Russian Court Thwarts Asset Shifting Manoeuvre in Support of the LCIA Arbitration

On 4 June 2020, the Commercial Court for the city of St. Petersburg and the Leningrad Region granted provisional relief in order to prevent dissipation of assets and thus to avoid the frustration of enforcement of an LCIA award in Russia.

The court articulated ”reasonable suspicion“ standard for preliminary relief and provided further guidance and explanations of what exactly the standard encompasses. 

The security measure was taken in respect to the claim filed by Caledor Consulting Ltd., which is majority-owned by Mikhail Khabarov, a Russian businessman, currently the CEO of Trust Bank, with the remainder owned by the A1 Group. The claimant challenged the sale of shares in a large freight forwarding company “Delovye Linii” along with a number of other companies, owned by respondent, that allegedly represented a tactical asset shifting manoeuvre.

This note provides a brief summary of the dispute and outlines the laws of Russia on interim relief in support of arbitrations.

An LCIA Tribunal Resolves a High-Stake Corporate Dispute. The Losing Party Makes Strategic Moves to Defeat Enforcement in Russia

In 2015, Mr Khabarov was appointed chairman of the board of directors of Delovye Linii, and Caledor Consulting Ltd. secured an option to purchase 30% of shares in the holding company “Delovye Linii GK” for $60 million. Following a corporate conflict, however, the deal fell through.  Mr Bogatikov, then ex-owner of Delovye Linii, restrained Mr Khabarov’s access to the office, whilst the controlling stake in Deloviye Linii passed to the affiliated third parties.

Mr Khabarov and Caledor Consulting Ltd. brought an action before the LCIA. On January 21, 2020, the arbitral tribunal found in favour of claimants (LCIA Award № 183883) and ordered Mr Bogatikov to jointly and severally with DL Management Ltd., Doglemore Trade Ltd., companies under his control, to pay to the claimants damages in the amount of $58 million.

At the same time, Doglemore Trade Ltd. began to dissipate assets by transferring its share capital to third parties. According to the claimant, the sole purpose of these disposals was to defeat the enforcement of the LCIA award in Russia. Accordingly, Caledor Consulting Ltd. filed for asset preservation order and requested the Russian commercial court to recognize the dilution of an ownership stake in Doglemor Trade Ltd. null and void.

In the case at hand, the claimant sought interim measures to prevent the respondent from taking actions aimed at the alienation of disputed shares of the charter capital of companies, encumbrance of assets, as well as preventing the respondent from reducing the number of voting shares, that may hinder or even make impossible the enforcement of the LCIA arbitral award № 183883 in Russia.

The Commercial Court Affirms its Power to Grant Interim Measures in Support of Arbitrations and Clarifies the Applicable Standard of Proof

Russian commercial courts have the competence to grant provisional relief in support of domestic and foreign arbitrations. Pursuant to the art. 90(1) of the Commercial Procedure Code, the court may grant urgent interim relief aimed at securing a claim or property interests of the applicant.

In this regard, on 12 October 2006 the Plenum of the Supreme Commercial Court maintained that interim measures may be granted at any stage of the legal proceedings if failure to take such measures could impede or preclude enforcement of an award, or in order to prevent significant harm to the applicant. The standard of proof is ”reasonable suspicion“, as the court had articulated in the case at hand.

The court in Caledor Consulting Ltd.’s case notes that the asset preservation order is a preliminary relief, so the appropriate degree of proof in civil actions for obtaining such relief is less exacting as opposed to the standard of clear and convincing evidence as utilized in the proceedings on the merits when the permanent relief is sought. In its decree №11, the Plenum of the Supreme Commercial Court has also cautioned that the commercial courts should not grant interim relief unless the applicant had furnished proof of specific circumstances confirming the need for such preliminary measures.

In Doglemor Trade Ltd. case, the court remarked that a party seeking a preliminary injunction must prove a ”reasonable suspicion“ that the other party might misappropriate, transfer funds, take actions or negligently cause deterioration of the value of the disputed property. Further, the applicant can explain the likelihood of suffering irreparable harm in the absence of preliminary relief.

In the petition for provisional relief in the Doglemor Trade Ltd. case, the claimant argued that respondent acted in bad faith at the time of the sale of its shares, with the sole objective to defeat the enforcement of the LCIA award in Russia. Claimant tendered evidence showing that Doglemor Trade Ltd. transferred assets to the affiliated third parties and companies controlled by Mr. Bogatikov. The court found that claimant had presented evidence sufficient to show ”reasonable suspicion“, demonstrating the possibility of further alienation of shares directed to hinder the satisfaction of the LCIA award in Russia.

Interim Measures: Preserving Status Quo under Russian Law

The rules on preliminary measures in support of arbitration are mainly provided in the Russian Commercial Procedure Code. Commercial courts have competence to grant provisional relief to preserve arbitration in a way that renders subsequent decisions meaningful. The courts may require the preservation of assets, direct a party to take specific actions to prevent deterioration of the disputed property or to transfer possession or custody of disputed property until final disposition of proceedings. There is, however, no exhaustive list of interim measures that are available for the parties in support of arbitration proceedings.

In Edimax Limited v. Shalva Chigirinsky, the Russian Supreme Commercial Court confirmed that commercial courts have competency to grant interim relief over assets located in Russia in support of international commercial arbitrations seated outside of Russia.

Russian commercial courts, however, are unlikely to approve applications for the interim relief rendered by the foreign courts or arbitral tribunals seated abroad. For instance, the Presidium of the Supreme Commercial Court has indicated in its information letter № 158 that anti-suit injunctions granted by a foreign court are not enforceable due to their non-final nature.

Similarly, in AB Living Design case, the Supreme Commercial Court refused to enforce interim award noting its preliminary character. As such, parties must lodge an application for interim relief before the commercial court in Russia at the place of the debtor’s incorporation or at the place where the debtor’s assets are located.

Further, pursuant to the art. 91 of the Commercial Procedure Code, interim measures must be proportionate to the claim, must directly relate to the subject matter of the dispute, and be necessary and sufficient to ensure the enforcement of the arbitral award or to prevent significant harm to the applicant.

In relation to application for interim relief in corporate disputes, art. 225(6) of the Commercial Procedure Code stipulates that the court can restrain a legal entity, its corporate governance structures or stockholders from executing certain decisions, including sell of shares.

Lastly, according to the resolution № 55 of the Supreme Commercial Court, the court can arrest the property without specifying it, but it must indicate the total amount of the property to be arrested, that in turn must be proportionate to the amount of the claim. The bailiff may determine the specific composition of the property to be arrested in accordance with the provisions of the federal law.

Concluding remarks

The touchstone of asset preservation is that it mitigates the risk that the party could shift its assets to evade subsequent enforcement of an arbitral award or a court judgment. For claimant, the preliminary relief provides a legitimate way to seek the aid of national courts in forcing the counterparty to honour a duly rendered arbitral award.

A party to a foreign arbitration can enlist Russian court’s assistance to preserve assets within Russia that would be available to satisfy a foreign award. Such party needs to prove a ”reasonable suspicion“ that the other party might put those assets out of reach for the purposes of enforcement.

About the Author:

Rinat Gareev is a US-qualified attorney (admitted in New York), holds civil and common law degrees. In his current role of a Legal Consultant at a New York based law firm, Rinat represents domestic and international entities on a variety of general corporate matters and cross-border transactions, as well as assisting clients in navigating complex compliance issues. Prior to returning to legal consulting, Rinat has gained experience by working and training in leading arbitral institutions in Malaysia, South Korea, Russia, international organizations (UNCITRAL) and law firms. Through Rinat's professional and educational experience, he has developed expertise in trade law, aviation law, arbitration and cross-border dispute resolution. He has published several papers in international and local journals on issues relating to cross-border dispute resolution and also provides expert opinions on various domestic and international law-related issues. Rinat is HKIAC-accredited tribunal secretary.

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