Andrei Mikonin commented strengthening of the court’s role in some aspects of arbitration process

3 February 2012
Lawyers noticed some positive changes

At the close of 2011 the Kommersant publishing house traditionally sums up legal results of the year in the context of the forum organized by the newspaper, where the leading St. Petersburg lawyers give their opinions of draft bills passed for the year and make comments as to how these bills could affect business. Experts discussed the issue of improper tax audit, transfer pricing, bankruptcies, Russia's accession to the WTO, legal regulation of development and real estate, etc.

The forum was moderated by Aleksei Chichkanov, Chairman of the Committee on Investment and Strategic Projects. In his opening remarks he noted that working conditions faced by corporate lawyers become more complex every year. To illustrate his point, he gave the following figures: “This year the State Duma passed circa 450 laws, and the Legislative Assembly of St. Petersburg passed some 150 laws. And that is just laws, i. e., just a tip of the iceberg.”

Chastening normative standard

Speaking of improper inspections and blocked accounts, Aleksei Zhuk, Senior Associate & Head of Tax Practice Russia at Hannes Snellman noted: “In H1 2011, the number of tax inspections has decreased by approximately 13 %. The number of tax payer applying to arbitration courts has decreased by approximately 11 %. Based on experience of our company, actually, the amount of tax disputes which ended up in court has gradually been decreasing over recent years. When it comes to improper inspections and blocked accounts (suspension of operations on bank accounts), last year no significant changes in this area were observed”.

According to him, there is one positive point for businesses: a normative standard came into effect on January 1, 2011, which stipulates a negative material effect for tax authorities for illegal blocking of bank accounts: a tax payer has the right to demand repayment of interest at benchmark refinancing rate of the Central bank of Russia. “This being said, interest shall be added not to the amount which the tax authority tries to collect, but to the illegally blocked sum of money. Moreover, interest shall be accrued for delayed unblocking. This will reduce controllers to discipline,” said Aleksei Zhuk.

Transfer pricing has changed

Andrei Gusev, partner and head of St. Petersburg office at Mannheimer Swartling, introduced the forum participants to innovations in the transfer pricing: “Sections of law relating to transfer pricing underwent significant and needed changes, as the former legislation did not meet international standards and practices. First, a new list of interdependent persons was adopted. Second, businesses shall be obliged to prepare documents relating to the so called controlled transactions. However, it still remains unclear as to how to prepare them. Transactions made in 2012 will be checked in 2013. So tax payers will want to gather information on such transactions as early as in 2012, however, they are tempted to postpone this work and just watch developments. And that may be dangerous: in 2012 companies will start transacting without regard to specifics of new regulation, and in 2013 they will want to submit documents to the transfer pricing monitoring body.” He added that a concept of “agreement on pricing with tax authority" is adopted which makes it possible to apply re-agreed prices, however, only highest tax payers can conclude such an agreement.

Information technologies will be used in bankruptcy proceedings

Lawyer Dmitry Zubkov, the head of the civil practice of the law office “Prime Advice” shared his vision of legal regulation of bankruptcy procedure. According to statistics of arbitration court, over 10 000 bankruptcy applications were submitted within in the first six months of the last year. Over 30 amendments were made to the current bankruptcy law, of which seven were adopted in 2011. Arbitration courts are currently examining over 55 000 bankruptcy cases. “I’d like to emphasize, as the main trend, the use of information technologies in bankruptcy regulation. Since May 2011, a normative standard is in force concerning electronic auctions for the most types of property involved to bankruptcy procedure. Currently, electronic auctions are actively conducted, about twenty electronic sites engaged in this activity are accredited, and managers obtained computer-generated signatures. This work made auctions more transparent and accessible for businesses. The Unified Federal Register of Bankruptcy Information made bankruptcy procedures more open. Legislated electronic document management system adopted by arbitration court made their work easier. The lawyers of our company actively use innovations, it is particularly convenient when processing arbitration cases in other regions,” noted Dmitry Zubkov.

WTO accession is not necessary beneficial

Igor Nevzorov, Senior Manager (Law) at Ernst&Young, and Head of Intellectual property protection Group, has commented the issues relating to regulation of intellectual property in the context of Russia’s WTO accession, and cited recent negative and positive examples of law administration: a case of double compensation, a case of accredited collective rights management organizations, and a case of parallel import. Igor Nevzorov said: “Adherence to the principles of WTO involves the need to protect intellectual property rights. Russian legislators strive to protect the holder of rights, thus implementing the concept of double compensation. Subject to part 4 of the Civil code, any holder of rights, whose rights were infringed, shall be entitled to claim the double cost of illegally manufactured goods from the infringer. This being said, the courts currently proceed from impossibility of decreasing such compensation depending on any facts of the case. In practice, we often face the situation, when a company violates the law without being aware of the fact, for instance, when the company did not know and could not know about the existence of copyright, due to absence of register of copyright, any mandatory registration of copyright. Consequently, by refusing to decrease the amount of compensation (even in the presence of mitigating circumstances) the courts can actually contradict the constitutional principle of proportionality in sentencing.”

According to Mr. Nevzorov, accredited organizations are another example. In practice, tough control over using property covered by copyright and related rights exercised by such organizations has many times almost resulted in collecting royalty from the song author. “Put it otherwise, the legislative mechanism designed to protect authors actually turned to be detrimental to these very authors. Parallel importing: should a trade-mark exist in Russia and similar trade-mark exists abroad, then the international company shall only be entitled to import goods in Russia upon paying a fee to Russian right holder. Thus, we see that national concept of ban on parallel import, while protecting Russian right holders, is actually limiting the free trans-border trade. At that can hardly be deemed as adherence to the main principles of WTO,” said Igor Nevzorov.

The expert cited some positive tendencies as well, for instance, the new article 18 of the Law On Circulation of Medicines, introducing the legal “monopoly” of drug manufacturer on distributing information about medications and about clinical and pre-clinical trials within six years from the date of the state registration of the medicinal product. “Previously, manufacturers had much more to do. They had to register, to obtain licenses and to control the situation so as to prevent others from manufacturing generic products,” he said. “Other positive example is know-how protection in Russia which currently involves five or six rather formal and complicated procedures, whereas in the international legal practice everything is much easier. Adherence to the WTO rules involves deformalization of these processes. The third positive point is creation of the court specializing in cases involving intellectual property rights protection, which will promote more quick and efficient settlement of intellectual property disputes.”

Lenta as a positive example

Veronica Knyazkova, partner, and Head of Corporate Practice of legal firm Pen & Paper has told the story of corporate conflict involving Lenta Company, which was safely resolved in 2011, to illustrate the shift from legal nihilism to the supremacy of law in practice. As she said, the shareholder conflict was rooted in different interpretation of the bylaws clause on making corporate decisions by the two majority stakeholders. “The conflict might unfold as an ordinary one, and then be settled in a regular judicial proceeding, however information appeared that one of the parties is supported by VTB and TPG Capital fund, and a whisper went round that August Meyer stands almost no chance of winning the dispute,” said Veronica Knyazkova. She believes that all the branches of law (criminal, procedural, labor, and English law) were applied in the conflict involving Lenta Company. Claims were adjudicated both in English, and in domestic courts, and the latter proved to be out more quick and dexterous. And when the North-Western district cassational court has made their decision in the matter, the English court was still carefully examining the case papers submitted a year ago. The St. Petersburg arbitration was also able to determine that corporate action of an international company relating to management of a domestic company, shall be regulated by legislation of the RF. The conflict has finally ended by conciliation of parties, although they were very hostile to each other and were unwilling to make up. And win-win deal was made,” added Veronica Knyazkova.

Speaking about corporate conflicts, and in particular, forceful resolution of such conflicts, Egor Noskov, managing partner of "Duvernoix Legal", noted that in 2011 corporate conflicts were almost free of criminal flavor, and that common sense started to prevail. “In this year the anti-raid brigade of Investigative Committee at the Public Prosecutor's Office was dissolved. In earlier corporate conflicts law enforcement officers often supported one of parties to dispute (for instance, such was the case of the conflict at the Arsenal Machinery Plant), but now this trend almost ceased. In general, the last year was more civilized as regards legal disputes,” concluded Egor Noskov.

Liberalization due to Customs Union

“A trend towards extension of co-operation with Kazakh and Belorussian companies is already prominent within the Customs Union,” said Galina Balandina, Head of Practice, Customs Law and Foreign-Trade Regulation. “However, when people started to compare and evaluate business environment in other countries of the Customs Union, it has emerged that many of them provide far better business environment. This discovery made Russian government to implement essential liberalization in some regulation areas. Liberalization of exchange control may serve as a striking example: the ceiling on transactions requiring passports was raised to $50, 000. And such is the impact of the Customs Union, notwithstanding the fact that these issues are within the competence of Russian legislation.” According to Galina Balandina, another positive point is that a multilateral agreement was signed within the context of the CIS free trade zone, which enables all the parties to sell their goods free of charge on equal terms. “However, they will adhere to civilized rules. Should the exporting country violate the agreement, then the affected country shall be entitled to protect itself from such acts, including, by way of customs duties,” she said.

The future property underwent changes

As to changes in regulation of investment in construction industry, Denis Kachkin, managing partner at “Kachkin & partners”, says that resolution on sale-purchase agreements for property to be acquired or created in the future, issued by plenary session of the Supreme Arbitration Court on July 11, 2011, drastically changed court practice. “From now on, all agreements relating to acquisition of an off-plan property, i.e., not only the property still operated by seller, but also one to be created in the future, should be considered by courts as contracts for the sale of "future" property,” he said. “The above rule applies not only to investment contracts, but to other types of contracts as well. At the same time, should any payments be made under the provisional sale-purchase contract (and should such payments be made as a security), the court shall probably see it as payments under sale-purchase agreements for property to be created in the future. In general, to describe the "future" property, its location and approximate floor space will suffice.

Aleksandr Rassudov, director general of Rightmark group, also dwelled upon the real estate: “Since 2013 operation of completed construction projects will fall under the urban planning laws. In December 2011, legislators have extended planning documentation to include a new section titled “Operating Security”. However, traditionally, the section was adopted but no regulations hereunder were provided concerning its nature. It seems that they will suspend expert examinations of planning documentation until the nature of this section becomes clear. As to commercial buildings and premises, a legislatively determined amount of damage emerged, indemnifiable to persons injured at work due to non compliance with safety rules during construction and operation of a project. Today, people are released from the endless circle (i. e. from playing blame game trying to find out who is in fault, whether it be the project engineer, developer or operator), and instead have a bone to pick with owners or tenants. It is also worth noting that, this normative standard does not apply to multi-family developments, and it is a strange thing”. Aleksandr Rassudov took a particular interest in the new institute of suspending building operation. According to him, legislators did not explain whether it will apply administratively or by judicial procedure. “If such suspension will be applied in administrative proceedings, then it may become a method of competition. You just have to file an application concerning a neighbor shopping and leisure center to have their business suspended,” said he.

Andrei Mikonin, the lawyer and partner of legal firm S&K Vertikal says that today strengthening of the role of court in some aspects of arbitration process became a system phenomenon; “formal” adversarial principle is abandoned so as to achieve such objectives of arbitration as providing people access to justice, equitableness and efficiency in defense of rights. “The Supreme Arbitration Court formulates abstractions which may be formally relied upon by lawyers when competing in judicial investigation in lower courts,” concluded Andrei Mikonin.

Irina Bychina

"Itogi Goda". Supplement, no. 16 (4800), 01/31/2012

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