“Pierced in Russia”: Russian Courts Pierce the Corporate Veil

The Russian courts have made their first steps on the path of unmasking the “evil” hidden behind the corporate form. Moreover the Russian legislator is not rushing into shaping the corporate veil more thoroughly. Hence, the Russian courts have to decide how and when the foreign legal concept of piercing the corporate veil should be applied.

Shortly Russia will merge the Supreme Commercial Court and the High Court into one new High Court. Both courts have accepted the possibility of piercing the corporate veil.

Legal basis for piercing the corporate veil

Several Russian rules specify the cases in which the courts may neglect a company’s separate legal personality in order to find out who really runs the show, namely the rules on liability of the parent company arising from the obligations of the subsidiary, and on subsidiary liability of the controlling person in case of insolvency (bankruptcy).

These provisions and the general principles of civil law such as good faith, reasonableness of conduct and no abuse of rights form a basis upon which to introduce the concept of piercing the corporate veil directly into Russian legislation in order to hold the controller liable for the acts of companies under its control. Thus Russian courts apply the concept and pierce the corporate veil even without a specific exhaustive legal provision to such effect.

However, the Russian courts have still not elaborated criteria for a test to determine whether the veil can be pierced as how, for example, English and US courts have done. Nevertheless the Russian courts (mainly commercial courts) do analyse, among others, the following issues:

• whether the parent company or beneficiary controlled the subsidiary;
• whether one can look beyond the separate personality and autonomy of the subsidiary because de facto there is no economic rationale for treating the subsidiary and parent company or beneficiary as independent entities due to abuse of the corporate form; and
• whether such abuse of the corporate form had an unlawful purpose.

Russian courts generally consider and mention these issues.

Commercial courts piercing the corporate veil

In the landmark case of LLC Olimpiya v. Latvian banks Parex banka, Citadele banka for the first time the Supreme Commercial Court referred to the doctrine of piercing the corporate veil directly (however in parentheses). In this case the Supreme Commercial Court concluded that the corporate veil of the parent Latvian bank may have been lifted by the Russian courts because:

• Russian representative offices of the other Latvian companies in fact functioned as unlicensed representative offices of the parent Latvian Parex bank and Citadele bank (finally Citadele Bank) and thus rendered bank services of these Latvian banks in Russia;
• customers had the possibility of concluding transactions at the location of the representative offices in Russia without direct contact with the parent banks in Riga;
• the corporate structure, with involvement of other non-bank Latvian companies that registered representative offices in Russia, was designed to evade Russian bank legislation; and thus
• parent Latvian Parex bank and Citadele bank (finally Citadele Bank) conducted business in Russia via affiliated companies.

Consequently in that case the Supreme Commercial Court emphasised that the courts may pierce the corporate veil in case of evasion of the law by means of corporate structure. However finally the Court did not hold the parent Latvian bank liable under the claim brought in Russia because the disputed transactions had been concluded in Latvia and thus had not had enough of a close connection with the territory of the Russian Federation.

In another case of Municipal Unitary Enterprize “Achinsk public systems” v. Sole Proprietor S.N. Zykov the Commercial Court of the Krasnoyarskyy region concluded that change of the party to the contract from the sole proprietor to the company did not mean that the sole proprietor had stopped profiting from use of the real estate.

The sole proprietor was the single stockholder of the company and managed its activity. Thus the Court remarked that the party to the contract had changed only legally, whereas economically the same individual had continued to receive the profit.

To uphold this conclusion the court invoked the doctrine of piercing the corporate veil, the English case law of Salomon v. Salomon and Co. (1897), case law of the Russian courts on imposing an injunction on the beneficiary’s real estate by looking beyond the corporate form (namely the famous Shalva Chigirinskyy case) and existing legislative initiatives in this sphere.

By specifying in addition that the legal entity is essentially a legal fiction, the Court finally found that the sole proprietor had abused his rights by systematically confusing the claimant as to whether he represents himself as sole proprietor or the company. Therefore the court denied the existence of a formal corporate structure, pierced the veil and recovered debt from the sole proprietor, taking into account the violation of the claimant’s rights.

Consequently Russian commercial courts apply the concept of piercing the corporate veil. However they still have to form a list of criteria necessary to pierce the veil.

Courts of general jurisdiction piercing the corporate veil

The courts of general jurisdiction hear non-commercial claims. Thus, unsurprisingly, only a single case demonstrates how courts of general jurisdiction lift the corporate veil.

In the case of Dalemont Limited v. S. et al Meshchanskyy City Court recovered the debt in question from an individual by charging the property owned by the companies. Thus the court pierced the corporate veil inversely. S. secured payments under two facility agreements between the Russian legal entities and a Russian bank. Then acting as a guarantor S. failed to perform the surety agreements. In order to recover the penalty debt under one of the surety agreements the court charged several real estate objects and property rights that were owned not by S. but by the companies that were allegedly controlled by this individual.

The courts concluded that via “a chain of corporate (shareholder) control” this individual de facto owned the real estate objects the claimant asked to recover from. Hence, by piercing the corporate veil the court recovered a debt of the ultimate beneficiary from the property owned by legal entities under control of this beneficiary.

However the logic of the courts of general jurisdiction differs even from the approach adopted by commercial courts. In the case of Dalemont Limited v. S. et al the courts of general jurisdiction pierced the veil without referring to the concept of piercing the corporate veil or any rule of civil law. Moreover the courts did not analyse the issue of whether the individual had used the corporate structure for an unlawful purpose with bad faith, abuse of right, to evade the law, etc.

Conclusion

Consequently, at the present moment the Russian courts apply the concept of piercing the corporate veil (although thus far only in a few cases). The Russian commercial courts have not fixed elements required to pierce the veil as a test but they specify the principle of Russian law breached via abuse of corporate form (abuse of right, evasion of law, etc.). By contrast, the courts of general jurisdiction demonstrated that they could pierce the veil very easily even without due explanation of any abuse of corporate form. Hopefully the merged High Court will define the elements to be proved and considered in order to pierce the veil because the legislator is unlikely to do so first.

In the above cases the Supreme Commercial Court and Commercial Court of the Krasnoyarskyy region referred to the case law of the European Court of Justice and UK courts respectively. Thus the Russian courts are most likely to continue to take into account relevant foreign practices in order to “shape” the Russian concept of piercing the corporate veil.

Alexandra Khizunova

Muranov Chernyakov & Partners Law Firm