Presumption of good faith of the parties and their actions adopted initially in the Concept of the development of the civil legislation of the Russian Federation dated 7 October 2009, article 10 of the Civil Code of the Russian Federation (hereinafter – the Civil Code), has been developed by the Presidium of the Supreme Commercial Court of the Russian Federation (hereinafter – the SCC).
So far, the burden of proof of the good faith actions is generally imposed on the buyer in accordance with the Resolution of the Plenum of the Supreme Court No. 10, Plenum of the SCC No. 22 dated 22 April 2010 “On issues arising in the judicial practice on consideration of the cases connected with the title and other property rights protection”.
Additionally, due to clause 38 of the aforesaid joint Resolution the buyer shall be considered acting in a good faith, if it can be proved that the buyer did not know or should have known on illegality of the transaction, in particular, took all reasonable measures for identification of the authority of the seller. Even after all prerequisites the owner is entitled to rebut the good faith of the buyer by proving that the buyer should have doubted in the authority of the seller to transfer the title.
A new approach has been outlined in the Ruling of the SCC (case No. A40-82045/2011) (hereinafter – Ruling) on the dispute on real estate recovery brought by TSG “Skakovaya 5” (Moscow) against ARTEKS Corporation, which is registered in one of the Caribbean states. The Presidium of the SCC draw it attention on the fact that ARTEKS Corporation was acting not in good faith, since it was revealed the chain of cases regarding disputed property among different legal entities but which had the same interest regarding matter in the case at hand. The Presidium of the SCC by the Ruling has annulled the judicial acts of the courts of lower instances; the case has been remanded to the court of first instance for new consideration.
The SCC concluded that the burden of proof of the good faith as well as an obligation to disclose the UBO lies on the offshore company, when the company is involved in real estate transactions or if it operates with the establishment of legal significant facts related with the interests of the third parties. The SCC has indicated the difficulty in obtaining the information, but has not denied the possibility of its reception, for instance, involving legal sources operating in the foreign states (e.g. by the official request to the proper authorities under the mutual judicial assistance agreements, direct request (query) to the foreign court, etc.).
Affiliation between the respondent on the considered prior case on the real estate recovery and the respondent in the case on the same real estate further recovery shall be considered as an abuse of the procedural rights provided by the law by the offshore company. Moreover, it seems that imposing of the burden of proof on offshore companies may be considered reasonable due to the procedural economy.
The offshore company definition criteria also have been stipulated in the Ruling. The main feature determined is the registration in the offshore jurisdiction. The jurisdiction with tax preferential regime and nondisclosure options in respect to the financial operations’ information should be considered as an offshore.
The implementation of the approach under which on the offshore company lies the burden of proof of its good faith is connected with identification of the adverse influence of such business structure on publicity of the property rights’ legal nature.
Since all real estate disputes are to be considered by the Russian courts due to the exclusive jurisdiction, foreign counterpart (offshore company) signing the deal connected with the title to the real estate transfer shall be ready to disclose the whole business structure under the court before the case is considered on the merits. It seems that it may affect negatively on the investment climate in the Russian Federation.
Direct limitation of definition of offshore proposed by the SCC looks as an attempt to avoid the risk to disclose information for all potential investors signing the deal connected with the title to the real estate transfer.
In accordance with the wording of the Ruling of the Presidium of the SCC a company that registered in the foreign jurisdiction, which does not provide the tax preferences and considers the information on final beneficiary confidential (if it can be disclosed in exceptional cases), does not meet the notion of the “offshore company”, their good faith actions regarding the title transfer shall not be proved compulsory. Therefore, obligation to pierce the corporate veil for god faith proof is imposed to offshore companies exclusively.
Alongside with that it seems that, unfortunately, the approach on necessity of final beneficiary disclosure will hardly result positively. Companies placing their funds in the offshore may conduct any existing legal business scheme in order to avoid potential risks of disclosure of information regarding business structure easily.
Therefore, the great job has been done for the further development of the court practice by the SCC. However, approach determined by the Presidium of the SCC still will hardly lead to real working mechanism for identification of the offshore buyers acting in a good faith.