The Moscow District Commercial Court Will Determine the Board of Directors' Right for a Lawsuit to CEO. Commented by Alena Bachinskaya for Pravo.ru

6 june 2018

            A corporate dispute addressing provisions of the Civil Code innovations developed in City Palace company (its most famous project - the Evolution Tower in Moscow City). The Chairman of the Board of Directors of the company entered a lawsuit to the Chief Executive Officer with respect to recovery of losses incurred by the company in the amount of 251.8 mln roubles.

            According to the new CC, he is entitled to act this way: Clause 4 of Article 65.3 directly specifies that members of the corporation governance board have the right to claim for recovery of the losses incurred by the corporation.

            However, the arbitrator of the Moscow City Commercial Court Natalya Konstantinovskaya, as well as arbitrators of the 9th Commercial Court of Appeal Boris Steshan, Tatiana Lyalina and Margarita Verstova dismissed the lawsuit having referred to the rule of the Federal Law "On Limited Liability Companies" which establishes that the lawsuit may be entered by a company or its participant. According to the court opinion, this provision is a special rule of law and prevails over the Civil Code (case No. A40-21771/2018).

            The experts believe that such approach contradicts to the meaning of the corporate law reform.

Alena Bachinskaya, Project Manager of S&K Vertikal Law Firm believes that the provision of Clause 4 of Article 65.3 of the CC authorizes the members of a legal entity governance board (Board of Directors or Supervisory Board) to enter a lawsuit on recovery of losses incurred by the corporation due to the persons included into its management bodies.

            "This provision was an innovation in the course of the corporate law reform in 2014, which in its time caused a vivid discussion in the legal community. At the same time, the main purpose of this rule is that the members of the governance body of the company shall have the right to enter a lawsuit for the benefit of the corporation (on challenging transactions for a number of grounds, on recovery of losses), since this is a kind of guarantee for protecting their interests from fraud of the sole head of the company (Chief Executive Officer) or other members of the Board of Directors. Yes, similar rules are not included until now in special laws on joint stock companies and on limited liability companies. But the CC provisions prevail over special laws: Clause 4 of Article 3 of Federal Law No.99-FZ dated 05 May 2014 (which introduced the innovation under consideration into the CC) establishes that prior to bringing other statutory regulations in line with the new provisions of the CC, such regulations are applied in a part that does not contradict to the CC. Accordingly, the provision of Cl. 4 of Art. 65.3 of the CC shall be applied as a higher priority, since special laws in this matter have not yet been brought in line with the CC. It should also be noted that currently there is a public discussion of the bill prepared by the Ministry of Economic Development on introducing appropriate amendments to the laws on LLC and JSC."

            "That is why the position of the court with respect to this matter puzzles. Of course, in the doctrine there are disputes regarding resolution of conflicts between the СС and special laws, but this conflict is quite easy to resolve," Bachinskaya thinks.

            There exists just another question that according to the expert shall be answered in a similar dispute: was the court entitled to dismiss the lawsuit, having decided that the claimant had not proved the powers to act on behalf of the company?

            "In my opinion, no. Firstly, the lawsuit is de facto derivative. It differs from the direct one by the fact that it is entered for the benefit of a third party and the awarding by the decision occurs also with respect to this third party but not the claimant itself. In the case under consideration the stated claims were asserted by the claimant for the benefit of the corporation - City Palace LLC. And if in relation to a direct lawsuit the court can quite easily verify the formal availability of powers of the person entering the lawsuit - for example, the existence of a valid power of attorney, the powers of the director of the company who filed claims and dismiss the lawsuit, if the powers are not confirmed, the process is more complicated regarding derivative lawsuits," the expert expresses confidence. In her opinion, de facto the court shall establish not the existence of formal powers but existence of the substantive right to the lawsuit, in other words whether this person may enter such lawsuits as a matter of principle as the claimant is he himself, though indirect one. "And the matter of existence or absence of the claimant's right to the lawsuit shall be established by the court at disposition of a case on the merits. Therefore, the court shall determine if the claimant is indirect regarding the provisions of law and stands as a member of the Board of Directors. In case such status is absent, the lawsuit shall be dismissed. In other words, dismissing the lawsuit, in my opinion, was incorrect from the procedural point of view," Bachinskaya concluded.

            It is the cassation instance which has to put an end to this conflict: the date of the Commercial Court of Moscow District hearing is appointed for 21 June. The amount of corporate conflicts in Russia is estimated at tens of billions of dollars, so the transparency and consistency of the law enforcement practice in this area is critical for the regulatory and investment climate in the country.

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