible into shares, within 35 days from the date of entry of the record on the bankbook (obligatory offer).

The price for the securities indicated in the obligatory offer cannot be less than the weighted average price under the results of the bidding of the organizer of the bidding on the securities market six months prior to the forwarding of the obligatory offer to the Financial Monitoring Service.

After receipt of voluntary or obligatory offers the board of directors of an open company limited by shares obtains recommendations on such public offer including estimation of the price of the purchased securities. The company limited by shares must forward the above offer within 15 days from the date of the receipt together with the recommendations of the board of directors to the owners of the securities to whom the offer is addressed.


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The owners of the securities to whom the voluntary or obligatory offers are addressed must forward a notice on selling the securities, to the address indicated in the voluntary or obligatory offers within the term of acceptance of the offers. From the date of receipt of the offer by an open company limited by shares, this must be:

not less than 70 or more than 90 days, in case of voluntary offer: and not less than 70 or more than 80 days in case of obligatory offer.

On receipt by the open company limited by shares of the voluntary or obligatory offers, any person is entitled to present a competitive offer on the corresponding securities. The price for purchase of the securities in the competitive offer cannot be less than the price indicated in the voluntary or obligatory offers.

If in case of execution of the obligatory offer a person has purchased more than 95% of the shares in the open joint stock company (J-SC), this person must within 35 days from the date of purchase forward to the owners of securities, having a right to demand redemption of the securities, a notice on their right. A bank guarantee must be attached to the notice. The owners of the securities are required to present claims on redemption of their shares within six months from the date of forwarding the notice. A person buying more than 95% of shares of the J-SC must buy the rest of shares of the J-SC under the claims of the owners of shares.

Within 6 month from the date of the expiry of the term for claiming redemption of shares the owner of 95% of shares may demand other shareholders to sell shares to him.

Answer 53 CAPITAL AND FINANCING

(a) Meaning of “share”

A share is a security representing the owner’s equity in a company. The stake that the owner has is represented by the nominal value of the share as determined by the Charter of the company. As such it defines the rights of the holder and any limitations on those rights.

The relationship of a shareholder with a company, and indeed with other shareholders, is quasi-contractual, with the mutual rights and obligations arising from ownership of the share determined by the Charter and other constitutional references. The terms of the relationship may be dependent on the type of share held. For example, preference shares usually carry a right to a fixed dividend while the dividend payable to ordinary shareholders is usually established with reference to realisable profits.

As a contribution to risk capital, the share is a claim against the company. This claim is deferred until the company ceases to exist, except where statute law or the constitution of the company provide for redemption of the share. Even when the company ceases to exist, the right to claim against the share is subordinated to the claims of others, including the liquidator and creditors.

The share also signifies rights in relation to participation in decision taking. In the Russian Federation, the general meeting of shareholders is the supreme decision taking body of the company, though rights to participate are usually confined to holders of ordinary shares. The shareholder has a right to attend meetings, vote at meetings or in absentia, and subject to various thresholds determined by law, propose matters for inclusion on the agenda or meetings and nominate directors. Shareholders can also convene extraordinary general meetings, again subject to the provisions of law.

Subject to the constraints imposed by the constitution of the company, the share is a type of transferable security. Is can be gifted, sold, bequeathed or otherwise transferred. It can be mortgaged or pledged. Under certain circumstances it can be forfeited.


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(b) Differences between rights of shareholders and rights of creditors

The rights of a shareholder are defined when the company comes into existence or when a new class of share is issued. The rights are set out in the Charter of the company, though general legal rights are also defined by statute law.

The rights to participate in decision taking are laid down in the relevant federal laws. Although preference shareholders can be denied a right to participate in meetings and voting, their contribution to the company is limited to 25% of the capital, so the majority of shareholders enjoy the right to express their views and where appropriate take decisions on the future of the company.

Shareholders have a right to a dividend if declared. In the case of preference shareholders this is usually fixed and often cumulative, being carried over if a dividend cannot be paid in a given year. Ordinary shareholders have a right to a dividend to the maximum recommended by the directors. The directors’ “recommendation” cannot be set aside by the subsequent general meeting, though dissatisfied shareholders can act collectively to express their disapproval in other ways.

The right to withdraw capital is constrained by law, the extent of this being defined by the type of company and whether redeemable shares have been issued.

The relationship of a company with its long-term creditors is entirely different to that of the company-shareholder relationship.

A creditor has a contractual relationship with the company, with the rights and obligations of the two parties defined not by the Charter but by the specific terms of the credit. As debtor, the company enters into a series of binding covenants with the creditor, the most important of which is to repay the capital and make payments of interest according to the terms of the contract. There may be additional covenants, usually designed to reinforce the position of the creditor on default by the company. As payment of interest and repayment of capital is contractual, these obligations are mandatory, irrespective of the profitability of the company.

Generally, creditors have no rights of participation in the decision taking of the company. However, their rights to demand full repayment are triggered by events determined by law, such as reorganisation. In the event of insolvency, they are also constrained until the business of the external manager is concluded.

Answer 54 SHARE PLACEMENT

Tutorial note: This question tests knowledge of matters relating to the placement of shares by closed subscription and rights of pre-emption of shareholders.

(a) Legal requirements

Placement of shares by closed subscription entails issuing shares to a limited number of persons. The law “On Companies Limited By Shares” lays down regulations in respect of placement by closed subscription. In addition, the Charter may make additional provisions if they do not conflict with statute, or if the law is silent on the matter.

All shares placed by closed subscription require the support of a decision of the general meeting of shareholders, passed by at least a 75% majority. This majority is also required if ordinary shares exceeding 25% of the ordinary shares already placed are to be issued, and where registered securities convertible into ordinary shares exceeding 25% of those already placed are to be issued.


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In other cases, a simple majority vote of the shareholders is required. The shareholders may delegate the placement of additional shares to the board of directors except in cases where a 75% majority is required.

The Charter of the company may specify a greater majority of votes necessary to implement the placement.

(b) Restrictions on share price

The placement price of shares must be at par (nominal) value or in excess of this. Shares cannot therefore be placed at a discount to par.

The placement price is decided by the board of directors, using the market value of the shares as a benchmark provided this is not lower than the par value. The price struck for those who enjoy rights of pre-emption may be lower than that for other purchasers provided the differential does not exceed 10%.

(c) Regulations applicable to pre-emption rights

Pre-emption rights are laid down by the law to ensure that the rights of existing shareholders are not compromised in favour of third parties (non-shareholders).

Rights of pre-emption apply to shares placed by open subscription and shares placed by closed subscription where the shareholder did not vote in favour of an issue.

The right of pre-emption is determined with reference to the shares that the individual already holds on a pro rata basis.

The process requires the company to issue a notice to affected shareholders specifying the number of shares to be placed, the placement price, an explanation of how pre-emption rights have been determined and the time limit for exercising rights. In response, the shareholder wishing to exercise the right must make an application to the company stating the number of shares required together with personal details.

Shareholders with rights of pre-emption may choose to pay for the shares in monetary form even if the issue provides for non-monetary contributions.

Answer 55 ZAO MUSICMASTER

(a) Non-monetary contributions

The law “On Companies Limited By Shares” states that the consideration paid towards statutory capital may comprise money, securities, other property or titles to property and any other rights capable of monetary valuation.

A closed company limited by shares may therefore accept contributions to its statutory capital in both monetary and non-monetary form. This would have to be with the consent of the founders, who agree to the size of the statutory capital of the company, the categories and value of shares and how they are to be paid for at the time of formation of the company.


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(b) Appraisal of assets contributed

Natasha’s contribution to the share capital of the company is real estate. This would be evaluated at the time of the formation of the company at the behest of the founders of the company. If the property is contributed after the company is formed and shares are issued to her once the company is operating, the property will be evaluated on instruction from the board of directors.

The property has to be evaluated by an independent expert who is competent to place a valuation on the asset. The appraiser must make an assessment free of influence by Natasha or her colleagues.

Once the property is valued, shares can be issued to a value corresponding to that of her contribution to the business. The valuation of assets in terms of money produced by the founders of the company and the board of directors of the company must not exceed the valuation assessed by an independent appraiser.

(c) Use of property

The real estate is Natasha’s contribution to the company on or shortly after its formation. As such, she owns shares in the business in return for the contribution and therefore no longer has any right over the asset that formerly belonged to her. The shareholders of a company have a claim against the company but do not own a proportion of the assets on an individual basis. How the property is used is therefore a matter for the shareholders acting as a collective decision taking body. It would be inappropriate as well as unworkable for Natasha to expect 40% of the premises to be used for purposes dictated by her on the grounds that she owns 40% of the capital.

Although Natasha has little individual control over the way in which the resources of the business are used, she is in a relatively strong position as the main shareholder of the company. As such, she has the ability to exert a strong influence at general meetings. If she can persuade one other shareholder to vote with her, any decision requiring a simple majority can be passed routinely. For votes requiring a 75% majority, she would need the support of three more shareholders, which may prove more difficult.

As a major shareholder, Natasha can also propose items for inclusion on the agenda of the general meeting of shareholders and nominate persons to serve on the board of directors. She can also convene an extraordinary general meeting.

Although it is generally up to the shareholders to decide on the way in which the business is run, including the retail operational model it is based upon, Natasha may have some power to prevent the disposal of the premises. If the book value of the premises is 25% or more of the assets of the company as at the last financial reporting date, the transaction is regarded as a major transaction under the law “On Companies Limited By Shares”. As such, the transaction will require the unanimous consent of the board of directors, or failing that a majority of the shareholders present in general meeting. The majority requirement increases to 75% if the book value of the asset exceeds 50% of the company’s assets. The outcome would ultimately depend on the support or lack of support from the other shareholders for Natasha’s case.


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(d) Implications

The auditors of a company are appointed by the founders on formation of the company and thereafter by the general meeting of shareholders.

It is the duty of the auditors to make all necessary enquiries in order to discharge their statutory functions. This routinely involves access to financial and other documents made available by the company but also the right to have explanations to all reasonable enquiries made of the executives and other management of the company. Failure to make such enquiries simply because the executives of the business are too busy would constitute a breach of the duty of care owed to the company.

If Natasha does not cooperate with the auditors there may be serious consequences. They may at best bring this to the attention of the members in the form of a qualified report or at worst convene an extraordinary general meeting to bring the lack of cooperation, and its possible consequences, to the attention of the shareholders. Ultimately, they may decide that it is impossible to form an opinion and report to this effect when addressing the shareholders.

If the auditors resign, this could also create serious problems. Potential replacement auditors would probably be alert to the situation and may refuse office. The new auditors would probably be more and not less searching in their enquiries as a result.

It is a relatively simple matter for Natasha to remove the auditors of the company provided she has the support of her fellow shareholders. Auditors are appointed for a fixed period, and on expiry of that period the general meeting of shareholders can replace one audit firm with a new one. However, this would hardly solve Natasha’s dilemma, as the new auditors are likely to be alert to the circumstances and make similar enquiries in the course of their future work.

If the auditors are removed ahead of expiry of their term of office this would constitute a breach of contract and render the company liable to pay compensation. It would also have serious ramifications for the perceived integrity of the company.

Answer 56 DIVIDENDS AND REDEMPTION

(a) Factors limiting right to pay dividends

The Federal Law “On Companies Limited By Shares” governs the rights and limitations of companies in respect of the payment of dividends.

A dividend is a distribution of profits to the shareholders in a company. It is the reward to the shareholder for putting up risk capital. Dividends are paid out of profits on a quarterly or half yearly basis as interim dividends or as an annual distribution.

Dividends are recommended to the general meeting of shareholders by the board of directors. However, an implicit contradiction of the Federal Law “On Companies Limited By Shares” in this respect is that the recommended dividend cannot be set aside by the shareholders. If they feel that a larger dividend should be paid, the shareholders can take many actions, including the removal of directors and executives, but they cannot award themselves a higher dividend.

In making their recommendation, the directors have to balance their consideration of the appropriate dividend with the perceived need to retain profits for reinvestment in the company.


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However altruistic the directors may wish to be, there is a practical limit to the size of dividend that may be declared. This is the value of net realisable gains made by the company, or put another way, the maximum that may be withdrawn from the company without necessitating a reduction in capital. If a company wishes to reduce its capital, it must invoke the procedures laid down in federal law for this purpose.

Many companies have different classes of shares, the terms of which are laid down in the Charter. It is usual for preference shareholders to be paid a fixed dividend. If the company does not have the financial resources to pay this fixed dividend in any given year, the right is carried over to the following year, ahead of the claims of other shareholders, unless the Charter stipulates otherwise.

The dividend payable to ordinary shareholders is not fixed and is therefore entirely dependent on the directors’ recommendation.

Dividends may not be paid at all if the Charter capital is not fully paid up, if there are symptoms of insolvency or if the value of net assets is less than the reserve fund. They also cannot be paid ahead of the claims of shareholders who have the right to redeem shares.

(b) Redemption

Circumstances

The shareholders of a company limited by shares have a legal right to redeem their shares if the company is reorganised, if the company concludes a large scale transaction or if amendments are made to the Charter that infringe the rights of the shareholders.

Procedure

The redemption price of the shares is determined by the board of directors. However, this cannot be less than the market value of the shares estimated by an independent appraiser. The appraiser must make this estimation discounting the effect on the share price of the decision to redeem.

If a general meeting is convened to take decisions that may give rise to a right of redemption, the agenda circulated in advance of the meeting must indicate this and inform the recipients of the redemption price and how applications may be made for redemption.

Any shareholders wishing to exercise their rights to redeem shares must serve notice on the company within 45 days of the relevant decision. This notice must include an address for communication and an indication of how many shares are to be redeemed.

The total value of funds set aside for redemption may not exceed 10% of the value of net assets. If this is inadequate, shareholders may partially redeem on a pro rata basis.


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Answer 57 DIMITRI

(a) Legal relationship between issuer and purchaser

Ordinary and preference shares represent partial ownership of the business. They represent a claim on the company for risk capital invested to fund the enterprise.

The nature of the relationship between the shareholder and the company is quasi-contractual. Shares of different classes are issued by the company under the terms of the Charter, which sets out the rights and obligations of the parties to the transaction. For example, the Charter states the type, nominal value and number of shares to be issued by the company. Of particular importance to the investor is the right to a dividend if declared and to certain constitutional rights in relation to decision taking, though these differ for ordinary and preference shareholders.

The relationship between the shareholder and the company is a permanent one in that the redemption of shares can only be effected in a manner that is consistent with the provisions of the Charter or federal law.

Federal law also lays down powerful rights in favour of the shareholder.

Company bonds are loan capital and the relationship between the investor and the company is therefore a contractual one of debtor to creditor. The terms of issue of the bond set down the rights and obligations of the parties. Of most importance to the investor are the rights to annual interest and to redemption of capital. Unlike a share in a company, a bond is not permanent capital.

(b) Rights of owners to participate in shareholders’ meetings

The ordinary shareholder has significant rights of participation in the affairs of the company limited by shares. As a partial owner of the business, the shareholder has the right to notice of general meetings, to attend these meetings and to participate in decision taking.

The general meeting of shareholders is of huge importance in relation to decision taking. There are many matters that fall within the exclusive competence of the general meeting and it is for the shareholders alone to decide these. The shareholders elect the board and executive body and have complete control over the constitution of the company.

Federal law establishes a number of thresholds through which shareholders have an increasing amount of influence according to the percentage of shares held in the company.

Preference shareholders generally have less influence over the company’s affairs. They cannot vote on routine matters. However, they can exercise a right to vote if the company is to be reorganised or liquidated, or where decisions are to be taken that will materially affect their interests. For example, they can vote if their fixed dividend is not paid or underpaid (including unpaid cumulative dividends), and also on matters that will change or restrict their rights.

Holders of corporate bonds do not have any voting rights in the company as their assets represent loan capital. They do however have the right to be informed of major issues such as a proposed reorganisation or liquidation of the company.


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(c) Realising cash in short-term

Shares in open companies limited by shares and company bonds are transferable and marketable, but the ability to realise cash in the short-term is dependent on the perceived attractiveness of the investment to buyers and sellers. The most suitable type of investment for the company described in the scenario is therefore dependent on market conditions. Shares in closed companies limited by shares are also transferable and marketable, but there is less immediate prospect of finding an investor in the short-term should cash be required.

Unless the terms of the Charter so provide, the investor cannot demand that the company redeems the shares, as redemption is only provided for in specific instances dictated by federal law. It is unlikely that such events will coincide with the investor’s requirement for liquid funds.

Company bonds are transferable should buyers be willing to invest and in practice can sometimes be more marketable than shares. The investor can purchase bonds with maturities that match known future cash requirements, and the debtor is contractually obliged to return the capital to the investor on the maturity date. Unexpected demands for cash may be met immediately by liquidating holdings of bonds, depending on market conditions.

For all of these investments, there is no guarantee that sale in the parallel market will realise sufficient cash for the investor’s requirements, as their capital value will fluctuate with the underlying performance of the company.

As registered transferable securities, both shares and bonds may be used as security for an obligation, though the underlying risk makes them unattractive as collateral for some lenders. There is however a prospect that the securities can be used as collateral to raise cash if required urgently.

(d) Risks and regular returns

Ordinary shareholders are legally entitled to a dividend if declared. The dividend is dependent on the recommendation of the directors, which in turn will depend on the profits generated by the company and the need to retain profit for reinvestment. The dividend is therefore not guaranteed and will vary from year to year. If the company does not make a profit then it cannot pay a dividend at all, which means that the investor has no return on risk capital.

Preference shareholders usually receive a fixed dividend and are therefore more certain of the return on the securities held. However, this is not guaranteed, as the dividend may be underpaid if the company makes little profit or not paid at all if the company is unprofitable. Unless otherwise specified in the Charter, the right to a fixed dividend carries over to the next year if it is unpaid or underpaid in the current year. Such shares are said to be cumulative. Furthermore, accumulated rights and current rights rank ahead of the dividends payable to ordinary shareholders. Preference shares therefore carry less risk in relation to regular income as long as the company is profitable. The downside of this is that when the company is highly profitable the preference shareholders’ dividends do not increase.

Company bond holders are entitled to interest and not dividends. The interest is a contractual obligation expressed in the terms of issue of the bond. The return is usually fixed, though floating rate bonds may be issued. The interest must be paid by the company. Failure to do so triggers crystallisation rights as set out in the terms of issue of the bond. In the event of default the bond holder can litigate for the debt. Therefore, the bond holder has the same certainty of income but is not dependent on the profitability of the company. There is still an element of risk in that the company may encounter periods of illiquidity that compromise its ability to make interest payments.


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(e) Risks in the event of liquidation

The Federal Law “On Insolvency (Bankruptcy)” lays down specific provisions in relation to the claims against the company by holders of different types of security.

It is a general principle of law that creditors should be paid ahead of shareholders in the event of insolvency. Therefore, the claims of owners of company bonds rank before the claims of any shareholders in the company. This applies not only to the capital due to the bond holders but also any unpaid interest. Generally, secured creditors rank before unsecured creditors. All creditors have a right to statutory notices at the observation stage and when the company is under external management. They also have a right to participate actively in the process.

From the above it follows that the shareholders take a greater risk than bond holders. In the event of insolvency it is the shareholders who are most likely to lose some or all of their investment. When a company is liquidated the preference shareholders often rank before the ordinary shareholders in relation to return of capital. The Charter of the company may make specific provisions in this respect.

Answer 58 STATUTORY CAPITAL

(a) Process to increase

A company may increase its statutory capital by either a decision of the general meeting of shareholders or a decision by the board of directors. In either case, the powers may be exercised within the provisions laid down in the Charter.

If the decision is taken by the general meeting of shareholders, a simple majority is required to authorise the increase, which is normally effected by increasing the number of the company’s shares. Once sanctioned it is necessary to amend the Charter of the company.

For a decision to be taken by the board of directors it is necessary for the directors to be unanimously in favour of this. The increase may be achieved by placing additional shares. In order to maintain the rights of existing shareholders in terms of proportionate voting powers, any placing of additional shares is made on a pro rata basis. The value of the increase cannot exceed the net assets of the company less the combined value of the reserve fund and statutory capital.

(b) Process to reduce

A reduction in share capital may only be sanctioned by the general meeting of shareholders. This is again subject to the provisions of the Charter of the company.

The decision to reduce share capital may be implemented by either reducing the par value of all shares in the company or through a buyback (acquisition and repayment of shares).

If this reduction is approved the creditors of the company must be notified within 30 days. The creditors may then demand repayment of monies due to them plus any compensation for losses suffered.

(c) Reserve fund and net assets

Reserve fund

The purpose of the reserve fund is to provide for losses incurred by the company and for the redemption of bonds and buybacks of shares if the company has no other means of achieving these actions.


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The reserve fund is stated in the Charter but must comply with the statutory minimum value. The value of the reserve fund is accumulated by annual allocations of profit, again subject to statutory minimum amounts.

Net assets

The net assets of the company are the difference between its assets (working capital and fixed assets) and liabilities (all obligations due to third parties). This has obvious significance in relation to the solvency of the company. If the nets assets of the company fall to a level below the value of the statutory capital, the company is compelled to decrease the statutory capital to a level no greater than the net assets.

Answer 59 ZAO VOLATILE

(a) Effect on income of fluctuating trading performance

Ordinary shareholders

The income of ordinary shareholders is entirely dependent on the trading performance of the company and directly related to profitability. When the company performs well and makes a profit its dividends are likely (but not guaranteed) to be higher than when the company performs badly. The ability of the company to pay a dividend is dependent on its ability to make distributions out of profit and the decision of the board of directors on the proportion of profit that should be retained and ploughed back for reinvestment. Although the decision of the directors is a “recommendation” to the general meeting, the federal law “On Companies Limited by Shares” does not permit the shareholders to overturn this recommendation. Therefore, the holders of ordinary shares are directly exposed to the trading experiences of the company and the decisions of the directors. For the company in the scenario, this means that the ordinary shareholders have a reduced prospect of income from dividends and little prospect of their shares increasing in value when the company performs badly. However, when the company increases its profitability, the ordinary shareholders should benefit from both dividend and capital growth.

Preference shareholders

Preference shareholders are in a better financial position than ordinary shareholders when there is a downturn in profitability. Subject to provisions in the Charter, preference shareholders are paid a fixed dividend and are therefore entitled to the same income every year assuming that the company makes a profit. However, if there are no funds for distribution then even the fixed dividend cannot be paid.

The preference shares issued by most companies carry a right to accumulation through which any unpaid dividend in one year carries over to the next year before the ordinary shareholders are entitled to any distribution. This is the default situation if there is no reference in the Charter as to whether preference shares are cumulative or not.

Preference shareholders are at a disadvantage in comparison with ordinary shareholders when the company is generating a high level of profit and where the directors recommend a substantial dividend. The income of the preference shareholders is fixed regardless of the performance of the company. In such cases, the benefit from the prosperity generated by the company mainly falls to the ordinary shareholders.


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Holders of long-term debt

Holders of long-term debt are in a contractual debtor–creditor relationship with the company. They receive interest and not dividends. Therefore, the regular payment of income to the creditor is a contractual obligation that must be met, irrespective of whether the company is profitable or not. Therefore, the holders of long-term debt are certain to be paid provided the interest cover is adequate.

(b) Circumstances for redemption of capital investments

A company limited by shares is said to have perpetual succession which means that the company will continue to exist in its registered form even though its shareholders may be transient. Share capital is not intended to be an investment that can be realised in the same way as (for example) a savings account or a bond. The capital is generally regarded in law as permanent capital.

There are, however, certain instances in which shareholders may demand redemption of their shares. The most obvious example of this is where the Charter envisages that shareholders can exercise this right and when a company is liquidated even though it is solvent.

Shareholders may demand redemption of their investments on reorganisation of the company. In this scenario the company has transformed and proposes to spin off a division into a separate company. Either proposal would result in the shareholders being able to demand redemption of their shares.

Redemption of shares is also permitted where the company enters into a major transaction, but only in favour of those who voted against the major transaction or did not vote at all.

Shareholders may redeem their shares if the general meeting of shareholders takes a decision that directly and adversely affects the rights of shareholders.

Lastly, redemption of shares is an automatic right if one individual or entity obtains 30% or more of the company’s equity.

In all instances the shares are purchased by the company at a price struck by the board of directors, which in turn may be no lower than the market value estimated by an independent appraiser.

The creditors have similar rights to recall their capital ahead of schedule when a company decides to reorganise or enter into a major transaction. They are also able to claim for full repayment if the company proposes to reduce its statutory capital.

Some loan capital is convertible into shares, in which case the loan is redeemed and immediately transferred into equity.

Lastly, long-term creditors have a contractual right to redemption when the credit is scheduled for full repayment.


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(c) Rights of holders to participate in decision-making

As a general rule, only the ordinary shareholders in a company limited by shares have the right to vote. However, the voting rights are laid down in the Charter, which may make specific provisions in relation to voting powers provided these do not conflict with the provisions of the federal law “On Companies Limited by Shares”. The normal situation is that ordinary shareholders have the right to one vote per share issued, starting from the point at which the tabulation commission recognises the entry of the shareholder’s name in the register.

Preference shareholders cannot usually vote on routine decisions at the general meeting of shareholders. However, there are instances in which a right to vote is invoked. They can vote on matters relating to liquidation and to reorganisation. Therefore, the preference shareholders of the company in the scenario would be able to vote on the two reorganisations.

Preference shareholders also have a full right to vote if the company does not pay the dividend (or cumulated dividend) and this right is retained until such time that dividends due are paid in full.

If the company proposes to restrict or otherwise alter the rights of preference shareholders, then the affected shareholders have a right to vote on the issues that will affect them. In such cases, the proposed changes require a 75% majority in favour with reference to separate votes by both the general shareholders and the affected shareholders.

Additional voting rights may be envisaged by the Charter of the company.

Holders of long-term debt have no voting rights as their relationship with the company is conceptually different to that of shareholders. However, in the event that insolvency proceedings are invoked, then all creditors have a right to be consulted, and a right to active involvement in the decisions taken by the manager responsible.

(d) Priority of claims of investors

The Civil Code lays down the priority for repayment of monies due to the various stakeholders in an insolvent company.

As a general rule, creditors are paid before holders of any shares in the company. In turn, secured creditors are paid before the claims of unsecured creditors are addressed.

Repayment to preference shareholders ahead of ordinary shareholders is not an automatic legal right in the event of liquidation. The rules for payment are established in the Charter of the company, which may specify that certain classes of share represent higher claims than others. If the Charter is silent on this issue, the claims of preference shareholders are met alongside holders of ordinary shares.


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Answer 60 MINIMUM MONTHLY PAY

Minimum monthly pay is set by the government of the Russian Federation. It is an amount that nobody actually receives, or indeed could live on. It is used as a yardstick for certain calculations.

The minimum monthly pay figure is set by the government and revised upwards periodically. It is used as a multiple to set certain fines, sanctions and penalties. It is common to speak of fines being “ten times monthly minimums” or “100 times monthly minimums”. This has the obvious advantage over setting these figures in absolute terms. Rather than having to revise a whole range of fines to enable them to maintain their real value against inflation, it is only necessary to revise the multiple.

In the context of company law, minimum monthly pay is used to determine several limits under the federal laws “On Companies Limited by Shares” and “On Limited Liability Companies”.

The minimum size of statutory capital of a company limited by shares is 1,000 times minimum monthly pay. The equivalent figure for a limited liability company is 100 times monthly minimum pay. If the founder’s assets of a new enterprise is over 200,000 times minimum monthly pay it is necessary to obtain a notice from the anti-monopoly authority. The same multiple applies to permissions for merger and acquisitions, again from the anti-monopoly authority. The multiple for mandatory external audit is annual sales of 500,000 times minimum monthly pay (and balance sheet assets of 200,000 times).

Answer 61 OAO ZVEZDA

(a) Parties to the deal

LLC Technoproject concluded with LLC Ensk a contract of sale of shares, being the agent under the contract of mandate concluded with the issuer of shares, OAO Zvezda. According to the general principles of a contract of mandate, set by the Civil Code of the Russian Federation, rights and obligations under a deal concluded by an agent are possessed by the beneficiary. Therefore, the actual seller and the party to the contract in question is OAO Zvezda.

(b) Is there interest?

With respect to OAO Zvezda such a deal is a deal in which there is interest, since the General Director of the purchaser, LLC Ensk is a member of the Board of Directors of OAO Zvezda.

(c) Order of conclusion

A deal in which there is interest must firstly be approved by the Board of Directors or by the General Meeting of the company. In the given case, since the amount of placed ordinary shares exceeded 2%, the decision upon the deal should have been made at the General Meeting by the majority of shareholders that were regarded as not having interest in the deal.

(d) Consequences of non-observance

A deal in which there is interest, concluded with infringements of the requirements set by Federal law, may be regarded as void (disputable)


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Right to file claim

The right to go to court in that case belongs to the company or its individual shareholder. Therefore, the claim of a shareholder of the Zvezda company is to be allowed.

Answer 62 TRANSACTIONS

The aim of this question was to test the candidates’ understanding of transactions in which there is an interest by companies limited by shares.

(a) Who may be interested?

The persons that may be interested in a transaction carried out by a company limited by shares are:

any director of the company;

any person carrying out the decisions of the Board of Directors of the company, such as the General Director or an executive;

any shareholder who owns one-fifth or more of the company’s voting shares;

any shareholders who together with affiliates owns one-fifth or more of the company’s voting shares;

any individual who can confer a mandate on behalf of the company.

In turn, the law “On Companies Limited By Shares” specifies that such persons are deemed to be interested if they or connected persons:

are a party to the transaction;

derive some benefit from the transaction;

participate in the transaction as an agent, representative or other intermediary;

own, in their own right or collectively with affiliates, one-fifth or more of the voting shares of the counterparty to the transaction, or of an agent, representative or other intermediary to the counterparty;

participate in the management of the counterparty to the transaction or an agent, representative or intermediary to the counterparty;

are otherwise specified in the Charter as being interested persons.

Connected persons in the context of this law are the spouse, parents, brothers, sisters, half brothers, half sisters, step parents and step children.

(b) Interests that must be disclosed

The names of companies or other legal entities in which they own, autonomously or jointly with connected persons, one-fifth or more of the voting shares.

The names of companies or other legal entities in which they hold managerial or executive positions.


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Actual transactions in which they would be interested persons.

Planned future transactions in which they would be interested persons.

There are specific exclusions to the rules on transactions in which there is an interest. An interest is deemed not to exist where:

there is only one shareholder who also acts as the only decision taker;

all shareholders would be deemed to be interested persons;

the transaction relates to priority rights of acquisition of additional shares or convertible securities;

the company is to acquire its own shares/securities;

the company is to redeem existing shares/securities;

the company is to merge with another or be acquired by another where the counterparty already owns in excess of 75% of the voting shares.

(c) Approval procedure

A transaction in which there is an interest may be approved by:

the Board of Directors; or general meeting of shareholders.

The Board may take the decision provided that:

the meeting is quorate; and there is a majority of directors in favour, excluding those deemed to have an

interest.

If the meeting is inquorate or the required majority cannot be achieved, the decision must pass to a general meeting of shareholders. Where there are more than 1,000 shareholders, if all of the directors are interested persons the decision must pass to the general meeting of shareholders.

Transactions that may be approved by the general meeting include:

transactions in assets where the value is 2% or more of the balance sheet value of the company’s assets as at the last accounting date;

placements by subscription or sale of ordinary shares or convertible securities exceeding 2% of ordinary shares or convertible securities already placed.

The transaction does not require approval of a general meeting where the terms of the transaction do not differ significantly from the terms of transactions already concluded in the course of ordinary business activity prior to the time that the person was deemed to be an interested person. This rule applies to transactions between recognition of the person as an interested person and the date of the subsequent annual general meeting.

The general meeting may adopt a decision to approve a transaction between a company and an interested person in the course of ordinary economic activity. The shareholders may specify the maximum amount of the transaction.


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(d) Consequences for violation of the law

If there is a violation of the rules on transactions in which there is an interest, the transaction may be deemed invalid on receipt of a complaint by the company or a shareholder.

The interested person bears personal responsibility to the company for losses caused. If several persons are deemed to be interested persons, they share responsibility for losses on a joint and several basis.

Answer 63 LEGAL ROLES

Tutorial note: The requirement to “compare and contrast” tests understanding of the respective roles of the internal audit commission and the external auditors.

Similarities

There are numerous similarities in the functions of these bodies. Both are required by law for certain types of economic entity, fulfil a control function in relation to economic activities carried out by the company and are appointed by the shareholders of the company at the annual general meeting. Both have to discharge their duties acting independently of the management of the company. Both may convene an extraordinary general meeting of the shareholders if they deem it necessary to inform the shareholders of relevant facts or circumstances, or if they feel that certain actions would be in the best interests of the shareholders.

Internal audit commission

All companies limited by shares and LLCs with more than fifteen shareholders must elect an internal audit commission.

The internal audit commission is a management body but must act independently of management. It may only be formed for the statutory purpose of supervising and controlling the economic activity of the company and can therefore not fulfil any other delegated functions.

The internal audit commission can only be elected by the general meeting of shareholders. The law lays down specific voting provisions. Shares representing the holdings of the board of directors and other managerial bodies do not carry a voting entitlement. Conversely, members of the internal audit commission are not entitled to become directors of the company or sit on any managerial body.

As well as exercising a control function, the internal audit commission’s opinion is required prior to a general meeting of shareholders approving the financial accounts of the company.

External auditor

An external auditor is required in all open companies limited by shares and in other companies where their assets and annual business turnover exceed thresholds dictated by law. In addition, most financial institutions must have an external auditor. In other instances, shareholders with shares in excess of 10% of the total statutory capital may demand that an external audit be carried out.

The purpose of external audit is to provide the shareholders and management with an independent view on the financial situation of the company, and to confirm that the records are a true and accurate reflection of the company’s activities in the relevant accounting period. To this end, the external auditor may demand information and explanations from the company in order to discharge its responsibilities.


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In practice, the external auditor is chosen by the company, but the appointment must be ratified by the general meeting of shareholders. Once ratified, a contract is formed between the company and the auditor. Thus, the relationship with an external auditor is a contract for service with an external body, whereas the relationship with the internal audit commission is a contract of service. In some cases, formal ratification by the meeting can be retrospective.

Answer 64 BOARD OF DIRECTORS

(a) Roles

The provisions relating to the board of directors and the executive body are laid down in the Federal Law “On Companies Limited By Shares”. The precise role of each is decided in practical terms by the size of the company and the nature of its activities.

Board of directors

The board of directors may also be referred to as the supervisory council. Its purpose is to exercise general guidance for the company and to decide on all matters that do not fall within the exclusive competence of the general meeting of shareholders. In smaller enterprises the board may not be required, so the law permits companies with less than 50 shareholders to dispense with the need for a board. If this is the case, all decisions will be vested in the shareholders’ meeting.

For other companies there must be a board of directors. The directors are elected annually and can serve for an unlimited number of terms of office. The shareholders’ meeting may determine the terms of reference of the directors, either in the founding Charter, by amending the Charter or through ongoing decisions at general meetings. The shareholders also decide on the number of directors, though the law prescribes that companies with more than 1,000 shareholders must have at least seven directors and companies with more than 10,000 shareholders must have at least nine directors.

Executive body

The executive body is responsible for the day-to-day operations of the company limited by shares. It may either be collegial (a group of executives) or a single person or entity. The shareholders’ meeting may sometimes decide to delegate executive powers to an external management organisation or to an individual entrepreneur.

The executive body deals with a wide range of operational matters, including acting in the company’s name, representing its interests, carrying out transactions on behalf of the company, dealing with human resources matters and issuing instructions and directions.

(b) Matters within exclusive competence

The real power in a company limited by shares lies with the shareholders’ meeting. The exclusive competence of the board of directors is to deal with those matters, which lie outside the exclusive competence of the shareholders’ meeting, or have been delegated to the board by the shareholders’ meeting.

Some matters can only be dealt with by the shareholders’ meeting subject to a recommendation by the directors. These include the declaration of an interim or annual dividend, reorganisation of the company into another corporate form and confirmation of the annual balance sheet and profit and loss account.


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Subject to the provisions of the Charter, the board appoints the executive body of the company limited by shares. If the Charter does not so provide, this task falls to the shareholders’ meeting.

Major transactions of 25–50% of the book value of the company’s assets can be approved by the board of directors, but only on a unanimous basis. If this cannot be achieved, the decision falls to the shareholders’ meeting.

Other matters that would normally be within the exclusive competence of the directors are:

Strategic direction of the company – agreeing the strategic plan and apportioning responsibilities for its execution;

Meetings – dealing with the higher administrative matters relating to the constitutional rights of shareholders (e.g. the list of voting shareholders, finalisation of documents, etc);

Capital – implementing decisions on increases in statutory capital, issuing and purchasing securities, appropriation of the reserve and other funds;

Other – dealing with matters charged to them by the shareholders or the Charter.

(c) Legal and other controls that limit decisions and actions

The highest level of control is exerted by Federal Law “On Companies Limited By Shares”, which stipulates the minimum requirements that must be fulfilled by the board and the executive body, and the Civil Code, which defines the obligations that individuals and businesses owe to others. Both the board and the executive body may bear civil responsibility for damage to the company brought about directly as a result of their actions. This responsibility is joint and several.

This principle extends to a sole executive body, so where an individual serves the company under a contract for service, he may bear a liability in tort and can therefore be sued for damages. Such relationships are regulated by the Civil Code.

The accountability of individual directors is not absolute in that any director who voted against or abstained on a matter may be absolved from responsibility.

Executives will normally have a contract of service in the form of a labour agreement. This is often of a fixed term nature. The contract is in itself a form of control as it enables the board to limit the power and authority, and hence the actions, of the relevant persons.

The laws of the Russian Federation impose a highly administrative approach to control of the company’s affairs. The next level of control, therefore, is the Charter and the internal rules of the company. These are binding on all who serve the company and on the actions of the company as a separate entity. The Charter itself may only be changed by the shareholders’ meeting, and only then if the change is consistent with federal law.

Another form of control is through external audit (where the law requires this) and through the activities of internal bodies (e.g. the internal audit commission and the tabulation commission). All of these activities have their own specific terms of reference but are essentially tactical and operational organs through which control is exerted.


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Answer 65 GENERAL MEETING OF SHAREHOLDERS

(a) Preparation

Shareholders are informed by the Board of Directors of the scheduled Meeting by:

registered mail (unless the Charter envisages another form of notifying); written notice (with acknowledged receipt); publication in printed mass media (if stipulated in the Charter); additional information in other mass media (optionally).

The notice must contain:

full name and location of company;

form of holding the General Meeting (voting in presence or absentee voting);

date, time and place General Meeting is to be held, postal address to send filled-in ballots;

deadline for accepting absentee ballots;

date of closing the list of shareholders entitled to participate in the General Meeting;

issues on the agenda;

order of access to information (annual financial reports, information on candidates, draft decisions of the Meeting and other documents stipulated by the Charter).

Shareholders must be informed on holding the General Meeting not later than:

20 days before the scheduled date of the Meeting – in general

30 days before the scheduled date of the Meeting – in case the agenda contains the issue on reorganisation of the company

50 days before the scheduled date of the Meeting – in case the agenda contains the issue on electing the Board of Directors by cumulative voting

(b) Rules for convening an EGM

Although the law “On Companies Limited By Shares” does not stipulate any restrictions in terms of the jurisdiction of an Extraordinary Meeting of shareholders when compared to its annual Meeting, it does envisage that it is at the annual Meeting where shareholders elect the Board of Directors (Supervisory Council), internal audit commission (internal auditor), approve external auditor, and approve the company’s annual report. However, this legal provision should not be interpreted as a ban on considering all of the above-mentioned issues at an extraordinary meeting should that be required in the interests of the business.

An Extraordinary General Meeting of shareholders is held by decision of the Board of Directors (Supervisory Council) on the basis of:

board of Directors’ initiative;

request of internal audit commission (internal auditor) or of external auditor;


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request of shareholder(s) having no less than 10% of voting shares;

In the last two cases, the Meeting must be held within 40 days of the request being submitted (70 days – in case the agenda contains an issue on electing the Board of Directors by cumulative voting, unless a shorter period is envisaged by the Charter).

The initiator draws up the issues on the agenda and options of decisions, and determines the form of conducting the Meeting. The Board of Directors may not change them.

After receiving the request, the Board of Directors decides within five days on convening General Meeting or refusing to convene it and within three days notifies the initiators on its decision.

Refusal is possible only if:

the order of submitting the request has been violated;

the person submitting the request possesses less than 10% of shares;

none of the items on the agenda are within the General Meeting’s competence;

an item on the agenda does not conform to the requirements of the law “On Companies Limited By Shares” and other legal acts of the Russian Federation.

If the Board of Directors has not taken the decision in due time, the Meeting may be convened by the initiators, and expenses may be covered by the company according to the General Meeting’s decision.

(c) Decision-making procedure

The Board of Directors sets the date for which the list of shareholders entitled to participate in the scheduled General Meeting is compiled according to the register.

Such a list may not be composed earlier than the decision on convening the General Meeting is made.

In case the agenda of the General Meeting contains the issue on electing the Board of Directors by cumulative voting, the list of shareholders entitled to participate in the Meeting should be compiled not later than 65 days before the scheduled date of the Meeting. In general, the list of shareholders entitled to participate in the Meeting should be compiled 50 days before the Meeting is convened.

A nominal shareholder submits, for compiling the list, information on persons for whom he holds the shares.

Shareholders possessing not less than 1% of votes may inspect the list, while the rest of shareholders may obtain information on their inclusion in the list.

Voting standard – “One voting share – One vote” (exception – cumulative voting on electing members of Board of Directors).

Companies with the total number of holders of voting shares over 1,000 elect its Board of Directors only by cumulative voting. Cumulative voting for companies with a lesser number of shareholders may be stipulated by the Charter.


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Cumulative voting implies that one voting share gives to its holder the number of votes equal to the number of members of the Board of Directors. The shareholder may vote with all its votes for one candidate or allocate its votes between several candidates. Candidates with the most votes are deemed to be elected.

(d) Voting

The Board of Directors deciding upon convening the Meeting simultaneously determines the form of voting at the Meeting (voting in presence of all shareholders, mixed voting or absentee voting). If the General Meeting is convened by the demand of internal inspection commission, auditor or individual shareholders of the company and the demand stipulates a particular form of voting, the Board of Directors may not change this form.

Three forms of voting at General Meeting stipulated by law are as following:

Voting in presence of shareholders. Can also have the form of mixed voting (shareholder having received a ballot beforehand may either send a filled-in ballot or vote in person).

Mixed voting – shareholder having received a ballot beforehand may either send a filled-in ballot or vote in person.

Absentee voting (by sending completed ballot). There are certain restrictions to the application of absentee voting. Thus, an absentee-voting Meeting may not substitute a Meeting that should have had the form of voting in the presence of all shareholders.

Absentee voting is unacceptable for deciding upon the following issues:

election of the Board of Directors, Internal audit commission, approval of external auditor;

consideration of annual report, its approval and approval of annual financial accounting reports;

distribution of profit including payments (declaring) of dividends, and distribution of loss of the company according to results of financial year.

This means that ordinary Meetings may only be held in the form of voting in presence of all shareholders or in the mixed form, when a shareholder may choose to send a filled-in ballot or be present at the Meeting. Absentee voting is possible only for Extraordinary Meetings.

A tabulation commission draws up the protocol on the results of voting not later than 15 days after the Meeting or after the deadline for accepting the ballots. Members of the tabulation commission or the commission’s representatives sign the protocol.

Answer 66 A, B, C & D

(a) Amount and face value of shares after consolidation

By decision of the general meeting of shareholders, a company has the right to consolidate issued stock, as a result of which two or more stock shares of the company will be converted into one new stock share of the same category (or type). In such a case, respective changes relative to the par value and quantity of the company’s floated and announced shares of a relevant category (type) must be made to the charter of the company.


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After consolidation, issued stock, the par value and quantity of stock shares for each shareholder are:

A – the quantity 4, the par value of each share – 1,000,000 B – the quantity 2, the par value of each share – 1,000,000 C – the quantity 2·7, the par value of each share – 1,000,000 D – the quantity 1·3, the par value of each share – 1,000,000

If, in the course of share consolidation, the shareholder cannot acquire an integral number of shares, fractions of shares must be created (“fractional shares”).

The fractional share confers on its owner the rights provided by a share of a relevant category (type) within the scope corresponding to the part of a full share it represents.

For the purposes of recording the total number of floated shares in the charter of a company all floated fractional shares are added up. If a fractional number is obtained as a result of this the number of the shares floated is shown as a fractional number in the charter of the company.

Fractional shares are traded on an equal basis with full shares. If a person acquires two or more fractional shares of a certain category (type) these shares make up one full and/or a fractional share equal to the sum of these fractional shares.

(b) Is the ordinary shareholders’ meeting empowered?

According to the law “On Companies Limited By Shares” (art. 48) the following issues are deemed to be within the scope of responsibility of the general meeting of shareholders:

(1) re-organising the company;

(2) endorsing annual reports, annual financial statement, in particular, statements of profits and losses (profits and losses accounts) of the company and also distributing profit, in particular, disbursing (announcing) dividends and losses of the company according to the results of the financial year;

(3) fractioning and consolidating shares;

Also according to the law (art. 58), the general meeting of shareholders is deemed to have a quorum if it is attended by shareholders owning, in aggregate, more than half of the votes of floated voting shares of the company.

As A and B are the shareholders who have registered for the purpose of attending the meeting and they have a majority vote (60%) of the holders of voting stock of the company, it can be concluded that the general meeting of shareholders is deemed to have a quorum.

(c) Legal adoption of decisions

(i) Dividend payment

The decision with regard to disbursing annual dividends is adopted by simple majority (50%) of votes, present at the meeting, thus the respective decision in the described case has been adopted because A has a majority vote of the holders (2/3 of votes present at the meeting).


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(ii) Reorganisation

The decision with regard to “re-organising” the company has not been adopted because according to the law (art. 49) the decision on this issue must be adopted by a general meeting of shareholders by the majority of three quarters of the votes of shareholders owning voting shares and attending the general meeting of shareholders (and A has only 2/3 of votes present at the meeting).

(d) Decision on reorganisation

In the case B voted “for” with regard to re-organising the company the decision on this issue would have been adopted by a general meeting of shareholders.

(e) Rights of shareholders

C and D (as they did not take part in the voting on reorganisation) have the right to demand from the company to redeem shares belonging to them. The company is obliged to inform the shareholders who did not take part in the voting or voted against the respective decision of:

their right to demand the compulsory redemption of shares; the price and order of such redemption.

The shareholder’s claim to redeem the shares must be presented to the company within 45 days after the respective decision was taken. The claim must contain information on the name, place of residence of the shareholder and the amount of shares subject to redemption.

The shares are to be redeemed at the market price determined by the board of directors. Opinion of an independent appraiser is also taken into consideration.

In case the shares are redeemed within the process of reorganisation they are to be cancelled by the company.

Answer 67 ORDINARY MEETING

(a) Terms and conditions

The company must hold an annual general meeting of shareholders every year. The annual general meeting of shareholders must be convened on the dates stipulated by the charter of the company but at least two months after and within six months after the end of the financial year.

(b) Who is empowered?

The decision on convening annual general meetings of shareholders is the issue within the scope of responsibility of the board of directors (supervisory board) of a company.

The decision of a meeting of the board of directors (or supervisory board) is signed by the person presiding at the meeting, who bears responsibility for the correctness of the drawing up of the decision.


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Matters to be determined

This decision includes the following matters:

the place and time of holding it; the persons present at the meeting (shareholders having the right to take part in it); the agenda of the meeting: the matters put up for voting and possible results of the voting with regard to them; the decisions adopted.

(c) Information to be submitted

An announcement of a forthcoming general meeting of shareholders must be made at least 20 days prior to the meeting and an announcement of a forthcoming general meeting of shareholders having on its agenda the issue of re-organisation of the company, at least 30 days prior to the meeting.

The following must be indicated in an announcement of a forthcoming general meeting of shareholders:

the full name of the company and its location;

the form of the forthcoming general meeting of shareholders (meeting or postal voting);

the date, place and time of the forthcoming general meeting of shareholders, the postal address to which they can be mailed, or in the event of the general meeting of shareholders being held in the form of voting, the deadline for receipt of ballot papers and the postal address to which completed ballot papers must be mailed;

the date of compilation of the list of persons entitled to attend the general meeting of shareholders;

the agenda of the general meeting of shareholders;

the procedure for getting familiarised with information (materials) offered in preparation for the general meeting of shareholders and the address (addresses) where one can familiarise oneself with them.

The information (materials) that must be presented to persons entitled to attend the general meeting of shareholders in preparation for holding such a meeting is as follows:

annual financial statements, in particular, an auditor’s report statement of the company’s in-house audit commission on the results of verification of annual financial statements;

information on nominees to the company’s executive bodies, board of directors (supervisory board), in-house audit commission, vote counting commission;

draft amendments to the charter of the company or a new version of the charter;

draft in-house documents of the company;

draft decisions of the general meeting of shareholders; and

information (documents) stipulated by the charter of the company.


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(d) Re-election of general director

A sole executive body (director, director general) must operate on the basis of the charter of the company approved by the general meeting of shareholders in which the periods of his acting are established. The general meeting of shareholders of a company, unless the resolution of these matters is put within the scope of responsibility of the company’s board of directors (supervisory board) by the constitution of the company, makes a decision with regard to forming an executive body of the company every time as it is stipulated in the charter of the company.

(e) List of shareholders

The list of persons entitled to attend the general meeting of shareholders is drawn up on the basis of data of the shareholders register of the company. The nominal holder of shares submit data concerning the persons in whose interests he possesses shares on the date of drawing up the list in order to draw up the list of persons entitled to attend the general meeting of shareholders. The list of persons entitled to attend the general meeting of shareholders contains:

the name of each such person and his identification details;

information on the quantity and category (type) of the shares whereby the person has voting rights; and

the postal address in the Russian Federation to which a notice of a forthcoming general meeting of shareholders, ballot papers (if voting requires ballot paper mailing) and a report on the results of voting are to be sent.

Answer 68 ZAO TTT

(a) Type of deal

The deal concluded is a major (large-scale) deal. A major deal is a deal (several related deals) related to acquisition or alienation of property whose value is over 25% of the book value of the company’s assets as of the date of the decision on the deal (except for transactions made in the course of usual business activity of the company and transactions implying the placement of ordinary shares).

(b) Which body has power to decide?

Major deals related to acquisition or alienation of property whose value is over 50% of book value of company’s assets may be effected only with the approval of the General Meeting of Shareholders by a 3/4 majority of holders of voting shares present.

The fact that the members of the Board of Directors possess the number of shares that would have allowed them to make the General Meeting decide positively on the deal, does not give them the right to perform functions of the General Meeting. In accordance with the law “On Companies Limited By Shares”, such deals may be effected only with the consent of the General Meeting.

(c) Right decision of the court of appeal

The court of appeal must reject the appeal and keep the decision of the court of first instance unchanged, since according to the law “On Companies Limited By Shares” issues pertaining to the powers of the General Meeting may not be passed for the decision of the Board of Directors (Supervisory Council) of the company.


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Answer 69 OAO OBLSVIAZINVEST

(a) Convening the General Meeting

Firstly, notification about convening the General Meeting should be made not later than 20 days before the planned date of the Meeting. In case the agenda of the General Meeting contains an issue on the reorganisation of the company, notification should be sent not later than 30 days before the date of convening.

Notification should be sent to each person in the list of those entitled to participate in the General Meeting by a registered letter, unless the Charter of the company stipulates another way of written notification, or hand-delivered, or published in a mass-media edition available to each of the shareholders (in the latter case the edition is to be named in the Charter).

Secondly, notification on convening the General Meeting should contain:

full name and location of company;

form of holding the General Meeting (voting in presence or absentee voting);

date, time and place that the General Meeting is to be held, postal address to send completed ballots;

deadline for accepting absentee ballots;

date of closing the list of shareholders entitled to participate in the General Meeting;

issues on the agenda;

order of access to information (annual financial reports, information on candidates, draft decisions of the Meeting and other documents stipulated by the Charter).

Thirdly, during preparation for the Meeting, shareholders are presented with the company’s annual report, including the auditor’s opinion on the results of the annual inspection of financial and economic activity, the information on candidates to executive bodies of the company, to the Board of Directors and internal audit commission. In case any amendments to the Charter or inner documents of the company are planned to be discussed at the Meeting, the drafts of such amendments must be presented, as well as any other information stipulated by the Charter.

In case the shareholder requires copies of any of the documents listed above, the company is to present them at the prime cost of the copying.

(b) Legal implications

Certainly, the Board of Directors of OAO OblSviazInvest infringed the requirements of the law “On Companies Limited By Shares” and provisions of its own Charter. However, even if Mr Ivanov, the holder of 8% of shares of the company, had participated in the Annual General Meeting, his vote would not have changed the decisions adopted, since the representative of the plaintiff proved that all the decisions on the agenda were made unanimously.

(c) Court ruling

The court will reject the claim of shareholder Ivanov.


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Answer 70 COMPANY F

Tutorial note: The question posed a general meeting scenario in which shareholders were invited to approve a major transaction. The purpose of the question was to test the candidates’ understanding of voting rights of shareholders and the validity of the decision taken. It also required candidates to comment on the rights of shareholders to redeem their shares.

A major transaction is one that deals with the acquisition or divesting of property that has a value of 25% or more of the book value of the company’s assets as at the last formal reporting date, unless it is specifically excluded by law.

(a) Powers

The law “On Companies Limited By Shares” states that it is within the competence of a properly convened general meeting of shareholders to approve a major transaction. Therefore, assuming that the meeting was properly convened, the general meeting is within its powers to consider the transaction.

The general meeting of shareholders is deemed to be quorate if it is attended by shareholders representing at least one-half of the voting rights in the company. In the case of Company F, the quorum is 50 shares (or votes). Shareholders representing 92% of the company’s voting capacity attended and voted at the meeting.

(b) Validity of decision

A general meeting can approve a major transaction if 75% or more of the voting rights attached to shareholders present at the meeting are cast in favour. In the case of Company F’s general meeting, shareholders A, B and C all voted in favour. They represented 92% of the voting rights with 80% in favour of the transaction.

The major transaction has therefore been properly validated by the meeting.

(c) Submission of applications

The demand by shareholders who wish to redeem their shares must be submitted to the company within 45 days of the decision by the general meeting of shareholders. This notice must include details of the shareholder’s address and the number of shares that are to be redeemed.

(d) Taking the decision

Applications to redeem shares must be presented to the Board of the company. The decision must be taken and redemption exercised within 30 days of the expiry of the 45 day period described in part (c) above.

(e) Rights of redemption

Shareholder C has no right to redeem his shares because he voted in favour of the resolution to approve the major transaction.

Shareholder D has a right to redeem his shares as he voted against the major transaction being approved.

Shareholder E also has a right to redeem his shares as he did not take part in the meeting.


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(f) Number of shares and amounts due

The purchase of shares is carried out at the price specified in the communication to shareholders regarding the general meeting.

The market value of each share is 100,000 roubles. The total amount to be redeemed assuming market value is:

shareholder D – 12 × 100,000 = 1,200,000 roubles shareholder E – 8 × 100,000 roubles = 800,000 roubles total 2,000,000 roubles.

The law provides that in the event of shareholders being legally entitled to redeem their shares, they will be paid a value determined by the Board of Directors, but this value may be no less than the market value of the shares.

However, the net asset value of Company F is 10,000,000, so the value to be redeemed exceeds the 10% maximum limit as set down in the law “On Companies Limited By Shares”. As the 2,000,000 roubles is double the limit set by law, each shareholder entitled to redemption of half of his shares.

Using the figures provided in the scenario, the company can redeem 10 shares. As already stated, these will be redeemed on a pro rata basis, that is, in proportion to the demands of the shareholders. The final situation will therefore be as follows:

shareholder A – 45 shares; shareholder B – 25 shares; shareholder C – 10 shares; shareholder D – 6 shares remaining with the remainder redeemed; shareholder E – 4 shares remaining with the remainder redeemed.

The shares purchased by the company (10 shares in total) must be sold at their market value within one year of the purchase by the company. In the meantime they carry no voting rights and have no dividends attributed to them. Failure to divest these shares within the prescribed time limit will lead to the shareholders adopting a decision at the next general meeting to reduce the authorised capital of the company by redeeming the shares.

Answer 71 OAO CAET

(a) Convening of the Annual General Meeting

Every company limited by shares must hold an Annual General Meeting of members. The legal requirements are set down in the law “On Companies Limited By Shares”, augmented where appropriate by the provisions of the company’s own constitutional documents.

The meeting must be held between two and six months after the financial year end of the company. It routinely considers election of directors, the internal audit commission and the external auditor, receives the annual report, approves the financial accounts and allocates the dividend payable to members if declared. The meeting is empowered to consider other business as appropriate.

As the meeting is the main decision taking organ of the membership, every member is entitled to attend. Holders of ordinary shares are entitled to vote, with voting power established by the constitution of the company.


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It is the responsibility of the directors to convene the meeting, including deciding on the date, the agenda of business to be discussed or heard and issuing notices to members.

The directors also recommend the dividend if payable. This is critical, as the meeting cannot vote for a dividend in excess of that recommended by the directors.

Members have a right to attend in person or to be represented by a proxy. If the company fails to notify a member of a meeting and a decision is taken with which the absent member disagrees, that member has the right to litigate against the company. Given the history of poor shareholder relations in the company described in the scenario, it would be in the interests of the directors to ensure that the administration is flawless.

The list of members entitled to participate must be prepared between the date on which the decision was taken to convene the meeting and a minimum of 50 days before the date of the actual meeting. If cumulative voting is adopted, the relevant period is 65 days. The list of members is available for scrutiny by any members holding at least 1% of the voting power.

The directors decide on the form that voting will take. Generally, voting may take place in person or on a mixed basis, which combines votes cast in person with votes exercised by pre-completed ballot.

The notice of the meeting must be dispatched in the manner prescribed in the Charter. This may provide, for example, for notification through the newspapers. If the Charter is silent on this, the notice must be issued by registered post or by other acknowledged written dispatch.

The minimum content of the notice of the meeting is prescribed by law. It must contain the name and location of the company, information on voting protocols, date, time and venue for the meeting, deadlines applicable to the list of members and casting ballots, agenda and information on where members can have sight of relevant documentation.

The notice must be despatched to members 20 days before the meeting. This period extends to 30 days if the meeting is to consider reorganization and to 50 days if cumulative voting is to apply.

(b) Cumulative voting

As a general rule, voting is often carried out at general meetings on the basis of one share representing one vote. This ensures that democratic processes are observed but also means that those who have made large contributions to the risk capital of the enterprise have an appropriate degree of influence.

Cumulative voting may be used for elections of directors if stipulated in the Charter. Under this method, each voting share gives the owner of the share the same number of votes as the number of directors of the company. The member can therefore apportion all of these votes for one candidate or spread then as desired across the candidates presenting themselves for election.

Cumulative voting can therefore produce a profoundly different outcome to an election to that which might apply if standard voting procedures are adopted. The member can strongly support one or more candidates in order to tactically exclude others.


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(c) Convening a formal meeting of shareholders

Any meeting of the company that is not the annual meeting of members is deemed in law to be an extraordinary general meeting. Such a meeting can be convened by the Board of Directors, at the request of the internal audit commission, at the request of the external auditor or by entitled members.

Members may convene an extraordinary general meeting if they hold not less than 10% of the voting rights in the company.

Therefore, if the dissatisfied member has this minimum shareholding, he is entitled to call the meeting. Alternatively, he must persuade other shareholders to join with him in petitioning for the meeting in order to attain the 10% threshold required.

If the right to call the meeting is established, the meeting must be convened within either 40 days of the request being submitted or 70 days if the meeting is to elect directors by cumulative voting. These periods may be varied by the Charter.

The business to be heard and discussed at the meeting is promulgated by the person or persons calling the meeting. This may not be refused or varied by the company unless there is conflict with the law, the necessary procedures have not been followed correctly or the business to be heard is ultra vires in relation to the competence of the meeting.

If the dissenting shareholder is not able to attract the 10% threshold necessary, he is still able to submit items for the agenda of the Annual General Meeting, provided he has a minimum of 2% of the voting shares.

Answer 72 MIKHAIL

(a) Actions by board of directors

As Mikhail works under a contract of service within the meaning of the Labour Code, the most likely course of action is that the board of directors will dismiss Mikhail from his position as general director. The facts of the case suggest that the directors would be within their rights to do so as Mikhail’s actions would seem to be contrary to the interests of the company and may in fact inflict harm on the company.

A general director is in a position of trust and as such would be expected to “keep the secrets” of the business. This is a moral issue arising from the perceived integrity that a key decision taker should demonstrate. Releasing confidential information to a competitor is most certainly immoral conduct (and nothing to do with “networking”). Mikhail has been in gross violation of duty and could therefore be removed without delay.

If it can be established that his actions have inflicted damage on the company, Mikhail could also be dismissed for breach of his duty as a chief executive officer.

(b) Removal as a shareholder

Mikhail cannot be removed as a shareholder without his consent. Shares are a form of personal property. They can be sold or otherwise transferred at the owner’s initiative, but the owner cannot be dispossessed simply because of the circumstances concerning his employment with the company or the choices made by the directors.


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The distinction must be made on the one hand between those who run the company (the directors and other important decision takers) on behalf of the owners and the owners themselves (the shareholders). The owners appoint the directors but the directors do not appoint the shareholders.

Therefore, however deplorable Mikhail’s conduct may have been, the company cannot force him to sell his shares or treat him differently to any other shareholder.

(c) Rights to make representation

As a shareholder Mikhail has the right to notices of general meetings and to attend general meetings. In addition, he can vote on resolutions placed before the meeting and address the meeting if the points he wishes to make are consistent with matters considered.

Mikhail has 15% of the shares in the company. This gives him several additional rights. He may inspect the list of shareholders and may propose items for inclusion on the agenda of the meeting, provided he gives sufficient notice of his request to do so. This means that he can influence the business that will be heard at the meeting and possibly put his arguments to all the shareholders.

If Mikhail chooses, he can nominate persons of his choice as directors at the next general meeting of shareholders. He may also nominate himself as a director, though of course the existing directors have a right to reveal the full circumstances underlying his earlier removal, which would undoubtedly influence the meeting.

(d) Extraordinary general meeting

The shareholding threshold for a right to call an extraordinary general meeting of the shareholders is 10%, so Mikhail’s holding of 15% automatically confers a right to do so.

In order to call a meeting, he must submit a formal request to the company. The company must then convene a meeting within 40 days, or 70 days if the meeting is to consider election of directors by cumulative voting. Shorter notice may be provided for in the Charter of the company.

The request to convene the meeting should state the business to be considered. This cannot be altered by the company unless any lawful matters contravene the provisions of the Charter.

The board cannot refuse the request to convene a meeting unless the request has been submitted irregularly.

Answer 73 GENERAL MEETINGS

Tutorial note: This question tests knowledge of matters relevant to general meetings of companies limited by shares.

(a) Agenda

Every company must hold an annual general meeting of shareholders. The meetings can deal with ordinary, routine business considered every year and also special business that is decided by those entitled to place matters before the general meeting.

In addition, the law provides for the right of management, shareholders, external auditors and the internal audit commission to convene an extraordinary general meeting as and when required. Such meetings are normally convened to deal with important, one-off issues.


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Some of the business dealt with by the annual general meeting is determined by law. The meeting must elect the board of directors and, where applicable, the internal audit commission and/or the external auditor. The meeting must also consider matters that fall within the exclusive competence of the meeting as and when they arise including amendment of the Charter, creation of subsidiaries, reorganisation and some other matters.

The business of the annual general meeting is normally decided by the board of directors. However, holders of no less than 2% of the shares may propose one to two matters to be included on the agenda. The Charter may make specific provisions relating to rights to propose business, as long as these do not conflict with the law.

In order to propose matters for inclusion on the agenda, the proposer(s) must inform the company of this in writing not later than 30 days after the end of the financial year and not later than 30 days before the meeting. The board then has five days to consider the proposal and either accept it for inclusion in the agenda or reject it. In the latter case, the affected shareholder must be notified with reasons for the rejection.

The matters dealt with by an extraordinary general meeting are likely to be narrower in focus. If convened by the board or the internal audit commission there will be a specific and definite purpose and this will be set out in the notice issued to the shareholders. The meeting can also be convened by shareholders with 10% or more of the voting rights, or less if the Charter so dictates.

In all cases, the extraordinary meeting must be convened within 40 days of submitting the request, within 70 days if the meeting is to consider the election of directors by cumulative voting, or a shorter period if permitted by the Charter. The directors can refuse to convene a meeting if the request is not compliant with the law or the provisions of the Charter, or if the matters to be dealt with are outside the competence of the meeting.

(b) Tabulation commission

The tabulation commission fulfils a scrutinising role. It is concerned with compliance with the procedures and rules necessary to convene and hold a general meeting of shareholders. The requirements for the constitution and activities of the tabulation commission are laid down in the law “On Companies Limited By Shares”. Any company where the number of shareholders with voting shares exceeds 100 must convene a tabulation commission.

Prior to the meeting, the tabulation commission must check the register of participants in the meeting and their authority to vote, clarify voting protocols and determine the quorum for the meeting (the minimum number of participants necessary to hold the meeting lawfully).

During and after the meeting, the tabulation commission is responsible for counting votes, notifying the results of voting and registering the results in the company’s records.

(c) Quorum

The law “On Companies Limited By Shares” lays down the minimum numbers of shareholders with voting rights who must attend the meeting if the business dealt with at the meeting is to be constitutionally valid.

A general meeting of shareholders is quorate if the shareholders hold in excess of 50% of the voting shares placed by the company.

If the meeting is inquorate it is necessary to decide a new date for the meeting with the same agenda as the originally planned meeting. A lower quorum of 30% of voting shares may be formed for the purpose of the rearranged meeting. For companies with more than 500,000 shareholders, the Charter may specify a smaller quorum.


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Answer 74 VOTING

(a) Absentee voting

All holders of ordinary shares in a company limited by shares are entitled to vote, usually on the basis of one vote per share held in the company. Voting may be done in person and in some cases in absentia.

Absentee voting is effected by shareholders who cannot attend the general meeting. This must be done in writing by completing a ballot form.

Absentee voting is permitted on all matters except those expressly forbidden in the federal law. These include most of the ordinary, routine business of all general meetings:

election of members of the board of directors; election of the internal audit commission; appointment of the external auditor; approval of the annual report and financial accounts; distribution of profit/loss.

It therefore follows that absentee voting is confined to extraordinary meetings of the company.

(b) Cumulative voting

This special form of voting required for the election of directors in companies with in excess of 1,000 shares that entitle the holders to a vote. In addition, companies with a smaller number of voting shares may adopt cumulative voting by inserting a specific provision in the Charter.

Cumulative voting enables the shareholder to cast a number of votes equivalent to the number of positions on the board of directors. Therefore, if the company has eight directors each shareholder has eight votes. These may be allocated entirely at the discretion of the shareholder, who may choose to cast all votes for just one candidate or spread the votes across a number of candidates in whatever proportion he or she desires.

(c) Quorum

The term “quorum” refers to the minimum number of persons who must attend the meeting if the decisions and other actions of the meeting are to be legally valid.

The quorum is set by the tabulation commission with reference to the register of equity shareholders entitled to vote.

The normal quorum for a general meeting is shareholders possessing in total 50% of voting shares. If the meeting attracts fewer shareholders any decisions taken are invalid and the meeting has to be called again.

When a new meeting is required due to the original meeting being inquorate, a lower minimum threshold of 30% of holders of voting shares is set. The reconstituted meeting must have the same agenda as the original meeting.

For open companies limited by shares with in excess of 500,000 shareholders the Charter may set a lower quorum.


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Answer 75 OAO TRUCKING

(a) Major transaction criteria

The rules relating to major transactions are applied under the federal law “On Companies Limited by Shares” and the Civil Code. The purpose of the rules is to safeguard the assets of a company, thereby reducing risk to shareholders’ wealth.

A major transaction is any transaction of the company whose value is 25% or more of the book value of the company’s assets as at the end of the last accounting period. In addition, the Charter of the company may specify transactions that will be regarded as major transactions. The value of the transaction is estimated with reference to the market value.

A major transaction may be a large, one-off disposal or acquisition or a series of related transactions. It may relate to acquisition or disposal of property or the company entering into a credit agreement, such as a pledge, guarantee or surety.

If the book value of the transaction is more that 25% but less than 50% of the company’s assets, the agreement to the major transaction may be taken by the board of directors. This must be unanimous. However, if all of the members of the board cannot agree on the transaction the decision passes to the shareholders in a general meeting. Their decision on the matter is taken by simple majority.

The ability of Peter and Rosa to secure the required level of support would determine whether the transaction could go ahead. However, they own 50% of the shares in the company, so it would be necessary for the holder of just one more share to sanction the transaction and therefore back their plan.

The question of whether the proposed sale of the real estate will be regarded as a major transaction turns on whether the value of the fixed assets fall within the thresholds determined by the law.

Even if the transaction is small enough not to be regarded as a major transaction, Peter and Rosa may bear subsidiary responsibility if the disposal price is clearly below the market value of the assets as this would constitute a fraud against the company.

(b) Transaction in which there is an interest

Transactions in which there is an interest are governed by the federal law “On Companies Limited by Shares”. The purpose of the rules on this matter is to reduce the prospect of “interested persons” from securing personal gain from the company’s transactions at the expense of the shareholders.

Transactions in which there is an interest are not forbidden, but it is necessary to follow the legal requirements on disclosure and decision taking.

There are various parties who are considered to be able to establish an interest. These include the directors of the company, the sole executive body or senior management, shareholders and their associates, who may individually or collectively hold 20% or more of the shares of the company, and persons authorised to give instructions on behalf of the company.

In this case it appears that the vehicle fleet will be sold to a company in which Peter’s brother has an interest. If so, this would be regarded as a transaction in which he has an interest and he would be excluded from voting on the matter.


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The law deemed these persons to be interested if they, their close relatives or affiliates are a party to the transaction or benefit from it. They are also deemed interested if they own 20% or more of the shares in an entity that is a party to the transaction, or if they hold managerial positions in an entity that is a party to the transaction.

Those who have an interest are required to notify the board of directors, internal audit commission or external auditor of their interests as defined above.

There are some exclusions to the rules. If there is a sole shareholder who also takes decisions on behalf of the company, the transaction is not a major one. This also applies if all of the shareholders of the company have an interest, where the company is buying back or redeeming its own shares and in the event of a merger or acquisition where the counterparty company owns 75% or more of the company being reorganised.

As the company in the scenario has more than 1,000 shareholders, the decision on the transaction may be taken by a majority vote of the board of directors. However, those deemed to be interested are not permitted to vote on the matter. If all of the directors are deemed to be interested persons the decision must be taken by a majority of the shareholders voting in a general meeting. This is a requirement if the book value of the transaction exceeds 2% of the company’s assets as at the last accounting date.

(c) Consequences of failure to follow due process

If the major transaction is approved without following the necessary procedures this is a violation of the Civil Code. This may apply even if the transaction is subsequently ratified by the board of directors or general meeting of shareholders. The persons responsible for the transaction may bear subsidiary responsibility for the transaction. Furthermore, under the minority protection provisions, the shareholders who are entitled to vote may demand redemption of their shares if dissatisfied with the outcome of the transaction, provided they voted against the transaction or abstained from voting.

If the company contravenes the rules on the proposed transaction in which there is an interest, those objecting to the transaction may petition the court to declare the transaction null and void and implement remedial measures. Shareholders possessing not less than 1% of the shares may file a claim against individual members of the board of directors or against the board as a collective body in order to obtain compensation for losses suffered.

Answer 76 ZAO PERITUUS

(a) Procedure for the sale of the warehouse

Unless the decision of Creditors’ committee (Creditors’ general meeting) provides for the following, the property must be sold at a public auction. Terms and conditions of sale of property must be approved by Creditors’ committee (Creditors’ general meeting).

The auction must be organised by the competitive manager or by an independent organisation on a contract basis.

The property that was not sold during the first public auction may be placed to a successive auction or sold by the competitive manager on the basis of sale and purchase agreement.

(b) Part of the building

The part of Kindergarten’s building belonging to ZAO Perituus being an object of social importance and a children’s object must be transferred to municipal ownership.


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(c) Turn of satisfaction

The Law provides for the following turns of satisfaction of creditors’ claims:

1. claims based on injury and damage caused to health; 2. payments on labour contracts, employment relations, author remunerations; 3. claims secured by mortgage of property; 4. obligatory budget payments (taxes included); 5. other claims.

In the above mentioned situation the creditors’ claims will be satisfied in the following turn:

(1) (there are no claims based on injury);

(2) Employees working according to the labour contract, employees working without labour contract, Mr Sidorov;

(3) Bank Z credit;

(4) Taxes payable;

(5) Bank X, payment for hot water supply, other creditors.

(d) Amounts to creditors

Total amount of property available = 3,000,000 + 730,000 = 3,730,000 roubles.

(1) No creditors of the 1st turn are present.

(2) Total amount of claims of the 2nd turn = (2,000 roubles × 100 employees) + (1,200 roubles × 100 employees × 3 months) + 10,000 roubles = 200,000 + 360,000 + 10,000 = 570,000 roubles.

The claims are satisfied in full. After satisfaction of the claims of the 2nd turn 3,160,000 roubles are left.

(3) The claim of bank Z (1,000,000 roubles) is satisfied in full. 2,160,000 roubles are left.

(4) Taxes (20,000 roubles) are paid in full. After payment of taxes 2,140,000 roubles is left.

(5) Total amount of claims of the 5th turn = 2,500,000 + 30,000 + 1 750,000 = 4,280,000 roubles. All the claims of the 5th turn are to be satisfied in proportion calculated as 2,140,000/4,280,000 = 0·5. It means that each creditor of the 5th turn will get half of amount due to him.

Finally the following creditors will receive the following amounts:

Employees (100 individuals) working without employment contract – 2,000 roubles each;

Employees (100 individuals) working according to the employment contract – monthly salary equals to 1,200 roubles per month each – have not been paid for three months;

Taxes payable – 20,000 roubles;


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Mr Sidorov – (Author’s remuneration) 10,000 roubles;

Indebtedness:

Credit provided by bank X – 1,250,000 roubles;

Credit provided by bank Z (secured by mortgage of the warehouse building) – 1,000,000 roubles;

Municipal authorities (hot water supply) – 15,000 roubles;

Other creditors (goods provided) – 875,000 roubles.

Answer 77 OAO KRAITEPLOENERGO

(a) “Composition”

Composition – is a specific type of deal that may be concluded between the debtor and creditors at any phase of arbitration court consideration of bankruptcy. Composition is to be approved by arbitration court. Unilateral renunciation of composition, which is already effective, is inadmissible.

Composition is to contain provisions on the amount, order and terms of performing the debtor’s obligations and/or on terminating the debtor’s obligations by cancellation compensation, novation of obligation or by other means stipulated by the Civil Code of the Russian Federation.

Besides, composition may contain provisions on:

deferral of performance of the obligation (performance by instalments);

cession of the debtor’s right of claim;

performance of the debtor’s obligations by third parties;

discount on the debt;

exchanging claims for shares;

meeting creditors’ claims by other means not contradicting legal acts of the Russian Federation.

Arbitration court may rule on refusal to approve composition, on recognising it void or on dissolving composition.

(b) Conclusion during observation

Composition is one of the grounds to terminate the bankruptcy procedure. According to the law on insolvency, composition is the grounds for terminating court proceedings on bankruptcy. Composition may be concluded at any stage of court bankruptcy adjudication, including the observation stage.

(c) Consideration as a separate claim

The volume of creditor’s claims, who concluded composition with the debtor, is determined by terms stipulated in composition.


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In the given case, in 2008 arbitration court approved composition concluded by the debtor and creditors in the course of observation, and terminated the proceedings by adjudication ZAO KTC as bankrupt. According to composition, the debt of ZAO KTC to OAO KraiTeploEnergo amounted to 150,000 roubles. Therefore, OAO KraiTeploEnergo may not file claims on debt recovery to the amount of 3 million roubles from ZAO KTC after composition was signed and the bankruptcy procedure terminated, since it is unlawful.

Answer 78 EXTERNAL MANAGER

(a) Role and responsibilities

The external manager is introduced by the arbitration court at the end of the observation stage of the insolvency procedure following the decision of the meeting of the creditors of the company. The appointment is initially for a period of up to 12 months, which can subsequently be extended if necessary by up to a further six months.

The external manager must balance the prospect of rescuing the company with meeting the demands of the creditors.

The external manager effectively takes control of the company’s affairs once appointed. The appointment signals the termination of the authority of the company’s management bodies and the freezing of claims against the company by its creditors.

The external manager takes control of the company’s assets and proposes, where possible, a plan to restore the solvency of the company. If the plan is approved by the creditors it is submitted to the court.

The powers of the external manager are broad. These include the right to restructure the business by changing the nature of its production, termination of unprofitable aspects of the business, credit control functions and disposal of assets.

There are limitations on the powers of the external manager. These include restrictions on the right to carry out transactions of a significant value, increasing the outgoings of the enterprise and restrictions on entering into transactions that fall outside the external management plan.

(b) Alternative outcomes that may follow the submission of an external manager’s report

The report may be approved by creditors, in which case their demands will be settled in due course.

If the report is not approved this will invoke insolvency proceedings and the company will be wound up. The assets of the company will then be realised and the demands of creditors and others met according to the priority determined by law or alternatively the priority of their notices.

A composition may be agreed at any time during the insolvency procedure. If approved, this will ultimately result in creditors’ demands being met in due course.

The external management may be prolonged in order to extend the period in which the company may be rescued or creditors’ demands met.


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Answer 79 OBSERVATION

(a) Responsibilities of interim manager

An interim manager is appointed under the provisions of the Federal Law “On Insolvency (Bankruptcy)”. The interim manager is responsible for matters concerned with the observation stage of the insolvency process.

The interim manager is appointed by the court of arbitration once it has decided that observation will commence.

The interim manager is accountable for safeguarding the debtor’s property and making an initial assessment of the financial position of the company. He has to establish whether there are adequate financial resources to cover the arbitration manager’s fees, legal fees and expenses and to consider the prospects of recovery. The manager must consider whether there are indicia of spurious or intentional bankruptcy.

The creditors of the company must be notified by the interim manager that the observation process has been instigated. They will also be invited to convene the first meeting of creditors. This must take place at least 10 days before the end of the observation stage and involves not only the creditors but also the management, an employee representative and the interim manager himself.

(b) Observation – purpose and process

When an application for insolvency is accepted by the arbitration court, the court places the company under observation. This will be done if the court is convinced that there is a prospect of the company being unable to meet its obligations or where there is prima facie evidence of insolvency.

Although the commencement of the observation process by no means results in eventual insolvency in every case, the reality is that the vast majority of companies that enter this phase do not ultimately survive. However, the laws of insolvency have become progressively more liberal to debtors in order to enhance the prospects of saving companies experiencing financial difficulties.

The purposes of observation are to avoid the debtor company being asset stripped and to prepare for the recovery of the company or eventual liquidation of its assets. The Federal Law “On Insolvency (Bankruptcy)” establishes a strict order of priority of claims in the event of insolvency, and observation prevents the debtor from subordinating the rights of preferential creditors in favour of others. It also prevents short-term enrichment of the principals of the business should they choose to liquidate company resources for personal gain.

During the observation stage it may become apparent that the company is able to discharge its financial obligations or that the company is not faced with insolvency after all. If this is the case, the company can continue as a going concern and the insolvency process is terminated.

Once a decision has been made by the arbitration court, the interim manager is appointed. The creditors of the company and its employees are notified of the situation, and the interim manager prepares and publishes a formal notice of observation.

While the observation process is under way, the existing management of the company may remain in place. However, if appropriate steps are not taken by them to protect the property, or if the interim manager is impeded in his duties, the arbitration court may remove all powers of the management and transfer them to the temporary administrator.


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The creditors have 30 days to file their claims against the company from the date of the official notice. In turn, the company has a right to challenge these claims.

The interim manager convenes a creditors’ meeting which considers the appropriate course of action. This may involve one of several courses of action, including a financial recovery programme, appointment of an external manager, signing of a composition or initiating an insolvency action.

The creditor’s meeting may be inconclusive, in which case it falls to the arbitration court to decide whether to appoint an external manager, initiate financial recovery or proceed to insolvency.

After completion of observation, the company may be placed under the control of a licensed external manager, usually an economist, jurist or other individual with appropriate experience. This individual is responsible for preparing a plan within one month of appointment and submitting it to creditors.

Alternatively, the enterprise may be recuperated through a financial recovery programme, or “pre-judicial sanation”, through which interested parties (usually the founders or other stakeholders) may provide financial assistance for recuperation of the enterprise.

If the company is to be liquidated, an insolvency practitioner is appointed to realise the assets of the company in a manner consistent with the priority of their claims under the law.

Answer 80 CORPORATE INSOLVENCY

(a) Bankruptcy process

Bankruptcy procedures are opened by a decision of the court of arbitration. It involves compulsory liquidation of the company. The role of the bankruptcy manager is therefore to liquidate the company’s assets and discharge its obligations where possible. Special provisions apply to securities companies, insurance companies, agricultural entities and organisations employing more than 5,000 persons.

Once the bankruptcy decision is made, it is prohibited to transfer any property of the debtor to other individuals or organisations without prior permission of the creditors’ meeting. All management personnel of the company are de facto dismissed and the bankruptcy manager assumes responsibility for its assets and obligations. The bankruptcy manager must assess the value of the company’s assets (which may be considerably less than the book value) and prepare a formal inventory. The manager also has a responsibility to make appropriate arrangements to secure the assets. The manager may operate the insolvent company’s property if it is in the interests of the creditors to do so.

Subject to the limitations imposed by the federal law “On Insolvency”, the bankruptcy manager arranges for the disposal of assets of the company and has a responsibility to apply the funds realised for the benefit of the creditors.

The bankruptcy manager has wide discretion in dealings with creditors of the company. The claims of creditors may be allowed or refused, depending on the priority of claims and the monetary value that may be realised by disposals. The bankruptcy manager may also make claims against debtors on behalf of the insolvent company.


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Settlements with creditors take place in a strict order established by the Civil Code. The highest priority are claims arising from legal fees and charges imposed in relation to the insolvency process, maintenance expenses, claims on liabilities that became apparent during bankruptcy, debts arising from claims of employees under contracts of service and other current expenses. If these obligations can be met in full any claims by natural persons for personal injury or damage to health are then paid. Claims by secured and unsecured creditors are the next priority. Shareholders are paid last of all if there are sufficient funds remaining to meet their claims. Any outstanding claims that cannot be paid are cancelled.

If it is found that the founders or participants in the company brought about the bankruptcy by their actions, they may bear subsidiary responsibility to the creditors. This also applies to anyone with the right to give binding instructions to the enterprise.

The bankruptcy manager must report to the arbitration court giving an account of actions taken, including a record of claims paid.

(b) Limitations on disposal pf assets by bankruptcy manager

The powers of the bankruptcy manager are not unlimited as the federal law “On Insolvency” ring fences certain types of assets.

Residential property, pre-school amenities (such as a kindergarten), any housing fund and public facilities may not be included in the assets scheduled for disposal. Likewise, property leased by the company, property in the company’s possession but not ownership, personal property of employees and property in trust management are all excluded.

The method of disposal of the insolvent company’s property must be effected to maximise the funds available for distribution to creditors. This is usually by public auction and bidding, though the creditors’ committee may decide on an alternative method of disposal if appropriate. Failure to dispose of property at auction may result in a further auction being held or an alternative method of disposal being adopted.


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F4CL(Rus)RQB-As_d09

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