The following legislative acts are applicable:
Criminal Law Matters
Russian law sets out the general term “fraud” in Article 159 of the RCrC. The cited article defines “fraud” as misappropriation or acquisition of rights to another’s property through deceit or abuse of trust.
Characteristics of “deceit” include false statements, intentional non-disclosure of facts and other deliberate acts aimed at misleading the owner of property or another person (Resolution of the Russian Supreme Court plenum, dated 30 November 2017, No 48).
Characteristics of “abuse of trust” include the use of a relationship of trust with the owner of the property to obtain it, or undertaking of obligations with no intention of fulfilling these at the time of the undertaking (Resolution of the Russian Supreme Court plenum, dated 30 November 2017, No 48).
Article 159 of the RCrC distinguishes the following types of “fraud”:
Fraud in the course of business must involve intentional failure to fulfil contractual obligations and entail major damage (from RUB10,000).
In addition to Article 159 of the RCrC, the RCrC defines the following special types of fraud, depending on the sector and modus operandi:
In addition to fraud, the RCrC also sets out liability for the following types of crimes.
Misappropriation or embezzlement (Article 160)
Misappropriation is the intentional unlawful use of property/assets by corporate management entrusted to him or her by the owner against the owner’s will, and for the management’s own benefit (Resolution of the Russian Supreme Court plenum, dated 30 November 2017, No 48).
Embezzlement is the unlawful act of corporate management who, for covetous purposes, uses assets entrusted to him or her against the will of the owner by consuming such assets, spending them or transferring them to third parties (Resolution of the Russian Supreme Court plenum, dated 30 November 2017, No 48).
Commercial bribery (Article 204)
Commercial bribery is defined as the unlawful provision of anything that has financial value (including property rights and services, among others) to a person who performs managerial functions in a commercial or other organisation, or upon the instructions of such person to other individual or legal entity, for an act or omission in connection with such person’s role, in the interests of the provider or third parties, if such acts or omissions fall within the range of the authority of such person or if such a person can, thanks to their role, enable such acts or omissions.
The present article applies to both the company’s corporate manager and person that makes the illegal transfer.
Administrative Law Matters
Administrative liability applies in cases of minor larceny by means of fraud, embezzlement or theft (Article 7.27). The amount of larceny shall not exceed RUB2,500.
Civil Law Matters
Russian civil law does not recognise a stand-alone “fraud” claim. Instead, there are following mechanisms available to victims of fraud.
Civil suit in criminal proceedings
Pursuant to Article 44 of the RCPC, any natural or legal person subject to damages associated with fraud is entitled to bring a civil suit against the perpetrator. In that case, a victim of fraud shall obtain the status of a civil claimant pursuant to the decision of the court or the investigator’s order.
A civil suit may be brought after the commencement of criminal proceedings and before the end of the judicial inquiry.
Both RCPC and the CPC regulate the procedural matters in that case.
Compensation of damages incurred as the result of a crime
Pursuant to Article 1064 of the RCC, all damages incurred by the parties shall be compensated. Where a victim of fraud did not bring a civil suit in criminal proceedings and decided to claim the subsequent damages after the verdict in the criminal case came into legal force, the claim for compensation may be filed in ordinary civil proceedings. The provisions of CPC only will regulate this procedure. The facts established in the criminal case will have the prejudicial effect (Article 90 of the RCPC).
Subsidiary liability claim in bankruptcy proceeding
The RBL sets out a special Chapter III.2 dealing with subsidiary liability of a company’s management or any controlling person.
The cited persons may be held liable in case of their involvement in the fraudulent withdrawal of the company’s assets. There is also ground for subsidiary liability, should these persons have knowingly approved or entered into a deal on terms unfavourable for the company, or with a person that is intentionally unable to fulfil the contractual obligations (Resolution of the Russian Supreme Court Plenum, dated 21 December 2017, No 53).
The RComPC regulates the procedural matters in that case.
The following articles of the RCrC deal with a bribery acts committed by the claimant’s agents.
Commercial Bribery (Article 204)
The cause of action is the illegal transfer or receipt of money, securities, other property, as well as the illegal provision of services, the provision of other property rights to (or by) an official in an organisation (commercial or non-profit). These transfer must be made for the commission of certain actions (omissions) in the interests of the giver or third parties, where such actions (omissions) fall within the scope of the official’s duties or such actions can be performed by the official. Liability extends to both the giver and the recipient of the bribe.
Assistance in Commercial Bribery (Article 204.1)
The cause of action is the direct transfer of the bribe by the bribe-giver to the person receiving the bribe, as well as assisting these persons to achieve or implement an agreement between them to transfer and receive the bribe in a significant amount (from RUB150,000).
Small Commercial Bribery (Article 204.2)
The cause of action is the same as in Article 204 of the RCrC. However the amount of bribe in that case shall not exceed RUB10,000.
Pursuant to the RCrC there are two grounds for liability of the persons assisting or facilitating the fraudulent acts of another.
Complicity in a Crime without Conspiracy (Article 32-34)
Complicity in a crime may be found where there is instigation and (or) abetting.
An "instigator" is an individual who induces another person to commit an offence by persuasion, bribery, threat or other means (Article 33 (4)).
An "abettor" is an individual who assisted in the commission of an offence by giving advice, instructions, information, means or tools or by removing obstacles. It is also a person who has promised in advance to conceal the perpetrator or the means or tools of the offence, evidence of the offence or property obtained by criminal means, as well as a person who has promised in advance to buy or sell such objects (Article 33 (5)).
The liability of such individuals comes under the same article as that of the perpetrator. However, depending on the nature and extent of the actual participation, the liability may be reduced.
Conspiracy in a Crime (Article 35)
The existence of a conspiracy in any of these offences is an aggravating circumstance and increases liability.
Thus, parties assisting or facilitating fraudulent acts of another will be claimed to be liable together with the perpetrator.
In criminal offences, the limitation period ranges from two to ten years, depending on the seriousness of the offence.
For an administrative offence under Article 7.27 of the RAOC, the limitation period is three months.
There is a strict time limit for filing a civil suit in criminal proceedings. Pursuant to Article 44 of the RCPC, a civil suit may be brought after the commencement of criminal proceedings and before the end of the judicial inquiry.
A subsidiary liability claim shall be filed no later than three years from the time when the person knew or should have known of the circumstances that form the grounds for that claim. This claim cannot be filed more than three years as of the company’s bankruptcy. Moreover, once ten years since the bankruptcy-leading circumstances occurred have passed, the right to bring a subsidiary liability claim is forfeited (Article 61.15 (5) of the RBL).
In criminal proceedings, Chapter 21 of the RCrC provides that fraud is a crime against property.
The damage from the commission of fraud in business settings occurs as a result of the seizure of someone else’s property or the acquisition of the right to someone else's property; the amount of the damage is determined by the actual value of the seized property or the right to it at the time of the crime.
In the framework of a criminal case, an arrest/seizure commensurate with the value of the damage caused must be imposed on the property. The investigation authorities do not assess whether the proceeds of the fraud were mixed with other funds. If a person is convicted of committing a crime, the damages compensation can be paid to them from any means, not just that obtained by criminal means.
Moreover, in case there are sufficient grounds to believe that property was obtained as a result of a crime, or was used or intended to be used as a means of committing a crime (including terrorism, extremism, financing an illegal armed group, etc) the arrest/seizure can be imposed on property held by third parties who are not themselves suspects or the accused (Article 115 (3) of the RCrC).
In the presence of the indicated grounds, arrest can be imposed on both the property of individuals and legal entities.
In civil proceedings. there are two types of property claims to seek the recovery of misappropriated property:
The following conditions apply for granting of that relief:
Money and securities cannot be claimed in pursuant to Article 302 of the RCC.
In case the claimed property was converted into another property or was mixed with other assets, the victim of fraud is authorised to bring one of the claims above only if the property can be identified based on proof of ownership. If it is not possible to identify the property, the victim of fraud is entitled to claim monetary compensation only.
The rules are different with regard to pledged property. In recent years, Russian courts have increasingly accepted the position that a pledge is a right to the value of the property (eg, Decision of the Commercial Court of the North-Western District, dated 23 December 2020, No F07-14426/2020 in case No A66-7698/2016). Hence, conversion of property and its processing does not entail loss of priority in bankruptcy proceedings and termination of the pledge as such.
Russian law does not provide specific mechanisms in the case where the proceeds of fraud are successfully invested before they are recovered by the victim. The victim can resort to ordinary civil remedies, as described below.
Challenging transactions on illegal transfer of assets and their subsequent return (Chapter 9, paragraph 2 of the RCC) – if the assets cannot be returned (eg, they have become an integral part of something else or cannot be identified), the person will only be able to claim monetary compensation.
Compensation for losses – a victim of fraud may recover both actual damage and lost profits (Article 15 of the RCC). The successful investment of money largely depends on the skills of the fraudster himself. Hence, it will be difficult for the victim of fraud to prove the existence of any additional losses other than the money itself. Whilst nothing prevents the victim from trying to prove lost profits, Russian courts demand a very high standard of proof.
As far as we are aware, pre-action conduct is an institution typical under English law. Practice Direction – Pre-Action Conduct and Protocols (“Direction”), governs the main provisions on this subject. This document regulates the parties’ conduct in civil proceedings. Pursuant to paragraph 3 of the Direction, before commencing proceedings, the court will expect the parties to have exchanged sufficient information to:
The parties of the English civil proceedings also draft pre-action protocols explaining the conduct and set out the steps the court would normally expect parties to take before commencing proceedings for particular types of civil claims.
In Russian law, there are no mechanisms analogous to those of the English law discussed above. The closest one is forwarding a pre-trial complaint before filing a lawsuit (Article 4 (5) of the RComPC, Article 132 of CPC). In this complaint, the party must state the nature of the claim and try to settle the dispute amicably.
Nevertheless, the most common civil claims in relation to fraud include those brought within the framework of criminal proceedings or subsidiary liability claims. Forwarding a pre-trial complaint before bringing of these claims is not a requirement under Russian law.
The victim of fraud must be recognised as such by the investigator. This process can be expedited by submitting the right form, which will be considered within three days. The victim then has the right to file a civil suit within the framework of the criminal case.
The civil suit can be filed after the commencement of the criminal case and before the end of the judicial inquiry. When a civil suit is filed, the civil claimant is exempt from paying the state fee. After a civil claim is filed, the victim is recognised as a civil claimant, and the suspect, accused or defendant is recognised as a civil defendant.
Once a criminal case is initiated, and to ensure the subsequent execution of the civil case judgment, the investigative authority can seize the property of the defendant or persons legally liable for his or her actions.
The courts shall take into account that the value of the property seized must not exceed the maximum amount of the fine established by the RCrC, or must be proportionate to the damages sustained as the result of the crime.
However, according to Article 115 (4) of the RCrC, seizure cannot be imposed on property, which, in accordance with the RCC, is immune from seizure.
There is a possibility of seizing the property of the accused outside the Russian Federation. However the obligations to enforce this decision will fall on the competent authority of the foreign state.
Pursuant to Article 453 (1) of the RCPC, if it is necessary to conduct an interrogation, examination, seizure, search, forensic examination or other procedural actions provided for by the RCPC on the territory of a foreign state, the court, prosecutor, or the investigative authority needs to submit a relevant request to the competent authority or official of the foreign state in accordance with the relevant international treaty, or on the basis of the principle of reciprocity. It should be borne in mind that this procedure takes on average from four to 12 months.
Generally, both RComPC and CPC set out the court fees to be paid towards the amount of the claim (Article 101 of the RComPC, Article 88 of the CPC). As previously mentioned, the civil claimant within the framework of criminal proceedings is exempt from the requirement to pay the court fee (Article 44 of RCPC).
The consequences for non-compliance with interim measures imposed by the court’s order are the following (Article 96 of the RComPC, Article 140 of the CPC):
The obligation of the claimant to give a cross-undertaking in damages may arise in the commercial proceedings (Article 94 of the RComPC). A commercial court during provision of interim measures may demand the claimant to give cross-undertaking (i) based on the defendant’s complaint or (ii) on its own initiative.
The cross-undertaking required is designed to cover potential damages of the defendant incurred as a result of interim measures. It is worth noting that the defendant may elect to substitute interim measures with a proportionate cross-undertaking.
The cross-undertaking shall be transferred in the court’s deposit account in the form of money. The court determines the amount of the sum to be transferred. The cross-undertaking may also be provided in the form of a banking guarantee, surety and so forth.
Civil proceedings do not provide an analogous mechanism.
Russian law does not have the disclosure mechanisms typical for England and the USA, but there are some tools allowing to identify the defendant’s assets.
In order to obtain disclosure, a criminal prosecution can be instigated. Within the framework of a criminal case, it is possible to obtain information about a person’s assets, as the materials become available once the preliminary investigation is completed.
The following mechanisms are available in criminal proceedings:
During these procedural acts the investigative authorities can seize the documents supporting the holding of a particular asset. Moreover, the crime scene awareness allows investigative authorities to physically examine the contents of the documents. This mechanism can be very effective, since the examination is conducted with the participation of witnesses and the victim of fraud, who tend to be fully aware of the defendant’s assets.
Investigative authorities have an obligation to identify and arrest the property subject to compensation under the civil suit, even before that suit had been brought. This property can be located in both Russia and abroad (Article 160.1 of the RCPC).
In commercial proceedings, Russian law sets out a general requirement of disputed parties to disclose all evidence before the commencement of the hearing or at any other date provided by the court (Article 65 (3) of the RComPC), including details in relation to a person’s property. The same rule is applicable to civil proceedings (Article 56 (3) of the CPC).
Additionally, pursuant to Article 66 of the RComPC, (Article 57 of the CPC) a party that is unable to obtain the necessary evidence independently from the person in whose possession it is held, can apply to the court with a request to obtain that evidence.
This request cannot be brought before the court until the statement of claim has been lodged (Article 125 (2) of the RComPC).
There have been some attempts to develop the institute of disclosure under Russian law. In one case, the court indicated that the failure of a person to disclose evidence establishes the presumption that this person had refused to challenge the opponent’s position (Decision of Supreme Commercial Court, dated 06 March 2012, No 12505/11, No А56-1486/2010). However, such practice is very rare.
The RBL also sets out certain rules of disclosure. Pursuant to Article 64 (3.2) of the RBL, the current or former CEO of a bankrupt company is under an obligation to disclose the information concerning the company’s assets to the insolvency manager. Where such information is not disclosed, the insolvency manager can apply to the court with a request to obtain that evidence (eg, Decision of Commercial court of the Ural district, dated 3 March 2020, No F09-5580/19 in case No А76-28210/2018).
Additionally, pursuant to the Article 213.9 (9) of the RBL, in case of an individual’s bankruptcy, the individual must disclose all information about his or her assets and liabilities to the insolvency officer. Failure to do so entitles the insolvency officer to request the disclosure of the required evidence.
The defendant can be a subject of a fine imposed by the court for non-compliance with disclosure request (Article 96 of the RComPC, Article 140 of the CPC).
Any information can be deemed as evidence in a criminal case (Article 73 of the RCPC). The burden of proof is on the investigative authority (Articles 38, 39, 40 of the RCPC). The investigative authority is authorised to carry out investigative and other procedural actions, the purpose of which is to collect evidence in a criminal case.
There are the following types of evidence (Article 74 of the RCPC):
If the defendant is deemed able to (i) threaten the witness, or other participants in the criminal proceedings, (ii) destroy evidence or otherwise obstruct the proceedings in the criminal case, certain preventive measures may be sought from the commencement of criminal proceedings (Article 97 of the RCPC).
The right to apply interim measures, as a general rule, depends on the stage of the criminal proceedings:
The most common interim measures are (Article 98 of the RCPC):
Interim measures aimed at curtailing the defendant’s freedom including (i) prohibition of certain actions, (ii) house arrest, and (iii) placement in custody are applied only following the court’s decision in cases where it is impossible to apply a more lenient measure.
The defendant, the victim, the witnesses and their representatives are provided with the right to present evidence. These may include photos, video and audio recordings, documents and objects that, at the request of the parties, can be attached to the materials of the criminal case, examined and recognised as material evidence. A lawyer participating in a criminal case under the Federal Law entitled On the practice of law and the legal profession in the Russian Federation, dated 31 May 2002, No 63-FZ, can receive clarifications, which can later be considered as "other documents".
In circumstances where it is immediately necessary to attest some circumstance, for example, to inspect documents or an internet resource, and where investigative actions are not currently available (for example, before the initiation of a case), it is possible to engage a notary to do so.
In commercial and civil proceedings any interested party is entitled to apply for an imposition of the following interim measures (Article 91 of the RComPC, Article 140 of the CPC):
The court may also impose other interim measures, as well as apply several interim measures together.
One of the following conditions is appropriate to grant interim measures (Resolution of the Russian Supreme Commercial Court’s Plenum No 55, dated 12 October 2006):
Russian law has no statutory provision or subsequent case law allowing a court to authorise a party to conduct a physical search of documents at the defendant’s residence or place of business. In commercial and civil proceedings, bailiffs may exercise such measures only.
There is no disclosure procedure per se in Russian criminal practice. There exists a procedure whereby there is the possibility of obtaining required materials at the end of the preliminary investigation (see 2.1 Disclosure of Defendants' Assets). Further there is the possibility of seeing the materials of the criminal case at the judicial stage of its consideration.
In commercial and civil proceedings, an obligation to disclose all evidence before the hearing or on other date prescribed by the court is applicable to third parties as well as to defendants (Article 65 (3) of the RComPC, Article 56 (3) of the CPC). Parties of the proceedings may also apply to the court for judicial assistance in order to obtain the evidence from the third party (Article 66 of the RComPC, Article 57 of the CPC).
Pursuant to Article 65 (3) of the RComPC (Article 56 (3) of the CPC), all parties shall disclose their evidence before commencement of the court hearings. In fact, this can happen at any stage of the process, starting with the filing of a lawsuit.
A request for assistance in obtaining evidence (Article 66 of the RComPC, Article 57 of the CPC) can be made at any stage of the process, but it will not be considered until after the start of the hearing.
Since Russian law does not set out clear disclosure mechanisms there are no restrictions placed on the use of such materials. All information disclosed by all the parties during proceedings is annexed to the case materials. All parties involved in the proceedings can read these materials, make excerpts from them and refer to them to support their position (Article 41 (1) of the RComPC, Article 35 (1) of the CPC).
In criminal proceedings the court shall summon all parties by issuance of a subsequent order (Article 232 RCPC).
In commercial proceedings a person seeking a procedural order in any case shall notify the intended defendant (Article 121 of the RComPC). Failure to make that notification is a ground for challenging the court order since the defendant’s right to protection of his or her interests has not been duly complied with.
In practice, the court conducts proceedings concerning the application of interim measures or documents’ requests without summoning the parties. However, all interested parties must be notified.
In civil proceedings the court notifies all the parties involved in the proceedings by the subsequent writ of summons on any procedural act which is being taken place (Article 113 of the CPC).
There are two options to seek redress against the perpetrator.
Firstly, to bring a civil suit in criminal proceedings (Article 44 of the RCPC). A civil suit within the framework of the criminal procedure of the Russian Federation is a claim for compensation for property damage, if there are grounds to believe that this damage is a direct consequence of the crime. It is always a claim for an award.
A civil suit may be brought after the commencement of criminal proceedings and before the end of the judicial inquiry. Hence, the criminal process is a prerequisite in that case.
Lost profits or other such damages cannot be recovered (Resolution of the Russian Supreme Court Plenum, dated 13 October 2020, No 23). However, when deciding a guilty verdict in the criminal case, the court may leave the civil one without consideration, which allows its subsequent presentation and consideration in the framework of civil proceedings.
Secondly, to bring a damages compensation claim in civil proceedings. After the verdict in the criminal case came into legal force the compensation claim may be filed in ordinary civil proceedings, pursuant to Article 1064 of the RCC. The provisions of CPC only will regulate this procedure. The facts established in the criminal case will have the prejudicial effect (Article 90 of the RCPC).
In fact, the victim of fraud has the option to choose in which proceedings to seek the redress (Decision of the Russian Constitutional Court, dated 4 July 2017, No 1442-О). The presence of an initiated criminal case does not in any way limit the right of a person to apply to the court with a claim in civil proceedings. However, a civil suit in criminal proceedings is preferable, since the burden of proof is not with the claimant, but with the investigator, and then with the public prosecutor, and no state fee payment is required.
In light of that, the special attention should be given to the subsidiary liability claim during the bankruptcy. The RBL establishes a separate list of acts that may be considered as the grounds for subsidiary liability of company’s controlling persons. These acts are fraudulent in nature and fall under the term “fraud” provided by Article 159 of the RCrC. Moreover, often these claims are reviewed by the courts in parallel with criminal proceedings. The materials found in criminal case are used in the bankruptcy case and vice versa. However, in practice the criminal process is not a prerequisite for the subsidiary liability claim.
In practice, parties often obtain an enforceable criminal verdict and after that seek the redress in criminal proceedings. In case the criminal prosecution is ongoing it will most likely delay the parallel civil claim. Traditionally, investigations of economic crimes in Russia are quite protracted. Hence, the parties often apply to the courts seeking the necessary materials to expedite the process.
In relation to criminal proceedings, pursuant to Article 247 of the RCPC, the trial can take place without the defendant’s participation in the following instances only:
An expedient procedure conducted with the consent of the defendant without a court hearing is also available (Chapters 40, 41 of the RCPC).
An expedient procedure can be conducted when considering crimes of minor or medium gravity. The defendant agrees with the charge brought against him or her and motions to conduct trial in expedient procedure. The public or private prosecutor and (or) the victim does not object to the motion made by the defendant. The judge does not generally conduct research and evaluation of evidence collected in a criminal case, but may consider the defendant’s character references and circumstances that mitigate or aggravate the penalty. If the judge comes to the conclusion that the accusation with which the defendant agreed is reasonably supported by the evidence collected in the criminal case, then he or she may reach a guilty verdict and assign the defendant a punishment that cannot exceed two-thirds of the maximum term or two thirds of the amount of the most severe type of penalty provided for the crime committed.
In civil proceedings, where the defendant was duly notified and failed to appear, the court has the right to consider the case in his or her absence (Article 156 (3) of the RComPC).
Parties may also resolve a dispute in expedited proceedings pursuant to Chapter 29 of the RComPC. This type of proceeding is available on claims up to RUB800,000 or legal entities and RUB 400,000 for sole proprietors.
The particulars of this procedure include:
There are no specific rules or professional conduct considerations for pleading fraud under Russian law.
Russian law sets out a general requirement for a comprehensive, complete and objective determination of the circumstances of the case. This principle is reflected in relevant provisions of the RCPC regulating:
This mechanism is available through commencement of criminal proceedings only. The victim of fraud may apply to the investigating authorities or the prosecutor’s office to report the offence. If there are sufficient grounds, a case may be brought against an unknown fraudster. Russian case law furnishes the following examples:
In practice, a criminal case may be commenced against unknown fraudsters even if the investigative authorities are onto the potential perpetrator. This is done due to the fact that at the time of the initiation of the case, the investigative authorities do not have the proper evidence to bring charges. The potential perpetrator is questioned in this case as a witness.
The following powers are available to investigation authorities in criminal proceedings:
In commercial and civil proceedings the only mechanism to compel the witness to provide testimony is an imposition of a fine (Article 119 of the RComPC).
Legal entities are not subject to criminal liability in Russia. Hence, the matter of a director’s knowledge cannot be attributed to the company.
As a matter of civil liability, legal entities are solely liable for their actions (Article 49 of the RCC). It means that knowledge of the company’s director as well as his or her illegal acts is generally attributed to the company. Therefore, should the company be involved in any fraudulent actions, the affected creditors bring its director to subsidiary liability along with company. The mechanism of bringing a subsidiary liability claim against senior management is very popular among creditors (see the adjacent Trends and Developments chapter). However, this option is available in bankruptcy proceedings only, or after their termination in circumstances provided by Article 61.19 of the RBL.
The following grounds set out in the RBL to hold a director under subsidiary liability (Charter III. 2 of the RBL)
The Commission of Acts That Have Caused Damage to Creditors
These acts shall be committed in an unfair and unreasonable manner and lead (i) to the loss of property at the expense of which the claims of creditors could be satisfied or (ii) to the signs of company’s insolvency. The former consist of a broad scope of acts including organisation of corporate structure in such a manner that lead to company’s inability to pay over its obligations, entered into transactions on terms known to be disadvantageous for the company and so forth.
The court will estimate an extent of these acts and the role of the director in company’s insolvency as a whole (Resolution of the Russian Supreme Court’s Plenum, dated 21 December 2017, No 53).
Loss or Uncertainty of Accounting Documents Affecting the Bankruptcy Procedure
As a result of this director’s omission, the documentation shall not provide with information on:
Failure to File for Bankruptcy in Appropriate Time
The manager must determine, given the size of the company, whether or not to file for bankruptcy (Resolution of the Russian Supreme Court’s Plenum, dated 21 December 2017, No 53).
Failure to Turn Over all Documentation to the Bankruptcy Trustee
The indictment period for commission of the listed acts is ten years. This means that a vicarious claim can also be made against a former director of the company.
Pursuant to the Article 53.1 of the RCC, a company’s controlling person (including beneficiary) may be held liable for any losses caused to a company. All listed persons must act reasonably and in a good faith in relation to the company.
In fact, there are two ways to hold the controlling persons liable, as described below.
Subsidiary Liability Claim in Bankruptcy Proceedings
The idea is the same as with directors. The controlling person shall not cause damage to the company that leads to its insolvency. This may include provision of ineffective instructions to the company’s management, an informal order to the company’s director to commit an illegal act of withdrawal of assets and so forth. Non-compliance of the controlling person with the cited rule entitles the company’s creditors to file a subsidiary claim against it.
Creditors must also prove the existence of a control relationship. The presence of such a control relationship is evidenced by the following attributes:
Nevertheless, in each case the courts must determine the degree of influence exercised by the controlling person over the company and its directors.
Derivative Action for the Damages
Pursuant to Articles 53.1 and 65.2 of the RCC, a company’s member can bring a derivative action against the controlling person for damages caused to the company. The cause of action is any harm caused to the company as the result of unfair and unreasonable act of the controlling person. Please see 3.3 Shareholders' Claims against Fraudulent Directors for further information.
There are two types of claims against fraudulent directors, as described below.
Derivative Action for the Damages
Article 65.2 of the RCC authorises the company’s members to bring a derivative action against company’s directors and members of collective management bodies.
The cause of action is causing the damages to the company as a result of unreasonable and unfair acts. The defendant may oppose pointing that a particular act was a result of normal business conduct or consistent with ordinary expectations from turnover. These criteria may include the following examples:
Russian case law stems from the fact that a derivative action in defence of a legal entity is derived from the interests of its participants (Decision of the Russian Supreme Court, dated 26 August 2016, No 305-ЭС16-3884). Hence, from the point of view of substantive law, the characteristic feature of a derivative action is that the company’s member bringing such a claim, acts not on behalf of himself or herself, but on behalf of the company.
The nature of that claim leads to a substantial procedural result. The company will be the claimant in such a claim, whereas a member that initially brought the derivative action is the company’s legal representative.
Challenging the Illegal Transactions
In the course of his or her activities, a director may enter into many fraudulent transactions. These may include transactions (i) to withdraw company’s assets, (ii) transactions on unfair for company conditions in the director’s personal interests and so forth.
Article 174 (2) of the RCC entitles the shareholders to challenge the transactions causing the damage to the company. The company’s member seeking the challenge of the fraudulent transaction will act on behalf of the company as its representative.
Pursuant to the Article 11 of the RCrC, any person (including a foreigner) who committed a crime in the Russian territory shall be held liable in Russia.
However, the Russian Criminal Code may be also applied extraterritorially to foreigners who have committed a crime outside Russia if (i) the crime is directed against the interests of Russia or its citizens; (ii) it is provided for in an international treaty (Article 12 of the RCrC).
Thus, in the examples above, overseas parties may become parties to criminal proceedings in Russia.
In commercial or civil proceedings, a foreign company can participate in the same manner as Russian parties.
There is also an important development in Russia concerning civil disputes over the compensation of damages. Pursuant to Article 248.1 of the RComPC, Russian commercial courts have exclusive jurisdiction over the following categories of disputes:
This rule is applicable, unless otherwise provided by the international treaty or by the agreement of these parties. The rule is also applicable in cases when prorogation or arbitration agreement to settle dispute in foreign court or arbitration is unenforceable due to foreign sanctions.
Additionally, pursuant to the Article 248.2 of the RComPC, Russian commercial courts are entitled to issue anti-suit injunctions against proceedings in a foreign court or international commercial arbitration seated outside Russia.
When it comes to domestic judgments, the most common method of enforcement is a writ of execution issued by the court. This document is filed with the bailiffs together with an application for enforcement. Together with the judgment’s enforcement in principle, an application may provide with a motion to freeze the defendant’s assets; to secure enforcement; and to prohibit certain activities by the defendant.
When it comes to foreign judgments, the RComPC’s Chapter 31 sets out the recognition and enforcement of foreign judgments. Foreign judgments are recognised and enforced based on the federal law or international treaties. In their absence, rules of international comity and reciprocity are also applicable.
Russia is party to the following important international treaties:
Russia is also party to several bilateral treaties on various civil matters.
An application for the recognition and enforcement of a foreign judgment must be lodged within the district commercial court where the debtor is located, or if it is unknown, at the location of the debtor’s property. If the application is satisfied, the commercial court issues a writ of execution to the claimant.
When it comes to the foreign arbitration awards, Russia is a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”).
Pursuant to the Article 244 of the RComPC the following grounds for refusal and recognition of foreign arbitral award (or judgment) are applicable:
The same grounds are provided in Article 412 of the CPC.
There is no such legal mechanism under Russian law.
Pursuant to the Article 18 of the Federal Law, On the practice of law and the legal profession in the Russian Federation, dated 31 May 2002, No 63-FZ, the discovery and disclosure of the attorney’s documentation concerning his or her activity on representing of his or her client is prohibited.
However, the Russian Constitutional Court repeatedly pointed out that the discovery and disclosure are permissible in the most exceptional circumstances where there is a reasonable suspicion of abuse of the attorney-client privilege by the lawyer and the defendant (eg, Ruling of the Russian Constitutional Court, dated 29 November 2010, No 20-P; Ruling of the Russian Constitutional Court, dated 17 December 2015, No 33-P).
There is an extensive academic debate in Russian law concerning the permissibility of punitive damages. Nevertheless, currently, neither legislation nor case law allow for these types of damages to be recovered in any category of cases. In fact, they are substituted by the contractual mechanisms (eg, penalty).
Pursuant to Article 26 of the Law On banks and banking activity, banks guarantee the confidentiality of transactions, accounts and deposits of their clients and correspondents. All employees of a bank are required maintain the transactions, accounts and deposits of its clients and correspondents, as well as other information established by the bank, as confidential, unless it contradicts federal law.
Russian law sets out numerous exceptions to this rule, including:
Subsidiary Liability of Senior Managers and Controlling Persons
A key trend that has emerged over the recent years has been the prosecution of controlling persons of a business for losses incurred by creditors, management, directors and so forth.
The main "drivers" of this process are the Central Bank of Russia, which is responsible for the reorganisation of banks that find themselves in financial difficulties, and the Deposit Insurance Agency (DIA) – a Russian state corporation providing deposit insurance. The DIA essentially acts as a corporate bankruptcy trustee, as well as the main creditor once the compulsory compensation to depositors is paid out.
These cases tend to develop in the following manner:
The above actions often beg the question of which forum becomes “key” – Russian or English? On the one hand, Russia is a natural forum for such cases, and the process in Russian courts is much cheaper and faster than in English courts. On the other hand, the execution of a Russian court's decision on the foreclosure of assets may be hampered by various factors, such as the differences in legal systems, the refusal of the defendants to participate in the process if they left the country, the lack of an agreement on mutual recognition and enforcement of decisions, and so forth.
If the assets are hidden in overseas trusts, it may be difficult for a Russian court to “unpack” them, as civil law does not recognise “split” property. This is not a problem for an English court. In addition, on the basis of Bank Otkritie’s lawsuit against its former board members, the decision may contain confidential banking information that is deemed “closed”, which complicates execution abroad.
When weighing up whether to take a claim against defendants that do not reside in the UK, the English court considers the ability to quickly enforce a decision across different countries as one of the grounds.
This consideration guided the English High Court judge Sir Nigel Teare's decision on allowing to serve a claim to three Russians whose paths crossed with the banking group Otkritie, and who lived abroad. On 23 March 2021, the court ruled that the claim of Trust Bank and Otkritie Financial Corporation for subsidiary liability against seven defendants – Russian citizens – will be heard in London (PJSC National Bank Trust, PJSC Otkritie Financial Corporation v Boris Mints and Others  EWHC 692 (Comm).
The essence of the matter is as follows. Two Russian banks, Trust and Otkritie, deemed for reorganisation by the state, filed a lawsuit against Boris Mints and his sons in London in 2019 in relation to loans provided to the O1 group in the amount of circa USD800 million, subsequently converted into O1 bonds, which the claimants considered "illiquid".
On 10 July 2020, the plaintiffs petitioned to bring Vadim Belyaev (who changed his last name to Wolfson), Yevgeny Dankevich and Mikail Shishkhanov as, respectively, five, six and seven defendants. The problem for the plaintiffs was that whilst Boris Mints and his sons resided in the UK and were therefore under the jurisdiction of the English court, defendants five, six and seven resided, respectively, in the USA, Israel and Russia.
In order to involve them in the process, the claimants needed to obtain a court permission to serve the claim abroad (permission for service of the proceedings out of the jurisdiction). Such permission was granted on 4 August 2020 at an ex parte hearing, without summoning the defendants. Defendants five, six and seven challenged this authorisation, and their complaints were reviewed by Sir Nigel Teare.
The judge had to determine whether London was a "forum convenience" to hear the claim against all seven defendants. The test applied was the findings of the famous case of Spiliada (Spiliada Maritime Corp v Cansulex Ltd  AC 476), which is usually applied where the defendants live abroad and the English court is not a natural forum. Sir Nigel Teare also proceeded on the presumption that the case was closely connected to Russia. The claimants needed to prove that London was, nonetheless, the most "appropriate forum" for bringing their claims.
The judge agreed with the claimants and allowed to bring the claim against defendants five, six and seven in the English High Court, taking into account various factors, such as:
This case clearly shows that Russian lenders have become seasoned litigators in London. They have acquired a pool of suitable professional advisers and experience no difficulties in using tools available under common law and equity principles to trace and recover assets.
Further proof of this is the decision of the High Court of Justice in the claim against Sergei Pugachev, where it was possible to prove that the real control over the New Zealand trusts was exercised by Mr Pugachev himself, rather than the trustee; a total of 18 cases on the Mezhprombank/DIA disputes were heard in the High Court with Mr Pugachev.
In some cases, the DIA hires special collection companies (such as A1) to seek recovery from debtors who fled abroad (eg, Bedzhamov).
Claims Running in Parallel
Whether it is a divorce or a corporate battle, Russian counterparties love to play several "chessboards" simultaneously, often easily transferring a dispute from a civil to a criminal plane.
In disputes between Russians, ranging from high-profile divorces to corporate battles, one can often find a whole bunch of processes that can be very difficult to curtail if the parties decide to settle.
A number of conflicts, transferred to the criminal plane, such as the Baring Vostok case, continue even after the parties have settled and withdrawn their claims against each other: the criminal case itself cannot end by itself.
Use of Evidence from Russian Criminal Cases in Foreign Proceedings
The Russian criminal procedure makes it possible to “effectively” collect evidence that is inaccessible to participants in corporate disputes.
Considering that there are no disclosure procedures in the Russian process, the initiation of criminal cases began to be used as a tool for collecting documents and interrogating witnesses in order to then use the obtained data in foreign courts, primarily English courts.
Such "schemes" for obtaining documents are workable in practice thanks to the fact that: (i) the Russian criminal process does not contain a direct prohibition on use of documents obtained from the criminal case in other cases, including foreign ones, unless there is a prohibition by the investigator; and (ii) the English process may admit evidence, even if it was obtained in violation of the law of another country.
Civil Confiscation of Undeclared Property of Bureaucrats and Government Officials
This trend includes the widespread application of the rule on confiscation of assets of civil servants – for example, investigators, law enforcement officers and other siloviki (securocrats), governors, etc – ownership of which cannot be justified by their income. This is analogous to civil forfeiture.
Practice shows that claims for the seizure of assets in favour of the state are filed by the prosecutor's office in parallel with the criminal investigation (eg, the case of the former governor of Sakhalin, Mr Khoroshavin, the case of Colonel Zakharchenko, etc).
The request for the seizure of assets is based on the evidence obtained in the criminal case, the investigation of which may not yet be completed (eg, the case of the former Minister of the Open Government, Mr Abyzov).
The seized property may belong to close relatives of the accused, which is not an obstacle to seizure.
Claims relate to assets located on the territory of Russia (typically, these are funds in a bank account, real estate and cars). There are no examples of assets seized abroad based on such court decisions.
Inflated Civil Claims within the Framework of Criminal Claims
Another trend shows prevalence of inflated civil claims brought within the framework of criminal cases. These, in turn, are satisfied by the courts where a conviction is issued, which is much more common than getting an acquittal.
A civil claim in a criminal case is often separated into its own process, rather than considered together with the criminal case. Despite the fact that a civil claim should be heard in accordance to the rules of civil procedure, bringing the claim within the criminal framework helps avoid numerous obstacles, such as the statute of limitations. This means that another claim, the term for bringing which would have expired had it been brought under a separate civil procedure, may be “packed” into a claim for damages within the criminal process. The legal team for the defence needs to be on top of such trickery, in order to react in time with the help of procedural objections and appeals against judicial acts.