Real estate transactions require care and caution. You can pay for frivolity and inattention. For example, the fact that a deal you have concluded may be declared invalid. There are plenty of grounds for declaring a transaction invalid in the law.
When purchasing real estate, it is important not only to thoroughly check the legal purity of the purchased property. It is equally important to know under what conditions your transaction may be invalidated. The further fate of the transaction and the acquired property will depend on this.
Invalid transactions are divided into void and voidable. If, in accordance with the Civil Code of the Russian Federation, a transaction is declared invalid in court, then it is called voidable. If the Civil Code indicates the invalidity of a transaction without the need for legal proceedings, the transaction is void.
The consequences of an invalid transaction are provided for in Article 167 of the Civil Code of the Russian Federation. In accordance with it, an invalid transaction is recognized as if it had not taken place and does not entail legal consequences. As a result of declaring a transaction invalid, bilateral restitution occurs, that is, each party is obliged to return to the other everything received under the transaction, and if it is impossible to return what was received, reimburse its value - unless other consequences of the invalidity of the transaction are provided for by law.
A worthless deal
If the transaction is void, then to declare it invalid there is no need to go to court, since, by force of law, it is already invalid from the moment of its conclusion. In case of a void transaction, the court is only asked to invalidate the consequences of the transaction. Moreover, any interested person can file a claim.
Grounds for nullity of transactions:
1. A transaction that does not comply with the requirements of the law or other legal acts is void unless the law establishes that such a transaction is contestable.
For example: in a long chain of sales and purchases that have already been made, there is an apartment in which the rights of minor children were violated during privatization. The guardianship authorities did not give prior permission for the non-participation of children in privatization. It all comes out somehow. Privatization is declared invalid, and the entire multi-part transaction instantly becomes void. Citizens must return to their original position, that is, move into their previous apartments, return the money received and start all over again.
2. A transaction made for a purpose contrary to the foundations of law and order and morality is also void.
Transactions with forged documents, forged signatures, etc. may fall under this basis.
3. Imaginary and feigned transactions are also void.
An imaginary transaction is a transaction made only for show, without the intention of creating legal consequences corresponding to it. For example, re-registration of real estate to a dummy person in order to evade seizure of property.
A sham transaction is a transaction made to cover up another transaction. Under the guise of a gift, sell real estate.
4. A transaction made by a citizen declared incompetent as a result of a mental disorder is void.
If such a citizen has concluded a purchase and sale agreement, then his legal representative may file a lawsuit in court to declare the consequences of such a transaction invalid. In this case, the buyer will have to return the apartment, and the seller will have to return the money. But in the interests of an incapacitated citizen, a transaction may, at the request of his guardian, be recognized by the court as valid if it was concluded for the benefit of this citizen.
5. A transaction concluded by a minor citizen is void.
Here, minors mean citizens under 14 years of age. In practice, of course, it is unlikely that you will meet a 10-year-old apartment seller. But you still need to know about this basis for the nullity of transactions.
What is restitution?
After the transaction is declared invalid, a logical question arises: what to do with the property that the parties managed to transfer to each other? As indicated in paragraph 1 of Art. 167 of the Civil Code of the Russian Federation, an invalid transaction does not entail legal consequences. But he immediately makes a reservation: “... with the exception of those related to its invalidity.”
Such a legal consequence, and the main one, is restitution. Strictly speaking, the emergence of restitutionary rights and obligations is a consequence not of the invalidity of the transaction itself, but of the provisions made under it.
If they were not there, then there are no grounds for restitution - the parties have nothing to return to each other. Also, restitution is not made for sham transactions, because there is a special consequence in the form of reclassification.
Restitution is a general property consequence of the invalidity of a transaction, executed in whole or in part, which is expressed in the exercise by its parties of the rights and obligations to return everything provided and received under such a transaction or reimbursement of its value.
The Civil Code of the Russian Federation does not use the term itself, but it is widely used in legal science and judicial practice. It is derived from the Latin word "restituere"
- return back, restore.
The concept of “restitution” came to us from Roman law and exists abroad, but in both cases it has different meanings than in our civil law.
In restitution, the parties must return to each other everything provided and received under the invalid transaction.
Restitution is possible only if the transaction is invalid. If it is valid or the contract is declared not concluded, then other consequences apply.
For example, when a third party has seized an item from the buyer on grounds that arose before the execution of the purchase and sale agreement, the claim to the seller to return the purchase price and recover damages is considered according to the rules of liability for improper performance of the obligation.
The rules on restitution are not applicable here, as explained in paragraph 83 of the Resolution of the Plenum of the Armed Forces of the Russian Federation dated June 23, 2015 No. 25 “On the application by courts of certain provisions of Section I of Part One of the Civil Code of the Russian Federation.”
As a general rule, restitution is two-way. But in some situations, unilateral restitution may be applied, or it may not be applied at all.
Voidable transaction
A voidable transaction is a transaction that may or may not be recognized as invalid by a court. Only persons specified in the law can file a lawsuit to declare a transaction invalid.
Grounds for voidable transactions:
1. A transaction made under the influence of deception, violence, threat, malicious agreement between a representative of one party and the other party, as well as a transaction that a person was forced to make due to a combination of difficult circumstances on extremely unfavorable conditions for himself (a enslaving transaction), may be recognized invalid by the court on the claim of the victim.
For example, registration of real estate obtained as a result of deception or violence in the name of dummies. If the transaction is declared invalid, the defendant must return to the victim everything received under the transaction. The property received by the victim from the defendant under the transaction is turned into the income of the Russian Federation. If it is impossible to transfer property to the state, its value is collected.
2. A transaction made under the influence of a mistake may be declared invalid by the court at the request of the party acting under the influence of the mistake. But the misconception must be of “substantial significance.”
In accordance with Art. 178 of the Civil Code of the Russian Federation, “misconception regarding the nature of the transaction or identity or such qualities of its subject matter that significantly reduce the possibility of its intended use is of significant importance. The misconception regarding the motives for the transaction is not material." If the court declares the transaction invalid on this basis, then two-way restitution occurs. In addition, the plaintiff party has the right to demand compensation from the other party for actual damage caused to it if it proves that the mistake arose through the fault of the other party. If this is not proven, the plaintiff party is obliged to compensate the other party at its request for actual damage caused to it, even if the error arose due to circumstances beyond the control of the erring party.
3. A citizen may be recognized as having limited legal capacity if he abuses alcohol or drugs.
A transaction made by a citizen recognized as having limited legal capacity may also be declared invalid by the court. In order for a citizen with limited legal capacity to sell or buy real estate, the consent of the trustee is required. If the transaction is completed without such consent, the trustee may file a lawsuit to declare the transaction invalid. If the court recognizes the transaction as invalid, two-way restitution occurs.
4. Citizens aged 14 to 18 years have the right to dispose of real estate only with the prior consent of their parents, adoptive parents or guardian.
If there is no such consent, then the legal representatives can file a lawsuit to declare the real estate transaction invalid. But it is possible to acquire full legal capacity before reaching 18 years of age (marriage before 18 years of age, emancipation). For transactions with real estate by such citizens, the consent of legal representatives is not required.
5. A transaction can be declared invalid if a citizen entered into it without being able to understand the meaning of his actions.
The claim is filed by the citizen himself or by persons whose rights are violated as a result of such a transaction. The consequence of such a transaction is also bilateral restitution.
6. If real estate is jointly owned by spouses, then the disposition of such property requires the notarized consent of the second spouse.
The spouse, whose notarized consent to carry out the said transaction was not received, has the right to demand that the transaction be declared invalid in court within a year from the day when he learned or should have learned about the completion of this transaction.
Time limits for going to court
In any case, if the transaction is invalid, you cannot do without a trial. But, in order to recognize the transaction as invalid or to recognize the consequences of the transaction as invalid, it is important not to miss the statute of limitations and go to court on time.
If the transaction is void, then the limitation period for declaring the consequences of the transaction invalid is three years. The limitation period begins from the day when the execution of this transaction began.
The statute of limitations for claims to declare a voidable transaction invalid is one year. The limitation period begins from the day the violence or threat under the influence of which the transaction was concluded ceases, or from the day when the plaintiff learned or should have learned about the circumstances that constitute the basis for declaring the transaction invalid. If there are good reasons, the court may restore the statute of limitations.
Several years have passed since significant amendments were made to Russian legislation regarding invalid transactions (No. 100-FZ of 05/07/2013). Those that violate the requirements of the law were previously considered insignificant, but are now voidable. The statute of limitations has also changed. Despite the fact that in the last decade the number of illegal and problematic transactions has decreased, one can hardly talk about high-quality legal and financial protection for the buyer. What specific changes have occurred and how do they affect today's residential real estate market?
In this article we tried to answer the questions posed. What has changed in the new legislation? What are the limitation periods (i.e., after what period can the buyer of an apartment be completely calm and free from claims of participants in the transaction and third parties)? “In May 2013, amendments were made to the Civil Code of the Russian Federation, which differentiated the concepts of voidable and void transactions (invalid transactions), reclassifying most void transactions as voidable (Article 168, clause 1 of the Civil Code of the Russian Federation). The main difference between void and voidable transactions is the moment of their invalidity, and the time frame within which they can be challenged. The nullity of a transaction (in other words, its invalidity) does not depend on a court decision. The transaction is void from the very beginning of its conclusion and does not give rise to any legal consequences for the parties. A voidable transaction can only be declared invalid by a court decision; accordingly, until such a decision, the concluded agreement has legal force and is binding. By the time of the changes, a problem had arisen regarding transactions concluded in the real estate market: any transaction concluded by the parties in violation of the current legislation was recognized as void. In addition, a claim for recognition of a void transaction could be brought by any person. This possibility in practice led to abuses by persons who, having no specific interest in the concluded transaction, tried to destroy it. Now, for both a voidable and a void transaction, only a party to the agreement or a person expressly specified in the law, for example a trustee, in other words, a person who has an interest in challenging the transaction of Art. 177, 166, clause 2 of the Civil Code of the Russian Federation. The main reason for declaring transactions invalid due to insignificance is a transaction made by an incapacitated person, Art. 171 Civil Code of the Russian Federation. That is, the citizen selling the housing was deprived of legal capacity by the court before the sale agreement was concluded. In such a transaction, the court will oblige the parties to return to each other everything received under the purchase and sale agreement. The buyer in this transaction is the weaker party, since, having returned the purchased housing, the question arises of returning the money, which the incapacitated person, of course, no longer has. For voidable non-competitive transactions, Art. 177 of the Civil Code of the Russian Federation: a transaction concluded by a person incapable of understanding the meaning of his actions or managing them. If in the first case the fact of confirmation of incapacity is sufficient - a court decision declaring the citizen incompetent, then in relation to 177 Art. According to the Civil Code of the Russian Federation, the court will order an examination, and taking into account other evidence of the parties, a decision will be made to recognize the transaction as invalid or to refuse the relevant claims. In practice, the expert’s opinion plays a decisive role if the court has no doubts about the reliability of the expert’s opinion (usually this is the case). Other evidence, for example, witness testimony, may be of very conditional significance for the court’s decision. Speaking about the legal mechanism for protecting the right of a home purchaser, we can say that there are essentially two of them: the statute of limitations and qualification under Art. 302 of the Civil Code of the Russian Federation as a bona fide purchaser. In the first case, the limitation period for transactions is one year for a voidable transaction and three years for a void one. For void transactions, where a claim is made by a party to the transaction, the limitation period begins to run from the moment of execution of the contract; if the claim is made by a third party, then from the moment when he learned or should have learned about the fact of concluding the contract. It is important to note that dated 05/07/2013 No. 100-FZ amended Article 170. The Civil Code of the Russian Federation in the qualification of a sham transaction. A sham transaction, the consequences of which is nullity, is now also a transaction concluded on conditions other than those specified in the contract. These changes may have implications for parties to undervalue a transaction to optimize taxation. It can be assumed that, for example, the spouse who gave consent to the sale of housing will be able to recognize the transaction as void on this basis if the consent itself does not express the cost of the sale of jointly acquired property.” What are the most common reasons for invalid (void and voidable) transactions today? Is this a common occurrence or rare? Have there been such cases in your practice (or in the history of the company) and if so, how did it end for the buyer? “In most cases, an invalid transaction obviously contains an element of an offense. Therefore, professional participants in the real estate market who respect themselves and value their reputation try to stay away from such transactions. The same can be said about void transactions. Another thing is transactions in which one of the parties bears one or another risk, including the risk of challenging the current or previous transactions with the object. Such risks may have nothing to do with offenses, but be present in the history of the object. The task of a specialist accompanying the buyer is to promptly identify this risk or risks, assess their magnitude, suggest possible ways to minimize and give appropriate recommendations to the client. Such recommendations, depending on the specific situation and the specific risks of contestation, can be very different - refusal to purchase, demanding an adequate discount, providing additional statements, guarantees, etc. The task of the specialist accompanying the seller is to detect and minimize the risks of contestability of previous transactions with the object at the stage of preparing documents for the object being sold, and to give his motivated assessment of the risks to the counterparty (buyer). Often, assessing the contestability of transactions and the likely consequences becomes the subject of heated debate between the seller and the buyer with the participation of their lawyers, agents and banking specialists. Sometimes common sense wins out in these debates, sometimes it doesn’t. In practice, we encounter very different attitudes among interested participants in the debate towards such risk factors of the contestability of transactions, such as, for example, non-participation in privatization of minors (in the period before August 1994);
— the absence of one of the residents due to being in prison;
- donation between non-relatives;
— deregistration by proxy;
— deregistration without registration in another place;
— recognition of property rights by court decision;
— non-market price in the contract;
- unequal exchange without additional payment;
— a fresh transaction with a bona fide purchaser. The list goes on, and every experienced specialist will have something to add to it. “Invalid transactions have become a rarer occurrence than before in the heady 90s. Firstly, because Rosreestr controls the rights of minors and does not conduct transactions with their property without the permission of the guardianship authorities. Secondly, the market for real estate services is now more transparent, large companies operate in it. Thirdly, with the introduction of the concept of a “bona fide purchaser,” buyers have become more protected if the transfer of rights to the apartment is registered according to the rules of Rosreestr and if the purchase and sale agreement includes the full price. However, there are voidable transactions. And, as a rule, their most common reasons are the following: - the appearance of relatives after the execution of the annuity agreement; — the appearance of heirs about whom the seller did not know (or was silent); — infringement of the rights of minors during privatization in the 90s; — carrying out a transaction with a person registered in a drug or mental health clinic without examination at the time of the transaction.”
Who and with what evidence: we challenge transactions correctly
To paraphrase the classic, all valid transactions are similar to each other, each invalid transaction is contestable in its own way, says Arthur Zurabyan, head of the international litigation and arbitration practice ART DE LEX ART DE LEX Federal Rating. group Antimonopoly law (including disputes) group Land law/Commercial real estate/Construction group Compliance group Natural resources/Energy group Dispute resolution in courts of general jurisdiction group TMT group (telecommunications, media and technology) group Arbitration proceedings (major disputes - high market) group Bankruptcy (including disputes) Group Corporate Law/Mergers and Acquisitions Group International Litigation Group Criminal Law Group Finance/Banking Law Group Intellectual Property (including Disputes) . If the goal is to appeal the agreement, then it is not necessary to tailor the grounds to this task, but the existing circumstances to suit them, adds Almaz Kuchembaev, head of the legal agency Kuchembaev and Partners Kuchembaev and Partners Regional Rating. . And one of the basic questions of this topic is who has the right to such contestation. As a general rule, the parties to the transaction have such powers.
In 2013, the legislator fundamentally changed the approach to challenging transactions. From this moment on, the basis for declaring a transaction invalid is not formal issues, but a real violation of the rights of the plaintiff by the disputed transaction. For this purpose, the presumption of nullity of transactions that do not comply with the law (Article 168 of the Civil Code) has been changed to a presumption of their contestability. That is, the violations of the law themselves committed during the conclusion of the transaction will not allow it to be considered invalid. The plaintiff must prove to the court what real adverse consequences he received from the disputed transaction.
Roman Rechkin, senior partner INTELLECT INTELLECT Regional rating. group Intellectual property (including disputes) group Labor and migration law (including disputes) group Arbitration proceedings group Land law/Commercial real estate/Construction group Dispute resolution in courts of general jurisdiction group Criminal law group Corporate law/Mergers and acquisitions group Bankruptcy (including disputes) Company profile
But with the existing regulation, it is precisely the most difficult thing for these individuals to challenge the agreement, says Ainur Yalilov, partner of Shaimardanov and Partners of Shaimardanov and Partners Regional Rating. . According to him, the courts direct counterparties to maintain obligations with strict execution, and not to cancel them. The lawyer adds that he will prevent the parties from challenging the transaction and the principle of estoppel. It appeared in Russian civil legislation five years ago and protects against dishonest behavior of the counterparty, based on the rule “do not contradict yourself.” Thus, a party cannot demand that a contract be declared void if it previously acted as if it considered it valid.
Basic components of a successful challenge
1. Determination of the proper subject having the right to challenge.
2. Choosing the right method of protecting the right.
3. Identification and formation of the evidence base, taking into account current judicial practice in relation to the chosen method of defense.
4. Taking into account the limitation periods and special deadlines for challenging.
Source: Arthur Zurabyan, head of practice at Art de Lex
Because of these circumstances, it is much easier to appeal the agreement to a third party whose rights are violated by this document, Yalilov notes. Or to the one specified in the law (clause 2 of Article 166 of the Civil Code). Roman Rechkin, senior partner INTELLECT INTELLECT Regional rating. group Intellectual property (including disputes) group Labor and migration law (including disputes) group Arbitration proceedings group Land law/Commercial real estate/Construction group Dispute resolution in courts of general jurisdiction group Criminal law group Corporate law/Mergers and acquisitions group Bankruptcy (including disputes) The company profile adds that judicial practice is consistently expanding the circle of persons who have the right to challenge transactions. According to him, this situation is especially indicative of the example of challenging the debtor’s transactions committed for the purpose of abuse of right: “The legal basis for going to court is Art. 10 and 168 of the Civil Code, but in these norms the creditor is not mentioned as a person who has the right to challenge the debtor’s transactions for the withdrawal of assets.” For this reason, it is judicial practice that helps to clearly understand who can challenge a particular transaction.
Who can challenge a transaction if there are special grounds?
1. For corporate purposes, this is the corporation itself and its participants. Other persons, such as members of a corporation's board of directors, do not have standing to sue.
2. In case of bankruptcy, this is the bankruptcy trustee and bankruptcy creditors. During bank reorganization, the temporary administration has these rights.
3. The law also allows for the presence of other plaintiffs specifically specified in the law. For example, authorized government bodies, prosecutors, etc.
Source: Arthur Zurabyan, head of practice at Art de Lex
What the prosecutor and the surety can challenge
Thus, if state and public interests are affected when making a transaction, then the prosecutor can also challenge it (clause 18 of the Information Letter of the Presidium of the Supreme Arbitration Court dated March 13, 2001 No. 62). But the supervisory authority will no longer be able to appeal against contracts concluded by a company that contradict the goals of its activities, Yalilov notes. In case No. A40-98055/2013, the prosecutor, along with other plaintiffs, tried to challenge the sale of the building by a military publishing house, which led to the disappearance of the company’s assets and its reorganization. But the courts pointed out that such an applicant is not one of the persons upon whose claim such an agreement can be declared invalid (Article 173 of the Civil Code).
The bailiff can also go to court with a demand to invalidate the transaction. We are talking about a situation where enforcement proceedings have been initiated against the debtor, and he is trying to sell part of his property in order to save assets from foreclosure. Nikolai Garin*'s bailiffs seized his trailer, encouraging him to pay off his creditors as soon as possible. But instead, the debtor managed to sell this property while enforcement proceedings were ongoing.
Then the FSSP employees went to court with a demand to challenge the property purchase and sale agreement. But the court did not accept their claim, citing the lack of legitimate interests of such applicants in the controversial situation. The appeal upheld this decision. And the Supreme Court canceled the acts of the lower authorities and emphasized that the bailiffs in this case can appeal the agreement (case No. 77-KG 17-7).
The Supreme Court emphasized that FSSP employees have such a right if, when making a transaction, the debtor abused his right during enforcement proceedings, acted in circumvention of the law and pursued the unlawful goal of avoiding foreclosure on his property. Although Rechkin notes: from paragraph 2 of Art. 174.1 of the Civil Code (“Consequences of a transaction in relation to property, the disposal of which is prohibited or limited”) it follows that such a transaction does not need to be declared invalid, since it does not interfere with the seizure of the sold asset.
What circumstances will help the plaintiff to challenge the transactions?
1) Committed for the purpose of withdrawing assets:
– The presence of a purpose for completing a transaction that is different from that which is usually pursued when concluding such agreements. – Presence of abuse of rights committed by the parties to the transaction. – The presence of negative legal consequences for the parties to the transaction, for the rights and legitimate interests of other citizens and legal entities. – The presence of other obligations among the parties to the agreement, the fulfillment of which by completing the transaction creates or will create obstacles in the future.
If transactions are made only for show and cover the withdrawal of assets, then the simultaneous fulfillment of the following conditions is proven: – The parties to the transaction did not intend to execute it or demand its execution. – When concluding a transaction, the true will of the parties was not aimed at creating those legal consequences that occur when it is completed.
2) Trades and transactions based on its results:
– The transaction has not yet been executed by the customer and the winning bidder.
– During the bidding, the provisions of the relevant procurement laws (44-FZ, 223-FZ) were significantly violated: there is information about the discrepancy between specific provisions of the procurement (competition/auction) documentation and the requirements of the procurement legislation.
3) Real estate transactions made by a person who did not understand the meaning of his actions:
– Expert opinions obtained based on the results of a forensic psychological (psychological-psychiatric) examination.
– Detailed and accurate witness statements.
– Explanations of the notaries who witnessed the transaction.
4) Transactions involving falsification of the contract itself
– Expert conclusion based on the results of examination (chemical, handwriting).
Source: Vyacheslav Golenev, lawyer Zheleznikov and partners Zheleznikov and partners Federal rating. group Criminal law Company profile
With corporate relations, controversial issues in the topic under discussion arise in cases where they are “complicated” by other disputes. In particular, hereditary ones. Thus, the courts had to figure out whether the heir to a share in an LLC has the right to challenge transactions that the testator could have appealed, but never did during his lifetime. Three authorities disagreed in their assessment of this situation (case No. A33-18938/2011). And the Presidium of the Supreme Arbitration Court emphasized that the heir has the same rights that the testator had and can defend them if they are violated. Including challenging transactions that at one time led to a decrease in the value of the received share in the LLC.
In general, society participants should more closely monitor the transactions that their organizations conduct. In case No. A60-29583/2011, the director of the LLC sold the company's real estate (non-residential premises) to third parties. One of the company participants noticed that the deal was enslaving in nature and tried to challenge it in court, but to no avail. The plaintiff argued that it would be more profitable to sell the disputed property separately and for a higher price. In addition, enforcement proceedings have been initiated against the LLC, so this is not the best time to sell off its assets. But the courts were not convinced by these arguments. Three authorities indicated that a transaction can be recognized as enslaving if several difficult circumstances coincide, and not just one. And the terms of the agreement must be not just “unprofitable”, but “extremely unprofitable,” the courts emphasized when they rejected the claim.
It is much easier to achieve recognition of a transaction as enslaving if, during its conclusion, one of the parties was seriously deceived. Soslan Gadzhinov bought it from Andrey Tarasenko. When signing the purchase and sale agreement, the seller, in the transfer acceptance act, listed the debts that the company had - 111,000 rubles. But after the transaction it turned out that the company’s total debt to all creditors was about 300,000 rubles. Pointing out that Tarasenko did not inform the buyer about this, Gadzhinov asked to invalidate the purchase and sale agreement of the organization. And the courts satisfied the applicant’s demands, recognizing the deal as enslaving (case No. A61-2982/2013).
But it will not be easy for the guarantor to appeal the main obligation. took out a loan for 82 million rubles. to VTB, but was able to give only 6 million rubles. The bank began to demand the rest of the amount from the guarantors, who in response tried to invalidate the loan agreement (case No. A32-28266/2010). The applicants asserted that the loan agreement was initially concluded on enslaving conditions. But three instances emphasized that the guarantors, not being a party to the disputed agreement, cannot challenge it due to “extremely unfavorable” conditions in the document.
The guarantor of the buyer-company will also not be able to challenge the purchase and sale agreement, even if the director of the company signed this agreement, going beyond his powers (clause 1 of Article 174 of the Civil Code). In accordance with this norm, the court can invalidate such a transaction only upon the claim of a person “in whose interests restrictions are established” (clause 10 of the information letter of the Presidium of the Supreme Arbitration Court No. 28 “Review of the practice of resolving disputes related to the application by arbitration courts of the Civil Code of the Civil Code on surety”). . In a controversial situation, it is the purchasing company.
Transactions outside the scope of authority
Grounds for challenging transactions from clause 2 of Art. 174 of the Civil Code are relevant exclusively for business and in practice cause many difficulties.
Clause 2 Art. 174 of the Civil Code (“Consequences of violation by a representative or body of a legal entity of the conditions for the exercise of powers or interests of the represented person or the interests of the legal entity”)
1) Transactions made by representatives or bodies of a legal entity to the detriment of the interests of the represented person or organization, if the other party to the transaction should have known about it.
2) Transactions made as a result of conspiracy or other joint actions of a representative or body of a legal entity and the other party to the transaction to the detriment of the interests of the represented person or the interests of the company.
In Russian courts, it is difficult to confirm the existence of collusion (this is required by law), explains Mergen Dorayev, partner at EMPP EMPP Federal Rating. group Family and inheritance law group Criminal law group Arbitration proceedings (medium and small disputes - mid market) group Corporate law/Mergers and acquisitions TMT group (telecommunications, media and technology) 20th place By revenue per lawyer (less than 30 lawyers) 49th place By revenue Profile . And the economic consequences of the concluded agreement may be spread in time from the moment of its signing, the lawyer adds: “That is, a transaction that is beneficial for society at the time of its conclusion may have the opposite effect due to changing market conditions.” And it can be difficult to prove the unequal value of the consideration, since there are no clear criteria for it, the expert explains.
Who can challenge transactions under paragraph 2 of Art. 174 Civil Code
– The person being represented or the legal entity whose head concluded the disputed transaction.
– Member of a business company.
– Arbitration manager in bankruptcy.
What must the applicant prove?
On the first basis:
– Completion of a transaction on obviously and significantly unfavorable terms. For example, in case of unequal counter-provisions.
– Awareness of the other party about the unprofitable nature of the transaction for the represented one.
– There are no circumstances allowing the transaction to be considered economically justified.
For the second reason:
– The fact of conspiracy or other joint actions to the detriment of the interests of the represented person.
Source: Mergen Doraev, partner of EMPP EMPP Federal rating. group Family and inheritance law group Criminal law group Arbitration proceedings (medium and small disputes - mid market) group Corporate law/Mergers and acquisitions TMT group (telecommunications, media and technology) 20th place By revenue per lawyer (less than 30 lawyers) 49th place By revenue Profile companies
The 9th AAC presented a general approach to proving the elements of a violation contained in the norm under discussion in its decision in case No. A41-41596/17. The court indicated that the grounds for invalidity of the agreement from paragraph 2 of Art. 174 of the Civil Code are “a remedy in cases where counterparties have entered into a transaction that in itself is not prohibited by law or other legal act, but at the same time causes clear and obvious damage to one of the parties.”
“In such a situation, it is only necessary to prove the circumstances that the transaction has caused or will cause obvious damage to the party. And the other party to the agreement should have known about this. In addition, the disputed transaction is not economically justified for the party to whom it has caused or will cause obvious damage.”
This approach can serve as a guide for preparing the evidence base for this category of cases, Dorayev believes. In such disputes, when making a decision on the invalidity of transactions, the courts rely on the market value of goods sold or services provided, the expediency of which the plaintiffs question. Thus, in case No. A40-89325/17, the applicant was able to successfully challenge the contract, since the price of the work was many times higher than the market price. This made the deal economically unfeasible. In another dispute, the court declared the car purchase and sale agreement invalid under clause 2 of Art. 174 of the Civil Code, since the cost of the car turned out to be significantly lower than the market price (case No. A40-14781/17).
The discussed norm is actively applied by the courts in relation to transactions of those banks that are in a pre-bankruptcy state. The court invalidated the additional agreement of the credit institution, by which it extended the loan repayment period to its shareholder for 10 years (case No. A40-151926/15). The court indicated that because of this agreement, the bank lost the opportunity to benefit from its relationship with its debtor. And the shareholder-borrower could not help but know about this.
According to paragraph 2 of Art. 174 of the Civil Code, two authorities also invalidated the agreement of Mosoblbank, which, in a pre-bankruptcy state, donated 15 million rubles to the National Foundation of St. Tryphon. Moreover, the founder of this organization was the chairman of the board of the bank. Referring to this circumstance, the courts indicated that the fund knew what damage this donation agreement was causing to the bank (case No. A40-50329/15).
Despite detailed legislative regulation and clarification of law enforcement practice, problematic aspects remain regarding challenges. In particular, we are talking about the circle of entities that could appeal corporate decisions when they are made with the aim of violating the law and/or abuse of rights, notes Zurabyan: “Transactions in this case can be challenged by an interested party.” And when it comes to corporate decisions, the courts believe that no special grounds provide the opportunity for persons who are not members of the company to appeal them, the lawyer states. Thus, the beneficiaries of the business in such cases appear defenseless.
- Alexey Malakhovsky
- Arbitration process
- Civil process
