Review of the case law of the Supreme Court of the Russian Federation

The Supreme Court prepared a regular practice review of the presidium and panels, and provided an explanation for sales of real estate in bankruptcy proceedings. We will cover the most interesting conclusions related to corporate disputes, antimonopoly legislation and other issues.

Compensation for legal expenses in tax disputes

The Supreme Court clarified whether the taxpayer who managed to defend its position in a dispute with the tax authority may recover from the tax authority legal expenses in the form of the cost of legal services.

Thus, it is noted that expenses incurred by the taxpayer in connection with the collection of evidence to refute allegations of a tax offense, as well as paid legal or other expert fees for the purposes of forming a legal position are ordinary expenses borne by the taxpayer as an economic operator.

The fact that legal tax control measures and assessment of the legality of the taxpayer’s actions had adverse property consequences for the taxpayer does not indicate the illegality of the tax authority’s actions and does not form sufficient grounds for damage compensation. Otherwise, it would mean that according to the rules of damage compensation, expenses are compensated for the very fact of the taxpayer’s participation in administrative procedures prescribed by the Tax Code of the Russian Federation.

Therefore, the reversal of the decision of the tax authority by a higher tax authority in itself does not mean that all the conditions of tortious liability listed above are fulfilled. When distinguishing between assessment of completeness and correctness of the performance of the tax obligation by the taxpayer lawfully given by the tax authority within its powers, and the unlawful infliction of harm as a result of the publication by the tax authority of a legal act following a tax audit, it is not as such the correctness of the calculation of arrears that matters, but other circumstances: whether the tax authority failed to perform public obligations which led to the fact that the taxpayer exercising its right to challenge the decision of the tax authority had to incur additional (excess) expenses to remedy violations and which caused improper additional accrual of relevant tax payments.

It should be noted that this position is also applicable to other disputes between commercial structures and state organizations.

Challenging transactions as part of the bankruptcy procedure

Declaring an organization bankrupt does not prevent shareholders from independently challenging its transactions on general grounds and seeking the return of the property to the bankruptcy estate. Thus, a shareholder wanted to invalidate a large property sale transaction made by a company without the approval of its members. However, his claim was initially dismissed as part of a bankruptcy case, which was at the stage of bankruptcy proceedings, and then in an independent dispute.

The Supreme Court included this dispute in the review and fixed several important positions on its example:

  • Introduction of bankruptcy proceedings against a bankrupt JSC does not prevent a shareholder from challenging a transaction of this company on general grounds;
  • Even in the event of a JSC bankruptcy, the possibility of challenging its transactions on general grounds, i.e. beyond the bankruptcy case, is not excluded;
  • The status of an official receiver as a representative of the company does not make him/her the only person authorized to challenge the debtor’s transactions.

Subsidiary liability

Due to new virus, the economic situation in the country deteriorated. According to predictions of the Chamber of Commerce and Industry, about 3 million entrepreneurs may go bankrupt due to this crisis. Some business persons will also face the threat of subsidiary liability. According to experts, both bankers and managers of firms whose revenue significantly dropped during the pandemic are on the line.

The Supreme Court in its review considered a case, when a holding company used a popular tax evasion scheme. One of the companies was left with tax debts and thus turned into a “loss center”. While all the income went to an allied “profit center”, where the funds were distributed among beneficiaries. The Supreme Court called this approach “an abuse of the corporate form” and cleared that the “profit center” may be held liable for obligations of the “loss center” as a co-executor.

A person shall bear subsidiary liability for debts of a bankrupt debtor in case bankruptcy is caused by the actions of this person, involving arrangement of activities of a corporate group in such a way that the debtor is solely responsible for losses, while other members of the group receive profit. Persons who caused the damage together with the person controlling the debtor shall bear subsidiary liability jointly and severally with such a person.

It should be noted that it is not the first time that the problem of “loss centers” is raised: back in 2017, the Federal Tax Service in its letter indicated prohibition of building a business model with separation in risky and risk-free parts.

Thus, together with the new position of the Supreme Court the practice of bringing to subsidiary liability for the creation of a “mirror” business, whereto all labor and financial resources are transferred from a loss-making company, may start to form.

The Supreme Court banned the use of subsidiary liability as a tool in corporate conflicts. If a businessperson believes that his/her partners acted unreasonably or in bad faith in relation to the common cause, then it is allowed to resort to remedies provided for by the corporate legislation rather than the bankruptcy law, e.g. to challenge transactions, recover losses from them, or seek their exclusion from the company.

Filing of such a claim in essence may be regarded as an attempt by claimants to compensate for the consequences of their unsuccessful actions in entering the debtor’s capital and investing in the debtor’s business. At the same time, the mechanism of bringing to subsidiary liability shall not be used to resolve corporate disputes.

As a general rule, founders and members of a bankrupt company shall not participate in an insolvency case on their own. This shall be done through a selected representative. But if a company has a corporate conflict in addition to bankruptcy, then a member may get involved in the case and independently defend his/her interests, e.g. to challenge a fictitious transaction of the debtor.

Roman Moskovskikh


Tax and Legal Practice

Korpus Prava (Russia)

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