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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)

Tutorial note: Answers to past exam questions are those of the examiner at that time. In some cases
the answer to a question or part thereof is minimal, whilst others are very extensive. Do not be
deterred by the length of the longer answers as they are intended to be informative and illustrative of
the range of valid answer points that could be made.
Answer 1 SYSTEM OF LAW
(a)

The system of the law and the system of legislation


System of law is the inner structure of law expressing the co-ordination and unity of legal
norms and at the same time dividing these norms between branches and sections.
The hierarchy of the system of law includes the branch of law, sub-branch, institute of law
and legal norm (provision).
Branch of law is a separate complex within a major system of similar legal norms regulating
one field of civil relations (e.g. substantive and procedure branches of law).
A branch may divide into smaller complexes sub-branches (e.g. law of estate; contractual
law (includes norms regulating contract and torts); hereditary law (norms regulating inheriting
property), etc.
Institute of law is a complex of interrelated legal norms pertaining to one or several branches
of law, which regulates individual sections of civil relations.
Legal norm is the basic element of the system of law, a rule of conduct obligatory for
everyone established or admitted by the State and enforced by it (non-observance of the legal
norm entails judicial responsibility).
While the system of law is actually the laws inner structure, the system of legislation is the
external expression of the law (the form of the law).

(b)

Major characteristics and examples of public and private law


Private law mostly concerns the interests of individual persons, their legal status and
proprietary relations, while public law deals with state interests, legal implications to the state,
its bodies and officials and regulates relations of public interest.
The following characteristics are typical for private law: the object of the law relations
based on legal equality of participants, autonomy of their will and their proprietary
independence (possessing with set-apart property). Application of residuary rules norms is
typical for private legal relations (e.g. the Civil Code of the Russian Federation stipulates that
parties may conclude a contract either in the form set by the law (other legal acts) or in other
form.
Civil law is one of the branches of private law. The Civil Code of the Russian Federation sets
legal foundations of private law:

equality of participants to proprietary relations;


inviolability of property;
contractual freedom;
inadmissible arbitrary interference into private affairs;
necessity to freely exercise civil rights and the guarantee of their protection in court.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


As for the branches of public law, their typical characteristic is that they regulate relations
based on subordination of one party to another. Public law regulates the structure and
operating of the state, foundations of the state system, law-making and law enforcement.
Branches of public law include constitutional law, administrative law, finance law, etc.
(c)

The role of international legal acts in the Russian legal system


In accordance with of the Constitution of the Russian Federation (art. 15), universally
accepted principles and provisions of the international law and international treaties are the
part of the legal system including international treaties with the Russian Federation as the
successor of the USSR.
Today international law is presented by pacts, treaties, declarations and resolutions of
international organisations (first of all, the United Nations). According to the Constitution of
the Russian Federation, the Russian Federation admits and guarantees civil rights and liberties
established by norms of international law and by the Constitution of the Russian Federation.
The procedure of application of the norms of international law is diverse and usually is agreed
upon in Russian Federation treaties with foreign states, in international conventions and
charters of international organisations.
As sources of law, regulations of international treaties hold advantage over the law of the
Russian Federation. Such regulations act directly unless the treaty stipulates that application
of its regulations in the Russian Federation requires a separate legal act to be adopted.
Individual international legal acts are regarded as recommendations. That concerns, in
particular, recommendations of the International Labour Organisation that are viewed by
states as standards to follow in labour legislation.

Answer 2 LLC RUSSIAN STYLE


(a)

Branches of law
With respect to the given situation one may apply the following branches of law:

(b)

Labour law, since Mr Ivanov worked under labour contract. The labour law is a
legal branch that regulates relations arising under a labour contract between the
employee and employer.

Civil law, since Mr Stepanov worked under a civil law contract for the performance
of work. Civil law is the law branch that determines the legal status of subjects of
civil turnover, grounds for arising and the procedure of implementation of the right
of ownership and other rights of estate, regulates contractual, proprietary and nonproprietary relations related to them based on equality, autonomy of will and
proprietary independence of the participants.

Social security law, since the reimbursement for the damage inflicted to the health
of the employees by a work-related injury (accident at work) is regulated by
provisions of compulsory state social insurance.

Change in situation
If it is supposed that the injured filed their claims to court for compensation for the damage to
health, norms of procedural law will be applied (in particular, civil procedural law).
Procedural branches of law regulate relations arising under settling disputes in court.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(c)

Which legal source?


Federal law is the regulatory legal act of higher legal force in comparison to an act of the
Supreme Soviet of the Russian Federation, and in the event of contradiction between these
two legal acts, the law has the supremacy.

(d)

Is the lawyer correct?


Court rulings on specific cases are not sources of Russian law. Therefore, in the given case
the lawyer is wrong when stating that the court should be guided by court decisions made
before. However, that does not mean that the judge may not base his decision on already
available court rulings on similar cases. Still, in any case the court substantiates its decision
by referring to regulatory legal acts and other sources of Russian law, but not to decisions
previously made.

Answer 3 LEGISLATIVE INITIATIVE


(a)

Labour team
The right of legislative initiative implies that a person may introduce draft legal acts for
consideration by the State Duma or the Federal Assembly. The Russian Federation
Constitution determines the list of subjects possessing that right, including the Russian
Federation President, the Federation Council, members of the Federation Council, deputies of
the State Duma, the Government of the Russian Federation, and legislative (representative)
bodies of Russian Federation subjects. The right of legislative initiative also belongs to the
Constitutional Court of the Russian Federation, the Supreme Court of the Russian Federation
and the Highest Arbitration Court of the Russian Federation with respect to issues in their
competence.
As it follows from the Constitution of the Russian Federation, trade unions do not have the
right of legislative initiative.

(b)

Application of provisions
According to the Constitution of the Russian Federation (art. 15), the latter has the supreme
legal power, direct action and is effective throughout the entire territory of Russia. Laws and
other legal acts adopted in the Russian Federation cannot contradict the Constitution. That
means that, first, in case of contradiction between a legal act (like Labour Code) and the
Constitution, the latter has supremacy, and secondly, that provisions of the Constitution are
applied directly and do not require a special legal act aimed at the implementation of a
provision of the Constitution.

(c)

Procedure of amending the Constitution


The supremacy of the Constitution is ensured by the special procedure of adoption and
amending.
Firstly, the number of subjects that may claim to amend the Constitution or adopt a new one
instead is restricted to the Russian Federation President, the Federation Council, the
Government and a number of other subjects (art. 134).
Secondly, provisions of certain charters (1, 2 and 9) may not be amended in the usual
procedure of amending the laws. If a proposal on amending these chapters is supported by
3/5 of votes of the total number of members of each chamber of the Federation Assembly, a
Constitutional Assembly is convened where either the invariability of the present Constitution
is confirmed or a draft of the new one is elaborated.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Thirdly, there is the special procedure for introducing amendments into the Constitutions
chapters 3-8, which simultaneously restricts the range of subjects entitled to amend the
Constitution.
Fourthly, amendments to art. 65 of the Russian Federation Constitution (where the
composition of the Federation is determined) may be introduced only on the basis of
appropriate federal constitutional law on a new subject entering the Russian Federation and
on the constitutional status of such subject. Changes to the name of a subject of the Russian
Federation require a Decree of the Russian Federation President.
(d)

Major characteristics of the Constitution


Supremacy The Constitution, that is the principal law of the country, is effective throughout
the entire territory of the Russian Federation and is to be observed by all state bodies and
other subjects. The Constitution also occupies the supreme position in the system of
legislation and directly stipulates that all legal acts are not to contradict the norms of the
Federal Constitution (art. 15).
The Constitution is the legal basis for other regulatory legal acts. The Constitution mainly
establishes general principles and regulations, while current legislation deals with
implementation of the constitutional norms in specific legal relations. The Constitution also
determines the process of law-making itself. The Constitution names types of legal acts
adopted by state bodies (art. 90, 105) and, in a number of cases, the level of a regulatory legal
act that must be adopted to regulate certain public relations (art. 39 and others). The
Constitution also sets the hierarchy of such acts.

Answer 4 JURIDICAL SYSTEM


Tutorial note: The aim of the question is to test the candidates knowledge of the courts of the Russian
Federation, with particular reference to their hierarchy and jurisdiction.
(a)

Courts of general jurisdiction


The courts of general jurisdiction are structured on the basis of a three tier hierarchy:

lowest level the district courts that serve cities and towns;
middle level the supreme courts of the constituent republics of the Russian Federation;
highest level the Supreme Court of the Russian Federation.

The courts of general jurisdiction preside over cases and claims in relation to criminal, civil
and administrative matters that fall outside the mandates of the constitutional and arbitration
courts. Inter alia, cases and claims heard before them include:

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civil, family and labour relations where at least one party to the action is an
individual (unless otherwise stipulated by the law);

cases involving land where at least one party is an individual;

cases involving cooperatives where at least one party is an individual;

issuing and revocation of licences to mass media bodies;

administrative legal relations;

cases as provided for in the Civil Code;

international transportation agreements;

disputes relating to religious organisations.

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


The term general is key to understanding the nature of these courts. Essentially, they deal
with matters that fall outside the respective roles of the courts of arbitration and the
Constitutional Court.
The court of first instance is the district court, except for those cases that are deemed too
sensitive, too complex or too serious, in which case the higher level courts serve as courts of
first instance. The second and third level courts also fulfil a supervisory function in respect of
decisions of courts subordinate to them, as well as an appeal mechanism.
(b)

Arbitration courts
In common with the courts of general jurisdiction, the courts of arbitration have a three tier
structure:

the first level is made up of the courts of first instance in matters concerning
commercial activity and economic disputes these serve specific districts and areas;

the second level is the courts of the federal regions, serving as courts of appeal;

the third level is the Supreme Arbitration Court this is the highest level and as
well as dealing with final appeals has the role of interpreting and ruling on matters
relating to commercial activity.

The types of dispute considered by the courts of arbitration are mainly concerned with
economic relations and activity. They include:

(c)

disputes and claims between individual entrepreneurs, economic entities and legal
entities;

dispute and claims between the Russian Federation and its subjects;

matters relating to contracts, including interpretation, variation, breach, legal


remedies;

matters relating to ownership, possession and rights over property;

civil wrongs (torts) and remedies in respect of economic entities.

Four rules of geographic position


(1)

Jurisdiction in personam

A case relating to property in personam (generally, property other than real estate) is dealt
with at the location of the defendant.
(2)

Alternative jurisdiction

If the defendants location is unknown or indeterminate, the case is dealt with by a court in
the same locality as the defendants property or last known address.
(3)

Jurisdiction in rem

The term in rem mainly applies to immovable property, which comprises mainly real estate.
Claims in relation to property held in rem are dealt with at the same locality as the property
itself.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(4)

Agreed jurisdiction

This is self-explanatory. The parties may agree to the location of the case, either by a clause
in the contract between them or otherwise by mutual express consent. Agreed jurisdiction
cannot apply to disputes in rem however.
Answer 5 IMPLEMENTATION
Tutorial note: This question aims to test your knowledge and understanding of concepts relating to
the implementation of law in the Russian Federation, and to give practical examples of these concepts.
(a)

Accomplishment
This term refers to individuals and legal entities taking the opportunities afforded by the law
to take actions or fulfil their obligations. In this respect, the law may be enabling or
restrictive. As Russian laws are mainly based on statute, it is generally accepted that actions
that do not cause harm to others and are not forbidden in law are permitted. Some laws
prescribe the actions that individuals and juridical bodies may take and the manner of
accomplishing them.
There are many examples of accomplishment. The individuals right to sell his or her
personal possessions is an accepted feature of the law, though certain possessions may be
divested only in a specified manner. Real estate, for example, has to be sold or transferred by
means of a written contract and the ownership vested in the new proprietor by State
registration before the action can be legally completed.

(b)

Execution
This term refers to the discharge of the legal obligations of citizens and legal entities as laid
down in the various laws and regulations that are imposed by government and municipal
bodies.
The most important examples of execution relevant to individuals are the fulfilment of
obligatory returns in the form of statutory records, including registrations of births, marriages
and deaths and the payment of monies due, such as taxes and other mandatory payments.
Another example is compulsory military service.
To the enterprise, it is necessary to make returns to the government in respect of constitutional
matters such as formation of companies, reorganisation, insolvency and dissolution.
Companies also execute obligations by paying taxes and mandatory payments to their staff.

(c)

Observance
This term refers to compliance with the limits laid down in relation to the activities of
individuals and organisations. It is a more negative concept in that it involves not taking
certain actions that are forbidden by law.
The restriction on the active capacity of young persons is a good example of observance,
especially in respect of activities that are prevented by the Civil Code before the individual
reaches the age of 18 years. The criminal (penal) law lays down instances in which specified
actions are deemed to break the conventions of society, the intention being to prevent
behaviour of which the State, acting vicariously on behalf of citizens, disapproves.
Individuals and legal entities must observe certain legal provisions when entering into most
types of contract, and even outside the scope of contract law can be held accountable if by
their actions they inflict loss or harm on others.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Legal entities are also constrained by their own constitutions (Charter and other documents),
which under the provisions of the law must lay down specified parameters within which they
may act.
(d)

Enforcement
This term refers to actions that ensure that individuals and legal entities comply with the law.
Where this is not the case, the law specifies the manner in which penalties, other sanctions or
other remedial actions may be taken against those whose behaviour is at odds with the law.
The clearest example of enforcement is the imposition of punishment or penalties against
criminals. However, enforcement is a broader concept in that any competent body may take
action to enforce the law within its specified terms of reference. The courts are integral
players in enforcing the law, such as in matters requiring the resolution of contractual disputes
and confirmation of the entitlements of citizens (such as payments from the State or from
their employers).
Legal entities incur certain obligations in the course of economic activity. One example is the
enforcement of the rights of creditors when the sums due to them become payable, such as on
maturity of the debt, on default by the debtor, on reorganisation or on insolvency.

Answer 6 RUSSIAN LEGAL SYSTEM


(a)

Main sources
The primary source of law is legislation, enacted by central government and subordinate
bodies. This legislation is created within the overall framework established by the
Constitution. Legislation must be consistent with the Constitution, and any inconsistencies
may potentially be set aside by the constitutional court. The statutory legal framework is
hierarchical in nature, with the Constitution at the apex.
Federal laws are created by the government of the Russian Federation. These laws apply to
all subjects of law within the state and are superior in the hierarchy to laws adopted by
subordinate bodies. Under the Constitution, any inconsistency between federal laws and
subordinate laws is resolved with reference to the former.
As Russia is a federal state, it is appropriate that various bodies are empowered to make laws
that apply within their stated jurisdictions. Examples of such bodies include regional
governments, municipal territories, cities and towns. Laws enacted apply only within the
jurisdiction of each body. The principle underlying subordinate legislation of this kind is
often referred to as subsidiarity. Under this principle, legal authority should be devolved to
those who exercise regional or local power and authority when this can be achieved more
efficiently than through federal measures.
Under the Constitution, the President of the Russian Federation has the power to enact laws
by issuing decrees. Again, any such decree may not contradict the provisions of the
Constitution. This power of the President has been significantly reinforced in recent years. It
enables the President to fill voids in the law or resolve issues that require high level
intervention (see (b) below).
In an international context, the universal principles of international law and the provisions of
international treaties entered into by the state are deemed to apply and are therefore binding
on the government and other subjects of law. This aspect of the legal framework is becoming
increasingly important as international trade expands and the forces of globalisation continue
to erode territorial barriers.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


There are two other minor influences that may be regarded as sources of law:

(b)

(1)

In common with many other large countries the Russian Federation has regions that
display different traditions and cultural stereotypes. To some extent, the customs
and traditions of each area may from time to time be reflected in the decisions of
judicial bodies.

(2)

As a legal system more closely aligned to the Germano-Roman model than the
Anglo-American common law model, it could be argued that the doctrine of judicial
precedent has no role in the Russian Federation. Although there is no formally
developed equivalent to judicial precedent in Russian law, the decisions of the
courts are documented and serve as a source of reference for judges presiding over
current cases. This is particularly important for the courts of arbitration which deal
with matters relating to entrepreneurial activity. To this extent, therefore, there is
some reliance on the previous decisions of courts as a source of law.

Absence of written law


A void in legal provision is often referred to as a law lacuna.
If there is no written law, the courts may have to resort to analogy whereby they consider
similar circumstances in which a law actually exists.
Alternatively, the court has to consider the existing legislation and apply a decision that is
consistent with the purposes and principles of the legislation.
The role of the courts in resolving a law lacuna is quite common in codified legal systems
such as in the Russian Federation. This is inevitable, as it is unlikely that the legislative
process can ever keep up with the pace of change in the commercial environment and society
as a whole.
At government level, an absence of law may be resolved by Presidential decree. The
President is empowered under the Constitution to make decrees and edicts to resolve any law
lacuna. Intervention at executive level was extremely common in the years immediately
following the end of the Soviet era.
It should be noted that there are limits to applying analogies to resolve voids in the law. Penal
and administrative laws cannot be interpreted or extended in any manner other than their
literal meanings.

Answer 7 NEW LEGISLATION


(a)

Submission of draft laws


Most of the new legislation implemented in the Russian Federation is devised and proposed
by the serving government. The programme of new laws reflects the commitments of the
government over a specified period of time. Given that by definition the government has a
majority of deputies, this legislation will normally be enacted with some debate but little
prospect of it being overturned on its way to becoming actual law.
However, the Constitution of the Russian Federation empowers various individuals and
bodies to propose new laws. These include deputies of the Duma, members of the Federation
Council, the President, legislative bodies of the subjects of the federation and the highest
courts in the judicial system. Among the courts that can propose legislation, strictly within
their terms of reference, are the Constitutional Court, the Supreme Court and the highest level
of the Arbitration Court.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(b)

Process of adoption
The process through which a draft law becomes legislation is laid down in the Constitution of
the Russian Federation.
Once a draft law is promulgated by its authors, it requires a simple majority of deputies in the
Duma and a simple majority of members of the Federation Council to vote in its favour.
However, the draft legislation cannot proceed to becoming law until it is signed by the
President.
The President has a right not to sign the draft law and to re-submit it to the Duma together
with his concerns. The Duma then reconsiders the draft law. If it is deemed appropriate, it
may overturn the President, but this is subject to a vote of not less than two-thirds of the
deputies and members of the Federation Council being in favour of this course of action. The
President must then sign the law.
The formal enactment of the legislation takes place 10 days after publication in the official
Rossiyskaya Gazeta, though the legislation may specify future dates on which the measures
to be implemented actually take effect. As a general principle, legislation is not enacted
retrospectively.

(c)

Powers of the President


The President of the Russian Federation has substantial powers to create legislation. These
powers have increased since the Constitution was introduced.
Subject to the parameters laid down in the Constitution, the President may issue decrees to fill
voids in the existing legal framework (law lacunae) and also to resolve contradictions or
dilemmas caused by existing laws if these cannot be resolved by the judiciary. This power
was extremely important in the years immediately following the end of the Soviet era, when
the law making process could not keep up with the rapidly changing needs of society.
The powers of the President to make laws are also invoked when it is necessary to resolve a
crisis.

Answer 8 LEGAL ENTITY


(a)

Organisational unity
The first characteristic of any legal entity is the entitys organisational unity that implies a
clear internal structure and the establishment of certain management bodies. Such a structure
is fixed by the statutory documents of the given organisation. The form of the organisational
unity is the organisations statutory document:

the Statutory Agreement;


the Charter;
in individual cases, provisions adopted on the basis of general provisions
concerning organisations of that type.

The content (implementation) of organisational unity is clearly set by the law and its
structure, by the organisations statutory documents. The Civil Code of the Russian
Federation and federal laws on individual types of legal entities both set general rules
concerning statutory documents and administration management and determine peculiarities
of application of these rules with respect to each type of legal entity.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(b)

Property separation (set-apart property)


The second most important characteristic of the legal entity is possession with set-apart
property. The form of such possession is an independent balance or an estimate of the legal
entity. The content (implementation) of that characteristic is the legal provision required from
founders in order to form the entitys aggregate (for economic companies) or statutory (for
other legal entities) capital. No legal entity may be set up without aggregate or statutory
capital, since its absence would mean the impossibility to meet creditors claims or the lack of
any commercial risk for founders. It should be emphasised that the entity must be the owner
of its set-apart property or possess it by right of economic disposal of operative management.
Disposal of set-apart property by other rights (e.g. the right of lease) is not allowed.

(c)

Proprietary responsibility
Proprietary responsibility is the third characteristic of the legal entity. Legal entities (with the
exception of institutions) financed by their owner are answerable for their obligations with the
entire property in their possession.
The founder (the participant) of the legal entity or the owner of its property is not answerable
for the legal entitys obligations, and the legal entity is not answerable for the obligations of
the founder (the participant) or of the owner, with the exception of cases, stipulated by the
Civil Code of the Russian Federation or by the statutory documents of the legal entity.
Founders or participants of an entity are answerable for the entitys debts only in case the
legal entitys property proves to be insufficient. This type of responsibility is called
additional or subsidiary. The law assigns this type of responsibility to full partners in general
or commandite partnerships, participants in superadded liability companies and production
co-operatives, founders of federal (treasury) enterprises and an organisations property
owners.
At the same time, it should be borne in mind that if the legal entitys property proves to be
insufficient and the insolvency (bankruptcy) of the legal person has been caused by:

the founders (participants);

the owner of the legal entitys property;

other persons who have the right to issue obligatory instructions for the given legal
entity or may determine its actions in any other way;

then subsidiary liability under the legal entitys obligations may be imposed upon such
persons.
(d)

Acting in civil turnover on ones own behalf


The fourth characteristic of a legal entity is the ability to act in civil turnover on ones own
behalf. A legal entitys ability to act on its own behalf is implemented by the fact that each
entity has its own official name, which is stipulated in its Charter or other statutory
documents as of the moment of state registration (art. 54 of the Civil Code of the Russian
Federation). The official name of the entity specifies its type of activity and the legalorganisational form, and thereby specifies the entity and singles it out as a subject of civil
turnover.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 9 STUDENT PETROV
(a)

Parental approval
Minors from 14 to 18 years old can effect certain deals with the written consent of their legal
representative: parents, adopters or guardian. The consent may be given before or after the
deal is effected.
Among the actions named in the case-study, student Petrov could effect the following on his
own:

Buy study materials, since minors from 14 to 18 years old may dispose of their
salary, grants or other income without the approval (consent) of their parents,
adopters or guardian;

Receive an authors fee for the published article, since minors from 14 to 18 years
old may exercise authors rights to a work of science, literature or art, to an
invention or to another legally-protected result of their intellectual activity without
the approval (consent) of their parents, adopters or guardian. This includes the
receipt of the authors fee.

Since the purchase of computer (due to its price) may not be regarded as disposal of a
students grant, salary or petty everyday deal, Petrov could not effect it without the consent of
his parents.
(b)

Circumstances
Civil legislation envisages such an institution as emancipation. That means that a minor who
has reached the age of 16 years may acquire full active capacity if (s)he has been declared
emancipated (i.e. if (s)he works by a labour agreement), or engages in business activities upon
the consent of the parents, adopters or guardian. Thus, after Petrov reaches the age of 16
years and providing he works by a labour agreement, he will be able to effect all the deals
listed on his own, without the consent of his parents.
Furthermore, full active capacity is acquired by a minor of less than 18 years in case (s)he
marries from the moment of entering into a marriage. Active capacity, acquired as a result
of entering into a marriage, is retained in full in case the marriage is dissolved before the
citizen reaches the age of 18 years.
A minor is declared as having acquired full active capacity (emancipation) by the decision of
the guardianship and trusteeship body upon the consent of the parents, adopters or guardian,
or, in the absence of such consent by court decision. Parents, adopters and guardians do not
bear responsibility for the obligations of an emancipated minor, in particular for those
obligations, which have arisen as a result of the inflicted damage.

(c)

Labour contracts and minors


According to effective labour legislation, a person becomes a subject of labour relations at the
age of 16. Before that age minors may be employed only with certain restrictions. In
particular, minors older that 14 years studying at schools or colleges may be employed to
perform work in their spare time with the consent of their legal representatives (parents,
adopters or guardian).
As employees, minors up to 18 years old have equal rights with adults, and besides with
respect to work protection, working time, leaves and some other labour conditions enjoy
privileges set by the Labour Code of the Russian Federation.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Minors younger than 18 years old may not be employed for hard or hazardous work (e.g.
mining). They may neither work night shifts, over-time or at the weekends.
Thus, Petrov may enter into a labour agreement providing all the above-mentioned privileges
are observed.
Answer 10 MRS KLUSHKINA
(a)

Gift of car
It is quite possible to transfer the car to the boy of 12 years old. The minor of 614 years old
may accept the gift himself, but in case the transfer of property needs state registration (e.g.
immovable property) the deed of accepting the gift must be concluded in the minors name by
his parents. The contract must be made in writing, notary form must be observed and the
contract must be registered with state authorities.

(b)

Sale of apartment
It is quite possible to transfer the apartment to the boy of 15 years old. The underage person
may accept the gift himself, but in case the transfer of property needs state registration (e.g.
immovable property) the deed of accepting the gift must be concluded in the minors name by
his parents by the minor with a written consent (approval) of his parents. The contract must
be made in writing, the contract must be registered with state authorities.

(c)

Gift of bicycle
The bicycle may be transferred to the girl of five years old but all the transactions in favour of
the minor under six years old must be concluded by her parents. In order to make the gift
valid no special form is to be observed, the bicycle must be physically accepted by the childs
parents.

(d)

Empowering
The best way to empower an individual to exercise any actions and/or deeds in the name of
another individual is to issue a power of attorney. This power of attorney must directly
provide for the actions/deeds that the individual is empowered to exercise.
Russian legislation also provides for trust management as means of management of another
persons property, but trust management is not appropriate in the described situation because
only legal entities may be trust managers.

(e)

Testament
No. Testament must be done by the individual in person. The deed of empowering another
person to do a testament is invalid.

Answer 11 ANNA
(a)

Personal capacity
The relevant provisions of the Civil Code relate to the personal capacity of the individuals
involved. All citizens of the Russian Federation have passive capacity which confers general
civil rights. However, the active capacity of natural persons is determined in most instances
with reference to their age. Active capacity related to the extent to which each individual can
act on his or her own behalf, enjoy rights or incur obligations.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


The trigger dates for increasing levels of active capacity are six, 14 and 18 years of age.
A child under six years of age has no active capacity. Therefore, as Oleg is only four years
old, he has no active capacity. In practice, there is no problem in setting money aside for him,
or indeed for him to legally own the money, but he will not be able to make transactions on
his own behalf for the time being.
Mikhail is seven years old and so enjoys partial active capacity. He also can acquire property
and carry out everyday transactions of nominal value. He can accept the gift from his
grandmother and become a legal owner of the money. Although he has a limited ability to
enter into transactions, it is probable that an adult would have to carry out transactions on his
behalf with the bank. As the scenario suggests that Mikhails father may be irresponsible
with money, it is questionable whether enabling transactions to be carried out on Mikhails
behalf by Alexei is a wise course of action.
The oldest two grandchildren are both over 14 years of age. They are entitled to manage their
funds to a greater extent, including deposits, transfers and withdrawals at the bank.
It should be noted also that should any of the children marry after reaching 16 years of age,
this confers full active capacity.
(b)

Transfer of car
Lilia is 16 years old and cannot therefore drive the car legally. However, under the Civil
Code Lilia does have property rights including the right to own the car, even if she cannot use
it. Lilia can therefore accept the car, though the acceptance requires the participation of her
parents as the gift is an item of moveable property that requires State registration. The
transfer must be executed in written form and notarised. The contract and the particulars of
ownership must be registered with the State authorities.

(c)

Transfer of dacha
The gift of the dacha can be made to the four children. The only difference between giving
the car to Lilia and giving the dacha to the four grandchildren is that the latter is immoveable
property whereas the former is moveable property.
It would be necessary to make a legal conveyance of the dacha to transfer it into the joint
names of the new owners. This must be effected in writing and notarised. This would require
the participation of the parents, who would for the time being have to act on behalf of the
younger three grandchildren. Particulars of ownership would also be subject to State
registration.
One practical difficulty that Anna should consider is that it could be troublesome to change
the terms of ownership in the near future while some of the children are young. She should
also consider the possibility that she may be disenfranchising other grandchildren if Alexei
and his wife have more children in the future.

(d)

Actions to be taken
Anna could execute a general power of attorney to enable Katerina to act on her behalf. This
is a legal document that creates an arrangement of voluntary representation.
It would not be possible to establish a permanent arrangement, as the maximum duration of
the power of attorney is three years. However, provided she remains of sound mind, Anna
can renew the power of attorney on a rollover basis in the future.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


The power of attorney would entitle Katerina to carry out any transactions on behalf of her
grandmother. However, Anna should be aware that conferring such rights on another family
member affords absolute discretion in favour of the attorney.
Therefore, Anna has to be certain that Katerina can reliably discharge those responsibilities
with which she is trusted.
As a power of attorney is a contractual arrangement of representation, Anna will only be able
to enter into a new power of attorney in future years if she remains of sound mind.
Answer 12 PERFORMANCE OF CONTRACTUAL OBLIGATIONS
(a)

Non-performance, partial performance, undue fulfilment of contractual obligations


The debtor is be obliged to reimburse to the creditor the losses, caused to him by the nonfulfilment or by an undue fulfilment of the obligations.
Losses are understood to include:

the expenses, which the person whose right has been violated, made or will have to
be made to restore the violated right;

the loss or the damage done to his property (the compensatory damage); and

the undeceived profit (i.e. missed profit) which this person would have derived
under the ordinary conditions of the civil turnover, if his right were not violated.

If the person who has violated the right of another person has derived profits as a result of
this, the person whose right has been violated has the right to claim, alongside with the
compensation of his other losses, the compensation of the missed profit in the amount not less
than such profits.
If for the non-fulfilment or an undue fulfilment of the obligations the fines have been ruled,
the losses should be recompensed in the part, which have not been covered by the fines.
The law or the contract may stipulate the cases when:

only the fines, but not the losses should be paid;


the losses may be exacted in full above the fines;
according to the creditors choice, either the fines or the losses may be exacted.

In the cases, when a limited responsibility for the non-fulfilment or an undue fulfilment of the
obligations has been established, the losses, liable to compensation in the part, not covered by
the fines, or above it, or instead of it, may be exacted up to the limit, fixed by such a
restriction.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(b)

Non-performance or partial performance of some types of obligations


For the non-fulfilment or/and undue fulfilment of monetary obligations such as using of the
other persons money as a result of its illegal retention, of the avoidance of its return or of
another kind of delay in its payment, or as a result of its groundless receipt or saving at the
expense of the other person, the interest on the total amount of these means will be due. The
interest rate is defined by the discount rate of the bank interest, existing by the date of the
discharge of the monetary obligation or of the corresponding part thereof at the place of the
creditors residence (the place of legal entity location). If the debt is exacted through the
court, the court may satisfy the creditors claim, proceeding from the discount rate of the bank
interest on the date of filing the claim or on the date of its adopting the decision. These rules
are applied unless the other interest rate has been fixed by the law or by the contract. This
kind of interest is exacted by the date of payment of the amount of these means to the
creditor, unless the law, the other legal acts or the contract have fixed a shorter term for the
calculation of the interest.
If the losses, caused to the creditor by an illegal use of his money, exceed the amount of the
interest mentioned above he has the right to claim that the debtor recompense him the losses
in the part, exceeding this amount.
The payment of the fines and the compensation of the damages in case of undue fulfilment of
the obligation do not absolve the debtor from the fulfilment of the obligations in kind, unless
otherwise stipulated by the law or by the contract.
The compensation of the damages in case of the non-fulfilment of the obligation and the
payment of the fines for its non-fulfilment absolves the debtor from the discharge of the
obligation in kind, unless otherwise stipulated by the law or by the contract.
In case of the non-fulfilment of the obligation to transfer a specific thing into the ownership,
into the economic or the operation management, or into the gratuitous use of the creditor, the
latter has the right to claim the forcible withdrawal of this thing from the debtor and its
transfer to the creditor on the terms, stipulated by the obligation. This right ceases to exist if
the thing has already been transferred to the third person possessing the right of ownership, or
of economic or operation management. If the thing has not yet been transferred, the right of
priority belongs to that creditor with respect to whom the obligation has arisen at an earlier
date. If this is impossible to establish, then to that creditor who filed the claim at an earlier
date.
Instead of the claim for the transfer to him of the thing, which is the object of the obligation,
the creditor has the right to claim the compensation of his losses.

(c)

Overdue performance of a debtor or creditor


The debtor who has failed to perform the obligation on time is answerable to the creditor for
the losses inflicted by the delay, and also for the consequences of the performance having
accidentally become impossible during the period of the delay.
If, because of the debtors delay, the performance has lost all interest for the creditor, he has
the right to refuse to accept the performance and to claim the compensation of the involved
losses.
The creditor is regarded as guilty of the delay, if he has refused to accept the proper
performance offered to him by the debtor, or if he has not performed the actions (stipulated by
the law, the other legal acts, or by the contract, or those stemming from the customs of the
business turnover or from the substance of the obligation) before the performance of which
the debtor could not have discharged his obligation.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


The creditors delay gives the debtor the right to the compensation of losses caused to him by
the said delay. The exception to this is if the creditor proves that the delay occurred through
circumstances which neither he, nor the persons to whom by force of law (or other legal acts
or the creditors commission), the acceptance of the discharge has been entrusted, are
answerable.
The debtor is not regarded as guilty of the delay during the period of time when the obligation
could not have been performance because of the creditors delay.
(d)

Responsibility for non-performance and/or partial performance


The person who has not performed the obligation (or who has undue performed it) bears
responsibility for this, if it has happened through his fault (whether intentional or due to
carelessness on his part). The exception to this is, when other grounds of the responsibility
have been stipulated by the law or by the contract.
The person is recognised as not guilty if, taking into account the extent of the care and caution
which has been expected from him in the face of the nature and the terms of the circulation,
he has taken all the necessary measures for properly discharging the obligation.
The absence of guilt must be proven by the person who has violated the obligation.
Unless otherwise stipulated by the law or by the contract, the person who has failed to nonperformance (or has undue performed it), while performing the business activity, bears
responsibility, unless he proves that proper performance was impossible because of a force
majeure (i.e. because of extraordinary circumstances, which made it impossible to avert under
the given conditions). To such kind of circumstances shall not be referred, in particular, the
non-performance of obligations on the part of the debtors counter-agents, or the absence on
the market of commodities, indispensable for the discharge, or the absence of the necessary
means at the debtors disposal.
An agreement on eliminating or limiting the liability for an intentional violation of the
obligation, concluded at an earlier date, shall be insignificant.

Answer 13 TERMINATION OF CONTRACT


(a)

Setting off similar obligations


The obligation will be terminated in full or in part by setting off a similar claim of regress,
whose deadline has arrived or has not been fixed, or has been defined by the moment of the
demand. For the set off, the application from one of the parties is sufficient.
Cases of impossibility of set off

1016

If, by the application of the other party, the term of the limitation of actions is
applicable to the given claim and the said term has expired.

For the compensation of harm inflicted to life or health.

On the exaction of alimony.

For life maintenance.

In other cases directly stipulated by the law or by the contract.

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(b)

Novation of an obligation
The obligation is terminated by an agreement between the parties on replacing the primary
obligation, which has existed between them, with another obligation between the same
persons, stipulating a different object or a different way of the discharge (the novation).
The novation is not admissible with respect to the obligations on the compensation for harm
inflicted to life or health, and also with respect to those on alimony.
The novation terminates the additional liabilities connected with the primary obligation unless
otherwise stipulated by the agreement between the parties.

(c)

Compensation for termination of a contract


By an agreement between the parties, the obligation may be terminated by way of paying an
indemnity (otstupnoe) instead of the discharge (the payment of money, the transfer of the
property, etc). The parties must establish the amount, the term and the procedure for paying
the indemnity.

Answer 14 CONTRACTS OF SERVICE


(a)

Responsibility for providing materials


Unless otherwise stipulated by the contract, the work must be performed by the contractors
maintenance from his materials and with his own forces and means. This means that in case
nothing is specially provided for in the contract all materials are to be provided by company B
who is also responsible for their quality.

(b)

Can Group X transfer responsibilities?


The fulfilment of the obligation under the contract may be imposed by the contractor (Group
X) upon the third person only with written permission of the customer (Company A).
In case the contract or the law does not provide for the personal execution of contract by the
contractor; the contractor may involve third persons to execution of the contract. In this case
the contractor acts as general contractor and the third persons involved by him as subcontractors.
In the described case the obligations of Group X are to be fulfilled by Group X in person as
the services (concert) is closely connected to the personality of the Group.

(c)

Has Group X fulfilled its obligations?


As under general rules the contract for the repayable rendering of services, the contractor is
obliged to render the services in person, unless otherwise stipulated by the contract. The
discharge of the obligation by the third person without the customers written permission is
considered as undue fulfilment.

(d)

Demands by Company A
As Group X refused to execute duly its obligations under the contract the Company A is
entitled to demand:

the return of the paid up remuneration;


full recovery of the losses inflicted upon the Group X;
(and the forfeit if it has been stipulated in the contract).
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(e)

Demand for reimbursement


According to the general rules, Company A entitled to demand to recover only direct losses
inflicted upon the contract between Company A and Company X.
If the scene construction was directly provided for as the Company As obligation in front of
Group X, the sum of contract of scene construction may be subject to reimbursement.
If nothing was specially provided for and as the stage could be used for different purposes,
Company A is not entitled to demand from Group X to reimburse the sum of contract of scene
construction, as it is not the direct loss of non-fulfilment of Group Xs obligations.

(f)

Can Company C transfer responsibilities?


The fulfilment of the obligation may be imposed by the Company C upon the third person,
unless the duty to discharge the obligation in person follows from the contract. In the abovementioned case does not provide for the personal execution of contract by the contractor; the
contractor may involve third persons to execution of the contract. In this case the contractor
acts as general contractor and the third persons involved by him as sub-contractors. As a
general contractor Company C will be responsible for due fulfilment of obligations by the
sub-contractor and also be responsible in front of the sub-contractor for due exercising of
payment.

Answer 15 LLC PRIBOY, LLC SYSTEMSNAB AND BANK BKR


(a)

Right to restrict powers


The statutory documents of the limited liability company (LLC) are the statutory agreement,
signed by its participants, and the Charter, approved by them. The statutory documents of the
LLC must contain the terms on:

the amount of the companys capital;


the size of the shares of every participant;
the size, the structure, the term and the procedure of contributions;
the structure and the competence of the executive bodies; and
the order of adopting decisions, including issues, the decisions on which should be
adopted unanimously or by a qualified majority of votes.

The statutory documents also contain other information, stipulated by the Federal Law On
Limited Liability Companies.
The procedure of operating of the sole executive body of the company and decision-making
by it is set by the Charter of the company, its inner documents and by the agreement
concluded between the company and the person who executes the duties of its sole executive
body. Thus, founders (participants) may establish restrictions of the powers (competence) of
its executive body in comparison with the powers of that body set by the law.
(b)

Statutory documents
According to the Federal Law On Limited Liability Companies, in case of contradictions
between provisions of the Statutory Agreement and the Charter of a LLC, the provisions of
the Charter have priority.

1018

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(c)

Contract of surety
Proceeding from that said above, there are no grounds to consider the contract of surety as
void.

Answer 16 AUDIT COMPANY PETER PETERSON


(a)

Sale of premises
Krasnaja Ploshad as the owner of the premises could freely possess, consume and dispose of
the premises, including sale of the premises under a corresponding contract. At the same
time, in case of the sale of property, where the right is abridged by the rights of third persons
(the tenants), the seller should have informed the purchaser of such an abridgement.

(b)

Rights of the tenant


The contract of sale does not influence the rights of the tenant stemming from a duly
registered contract of lease. At the same time, if the bank had agreed to purchase the
premises, where the right was abridged by the rights of third persons, the conclusion of the
contract of sale would have meant the change of the lessor under the contract of lease.

(c)

Courts decision
If the bank goes to court with the claim on forcing the tenant to move out of the premises, the
court should reject the claim. At the same time, if the bank did not know or was not to know
about the fact that the premises purchased by it were fully or partially leased (i.e. was
abridged by the rights of third parties), the bank may demand to reduce the price of the
purchase or to dissolve the contract of sale.

Answer 17 ZAO PEIDODNA


(a)

Advertisement
The advertisements containing all the essential terms of the contract (in which is seen the will
of the person, who is making the proposal, to conclude the contract on the terms indicated in
the proposal with any responding person) shall be recognised as an offer (the public offer).
The advertisements and the other proposals without essence of contract and addressed to an
indefinite circle of persons are regarded as an invitation to make the offers. The letters,
telegrams and any other documents sent by a person and based on the advertisement and as a
response thereto are considered an offer (oferta).

(b)

Conclusion of contract and payment


The contract should be concluded by way of forwarding the offer (the proposal to conclude
the contract) by one of the parties and of its acceptance (the acceptance of the offer) by the
other party. The acceptance will be recognised as the response of the person, to whom the
offer has been addressed, about its being accepted. Under general rules silence is not
regarded as the acceptance. As there was no contract between ZAO Peidodna and W, ZAO
Peidodna does not have the right to demand payment for the wine sent.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(c)

Validity of contract with Z


In the case when the term of acceptance has been fixed in the offer, the contract is regarded as
concluded if the acceptance has been obtained by the person who has forwarded the offer
(within the term stipulated in it). If the term has been fixed for the performance of a certain
action, it may be performed before the expiry of 24 hours of the last day of the term.
In the cases when the duly forwarded notification about the acceptance is received with a
delay, the acceptance is not regarded as belated unless the party, which has forwarded the
offer, immediately notifies the other party about the arrival of the acceptance with a delay. So
the silence of the offeree is regarded as accept of the acceptance that was received with a
delay. The contract is not concluded if the offeree notifies the other party about the arrival of
the acceptance with a delay.

(d)

Conclusion of contract with Y


The contract of purchase and sale of wine between ZAO Peidodna and Y was not concluded
because the answer, indicating the consent to conclude the contract on the terms other than
those indicated in the offer, cannot be regarded as the acceptance.
Such an answer should be recognised as the refusal of the acceptance and at the same time as
a new offer.

(e)

Conditions and price by Y


If ZAO Peidodna agrees to sell wine at the conditions and price indicated by Y, it has within
30 days from the moment of receiving the new offer to:

(f)

send to Y the full and unconditional acceptance; or

perform the actions involved in complying with the terms of the contract pointed
out in the offer (the dispatch of commodities, the rendering of services, the
performance of works, the payment of the corresponding amount of money, etc) that
will also be regarded as the acceptance.

Conclusion of contract with U


The contract of purchase and sale of wine was not concluded between ZAO Peidodna and U
because the advertisement addressed to an indefinite circle of persons is only the invitation to
make the offers.

(g)

Conditions and price by U


ZAO Peidodna has within 30 days from the moment of receiving the offer from U send to U
the full and unconditional acceptance or to perform the actions involved in complying with
the terms of the contract pointed out in the offer (the dispatch of commodities, the rendering
of services, the performance of works, the payment of the corresponding amount of money,
etc) that will also be regarded as the acceptance.

1020

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 18 FOUR-STOREY OFFICE
Tutorial note: The question tested the candidates understanding of the law relating to torts (civil
wrongs) and the consequences of civil wrongs to those culpable.
(a)

Can C sue F & G?


Under the Civil Code, a person or persons who cause damage to another person or his
property is obliged to reimburse the injured party for the damage caused. Company C can
therefore sue Federov and Galkin for the losses inflicted by their actions or inactions, though
it would undoubtedly be better served by taking action against their company as being
vicariously liable for the actions or inactions of the employees (see below).
The ability to recover damages from the individuals may be limited by the financial resources
of the individuals concerned. This may be recognised by a court if, for example, hardship
would arise from full payment, the court may impose limits on payments due or order
payments to be made over a period of time.

(b)

Can C sue D?
An economic entity such as a limited company can be held accountable for the damage
caused to third parties by its employees in the normal course of their duties. This is the
concept of vicarious liability.
Therefore, Company C can sue Company D for the damage caused by Federov and Galkin.
This is probably a better means of deriving financial recompense if the employees are of
limited financial means.

(c)

Rights of Company D
If Company D is held accountable for the damage caused by its employees as set out above,
the company may in turn sue its employees for the damage inflicted on the company by way
of regress action. They could recover monies due by way of deductions from salary, though
the extent to which this may be done is limited by legal and practical considerations.

(d)

Damages
It is necessary to distinguish between the damage caused directly by the actions of Federov
and Galkin and the expenses associated with the accident though not directly caused by it.
The former are subject to reimbursement whilst the latter are not.
The repairs and the need to buy new furniture were direct consequences of the accident. They
are therefore subject to reimbursement.
The furniture in the General Directors office was not damaged and was therefore still usable.
Although it may have been desirable to replace this furniture, its replacement was not caused
by direct damage as a result of Federov and Galkins actions.
The amount of damages due to Company C = 500,000 + 250,000 = 750,000 roubles.

1021

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Answer 19 SURETY
(a)

Meaning
The term surety applied to one of the six obligation security means permitted under the
Civil Code.
A surety is a person who personally guarantees to discharge the debt of another person.
Therefore, if in a debtorcreditor relationship the debtor defaults on the contractual
obligation, the surety becomes jointly and severally liable with the principal debtor for the
sum due.
The legal nature of a surety is contractual. When a loan is made conditional on a surety
agreement, two contracts come into existence. The first of these is the contract between the
debtor and the creditor. The second contract is a collateral contract that creates an obligation
of the surety to the creditor in the event of default of the debtor.

(b)

Rights and obligations


In the event of a surety being called upon by the creditor to pay under his obligation, the
surety has the right of regress action against the debtor. This means that the surety can claim
back monies paid as well as interest running on the debt.
The surety has a right to put forward any objections that could have been raised by the
principal debtor.
As mentioned above, both the debtor and the surety are contractually obliged to the creditor,
though the creditors rights against the surety only trigger in the event of default. It is
important to point out that the eventual sum owed by a surety may exceed the original debt, as
the creditor can claim the costs of recovery or realization of the debt as well as interest for the
relevant period.

(c)

Termination
A surety agreement may be terminated in several ways:
Once the sum due to the creditor is discharged in full, the surety is released from the
obligation, whether this is paid by the debtor or the surety himself.
The surety contract exists for a specified period of time. On expiry of this period, the
obligation is terminated. The claim against the surety is also time-limited to a maximum of
one year from the end of the term of the principal debt. If the debt is open ended, the claim
against the surety must be filed within two years of conclusion of the surety agreement.
If the terms of the debt are varied to the detriment of and without the prior consent of the
surety, the obligation of the surety is extinguished. This also applies if the debt is securitised
or otherwise transferred without reference to the surety.
If the creditor refuses to accept due discharge of the debt by the principal debtor, the surety
cannot be called upon to contribute.

1022

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(d)

Rights and obligations of a creditor


Rights
The creditor has the right to enforce any condition of the pledge that does not run contrary to
the law. This often involves not only the right to demand capital and interest due but also
charges and fees associated with management and administration of the agreement. The
creditor may also reserve a right to inspect pledged property and impose any other nonfinancial covenants to protect his position.
On default by the debtor, the creditor may realize the pledged property by selling and
repaying the sum due. Any sale must be by open auction with a price set by the court or by
agreement between the parties. The pledger has the right to petition the court to defer sale for
up to one year. If there is no buyer, the pledgee has a right to acquire the pledged property for
a price of no more than 10% less than the agreed or imposed price.
The outstanding debt may be repaid from the proceeds of sale. If there is a surplus, this must
be paid to the pledger. If there is a deficit, the pledgee can pursue the debt further against
other property owned by the pledger.
Obligations
The creditor is responsible for proper execution of the terms of the pledge in the event of
realisation of the pledged property.
Failure to do so may terminate the pledge.
Depending on the terms and conditions applicable to the pledge, the creditor may be liable for
loss or damage to the pledged property and may be responsible for insurance.
The creditor is liable for loss or damage if the pledge object is transferred to him and the loss
or damage arises from his actions, whether accidental or otherwise.
Once the debt is discharged the conditions relating to the object of pledge are terminated.

Answer 20 DISCHARGE OF A CONTRACT


The Civil Code lays down specific requirements for the proper discharge of a contract.
The contract must be discharged by the proper person. This relates to privity, under which the person
charged with the responsibility of fulfilling the contract is held to be accountable for proper discharge.
This duty may extend to third parties if the terms of the contract so dictate. In some cases, a potential
loss that may be incurred by a third party gives the right to the third party to honour the contract. If the
third party discharges the contract, the rights under the contract are subrogated to the third party.
The monetary value of the contract is determined with reference to its value in roubles. In the case of
obligations denominated in foreign currencies, this is set with reference to the official exchange rate on
the date of remittance unless otherwise specified in the terms of the contract.
The contract must be discharged in the manner specified. So if there is a variation between the means
of fulfilment and the prescribed means of fulfilment, the contract may not necessarily be regarded as
having been discharged.

1023

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


The contract must be discharged in a way that is consistent with the subject of the contract. It must be
performed completely and precisely in keeping with the conditions agreed. Part performance of the
contract by one party does not give rise automatically to discharge as by definition the contract has not
been performed in its entirety, and will therefore not generally result in pro rata entitlement to
consideration. For example, if an author agrees to write a book for a publisher and completes only half
the book, the author may not be entitled to half of the payment due for the completed work.
In relation to debtor-creditor contacts, the creditor has the right to accept discharge of the obligation in
instalments, even though the debtor may not be entitled to pay by instalments unless agreed in the
contract. Such funds can be paid into court in the event of legal incapacity of the creditor, where the
precise identity of the creditor is unknown or where acceptance of monies due has been refused or
delayed.
The contract must be discharged at the proper place. For property transactions, this is the location of
the property itself. For transactions in commodities, this is the place where the property is first placed
in the hands of the distribution company or agent.
For other obligations in relation to the supply of goods, this is the place of manufacture or storage. For
monetary liabilities, it is the location of the creditor as at the time the obligation is legally incurred. For
other obligations, it is the location of the debtor.
The contract must be discharged on or before the due date of discharge. If no term is specified, the
obligation becomes due within a reasonable period. Once a reasonable period has elapsed, the creditor
can demand payment within seven days of presentation of a demand.
Answer 21 FORFEIT AND EARNEST MONEY
Tutorial note: This question tests knowledge of forfeit and earnest money in the context of contract law.
(a)

Forfeit
A forfeit is a financial fine or penalty that may be levied by one party to a contract on the
other party to the contract in the event that the latter fails to discharge the contract, or if the
contract is discharged improperly.
It is usual practice in the Russian Federation for written contracts to specify a forfeit to be
paid in the event of non-performance or improper performance.
A contract may make various stipulations in respect of forfeit:

Offset forfeit may be specified for losses not covered by the forfeit.
Penalty forfeit may cover losses suffered by the party over and above the forfeit.
Alternative forfeit entitles the claimant to impose forfeit or losses incurred.
Exclusive forfeit entitles the claimant to the forfeit but not losses incurred.

In turn, losses may be regarded as de facto losses caused by the breach of the contract, or
missed profits, which are the reductions in profit suffered as a result of the breach of contract.
(b)

Earnest money
Earnest money is another form of security for an obligation in a contract. It is a sum of
money paid by one party to the other to offset the payment due. It serves as proof of
existence of the contract and forms a means of security for payment on discharge.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Earnest money fulfils several functions:

It fulfils a payment function, offsetting payments that will become due in the course
of time.

It is a form of security in that the payment lowers the risk to the recipient of the
monies paid. It fulfils an ascertaining function, confirming that the contract has
been entered into by the parties, thereby ascertaining that an obligation has been
created.

It is compensatory, in that the party in breach of the contract is obliged to


compensate the other party with the offset of the earnest money.

If the recipient of earnest money fails to discharge his or her side of the contract, then
payment of double the earnest money becomes payable to the other party once the breach has
occurred.
A contract that stipulates the payment of earnest money must be concluded in written form. If
this is not the case, the payment of one party to the other is treated as a simple deposit
representing payment ahead of schedule.
Answer 22 ALEXANDER
Tutorial note: This question tests your ability to resolve a scenario in which damage has been
inflicted through contractual and non-contractual relations.
(a)

In which court?
In the case study, Alexander has suffered loss and damage due to two separate incidents.
These are the traffic accident involving Igor and the subsequent accident, which appears to
have been caused by defective workmanship on his car.
Alexander wishes to pursue legal action for damage inflicted by Igor. At face value, it would
seem that Igor is liable for driving through a red traffic signal. The strength of the case would
depend on the evidence available and would be affected by the presence and testimonies of
witnesses. If Alexander believes he has a sufficiently strong case, he must pursue this
through the courts of general jurisdiction. The reason for this is that although Alexander is an
entrepreneur and Igor is a commercial driver, the incident did not take place in the course of
entrepreneurial activity between them.
For similar reasons, Alexanders case against OOO Carfix would also be dealt with in the
courts of general jurisdiction.
In reality, Alexander would probably be insured, even though it transpires that Igor is not
insured. This means that Alexanders insurance company may take action on his behalf under
its power of subrogation, instead of Alexander taking action on his own behalf. Such action
would be dealt with through the arbitration court.

(b)

Factors the courts will take into account


The courts would have to consider the case with reference to the provisions of the Civil Code
in respect of non-contractual obligations.
The losses arising from the first accident emerge from a non-contractual situation. It is likely
that Alexander and Igor do not know one another, but the law does provide protection in
instances where one party inflicts damage on another.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


The court would first have to consider whether damage occurred. This is straightforward, as
Alexanders car has obviously been damaged and has required expensive repairs as a direct
consequence of the accident. The next considerations are the alleged unlawful conduct of the
other party (Igor) and the causation behind the incident the court would have to consider
what actions were taken by the third party that inflicted the damage. It is then necessary to
establish fault, though not necessarily intent. The Civil Code imposes a liability on then
owner of the property that inflicts damage, so Igors employer is likely to be the defendant in
the action as it would be vicariously liable for Igors actions or inactions.
The case against OOO Carfix arises from a contractual arrangement, in that Alexander
entered into a contract for the company to repair his car.
A third case may involve the owner of the building and his or her action against Alexander.
As Alexander is the owner of the car, there is a potential liability, though it would seem that
Alexander would have a claim against OOO Carfix for any damages payable to the owner of
the building. The process that the court would follow is similar to that described above.
(c)

Rights and obligations


Alexander
Alexander has the right to pursue legal action against Igors employer or Igor personally for
the damage inflicted in the first accident. He has a greater prospect of success if he sues the
employer, as the latter would be vicariously liable if the case is proven.
He also has the right to sue OOO Carfix for the improperly completed work on his vehicle,
the damage caused to the vehicle and any monies that he has to pay to the owner of the
building, provided that it can be established that the steering failure was a consequence of the
work. He may also sue the company for the extra money that he has paid for the flight, but he
is unlikely to succeed in this action as the loss is remote and could not be foreseen by OOO
Carfix.
Alexander may be obliged to recompense the owner of the building for the damage caused to
the building.
Igor
As an employee of his company, Igor may be liable to make good any losses arising from
Alexanders claim against the company if his company takes a regress action against him.
Igor may be criminally liable for driving without insurance, though the responsibility may fall
to the employer. If it can be established that Igor drove through a red signal, he will be
criminally liable for careless driving.
Igors employer
The employer is the owner of the commercial vehicle and as such bears responsibility for any
loss inflicted by the property under the provisions of the Civil Code. As mentioned above, it
may choose to take a regress action for recovery of the losses from Igor, though the amount
he would be expected to pay is limited by the law. In practice, it would also be limited by his
personal ability to pay.
The employer would probably be liable under criminal law for failing to insure its driver.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


OOO Carfix
If it can be established that defective work was a the direct cause of Alexanders second
accident, the company has liability for damage caused to Alexanders car and to pay
Alexander damages for any payments made to the owner of the building.
It would not be liable for the extra expenditure on Alexanders rescheduled flight. The
company has a right to take action against the individual employee to recover any monies
paid to Alexander in respect of damage to the building.
Engineer employed by OOO Carfix
The engineer is in a similar position to Igor. Provided he is employed under a labour contract,
the employer will be liable for his actions in the ordinary course of business but can sue him
if it has lost money as a result of his defective work.
Owner of the damaged building
The owner of the building can sue Alexander as the owner of the vehicle that caused the
damage.
Answer 23 BANK GUARANTEE
(a)

Nature, rights and obligations


A bank guarantee is one of the six means of securing an obligation set down in the Civil
Code. It is a written contractual arrangement through which the bank undertakes to make a
payment that is legally due to be paid by one person to another if the principal debtor fails to
pay. Guarantees are common in banking practice to underpin transactions carried out by
customers who are deemed to be sufficiently creditworthy.
Under a bank guarantee, there are three parties. The debtor is the party who borrows the
funds. The creditor is the party who makes funds available. The guarantor is the party that
secures the debtors obligation to the creditor. Therefore, a minimum of two contracts exist:
there is a credit agreement between the debtor and the creditor and a collateral contract
between the creditor and the guarantor. There may be a third contract between the debtor and
the guarantor if they choose to execute such a contract.
Guarantees are not transferable to a third party.
The right of the creditor is to seek repayment of all monies due, in the first instance from the
principal debtor and then from the guarantor if the debtor cannot (or will not) pay. The credit
contract will normally lay down a right to recover fees and expenses incurred in relation to
recovery of the debt as well as capital and interest due. It may also provide for missed profits.
Institutional lenders often lay down additional financial and non-financial covenants to
reinforce their position should default arise once the credit is in place. The creditor may also
have obligations under the contract.
The right of the debtor is to use the funds borrowed and to repay the borrowing according to
the agreed schedule. In some instances the debtor may be able to pay ahead of schedule,
though this may be subject to penalty. The obligation is to repay all monies due in
accordance with the conditions of the contract. As mentioned above, there may be additional
obligations.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


The guarantor has few rights unless these are stipulated in the guarantee or in a separate
agreement with the debtor. It is therefore a serious commitment that will be rigorously
assessed before it is sanctioned. Normally, the guarantor will have a right of subrogation over
any collateral provided by the debtor, so that if the debtor fails to pay and the guarantor is
called upon to make good the debt, the guarantor has a claim over the collateral. Unless
specified in a contract, a guarantor has no automatic right to information in relation to the
debtors conduct towards the creditor.
The guarantors main obligation is to pay if the debtor does not do so. This is usually
irrevocable, as it is impossible to walk away from a contractual obligation unilaterally. The
guarantor may refuse to meet a claim by the creditor if it is inconsistent with the terms of the
guarantee or if the claim is made out of time.
(b)

Termination of guarantors obligation


A guarantee is usually given to support the fulfilment of an obligation over a fixed period of
time. Therefore, if the obligation is fulfilled by the debtor, the guarantee will no longer be
required. Likewise, if the term of the guarantee expires, the guarantor is released from
obligation. As it is not certain that the debtor will discharge the obligation in a timely
manner, the creditor may insist that the guarantee is in place for a longer period than that for
which the credit is granted.
Under certain circumstances, the creditor may release the guarantor from the obligations
under the guarantee. This may arise when the level of financial commitment has reduced to a
certain threshold, or where the debtors perceived ability to clear any obligations is confirmed
beyond doubt.
A guarantee may be terminated if it has been executed in a manner inconsistent with
contractual requirements.

Answer 24 OOO GOURMAND


The purpose of this question was to test the candidates knowledge of contract law in the context of
mercantile transactions and their ability to apply this to the scenario.
(a)

Cases of caviar parties and enforcement of rights


Andrei ordered the caviar from a commissioner representing the distributor in October 2008.
As the order was placed three months before the company was scheduled to come into
existence, it is a pre-registration contract for which he is personally liable. Andrei could not
bind the company by his actions as at the time he entered into the agreement to buy the caviar
the company did not exist as a separate juridical person. At that time, he could not be an
agent for the company as it is impossible to be an agent when there is no principal.
The commissioner is a representative of the supplier but entered into the contract in his own
name under the laws of representation. Therefore, the other party to the contract is the
commissioner and not the company he represents.
These two parties can enforce the rights and obligations under the contract. However, civil
law also states that the producer of the goods may have a liability if there is resultant harm to
others. In practice, as the product was rare caviar from Azerbaijan it would be difficult (but
not impossible) to litigate against the producer unless it had a Russian subsidiary company.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(b)

Andreis communication
In order for a binding contract to come into existence, there must be an offer and acceptance.
An offer is a statement that a person is willing to be bound on specific terms while an
acceptance is an unconditional agreement to all of those terms.
The law distinguishes between an offer and a representation to the public at large. Once an
offer is accepted, a contract is formed. A representation to the public is not an offer but is
regarded as an invitation to persons with knowledge of this representation to make offers.
Examples of this are general advertisements in the newspaper, leaflets and goods displayed in
a shop window.
A communication may be regarded as an offer if it is addressed to one or more specific
persons and is sufficiently detailed in relation to the terms of the proposal, including the terms
and conditions of the bargain.
There is sometimes a thin dividing line between these two concepts. In the scenario, Andrei
has written to 50 clients stating that a maximum of two boxes will be made available to each
client at a specified price. If the communication had been addressed to 500 potential clients,
there would be little doubt that this would be an invitation to do business and not a formal
offer. It would be quite impossible from a practical point of view to hold stock indefinitely
while replies were awaited from all 500 clients, some of whom would never reply. In this
particular case however it could be argued that the 50 persons that Andrei has contacted have
received a very specific proposal, with the content of the offer proposing a maximum quantity
and a specific price.
Andreis communication with the 50 clients would probably be regarded as an offer, which
the prospective clients are free to accept or reject. However, the ability of the client to rely on
this would depend on other factors, such as:

(c)

how specific the proposal was;

whether the invitation to buy was time limited; and

whether the communication indicated any actions that had to be taken to secure the
goods (e.g. proposing a method of acceptance).

Arrangements created by Helena parties rights and obligations


Helena has entered into an agreement to purchase five bottles of rare French truffles. Under
the Civil Code, she has therefore a contractual obligation to purchase the truffles and make
the appropriate payment to the supplier. The obligation is a personal one, as Helena has
negotiated the transaction before the company comes into existence. Therefore, the same
rationale applies in this situation to Andreis purchase of the Azeri caviar.
Helenas transaction was probably motivated by her knowledge that five clients would be
prepared to buy the product if it came to the market. However, this does not mean that she
can bind them contractually, as the law requires acceptance to be communicated to the person
making the offer. Her action involves an element of risk and makes little commercial sense,
as the product is of high value and to despatch it without confirming an order or terms of
payment is foolhardy in the extreme.
There is little doubt that Helenas action in sending a box of truffles to each client is an offer,
but the recipients of the product are not obliged to complete the transaction as they have not
accepted the offer. If the prospective clients do accept Helenas offer, then it is on the basis
of a personal contract between her and the clients and not the company.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


It follows that the invoice is of token value only as a delivery note, as the recipient of the
boxes of truffles can choose to accept or reject Helenas offer of the goods.
(d)

Buffalo steaks 10% discount


Leonid has entered into an agreement to purchase the Asian buffalo steaks and this is binding
on him personally and not the new company that he has formed with his colleagues.
The Civil Code prevents him from escaping from the provisions of the contract on the basis of
a subsequent discovery that the product is an unpopular type of meat. The general principle
that applies here is that the risk lies with the buyer. The Latin phrase caveat emptor (let the
buyer beware) is often used to describe this. As a purchaser, it was up to him to satisfy
himself as to the credentials of the product before buying it. He cannot argue that because he
is wiser now the situation has changed.
Leonid cannot insist on a 10% discount if the terms of the original contract included a specific
price. The supplier can therefore claim full price from him.
As in the above situations, the company does not have liability for the contract. However, if
the goods are sold on to its own customers, it could be argued that the company has
concluded a contract by its actions. By accepting the goods and selling them, it is acting in a
way that tacitly confirms its acceptance of a contractual arrangement.

Answer 25 SECURING OBLIGATIONS


(a)

Meanings
Pledge
A pledge is a secured contract for credit through which two parties enter into a series of rights
and obligations. The two parties are the lender and the borrower. The lender secures a right
over the property of the borrower, usually for a specified period of time, in return for making
funds available to the borrower. The borrower agrees to pay capital and interest according to
the schedule agreed in the contract.
A pledge must be executed in notarial form and registered in the unified State register.
Pledges may be used to enable commercial investors to purchase real estate. Marketed as
mortgages, they are likely to become increasingly popular for the purchase of residential
property.
A pledge always includes a set of rights in favour of the lender and obligations incurred by
the borrower. These are designed to safeguard the position of the lender should the borrower
fail to meet the obligations. As well as the obvious requirement to repay the capital and make
interest payments on the outstanding sum due, the contract may also require the borrower to
maintain the subject of the pledge (usually real estate) in good repair and to insure it.
Surety
A surety is an example of a collateral contract. It is an arrangement whereby a third party
enters into a commitment that if a debtor does not repay a creditor, the surety will bear
subsidiary responsibility for the obligation. This includes all of the obligation specified in the
contract, which may comprise not only capital and interest but also forfeits, costs and other
charges.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


It is important to note that when a loan is backed by a surety two contracts come into
existence. The first contract is between the creditor and the debtor: the second contract is
between the creditor and the surety. Unless they choose to do so, there is no need for a
contract to be completed between the debtor and the surety.
(b)

Actions by a creditor when a debtor fails to meet the obligation


Pledged property
In the event of default by a borrower, the lender can sell the pledged property to repay the
debt. This may be achieved by agreement with the debtor or by petitioning the court. In
order to realise the security it is necessary to sell the object of the pledge by open auction. If
the parties agree to the sale of the object of pledge without going to court, they agree an initial
(reserve) selling price. If the sale is sanctioned by the court it is up to the court to fix the
selling price.
If the auction fails to attract a purchaser, the object of the pledge may be sold at a subsequent
auction. If all attempts to sell at auction fail then the creditor has a right to take ownership of
the security, having first served one months notice that the sale has failed and of the intention
to retain the object. In satisfying the obligation in this way, the lender may not value the
property at an amount lower than 10% below the reserve price at auction.
Realisation of pledged property may result in a surplus or deficit situation. If the sale results
in a surplus, the creditor must pass any surplus to the debtor once the debt and associated
costs are satisfied. If there is a deficit and the debtor owes an outstanding amount to the
creditor, the latter may take action against the former for the monies due. This may be futile,
of course, as the major reason for default is that the debtor may not have monetary resources
or other assets.
Surety
In relation to surety, the surety is only called upon to pay the debt, or part of the obligation
where applicable, if the principal borrower fails to do so. Therefore, if the borrower is in
default on the obligation to pay, the lender will notify the surety that this is the case and will
hold the surety accountable for the sum due.
In the event that a surety has to make a payment to the creditor on behalf of the debtor, the
surety may have a subsidiary claim against the debtor. This is sometimes reserved as a power
of subrogation.

Answer 26 ZAO BOOK


(a)

Igor rights and obligations


Igor entered into a contract with ZAO Book and committed himself to appear at the exhibition
in person. The scenario suggests that Igor has sufficient celebrity status to attract those
attending the exhibition to visit the stand and have books signed by him.
Igor would argue that he has engaged a substitute author to attend the exhibition and that this
author would provide a very similar service. However, the right to sub-contract the provision
of his personal service to a third party is limited in this instance because the services of two
different authors are not homogeneous. All authors are different and attract different readers.
If ZAO Book has publicised its presence at the exhibition by using Igors name, prospective
customers would probably not be impressed by seeing a different author there on the day of
the exhibition. It is also likely that ZAO Book would have bought in copies of Igors books
for sale at the exhibition.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


It is clear from the facts of the case that ZAO Book would have a strong case for arguing that
Igors substitution of another author is undue fulfilment of the obligation. From this would
flow a right of ZAO Book to be compensated.
(b)

Claims by ZAO Bank against Igor


There are numerous consequences of Igors failure to attend the exhibition and his undue
fulfilment.
ZAO Book would be entitled to reimbursement of the up-front fee paid to Igor and to
withhold the outstanding fee, even if Igor promised to pay the fee to the substitute author.
The company would also be able to claim forfeit on the grounds of Igors absence. The
forfeit would probably be stipulated in the contract. In addition ZAO Book may claim for
missed profits arising from its inability to sell Igors books at the exhibition, or at the very
least, missed profits from the reduced level of sales due to the author not being present to sign
copies of his books.
It is questionable whether ZAO Book would be able to claim for other costs of exhibiting at
the convention unless it could successfully prove to the court that the whole point of
exhibiting was to provide a showcase for sale of Igors books and no others. It is unlikely that
any company would take a stand at an exhibition to provide a platform for just one author.
Therefore, it would not be able to claim for the costs incurred in engaging the services of
OOO Show or OOO Move. This is not an absolute certainty however, as the issue turns on
just how big an attraction Igor would be to the visiting public.
The problems in the scenario may have been avoided by drafting the contract with Igor much
more precisely, and in particular specifying that only personal attendance by Igor would be
regarded as due fulfilment of the contract.

(c)

Effect on outcome of force majeure


Many contracts include a force majeure clause that enables the party that breaches the
contract to withdraw from the contractual obligations without penalty. Therefore, if Igors
absence was brought about by force majeure and he could prove this to the court he would be
able to escape from the commitments in the contract.
To argue that his non-attendance at the exhibition was due to a genuine force majeure, he
would have to establish that there was some supervening incident or circumstance that was so
profound or important that it genuinely prevented him from providing the service for which
he was committed and that the incident or circumstance was completely outside his control.
For example, if Igor was under the influence of drugs or had been arrested for a serious
violation of traffic rules this is not force majeure. A circumstance more likely to be accepted
would be the sudden death of a near relative that occurred sufficiently close to the date of the
service to be provided.
The fact that Igor had time to engage the services of a replacement author does suggest that
the action was not underpinned by circumstances that would be regarded as a force majeure.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(d)

Entitlement to sub-contract
The absence of a provision stating that OOO Move should provide the services without
contracting to a third party may mean that it could transfer the obligation to another company.
OOO Move may be regarded as a general contractor, in which case it will have sub-contracted
the duty to perform the obligation to another company. However, as a general contractor,
OOO Move would be responsible for ensuring due fulfilment of the obligation and could be
sued by ZAO Book if the contract was not properly performed. In turn, OOO Move would be
able to sue the third party provider for undue fulfilment of the obligation. It follows that the
duty to reimburse the third party falls to OOO Move and not ZAO Show.
It could be argued that there is little difference between the duties of personal fulfilment
imposed by contract law on Igor and OOO Move. However, the two services are entirely
different, assuming that services for safe and secure moving of the equipment could be
provided by many companies, whereas the service to be provided by Igor is unique.

Answer 27 CONSTRUCTION COMPANY X


(a)

Obligation to return goods


X is obliged to return the goods he did not order as the obligation to return unjust enrichment.
Under general rule a person who has acquired or saved property (purchaser) without the
grounds, established by law, other legal acts or the transaction, at the expense of another
person (victim) is obliged to return to the latter the property acquired or saved unjustly (unjust
enrichment). Assets comprising the unjust enrichment of the purchaser must be returned to
the victim in kind.

(b)

Responsibility for safekeeping


The purchaser is liable to the victim for any fortuitous shortage or deterioration of the
groundlessly acquired or saved property, which has taken place after he knew or should have
known about unjust enrichment. Until this time he is answerable for intent or gross
negligence. In this case X was aware of the unjust enrichment as he had not ordered the
goods, thus he was responsible for safekeeping the goods and in case he did not have a special
place for keeping this kind of goods he was obliged to rent a warehouse (these goods could
not have been kept in the yard without damage caused to them).

(c)

Reimbursement of expenses
In case of return of the property groundlessly received or saved or in case of the
reimbursement of its value, the purchaser has the right to demand that the victim compensate
for the necessary expenses on the maintenance and upkeep of property since the time from
which he is bound to receive income with the off set of the received benefits. The right to
compensation is lost if the purchaser deliberately retained property subject to return.
In this case X did everything possible to inform the supplier about the goods received and was
ready to give them back at any time. And it was only upon the suppliers will that the goods
were not given back to him immediately. X also did everything he could to safe keep the
goods and to prevent all kinds of losses to the goods. That is why his expenses in regard of
renting a warehouse are to be reimbursed by the supplier in full.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(d)

Consequences of non-return
If it is impossible to return the groundlessly acquired or saved property in kind, the purchaser
compensates to the victim for the actual value of this property at the time of its acquisition
and also for the losses, caused by the subsequent change in the value of property, if the
purchaser has not reimbursed its value at once after he knew about unjust enrichment.
A person who groundlessly used the property of other people for the time being without his
intention to acquire it or used the services of other people is required to recompense the
victim all that he has saved owing to such use at the price existing at the time when this use
ended and in the place where the use took place.
In this case X was aware of the unjust enrichment but failed to return the goods in full. The
missing part of goods must be reimbursed in kind, or as X failed to do that in monetary form
at the price at the moment of acquisition (July 10) and also to reimburse the losses caused by
the price fluctuation (in this case 20%).

Answer 28 OOO ABC


(a)

Rights of the owner


The general rules on property should be applied to the animals , unless otherwise stipulated
by the law or by the other legal acts. The injury inflicted on the property of an individual is
subject to full compensation by the person who inflicted the damage.
While satisfying the claim for redressing injury, the court of law, in keeping with the
circumstances of the case, binds the person responsible for the infliction of injury to
recompense for the losses caused. Losses includes:

(b)

the expenses which the person, whose right has been violated, made or will have to
make to restore the violated right;

the loss or the damage done to his property (in this case it could be the expenses on
medical treatment, the acquisition of medicines); and

compensation for the moral damage (which the owner of the dog has right to ask
for). Moral damage should be compensated regardless of the property damage
subject to compensation.

Conclusion of contracts
The contract may be concluded in any form, stipulated for making the deals, unless the law
stipulates a definite form for the given kind of contracts.
The purchase and sale of the office building is the subject to the state registration and this
contract is regarded as concluded in written form and from the moment of its registration,
unless otherwise stipulated by the law.
The contract of sale of office furniture and computers must be in written form.

(c)

Risk of damage
The risk of an accidental destruction of the property or of an accidental damage inflicted on it
is borne by its owner, unless otherwise stipulated by the law or by the contract.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Under the contract of sale of office furniture the risk of accidental destruction or damage of
the property is transferred to the buyer since the time when in keeping with the contract the
seller is deemed to have performed his duty of handing over the property to the buyer.
Under the contract of purchase and sale of the office building the alienation of the property is
subject to the state registration and in this case the right of ownership arises with the buyer
from the moment of such registration, unless otherwise established by the law.
(d)

Owner of building
If it is stipulated by the contract of sale of office furniture which was signed on 1 October
2008 and it was the moment of its transfer that the right of ownership arise from this moment
and the owner of office furniture at the moment of fire was OOO EFG.
Under general rules the building is subject to the state registration the right of ownership arise
with the buyer from the moment of such registration. In the case the parties to the contract of
purchase and sale of the office building signed documents proving transfer of property to the
buyer on 25 October 2008 that the owner of building at the moment of fire was also OOO
EFG.

(e)

Dissolving contract
OOO EFG has no right to demand dissolving of contract of purchase and sale of the building
and office equipment because at the moment of fire the contracts were signed by the parties
and the property under this contract were transferred to OOO EFG.
Under general rules the contract may be dissolve only by an agreement between the parties.
Upon the demand of one of the parties, the contract may be dissolved or cancelled by the
court decision only:
(1)
(2)

in case of an essential violation of the contract by the other party;


in the other cases, stipulated by the Civil Code of the Russian Federation, by the
other legal acts or by the contract.

An essential violation is recognised, as violation of the contract by one of the parties entails
losses for the other party the losses, to a considerable extent depriving it of what it could have
counted upon when concluding the contract.
(f)

Demand for payment


OOO ABC has the right to demand the payment in full because this payment forms his
obligation (the obligation of buyer) under the contract of purchase and sale and, as discussed
above, there are no grounds for dissolving or non-execution of obligations under the contract.

(g)

Duties of owner
The owner of a building that is of cultural and historical value has to take care under such
kind of property and In the cases, when the owner carelessly maintains these values, as a
result of which they may lose their importance, such values may be withdrawn from the
owner in accordance with the court decision, by way of their redemption by the state or by
their sale at an open auction.
In case of the redemption of the cultural values, the owner is recompensed their cost in the
amount, fixed by the agreement between the parties, and in the case of a dispute arising
between them by the court. If the values are sold at an open auction, the owner receives the
earnings from the sale, less the outlays for holding the auction.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Answer 29 MR IVANOV
(a)

Circumstances
Mr Petrov and Mr Sidorov have the right to claim reimbursement for damage inflicted by Mr
Ivanov, since according to the Civil Code of the Russian Federation the person who inflicted
the damage should reimburse, in full, damage inflicted to a citizen or citizens property as
well as damage inflicted to the property of a legal entity.
Legal entities and citizens whose activity is related to enhanced danger for others (use of
transport vehicles is one of activities) are to reimburse the damage inflicted by a source of
such enhanced danger unless they can prove that the damage occurred due to force majeur or
the victims intention. Therefore, Mr Petrov and Mr Sidorov have the right to claim
reimbursement for damage inflicted by Mr Ivanov providing there was unlawful conduct,
damage inflicted and causal relationship between the unlawful conduct and the infliction of
damage. There is no need to determine the fault of the person who inflicted the damage.

(b)

Who should reimburse?


The damage will be reimbursed by a legal entity or a citizen, who possesses the source of
enhanced danger (owns it, has the right of economic disposal of operative management or
disposes of it by the right of lease, by power of attorney or by an order of an appropriate
body, etc).
Proceeding from that mentioned above, in the three given cases the defendant for the damage
is:
(1)

Company X, that owns the car and hires Mr Ivanov as a driver, since it is Company
X who owns the source of the enhanced danger;

(2)

Mr Ivanov, who drove the car according to power of attorney issued by Mr Sysoev;

(3)

Mr Sysoev, who allowed Mr Ivanov to drive his car although Mr Ivanov had no
driving licence. Mr Sysoev may be exempt from the responsibility only in case Mr
Ivanov took the car from Mr Sysoev without the consent of the latter and in
violation of the law. In case it was Mr Sysoevs fault that Mr Ivanov took the car in
violation of the law, responsibility will be borne jointly. But if Mr Sysoev wittingly
passed the car into the possession of Mr Ivanov who had no driving licence,
responsibility for the damage inflicted is wholly and exclusively borne by Mr
Sysoev.

Answer 30 TYPES OF OBLIGATION


(a)

Damage to an individual
In case of maiming an individual (or of any other damage caused to his health) compensation
will be extended to:

1036

the earnings (i.e. income) which has been lost by the injured person and which he
had or could definitely have; and

the expenses incurred by damage caused to his health (including the expenses on
medical treatment, additional nutrition, the acquisition of medicines, prosthesis, care
by other people, the sanatoria and spa treatment, the acquisition of special transport
vehicles, retraining, if it is found out that the injured person is in need of aid of
these kinds and care and has not the right to receive them free of charge).

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


In estimating the lost earnings, the disability pension (awarded to the injured person in
connection with mutilation or any other damage caused to his health) and other pensions,
benefits and other similar payments (awarded both before and after the infliction of damage
caused on his health) are not taken into account and do not result in a reduction of the amount
of the compensation for the injury (i.e. are not be counted towards the redress of the injury).
The earnings received by the injured party after the impairment of his health is also not
counted towards the redress of injury.
The extent and amount of the redress of injury due to the injured party in keeping with this
rule may be increased by the law or the agreement.
The amount of the earnings lost by the victim and subject to compensation is determined as a
percentage of the average monthly earnings before maiming or any other impairment of
health or before the loss of the capacity for work, which corresponds to the degree of the loss
by the victim of his professional ability to work and, in the absence of professional ability to
work, to the degree of the loss of general capacity for work.
The lost earnings of the victim includes all types of taxable payment for his labour under
labour and civil-law contracts in the place of his main work and in case of holding more than
one office. Settled apart are lump-sum payments, in particular compensation for the non-used
leave of absence and the retirement benefit in case of dismissal. The paid benefit is reckoned
over the period of temporal physical disability or of maternity leave. Income from business
activity, and also the authors fees is included in the lost earnings, with income from business
being included on the basis of the data supplied by a tax inspection team.
All types of earnings are reckoned in amounts charged before tax.
The average monthly earnings of the injured person is reckoned by dividing the total sum of
his earnings for the 12 months of work that preceded the impairment of his health by 12. If
the victim had worked for less than 12 months by the time of the infliction of injury, the
average monthly earnings is reckoned by dividing the total sum of earnings for the actually
worked number of months that preceded the impairment of his health by the number of these
months.
The months during which he has worked not in full measure are replaced at the wish of the
victim by the preceding months in which he worked in full measure or are excluded from the
counting if it is impossible to replace them.
In case where the victim of injury account is taken at his wish of his earnings before the
dismissal (or of the usual amount of labour remuneration for the worker of his qualification in
the given locality) but not less than five-fold statutory minimum amount of the wage or
salary.
If stable changes improving the property status of the victim (a rise in the wage according to
the post held, the transfer to a high-paid job, employment after the graduation from an
educational establishment with full-time instruction and in other cases when changes are
stable and when it is possible to alter the payment for the victims labour) took place before
the maiming or other impairment of his health, account is taken only of the earnings which he
received or should have received after the appropriate change in case of estimating his
average earnings.
(b)

Health of minors
In case of maiming or any other injury inflicted on the health of a minor who has not attained
14 years-of-age and who has not got earnings, the person responsible for the inflicted injury is
obliged to reimburse the expenses incurred by the damages caused to his health.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Upon the attainment by a minor of 14 years-of-age, and also in the event of the infliction of
injury on a minor from 14 to 18 years-of-age, who has not got earnings, the person
responsible for the inflicted injury is obliged to redress the injury caused by the loss of, or
decreased in, capacity for work in addition to the reimbursement of the expenses incurred by
the impairment of his health by proceeding from the five-fold statutory minimum amount of
the wage or salary.
If by the time of the impairment of his health a minor had earnings, the injury is redressed on
the basis of their amount, but not less than the five-fold statutory minimum amount of the
wage or salary.
After the minor begins his labour activity after the injury was inflicted on his health, he has
the right to demand an increased amount of compensation for the injury on the basis of his
earnings, but not less than the amount of labour remuneration, fixed according to the post he
occupies or the earnings of the worker of the same qualification in the place of his work.
(c)

Death of a bread-winner
In the event of the death of the victim (bread-winner) the right to the redress of injury belongs
to:

the non-able-bodied persons who were dependants of the deceased person or who
had by the time of his death the right to receive maintenance from him;

the infant of the deceased person which was born after his death;

one of the parents, the spouse or any other family member, regardless of his ability
to work, who does not work and takes the care for his dependent children,
grandchildren, brothers and sisters who have not attained 14 years-of-age or
although have attained the said age but are in need of care by other people because
of poor health according to the finding of medical bodies;

the persons who were dependants of the deceased person and who have become
non-able-bodied during five years after his death.

One of the parents, the spouse or any other family member, who does not work and takes care
of the children, grandchildren, brothers and sisters of the deceased person and who has
become non-able-bodied during the period of this case, retains the right to the referred of
injury after the end of the care for these persons.
Injury is redressed for the following persons:

1038

minors until the attainment of 18 years-of-age;

students of over 18 years-of-age until the graduation of educational establishments


with full-time instruction and at least until 23 years-of-age;

women of over 55 years-of-age and men of over 60 years-of-age;

invalids (disabled persons) for the time of disability;

one of the parents, the spouse or another family member who take care of his
dependent children, grandchildren, brothers and sisters until the attainment by
them of 14 years-of-age or the change in the state of their health.

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 31 LIABILITY IN TORT
(a)

Tests of liability
Even where there is no contractual arrangement between persons or entities, liabilities can
arise in respect of their actions to one another. Such obligations arise from a duty not to do
harm to others. Therefore, if the actions of one person lead to consequential harm, this can
give rise to a civil action for financial compensation.
These non-contractual obligations are sometimes described in terms of torts, or civil
wrongs. They include negligence, trespass, slander, libel and deception.
There are four tests that are normally applied when cases of this nature are brought:

(b)

(1)

Actual damage must have occurred. This damage may be monetary in nature, such
as the loss of stock caused by a fire which in turn was caused by carelessness on the
part of an individual. The damage may be moral or non-pecuniary in nature. It may
also be physical damage to a person.

(2)

The damage must have arisen from the unlawful conduct of the person alleged to
have caused it. The conduct may involve taking actions that should not have been
taken, or alternatively omitting to take actions that would have prevented the
damage.

(3)

There must be a causal link between the damage and the conduct of the person. In
practice, this must be both reasonably proximate and foreseeable. For example, the
failure to drive a car with due care may cause an accident and may result in a claim
for compensation, but if the injured person failed to check in for a flight as a result
of the accident and that resulted in the loss of a contract to his business, the claimant
may not necessarily succeed in a claim for loss of business arising from the missed
flight as this may not be regarded as sufficiently foreseeable or proximate.

(4)

There is fault, either through intent, carelessness or oversight on the part of the
person inflicting the damage. This does not necessarily require proof of intent to
cause damage: it may arise from pure carelessness or oversight.

Circumstances of absolving an individual from responsibility


It is a principle of law that an individual acting in a master-servant relationship under a
labour agreement may be absolved from responsibility to the third party by the organisation
employing him being responsible for his actions. This is sometimes called vicarious
responsibility. The employer takes responsibility for the employees actions. This is
illustrated by a company being responsible for damage caused in a car accident if the
company owns the car.
This principle is not without boundaries. If the employee is in the course of his duties but is
acting in a manner inconsistent with those duties, the individual and not the company may be
held liable. Similarly, the company can sue the employee for harm caused.
The individual causing the damage may also be absolved if the damage arose with the express
or implied consent of another person or entity.
If a government official causes damage, that damage is redressed by the appropriate
government body, with compensation met from public funds.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Activities that are subject to special hazards and that cause harm are usually redressed by the
owner or the resources or those responsible for them rather that the individual who directly
inflicted the damage.
(c)

Right of regress
The Civil Code provides for the owners of resources incurring strict liability for damage
caused by application of those resources. Therefore, if a tile or brick falls from a damaged
building and injures a pedestrian, the owner of the building is liable. Similarly, if damage is
caused by a company vehicle, the company is liable.
Regress arises where the employer incurs a liability to compensate a third party and then takes
action against the employee to recover monies paid.
The right of regress may be included in the labour agreement. However, the Civil Code sets
limits on the amount that may be claimed from the employee with reference to a maximum
proportion of his remuneration.

Answer 32 EMPLOYMENT RELATIONS


(a)

Grounds for termination of the labour contract


(1)

Agreement between the parties.

(2)

Expiry of the labour contract, except for the cases when the labour relations actually
continue and none of the parties demanded their termination.

(3)

Discontinuation of the labour contract at employee initiative.

(4)

Discontinuation of the labour contract at employer imitative.

(5)

Employee transfer to another employer at his request or with his consent or transfer
to an elective work (position).

(6)

Employee refusal to continue to work because of the change of the proprietor of the
organisation, change of the agency affiliation (subordination) of the organisation or
its reorganisation.

(7)

Employee refusal to continue to work because of the change in essential conditions


of the labour contract.

(8)

Employee refusal to transfer to another job because of the health condition as


specified in the medical statement.

(9)

Employee refusal to transfer because of the employer relocation to another locality.

(10)

Circumstances beyond the will of the parties.

(11)

Violation of the rules of conclusion of the labour contract specified in the Labour
Code or another federal law if this violation rules out an opportunity to continue to
work.

The labour contract may be discontinued also for other reasons envisaged in the Labour Code
and other federal laws.
In all cases, the day of employee dismissal is considered to be the last day of his work.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(b)

Labour contract concluded for a certain term


The labour contract concluded for a certain term will be terminated upon its expiry, with the
employee being warned of it in writing no later than three days before the termination.
The labour contract concluded for the time of fulfilling certain work will be terminated upon
termination of this work.
The labour contract concluded for the time of execution of the duties of the absent employee
will be terminated with the arrival of this employee to work.
The labour contract concluded for the period of fulfilling seasonal works will be terminated
upon expiry of the certain season.

(c)

Labour contract terminated upon the employees initiative


The employee may terminate the labour contract having warned the employer of it in writing
two weeks in advance.
At the agreement between the employee and the employer, the labour contract may be
terminated also before the expiry of the time of warning of the dismissal.
If the employee application of dismissal at his initiative (own will) is stipulated by the
impossibility to continue the work (admission to educational institution, retirement and other
cases), as well as in cases of established violation by the employer of the laws and other
normative legal acts containing the norms of labour legislation, the terms of the collective
contract, agreement or labour contract, the employer is obliged to terminate the labour
contract within the time period indicated in the employee application.
The employee may withdraw his application any time before the expiry of the time of
warning of the dismissal. The dismissal in this case is not effected if another employee has
not been invited for this job in writing who, according to the Labour Code and other federal
laws, may not be refused to conclude the labour contract.
Upon expiry of the time of warning of the dismissal, the employee may stop fulfilling his
work. On the last day of work, the employer must hand out the work-book to the employee,
other documents pertaining to work if there is a written application of the employee, and clear
the final payments.
If the labour contract has not been terminated, and the employee does not insist on the
dismissal upon expiry of the time of warning of the dismissal, the labour contract is not
terminated.

(d)

Labour contract terminated upon the employers initiative


(1)

Liquidation of the organisation or termination of activities of the employer out of


natural persons.

(2)

Redundancy or staff cuts in the organisation.

(3)

Employee failure to correspond to the occupied position or fulfilled work because


of:
(a)
(b)

health condition as specified in the medical statement;


insufficient qualification as confirmed by the results of the certification.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(4)

Change of the proprietor of the organisation (with respect to the manager of the
organisation, his deputies and the chief accountant).

(5)

Numerous failures to fulfil labour duties by the employee without justifiable reasons
if he has a reprimand.

(6)

Single severe violation by the employee of the labour duties:


(a)

absenteeism (absence at the work place without justifiable reasons for


more than four straight hours within a working day);

(b)

reporting for work in the state of alcoholic, narcotic or other toxic


impairment;

(c)

disclosure of the secret protected by the law (state, commercial, service


and other) that became known to the employee as a result of execution of
the labour duties by him;

(d)

committing a pilferage at the place of work (including a minor one) of


others property, embezzlement, wilful destruction or damage to the
property as determined by the court ruling that entered into legal force or
decision of the body in charge of administrative sanctions;

(e)

violation by the employee of the safety requirements if this resulted in


severe consequences (industrial accident, disaster) or is known to have
created a real hazard of such consequences.

(7)

Committing culpable actions by the employee directly serving the monetary or


commodity values if these actions provide grounds to lose confidence in him on the
part of the employer.

(8)

Committing an immoral deed by the employee engaged in educational functions


that is incompatible with the given work.

(9)

Adoption of an unjustifiable decision by the manager of the organisation (branch,


representation office), his deputies and the chief accountant that resulted in the
damage to the property, its illegal use or other damage to the property of the
organisation.

(10)

Single severe violation by the manager of the organisation (branch, representation


office), his deputies of their labour duties.

(11)

Presenting of faked documents or information known to be false by the employee to


the employer at the conclusion of the labour contract.

(12)

Revocation of the clearance for state secrets if the fulfilled work requires being
cleared for state secrets.

(13)

Cases envisaged in the labour contract with the manager of the organisation,
members of the collegial executive body of the organisation.

(14)

In other cases specified in the present Code and other federal laws.

Dismissal for reasons mentioned above in (2) and (3) are permitted if it is impossible to
transfer the employee to another job with his consent.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


It is not be permitted to dismiss the employee upon the employers initiative (except for the
cases of liquidation of the organisation or termination of activities of the employer out of
natural persons) in the period of his temporary disability and leave.
In case of termination of activities of the branch, representation office or other separate
structural division of the organisation located in another locality, discontinuation of the labour
contracts with employees of these structural divisions will be carried out according to the
rules envisaged for the cases of liquidation of the organisation.
Answer 33 GULNARA
Termination of labour agreement
The closure of the business at the airport, due to lack of orders, means that the business is to
close down in its entirety. This means that all of the jobs in the company are de facto
redundant the job cannot continue to exist if the company no longer exists.
Redundancy is therefore a just ground for the termination of the labour contract. The contract
can be terminated at the employers initiative.
In the event of redundancy, the employee is entitled to:

alternative employment if available;


severance pay;
pay in lieu of leave not taken.

If the business at the airport is part of a larger whole, the employees are entitled to be offered
alternative employment elsewhere.
If the whole company is closing down this will not be possible. Failure to provide alternative
employment entitles the workers to severance pay of up to one months pay. They are also
entitled to remain on the payroll for up to two months or until new employment is secured,
depending which occurs first.
In relation to annual leave, employees are entitled to a minimum of 28 days paid leave each
calendar year. The individual labour contract may provide for longer leave entitlement but
not shorter.
Provided Galina has worked at the company for more than six months, she has the right to
this leave. If Galina has not taken the leave from work that is due to her, she has two practical
options either to take the leave due to her during the statutory notice period or to demand
monetary compensation on a pro rata basis for the leave that has not been taken.
Answer 34 LABOUR CONTRACT
The rights and obligations under a labour contract are laid down at the outset by a set of conditions to
which both parties agree. These are governed by the normal general provisions of contract law but are
also specifically governed by the provisions of the Labour Code. By contrast, the conditions of a
contract with an independent contractor are for the supply of a given service within the parameters
defined in the contract. The Labour Code does not apply to services that are outsourced, as the
contractor is not an employee.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


The terms of a labour agreement are generally more prescriptive than those applicable to a contract for
services provided by an independent contractor. They lay down the times and place of work and the
manner in which the work must be performed. They may also lay down specific conditions relating to
personal conduct, including sometimes conduct outside of working hours. The contract provides for the
method of remuneration and the basis of remuneration (e.g. flat rate per hour, week or month).
Unless they are fixed term agreements, labour contracts are open-ended in nature, providing for
termination of the contract by a specified period of notice by either party. Contracts for service are
usually time-limited or terminate on conclusion of the provision of the relevant services.
By entering into a labour agreement, the employee obtains rights, such as maximum hours, minimum
breaks and minimum leave, all prescribed by the Labour Code. Additional rights pertain to certain
individuals, such as single mothers and those caring for others. These rights are not applicable to a
contract with an independent contractor.
Labour contracts may provide for obligations outside the working day. For example, it may be a
condition of employment that the individual undertakes professional studies. In relation to obligations
of the employer, these may extend beyond the period of employment, such as the duty to remunerate in
the event of redundancy. These factors do not apply to contracts with outside providers.
The nature of the contracts also differs in relation to disputes. The Labour Code provides for individual
and collective disputes to be resolved through specific processes. A dispute in relation to a contract
with an independent contractor is normally resolved with reference to the terms and conditions of the
contract itself and general contract law.
Lastly, under a contract of employment the employee may be indemnified for damage caused to third
parties. The independent contractor bears full responsibility for damage caused in the course of his
duties.
Answer 35 ZAO TEACH
The purpose of this question was to test the candidates understanding of matters relating to
employment law. The Labour Code governs relationships between the employer and the employee.
(a)

Redundancy meaning and implications


Redundancy is a term used in employment law to describe the dismissal of an employee when
the job no longer exists, or where the nature of the job has changed significantly. This occurs
when a whole business or part of it is closed down or if the business relocates to another
region or town. Redundancy is also caused by the nature of a job changing due to new
technological processes being introduced, or by general downsizing of the workforce.
In the context of company ZAO Teach, the closure of the training centre will result de facto in
the redundancy of the twelve persons employed there. The Labour Code requires the
company to offer alternative employment if opportunities exist elsewhere in the company.
This will of course depend on the manning level of other centres and the geographical
dispersal of the different centres owned by the company. It is unlikely that all twelve of the
employees would be offered opportunities or be prepared to relocate.
If no such alternative prospects exist in the company, the redundant employees are entitled to
severance pay of one months remuneration (in addition to what they are owed). They are
also entitled to remain on the payroll of the company for up to two months or until they
commence new employment elsewhere, whichever occurs sooner. The redundant employees
are also entitled to pay for any holiday leave that they have not taken prior to their release
from duties.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(b)

Legal implications
A labour agreement is a formal contract, governed specifically by the Labour Code. It
contains a set of rights and obligations of the two parties to the agreement the employer and
the employee.
According to the facts of the scenario, the earnings that have not been claimed were set aside
voluntarily to help the company to address its financial difficulties. These earnings remain an
obligation of the company as the workers have agreed to delay the payments, not to forfeit
them. The company is therefore legally obliged to pay these, and as it is only one centre and
not the entire company that is being closed down, the liability to the workers cannot be
avoided by the company.
In similar manner, the right to redundancy (or severance) pay is a legal entitlement under the
provisions of the Labour Code.
This cannot be set aside by the proposed actions of the company, which effectively seek to
hold the employees to ransom by withholding the salaries due to them.
The workers should refuse to sign the declaration giving up their rights to redundancy pay.

(c)

Implementation of change in terms


Like other forms of contract, a labour agreement can only be altered with the consent of both
signatories. Generally, a contract cannot be changed unilaterally, unless it contains clauses
permitting one party or the other to introduce such variations.
The labour agreement of the lecturers specifies the terms and conditions of employment,
including inter alia their hours of work, place of employment, method of remuneration and
principal duties. The agreement is regulated by the provisions of the Labour Code, which
lays down entitlement to the maximum number of hours worked, annual leave, rest periods,
etc. Sergei cannot change the terms of the labour agreement without consulting the lecturers.
It appears that the lecturers are aware of the companys difficulties, as some of the staff have
actually postponed their salary entitlements to help out. Some of the lecturers may therefore
be willing to switch to part-time work, even at a reduced salary. This will be more likely if
their skills are in demand and they can offer their services elsewhere to supplement the
reduced income from ZAO Teach.
Another course of action that Sergei may contemplate is to declare the role of the full-time
lecturer redundant. This may be justifiable if he is correct in his assertion that the only viable
business model is to use less full-time employees and switch to part-timers and outside
contractors. This course of action will have a short-term cost in that the company will have to
continue paying salaries for two months plus any entitlement to severance pay. The company
could then recruit part-time lecturers with an entirely different labour contract. It is possible
that some of the existing full-time lecturers would apply for these positions.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(d)

Legal status
The full-time staff of the company have a contractual relationship with the company governed
by the Labour Code. As such, they have extensive legal entitlements. The company must
adhere to the minimum terms of the contract as well as abide by all the provisions of the
Labour Code. The workers are protected from having to work excessive hours without
interruption and are entitled to rest days and holidays. They are entitled to have any disputes
resolved through the mechanisms created by the Code in relation to individual and collective
disputes. The Code also imposes obligations on the employer in the event of redundancy or
dismissal. Workers with young children and those caring for elderly relatives have additional
protection.
By contrast, the individual contractor has little protection other than general contract law as
set down in the Civil Code. The individual contractor delivers the agreed service under the
stated conditions and for the remuneration negotiated between the parties. There is no longterm relationship here, as both parties can walk away once the service has been delivered.
The great advantage to the company is that it only has to pay for what it gets. Contrast this
with the situation in which full-time lecturers have to be paid whether the college is busy or
not. However, the college has less consistency in its approach to repeat clients, especially if
the preferred outside provider is not readily available. Those engaging outside contractors
tend to have less control over the quality of output and can find it difficult integrating the
efforts of many outsiders towards the companys objectives.
The company may also encounter some practical difficulties in forming contracts with outside
providers in this field of work. For example, it may be considered inappropriate for an
outside lecturer to work for two or more competing organisations in the same city or town,
but it is difficult to prevent this in practice. With full-time and part-time employees such a
prohibition may be included in the labour agreement.
Both a labour contract and a civil contract may include a confidentiality clause, but this is
more difficult to impose and monitor in relation to the latter.

Answer 36 TERMINATION OF LABOUR AGREEMENT


(a)

Ways of terminating
A labour agreement is a formal contract between an employer and an employee. The content
of the labour agreement and the exercise of certain rights under the agreement are governed
by the Labour Code.
From a legal perspective, labour agreements are rather different to other types of contract.
Most commercial contracts have a beginning and an end. However, a labour contract is often
open-ended and therefore ongoing until either party chooses to terminate the agreement.
Secondly, labour contracts are divisible, so partial performance may be partially remunerated.
This contrasts with many commercial contracts, in which a failure to perform all the
obligations in the contract may result in no payment being due.
A labour contract may be terminated by the employer or the employee.
The employer may terminate the contract at the end of a fixed period stated in the labour
agreement. This is a common feature of labour contracts for individuals in senior positions,
such as chief executives and finance directors. It enables the organisation to anticipate the
need to change key personnel.

1046

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


In the event of serious contravention of internal rules the employer may summarily (instantly)
dismiss an employee without the contractual period of notice and without pay for the
equivalent period of notice. This would occur in the event of gross misconduct such as
physical violence against others, misuse of alcohol or drugs whilst in the workplace or
disclosure of strategic information to competitors.
The employer may also dismiss an employee by giving the contracted period of notice, or by
asking the employee to leave immediately and remunerating the employee for the contracted
period. This is common where a new employee fails to meet the standards required for the
job by the end of a probationary period, or where a more established employee fails to
perform to the required level.
Redundancy is a special form of dismissal recognised in the Labour Code. Here the employer
dismisses the employee because the business is closing down or radically restructuring, where
the job becomes obsolete, perhaps due to the introduction of new technology or processes or
where the organisation decides to spin off or otherwise divest a particular part of its operation.
The employee may also terminate the labour agreement. The most common ground for doing
so is of course when the individual secures alternative employment and gives the required
period of notice to the employer. It is then up to the employer as to whether the individual is
asked to fulfil the period of notice. If the individual is moving to a competitor, the employer
may choose to pay off the worker for the period of notice and ask him or her to leave
immediately.
The employee may breach the contract by walking away from the job without giving notice.
Lastly and obviously, the labour agreement is also terminated on death or loss of legal
capacity.
(b)

Employee protection under the Labour Code


Employees are protected by the Labour Code in the event of dismissal under certain
circumstances.
The Labour Code establishes the right of both employees and ex-employees to file for
resolution of disputes through a commission for labour dispute and through the courts. The
grounds on which former employees can file such disputes include a petition for reinstatement
following dismissal or reconsideration of grounds for dismissal, compensation for injury
suffered in the workplace, compensation for being transferred to a lower paid job and claims
in respect of discrimination.
Under the labour agreement employees have certain rights protected by law, which if
contravened may entitle the employee to take action against the employer. These include the
rights to be paid for the work performed, to be allocated work that is consistent with the terms
and conditions in the labour agreement, an entitlement to specified minimum rest periods,
days off and maximum overtime limits and to be paid compensation for injuries arising from
work and moral damage suffered.
Additional rights are conferred by the Labour Code in respect of expectant mothers, single
parents with young children, teenage workers and those who care for sick or elderly relatives.
The Labour Code limits the grounds for dismissal of such persons and in some cases lays
down specific dismissal procedures.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


If a worker is made redundant, the Labour Code compels the employer to offer another job in
the organisation if this is possible. Clearly, if the company is closing down completely this is
not possible. If no other job can be offered the worker is entitled to severance pay of one
months salary and to remain on the payroll for two months or on acceptance of a new job,
whichever occurs earlier.
Employees dismissed on the grounds of poor health are entitled to severance pay of two
weeks wages.
Answer 37 COMMANDITE PARTNERSHIP
(a)

Characteristics
A partnership is a form of business entity that comprises two or more persons working
together in pursuit of common business objectives. It is a specific type of legal entity
recognized in law, and as such has to be registered in order to participate in entrepreneurial
activity.
Partnerships are not subject to minimum capital requirements. The founding and any further
additional capital is contributed by the partners and is not sub-divided into shares.
There must be a minimum of two partners in either type of partnership.
The unlimited partnership carries out its business under the written terms agreed between the
partners. The rights and obligations pertaining to the partnership are inseparable from those
of the individuals involved. This contrasts sharply with the obligations of the contributors to
a limited liability business, whose liabilities are confined to the financial contribution that
they have made to the company.
The partners can distribute any profits between themselves in proportion to the contributions
made to the business or in any other manner stipulated in their agreement. They are jointly
and severally liable for any financial or other obligations incurred to third parties.
In dealings with others, the partnership must identify itself as such.
The partnership business form empowers each partner to act individually on behalf of the
partnership, unless the contrary is stipulated in the agreement between them. Any actions
taken by the individual on behalf of the partnership binds the partners.
Any clause in the contract that excludes a partner from entitlement to profits or obligations is
void in law.
Any partner who gives notice of resignation from the partnership remains liable for
obligations that arose before his or her partnership was terminated.
The limited or commandite partnership is a modified model of the unlimited version. It
shares numerous similarities with the unlimited version, including the requirement to register
the business with the State and the need to represent itself openly as a partnership in its
dealings with third parties. The fact that the business is a limited partnership must be made
clear in its formal dealings with others.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


The law separates the obligations of two types of partner in this type of enterprise. Firstly, the
general partners who are directly involved in business activities are responsible for the
obligations they incur on an unlimited basis. Secondly, there may be one or more participantinvestors who put capital into the partnership but are only liable to the extent of their financial
contributions. The participant-investors can fund the partnership but may not take part in the
performance of business activity. Therefore they can invest in the business knowing the
maximum degree of risk that they incur.
A general partner can only participate in one limited partnership. A general partner in an
unlimited partnership may not participate in a limited partnership or vice versa.
(b)

Advantages and disadvantages


Advantages
The main advantage of ceasing to operate as a limited partnership and establishing a limited
liability company (LLC) is that all partners, general and participant-investors, would enjoy
limited liability as defined by the Federal Law On Limited Liability Companies. This
means that the company thus established has a separate identity in law and is therefore
separable from its owners in relation to ownership of its assets and obligations.
This offers little further advantage to the participant-investor but significant advantage to the
general partner who participates fully in the business.
The LLC offers the opportunity to attract investments from up to 50 shareholders and as a
result it may be possible to attract additional capital more readily. Although in theory the
partnership can also do this, it may be less difficult to involve others in the business under the
mantle of a LLC, especially in situations where a prospective shareholder is prepared to make
contributions in specie rather than in cash.
In the event that the LLC becomes less attractive to some investors at a subsequent date, they
are able to withdraw their capital for fair value. This may be more difficult to establish on the
resignation of a general partner.
The act of forming a LLC may be seen by trading partners as a desire to put the business on a
more professional and permanent footing.
Unlike the partnership, the LLC is a permanent separate legal person unless dissolved. This
has connotations for succession and transfer of shares in the future.
Disadvantages
There are numerous disadvantages of pursuing the LLC route. The partners have to spend
time and money putting together the Charter and statutory agreement, as well as taking advice
from appropriate professional persons. They have to undertake the registration formalities
necessary to establish the company.
The new company has to comply with the requirements of law in relation to statutory capital
and management. There are additional responsibilities of the management of a LLC,
including the need to comply with the legal formalities for holding meetings and reporting
requirements.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Answer 38 ANDREI AND NATASHA
(a)

Commitment to business transactions


A partnership agreement, if formulated lawfully, is a binding agreement between the parties
to the agreement. In other words, the partners are committed to comply with the terms of
business to which they have agreed. The agreement should set down the rights and
obligations of the parties to it and should be prepared on the basis of commonly agreed
business objectives that will be pursued once the business is registered.
In this case there is a fundamental disagreement between the partners. Andreis ambitions are
clearly at odds with Natashas view of how the business should develop. Andrei has therefore
proceeded unilaterally with his plans without the initial knowledge and consent of his partner.
Although the partnership agreement is binding on the partners, it is certainly not binding on
third parties who choose to do business with the partnership, or either one of the general
partners. Provided the suppliers acted in good faith when selling their goods to the
partnership, and had no prior knowledge of the restriction contained in the partnership
agreement, they can enter into a contract with either partner. Andrei is however in breach of
his agreement with Natasha.

(b)

Withdrawal from contract


There are several potential outcomes in respect of the contract with the suppliers.
If the two general partners cannot reach consensus on the matter, the sensible outcome would
be for Andrei to pursue his new venture independently or to form a business with Vladimir,
who seems tacitly in favour of Andreis ideas. He could then take responsibility for the goods
that have been ordered at his own risk.
The suppliers may be prepared to have the goods returned, thereby terminating the contract by
agreement.
If Natasha insists that the payment for the goods is withheld and Andrei refuses to return the
goods, this creates problems for the partnership, especially if mandates for payment require
the signatures of both parties. The suppliers can then enforce the contract against the partners
jointly or severally, with the right to claim the costs of doing so. In such a scenario, the
general partners bear unlimited liability and Vladimir bears liability up to his contribution to
the business as an investor.

(c)

Extent of action by partners


As Andrei is in breach of the original partnership agreement, Natasha would be entitled to
take action against him should the partnership incur costs or losses as a result of his actions.
Natasha may also be able to take action against Vladimir, who as an investor in the
partnership should have played no active part in the management and administration of the
business. The law provides that the investor enjoys limited liability but should not participate
in the business affairs of the partnership. Therefore, Vladimir has acted improperly in giving
advice to Andrei and encouraging him to proceed with the new development.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(d)

Implications for Vladimir


As an investor, Vladimir has a right to put risk capital into the business and to receive a return
on his investment. That is the full extent of his involvement in the business. He is not
permitted to have his name included in the name of the partnership, nor is he entitled to take
executive decisions on its behalf. In return for these rights and restrictions, he is able to enjoy
limited liability and, unlike Andrei and Natasha, cannot be called upon to make good
unlimited losses from his personal financial resources.
From the case it is clear that Vladimir has acted unlawfully. He has discussed the new
venture with Andrei and has agreed to encourage and support him in his arguments with
Natasha. These actions suggest that he is actively involved in management.
The potential consequence of this, if it can be proven, is that Vladimir risks losing his limited
liability and incurring the same obligations as a general partner. In reality, of course, this
would be difficult to establish beyond doubt if his discussions with Andrei were of a purely
informal nature.

Answer 39 ANDREI AND NIKOLAI


(a)

Rights and obligations


A simple partnership is the simplest business form that involves more than one person. It
relies on a formal agreement between the partners in the business, and anything not covered in
the partnership agreement relies on a high degree of trust between the business principals.
Arguably, the situation of trust has already broken down between Andrei and Nikolai.
Nikolai has been making a secret profit. If this has been done using partnership resources in
the partners working time, Andrei has a case against Nikolai as the partnership agreement
has been breached. Andrei can claim for lost profits as a result of the undeclared work and
income. In turn, Nikolai may have an obligation to make good any monies withheld from his
partner.
The second major issue in the case relates to the uncompleted work on the hotel. Andrei
cannot simply walk away from the project without incurring obligations. At the outset the
partners would have entered into a contract with the hotel for the work to be done, thereby
binding the partners jointly and severally to the terms of the contract. Under the partnership
agreement they would be entitled to half the profit each, and so Andrei would be responsible
for half the costs of the work. It is likely that Andrei would be entitled to a proportion of the
profit but would be responsible for the same proportion of the costs, including some costs
incurred after walking out of the business.
Andrei may not necessarily be responsible for contributing to the costs of general stock.
Some stock may have been ordered in anticipation of future business to be carried out after
Andreis departure. However, Andrei is likely to be responsible for the costs of the stock
used in the completion of the hotel project.

(b)

Termination of partnership obligations


From the point at which a partnership is terminated, the partners bear joint and several
responsibility for the failure to perform any outstanding common obligations to third parties.
The best way for Andrei to escape further obligations arising from the former partnership is to
serve three months notice of the severance of their arrangement by making a statement of
repudiation. In doing so, he will escape any liabilities incurred after the expiry of the three
month period.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(c)

Legal termination
Tutorial note: Note that the question specified apart from therefore no marks will be
awarded for consideration of dissolution.
A partnership may be dissolved if either of the partners lacks dispositive capacity, has limited
dispositive capacity or disappears unless the contract provides specifically for such instances.
The partnership is dissolved in the event of the death of either partner or on the insolvency or
either partner.
If a juridical person is a participant in the partnership, the reorganisation of the juridical
person terminates the partnership.
Some partnerships are created for a fixed term, so on expiry of the term the partnership is
dissolved forthwith.
A partnership may also be terminated by the State authorities if the business of the partnership
is for an illegal or improper purpose.

(d)

Trading form
Andrei and his brothers wish to minimise the risk of their new venture and maintain control of
their affairs. This suggests that they may consider a limited liability company (LLC). This
corporate form would confer limited liability on all of the participants, meaning that any
obligations are limited to the contributions made to the business. They would also have
absolute control of their business affairs, as any individual can withdraw from the company
but the remaining participants would be able to veto any third parties from joining the
enterprise.
The LLC would enable the participants to invite new members provided the maximum
number of participants did not exceed 50 persons.
The LLC would also enable the participants to make monetary and non-monetary
contributions to the starting capital, provided the non-monetary contributions are capable of
valuation.
An alternative corporate form is the closed company limited by shares. This would give them
less control over the ownership of the shares and would be more complex in terms of
compliance issues relating to constitution, management and administration.

Answer 40 ZAO INVESTOR


(a)

Withdrawal of a participant
According to provisions of the Civil Code of the Russian Federation, a participant may
withdraw from a company irrespective of the consent of other participants of the company. In
case of the withdrawal of a participant, its share transfers to the company from the moment of
submitting the application for the withdrawal. The company must pay out the actual value of
the participants share, the value is determined on the basis of accounting data for that year
when the application for withdrawal was filed, or upon the consent of the participant to
give the property in kind to the same value. If the participant had not paid its share to the
statutory capital in full, it receives, upon withdrawal, the actual value of its share pro rata the
portion of the statutory capital paid.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


The above-listed provisions are compulsory and do not allow interpretation, that is, may not
be changed by the statutory documents of the company. Any provisions of the companys
statutory documents that contradict these provisions are void.
Thus, LLC Levadia must pay ZAO Investor 20,000 roubles (100,000 20%) or give it the
property of the same value.
(b)

Ownership of property contributed


The owner of the property and monetary means contributed to the statutory capital is the
company itself. In the event of withdrawal of a participant, that participant is paid the actual
value of its participatory share or, with its consent, property of the same value. Thus, the
company is not obliged to return the very same property that was contributed to the capital,
but may do that by agreement with the participant.

(c)

Payments to a withdrawing participant


The actual value of the participatory share of the withdrawing participant is paid at the
expense of the difference between net assets of the company and the amount of its statutory
capital. If that difference proves to be insufficient for payment, the company must reduce its
statutory capital.

Answer 41 PEXO
(a)

Documents
The founders of the company enter into a contract in writing regarding the formation of the
company, which determines:

the procedure for their engaging into the joint activity of the founding of the
company;

the amount of the charter capital of the company

the categories and types of shares subject to placement among the founders and
amount and procedure for the paying therefore; and

the rights and duties of the founders in connection with the formation of the
company.

A contract regarding the formation of a company is not the foundation document of the
company.
The foundation document of the company is the charter of a company.
All company bodies and company shareholders must comply with the requirements of the
company charter. The company charter must contain the following information:

the full and abbreviated names of the company;

the location of the company;

the type of company (open or closed);

the number, par value, and categories (common, preferred) of shares, and types of
preferred shares to be placed by the company;
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK

the rights of the holders of shares of each category (or type);

the amount of the charter capital of the company;

the composition and authority of the governing bodies of the company and the
procedure for the adoption of resolutions by them;

the procedure for the preparation and conducting of the general meeting of
shareholders, including decisions on matters to be resolved by a qualified majority
or unanimous vote of the governing bodies of the company;

information concerning branches and representative offices of the company;

The companys charter may impose limits on the quantity and total par value of shares held or
the maximum number of votes cast by any one shareholder.
(b)

Date of creation
A company is regarded as established from the moment of its state registration (with the body
exercising the state registration of legal entities) under such procedure as may be determined
by federal law on the state registration of legal entities.
The date of creation of Pexomal is 16 July 2009 the date of its state registration by Moscow
Registration Chamber.

(c)

Appraisers remuneration
When payment for shares is effected in non-monetary form, an independent appraiser must be
invited to determine the market value of such assets. The valuation of assets in terms of
money produced by the founders of the company and the board of directors of the company
cannot exceed the valuation produced by an independent appraiser.
Thus in case the contributions to the charter capital are made in non-monetary form, the
services of the independent appraiser are necessary for the process of formation of the
company. That is why the founders or the company itself are to pay for the appraisers
services, and in case these are the founders who have paid, the company may further on
reimburse the amount due.

(d)

Purchase and sale of goods


As the contract of purchase and sale of goods was concluded by Mr Kovalenko before the
date of Pexomal registration and due to the general rules that a company is not liable for the
obligations of its shareholders (founders), the only person who is responsible for due exercise
of obligations under this contract is Mr Kovalenko.

(e)

Can creditors sue Pexo?


The creditors cannot sue Pexo LLC under the above-mentioned contracts because Pexo LLC
is one of the shareholders of the Pexomal and, under federal law of the Russian Federation,
the shareholders are not liable for obligations of the company.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(f)

Sale of shares to Pexo


As a general rule there are no restrictions on a person disposing of his property (including sale
of shares, but in this situation it is not possible for Mr Kovalenko to sell his shares in the
initial share capital of Pexomal to Pexo LLC because in the case of this kind of transaction
Pexomal will be a company having one shareholder Pexo LLC which also have only one
founder (Mr Leikin) and a company may not have as a sole founder (or shareholder) another
business company consisting of one person.

(g)

Sale of shares to Mr Leikin


Mr Kovalenko may sell his shares in the initial share capital of Pexomal to Mr Leikin because
the shareholders are entitled to alienate the shares they own, without the consent of the other
shareholders and the company. But the shareholders of the closed company limited by shares
have a right of priority to acquire shares sold by the other shareholders of the company at a
price offered to a third person pro rata to the quantity of the shares owned by each of them.
The charter of a company limited by shares may envisage the companys priority right to
acquire shares sold by its shareholders if shareholders did not use their priority right to
acquire the shares. A shareholder of the company who intends to sell his shares to a third
person must notify accordingly the rest of the companys shareholders and the company
proper including indication of the price and other terms for the sale of the shares. If the
shareholders of the company and/or the company do not use their priority right to acquire the
shares offered for sale the shares may be sold to a third person at the price and on the terms of
which the company and the shareholders have been informed.

Answer 42 ZAO A
(a)

Contribution by transfer of property


The charter capital of a company limited by shares is divided into a definite number of shares.
Payment for the shares distributed among the founders of the company at its formation may
be effected in money, securities, other assets or property rights or other rights that can be
appraised in terms of money. The form of payment for shares of a company at its formation
is set out in founders agreement.
An independent appraiser must be invited to assess the market value of assets transferred as
payment for shares. The final monetary valuation of the non-monetary property estimated
and stated down by the agreement between the founders must not be less than that estimated
by the independent appraiser.
Thus Mr X may make his contribution to the share capital in non-monetary form in case it is
provided for in the shareholders agreement. In order to estimate the value of his contribution
an independent appraiser must be invited.

(b)

Ownership
A company has separate assets in its ownership, which are reported in a separate balance
sheet, and the charter capital of a company determines the minimum amount of the property
of a company securing the interests of its creditors.
A company may at its own discretion use, possess and dispose of the property that it owns.
Thus the property transferred to the initial share capital of the company becomes the
companys property and the shareholder who has transferred it loses all rights in respect of
this property (except the case of liquidation of the company).

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(c)

Disposal of property
Yes, it is quite possible to dispose of the property that belongs to the company (property
initially transferred to the share capital) provided that all the restrictions of law concerning
major transactions are duly observed.

(d)

How to sell the property


In the above-mentioned case the amount of property that the General Director decided to sell
forms 60% of the assets of the company and the transaction in respect of this property will be
considered as a major one. In order to conclude and duly execute the transaction the
following requirements of law are to be respected:
A decision to approve a major deal of which the subject matter is assets worth 25 to 50% of
the balance sheet value of the companys assets must be adopted by all the members of the
board of directors (supervisory board) of the company unanimously, with the votes of former
members of the board of directors (supervisory board) of the company not being taken into
account. The decision to approve a major deal of which the subject matter is assets worth
over 50% of the balance sheet value of the companys assets must be adopted by a general
meeting of shareholders by a majority of three quarters of the votes of shareholders owning
voting shares and attending the general meeting of shareholders.
Thus, the executive body of the company (in this case General Director) must demand to
convene the general shareholders meeting in order to approve the above-mentioned
transaction.

(e)

Shareholders consent
A major deal must be approved by the board of directors (supervisory board) of a company or
the general meeting of shareholders. Thus in the described case the consent of three quarters
of shareholders present at the meeting will be necessary. As the quorum is formed by 50%
and more of shareholders, it can be supposed that, in order to get the approval of the general
shareholders meeting, the consent of the major shareholder(s) will be enough.

(f)

Shareholders rights
The shareholders that did not take part in the voting or voted against the major transaction
have the right to demand redemption of all or some of shares belonging to them. The relevant
demand must be presented to the company within 45 days since the moment when the
respective decision (on major transaction) was taken and contain information on name,
permanent residence of the shareholder and the amount of shares subject to redemption. The
redemption must be executed within 30 days upon expiration of the above-mentioned term.

Answer 43 COMPANY REGISTER


(a)

Register of shareholders
A register of the shareholders of a company comprises information on each person registered,
the quantity and categories (types) of shares recorded in the name of each registered person,
and other information as might be required under legal acts of the Russian Federation.
The company must ensure the keeping and storing of the register of shareholders in
compliance with the legal acts of the Russian Federation starting from the time of the
companys state registration.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(b)

Responsibilities
Either the company or a professional participant in the securities market licensed for the
activity of keeping registers of the owners of registered securities (a registrar) holds the
register of the shareholders of a company.
The register of shareholders of a company having more than 50 shareholders must be held by
a registrar.
A company that has entrusted the keeping and storing of its register of shareholders to a
registrar is not relieved from the responsibility for keeping and storing it.
A person registered in the register of shareholders must promptly notify the holder of the
register on changes occurring in his personal data and details. If he fails to present
information on such changes, the company and the registrar will not be responsible for the
losses inflicted in connection therewith.

(c)

Introducing records
Records are introduced to the Register at the demand of the shareholder (or nominee holder of
shares) not later than three days after the submission of the documents provided for by
statutory acts of the Russian Federation. A shorter term may be established by legal acts of
the Russian Federation.
A refusal to make records to the Register of a company is not permitted, unless it is directly
provided for by the laws of the Russian Federation. In the event of a refusal to make records
to the Register, the holder of the register must send to the person demanding the making of
the entry a reasoned explanation concerning the refusal to make the records not later than five
days from the presentation of the demand.
The refusal to make records to the Register of a company may be appealed in court. By
decision of the court the Register holder may be obliged to make the respective entry in the
Register.

(d)

Extracts
The Register holder of a company is obliged, at the demand of a shareholder (or nominal
holder of shares) to confirm the shareholders rights in respect of the shares by means of the
issuance of an extract from the shareholders register.

Answer 44 LIMITED LIABILITY COMPANIES


(a)

Steps to establish
A limited liability company (LLC) is a registered legal entity comprising a group of
individuals coming together to form an association with common business objectives. The
owners are the shareholders, who put up the risk capital of the enterprise. Once formed the
company has a separate legal personality and perpetual succession.
A LLC can be formed by no more than 50 persons. These persons can be private individuals
or legal entities.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Prior to formation it is necessary for the founders to agree common business purposes.
Unless the company is established by one person, the founders enter into a statutory
agreement, which forms the basis for creation of the enterprise and the rights and obligations
of the founders to one another, their contributions to capital, management and administration
and the right to withdraw.
It is necessary for the LLC to have a Charter. This defines the essential characteristics of the
company and must include information required by statute law name, location(s), statutory
capital, management bodies and their authority, size and nominal value of shares, how shares
may be alienated and matters relating to the custody and access to records and documentation.
The law is generally less prescriptive in relation to the content of the Charter than for
companies limited by shares.
The company is not compelled but may choose to prepare inner documents governing
administrative procedures and company policies. These may set out matters relating to
decision taking and meetings. They cannot conflict with the minimum requirements laid
down by statute.
The founders must agree the structure and composition of management bodies and their terms
of reference, including mandates and limitations on authority.
The company must comply with the requirements for minimum statutory capital. The
contributions to this are set out in the statutory agreement and the number and denomination
of shares will be contained in the Charter. The statutory capital may be contributed in
monetary amounts or in specie, provided the latter is capable of monetary valuation.
The company cannot come into existence until it is registered. Until then, any obligations
incurred are the responsibility of those who enter into them. Registration is effected by
submitting a formal application, together with the appropriate fee. The authorities will then
register the company if the application is in order, or alternatively issue refusal of registration.
The latter can be appealed.
(b)

Circumstances of ceasing to exist


A LLC ceases to exist with the cancellation of its registration by the State authorities. This
can arise from various circumstances.
The company may be liquidated on a voluntary or compulsory basis. Voluntary liquidation
occurs when the participants choose to wind up the company of their own volition. If solvent,
the process is simple with minimal involvement of the creditors. If compulsory, this usually
arises from pressure or action by the creditors and subsequent litigation.
A company may be liquidated on expiry of a term specified in its Constitution. This occurs
when the company is established for a specific purpose or for a specified period of time.
A company can also be reorganised. It may change its corporate form to a company limited
by shares or an artel . It can also merge with another company to form an entirely new
company, with the constituent companies ceasing to exist, or demerge into companies
spinning off the original entity. Lastly, the company may be taken over by another.
Tutorial note: A production cooperative, or artel, is a special form of commercial
organisation described in the Civil Code. This commercial form has its origins in Soviet
times, most visibly in the collective farm, or kolkhoz. The omission of references to
cooperatives in the Federal Law On Enterprises and Entrepreneurial Activity in 1990
caused some to doubt the future of the cooperative as a future trading model and prompted
some cooperatives to reorganise.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 45 LEGAL ENTITIES
(a)

Main difference between OOO and company limited by shares (ZAO/OAO)


Tutorial note: The generic characteristics of business entities are laid down in the Civil
Code and more detailed provisions are set out in the Federal Laws On Companies Limited
By Shares and On Limited Liability Companies.
Ownership
Both types of company are owned by the shareholders, who put forward the risk capital for
the enterprise. In a limited liability company (LLC) and a closed company limited by shares
the number of shareholders may not exceed 50 persons, whereas in an open company limited
by shares there is no such limitation, with many companies having well in excess of this
number of shareholders.
Regulation
As the shareholder of a company limited by shares tends to be separated, or rather more
remote, from the management and administration of the company, the federal law is more
prescriptive in relation to this corporate model than for the LLC.
Constitution
Both types of company have a Charter and internal rules governing capital, shareholder
democracy, meetings, voting protocols and officers. In addition to these sources of authority,
the LLC has a founding statutory agreement between the participants.
Management
A company limited by shares must have a board of directors. This is not mandatory in a LLC.
Capital
There are different statutory capital minima for the two types of company. Only the company
limited by shares is compelled to maintain a reserve fund.
Shares
The shareholders of a LLC may purchase, transfer and alienate their shares subject to many
limitations. For example, they can prevent shares being sold to certain persons or entities
without prior approval. Under stated circumstances, they can block a transfer even when the
shareholder dies. If a shareholder wishes to divest his holding of shares, these must be
purchased by the other shareholders or the company itself. Fair value for the shares is
assured.
The shareholders of a company limited by shares can only redeem their shares in instances
dictated by federal law. Shares may be gifted, transferred, sold or bequeathed, though in the
ZAO model there is a right of pre-emption for existing shareholders.
Shareholders of a LLC may be removed under certain circumstances. This is not possible for
shareholders of a company limited by shares.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(b)

Differences between open and closed companies limited by shares


Companies limited by shares may be of an open or closed type. One practical distinction is
that of size open companies tend to be larger both in relation to the scale of their operations
and the number of participants.
An open company limited by shares issues share capital that may be transferred relatively free
from restriction. If a shareholder wishes to purchase or sell shares there are few impediments
to this. It is not necessary to consult other shareholders, so there is an element of transience in
relation to ownership of the company. Shares may be sold to the public, subject to the laws
on securities. There is no restriction on the number of shareholders of an open company
limited by shares.
A closed company limited by shares may have a maximum of 50 shareholders. They own the
company and can exercise a high degree of control as they have pre-emptive rights to
purchase shares of which other shareholders choose to dispose.
Unlike an open company in which the share capital may be distributed by open subscription,
the closed company distributes shares to the founders or to persons of the founders choice.
This is a major distinguishing feature, and any closed company that wishes to make shares
available to the broader public must be reorganised as an open company.

Answer 46 MR CHAIKIN
(a)

Validity period
In case the validity period is not indicated in the power of attorney, the validity period is
considered to be equal to one year since the date of issue. In this case the power will expire
on October 2, 2009.

(b)

If date of issue not indicated


A power of attorney that does not contain date of issue is invalid.

(c)

Right to conclude
The power of attorney empowers the person only for execution of deeds and/or actions
directly provided for in the power of attorney. The examined power of attorney empowers Mr
Boiko for receiving goods and production due to OOO ABC but not for concluding contracts.
OOO ABC will be responsible on the contract with OOO Y only in case of subsequent
approval of the contract concluded by Mr Boiko by OOO ABC. Otherwise the contract will
create rights and obligations directly for the person, who signed it, and namely Mr Boiko.
And that will be Mr Boiko in person who will be responsible for fulfilment and nonfulfilment of obligations under the contract (exercise of pre-payment included).

(d)

(i)

Powers as general director

No. The fact of change of owner of the company does not directly influence the personality
of General director. However, appointment of General director is the competence of general
participants meeting, and the new 100% owner has a possibility to convoke the meeting and
cease Mr Chaikins powers as a general director. But the director will be in any case changed
by the general participants meeting decision.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(ii)

Validity of power of attorney

No. The power of attorney was issued by the company OOO ABCand the change of owner of
the company does not influence the validity of deeds executed and concluded by the
company.
(e)

Validity of power of attorney


No. The power of attorney was issued by the company OOO ABC and the change of owner
of the company does not influence the validity of deeds executed and concluded by the
previous director of the company. However the power of attorney may be dissolved by the
person who issued the power of attorney, namely by OOO ABC.

Answer 47 NIKITA
(a)

Contract of commission
Contracts of commission are one form of voluntary representation in the Russian Federation.
They are governed by the provisions of the Civil Code.
The case describes a contract of commission in which the two parties are Nikita and company
OOO CAET. Nikita is the commitant and OOO CAET is the commissioner. Under a
contract of commission the parties enter into transactions in their own names, so it follows
that when selling the goods the commissioner is liable for the quality of the goods.
The terms of the contract for the sale of the goods can therefore be legally enforced by
company OOO CAET and the purchaser of the goods.

(b)

Liability of shortfall in price


A contract of commission provides for the instructions to be carried out precisely by the
commissioner. The commissioner must act personally unless otherwise provided for in the
agreement with the commitant.
If a sub-contracting arrangement is then agreed, the commissioner retains responsibility for
carrying out the instructions of the commitant unless the contrary is expressed in the
agreement of commission.
The scenario states that sales of computer software packages are slow. If this is the case and
it can be established that a sale for a lower price was necessary in order to prevent greater
losses by the commitant, then OOO CAET may be able to escape liability for the shortfall in
revenues brought about by the lower price. If this is not the case, then the company will be
liable to make good the deficit. Company OOO CAET may therefore be sued for the
shortfall.

(c)

Liability to Nikita
Generally, the commissioner is responsible for entering into the contract of sale for the goods
but not for the execution of the contract unless the arrangement is of a del credere nature.
Nikita cannot therefore enforce the terms of the contract by claiming against OOO CAET.
The situation is different if the goods are sold by OOO CAET in the open market, in which
case the company would incur a liability to Nikita.
In addition, if it can be established that OOO CAET did not act reasonably in identifying a
buyer, then the company may be liable to Nikita.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(d)

Sums of money due in respect of the transactions


OOO CAET owes Nikita for the sale of 4,000 manuals at 1,000 roubles per manual, total 4
million roubles, as specified in the contract. It also owes Nikita for the sub-contracted sale of
6,000 software packages at 2,000 roubles per package, total 12 million roubles. This liability
may be reducible if it can be demonstrated that by not selling at the lower price there would
have been a prospect of greater losses to Nikita.
The sub-contractor, OOO TEAC, owes OOO CAET the sales revenue from the packages
(6,000 packages 1,500 roubles, total 9 million roubles) plus the difference between the
specified sale price and the actual sale price, which is 6,000 packages (2,000 1,500), total
3 million roubles.
From the total revenue due from the sale of the manuals of 5 million roubles, Nikita must
share the difference between the price obtained and the specified price with OOO CAET,
which is 4,000 (1,250 1,000), total 1 million roubles.
The commission fee of 10,000 roubles must be paid by Nikita to OOO CAET.

Answer 48 LAW OF REPRESENTATION


Tutorial note: This question tests knowledge of the general principles of representation as laid down
in the Civil Code and the provisions of law relating to powers of attorney.
(a)

General characteristics
The Civil Code provides for both obligatory representation and voluntary representation.
Obligatory representation arises where one person or entity must be appointed to act on behalf
of another. The simplest manifestations of this occur when a guardian represents a child or a
person who suffers a mental incapacity. The latter occurs when one person or entity chooses
to have another represent his or her interests. Voluntary representation may be effected
through a power of attorney and also through contracts of commission and mandate.
Generally, a representative acts on behalf of the person or entity he or she is representing. As
such, the actions of the representative are considered in law to be the actions of the donor of
the power to act. Any action of a representative that forms a contract with a third party is
deemed to be an action of the principal.
It is the duty of a representative to act in the best interests of the principal and not in his or her
own personal interest.
The powers and duties of a representative are not without limit. Such arrangements are
contractual and as such can be limited by the conditions contained in the contract. If the
representative exceeds his or her authority, the principal has a right to either ratify the action
or to disclaim it. In the latter case, the actions become the personal responsibility of the
representative. However, special rules apply to commercial representation through a contract
of commission.
In some instances the law requires the individual or entity to act in person. In such cases it is
not permitted for a representative to act on behalf of the person or entity responsible.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(b)

Power of attorney
Definition
A power of attorney is a contract of agency through which a person, natural or juridical,
confers powers on another to act on his or her behalf. It is a legally binding arrangement that
persists for the duration and within the scope of the power, for the representative to act on
behalf of the other party.
Powers of attorney are commonly used by individuals to enable transactions to be made by
another individual. For example, an elderly person may decide that it is desirable for a
younger or more mobile family member to make financial transactions or discharge other
obligations or duties. A person who is to work outside the Russian Federation for a protracted
period may also delegate some or all financial affairs to another person. In all instances, the
creation of a power of attorney implies a high degree of trust.
Types of power of attorney
There are three types:

A general power of attorney confers a general power to act on behalf of the donor
for a given period of time.

A special power of attorney enables a series of repeated transactions, again for a


specified period of time.

A one-time power of attorney enables the donor to sanction a single transaction


precisely defined in the power of attorney document.

To be valid, powers of attorney must always be executed in writing, and for some transactions
require execution in notarial form. If the document does not indicate a time limit, it is valid
for one year from its creation. All powers of attorney are time limited to a maximum of three
years.
(c)

Termination of rights
A power of attorney is terminated in the event of revocation by the donor (issuer) or refusal of
the donee (attorney) to act.
Any power of attorney automatically lapses after three years, even if the document specifies a
longer period of time. Powers of attorney that specify a shorter period terminate according to
the date specified.
In all instances, a power of attorney is terminated on the death, personal incapacity or
disappearance of the donor. This extends to the dissolution of a business organisation where
that organisation is the donor.

Answer 49 CONTRACT OF COMMISSION


(a)

Meaning
A contract of commission is one form of voluntary representation identified in the Civil Code
through which one person can act on behalf of another, usually in the course of commercial
trade. This method of representation is especially suitable for businesses dealing with
overseas counterparties.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


A contract of commission involves two parties. The commissioner undertakes to carry out
specified responsibilities under the instructions of the principal. The duties are carried out for
remuneration at the expense of the principal.
The contract may be general or specific in relation to the time for which the service will be
performed or territorial limits. It may include or exclude the right to execute contracts of subcommission.
(b)

Rights and obligations of parties to a contract


Tutorial note: The rights of one party are the equivalent obligations in respect of the other
party.
Obligations of the commissioner
The commissioner is obliged to execute the instructions of the principal on the most
favourable terms possible. In the absence of specific details relating to terms of dealing, the
performance must be consistent with usual requirements that are typically established in the
field of operation.
If the commissioner carries out transactions in a manner that is inconsistent with the
principals instructions, the commissioner will be liable under the contract unless it can be
demonstrated that his actions were taken to reduce greater losses that would otherwise have
been suffered. This could arise, for example, if the commissioner sells perishable goods for a
price lower than that specified by the principal.
Conversely, if the transactions undertaken by the commissioner yield a surplus, then this
surplus is divided between the commissioner and the principal.
The commissioner may be liable to the principal for loss or damage to goods held on the
principals behalf.
The commissioner must submit a report to the principal on his dealings.
Unless the contract of commission stipulates otherwise, the commissioner may enter into a
contract of sub-commission, instructing a third party to act in the necessary transactions.
Obligations of the principal to the commissioner
The commissioner must be paid a fee by the principal for the services rendered.
The principal is obliged to accept all goods received and to honour all commitments given
that are consistent with the contract of commission. The principal must examine goods
received and must report any deficiencies or discrepancies to the commissioner without delay.
Once the services to be performed under the contract of commission are concluded, the
principal must release the commissioner from his obligations under the contract.

(c)

Rights and obligations in relation to third parties


Under the terms of a contract of commission, when dealing with a third party the
commissioner becomes a party to the transaction and acquires rights and obligations that are
then transferred to the principal. There are two separate contracts the contract of
commission and the contract with the third party. Therefore, the principal is not a party to the
transaction with the third party, even though the principal may be named in the agreement.

1064

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


As a consequence, the commissioner obtains rights and obligations under the contract with
the third party.
If a third party does not fulfil contractual obligations to the commissioner, the commissioner
is not liable to the principal unless the commissioner has not taken due care in dealing with
the third party or where the commissioner has given surety for the transaction. The
commissioner should however inform the principal and transfer the rights under the
transaction on the principals demand.
Answer 50 MISTERS IVANOV, PETROV AND SIDOROV
(a)

Obligation to pay announced dividends


The company is obliged to pay announced dividends to its shareholders. In case of a delay in
the payment of dividends, a shareholder may file a claim to the court on recovery of the due
dividends.
However, in cases, when dividends for a certain period (a year, six months, a quarter) are not
announced (the decision on dividend payment is not made), holders of ordinary shares or of
preference shares not envisaging dividends of a fixed amount set by the Charter, may not
claim their dividends with recourse to court. It is the right of the company to decide upon the
feasibility of accrual of dividends in a certain period under such shares.

(b)

Decision not to pay preference dividends


Yes, it may if there are valid reasons for such a decision. In case the General Meeting decides
not to pay or to pay not in full the dividends under preference shares that envisage the receipt
of dividends of a fixed amount set by the Charter, holders of shares of that type may neither
apply to court to recover their dividends.

(c)

Symptoms of bankruptcy
No, it may not. The law On Companies Limited By Shares lists cases when a company has
no right to decide upon payment of the dividends or to pay the announced dividends. In
particular, such decisions may not be taken if a company has the symptoms of bankruptcy as
of the moment of payment or these symptoms may appear as the result of the payment of
dividends by the company.

(d)

Courts decision
In all given cases claims of the shareholders may not be recognised valid, therefore the court
decision to reject claims of Mr Ivanov, Petrov and Sidorov is lawful.

Answer 51 SHARE CAPITAL


Tutorial note: The question tested the candidates understanding of the law relating to preference
shares and distributions.
(a)

Restrictions on the amount of preferred shares


Under the law On Companies Limited By Shares the company is permitted to issue
preference shares of one or more types. The only restriction is that the nominal value of the
issued preference shares must not exceed 25% of the capital of the company as laid down in
its Charter.
The company is therefore compliant with the law.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(b)

Who is entitled to take decisions?


Decisions on matters relating to retention of profits and distribution of dividends are taken by
the general meeting of shareholders.

(c)

Dividend payment due


The dividend to be paid to holders of preference shares of each type is 100 roubles, as set out
in the Charter. The dividends would be payable to the holders of shares as follows:

300 roubles to the holders of the cumulative shares (100 roubles 2 years
cumulative, plus 100 roubles for 2008);

100 roubles to the holders of the non-cumulative preference shares as set out on the
Charter;

125 roubles to the holders of the ordinary shares as the dividend rate cannot exceed
the value recommended by the Board (50,000 less 40,000 divided by 800), where:

(d)

50,000 = total dividend recommended;


40,000 = dividends due to preference shareholders; and
800 = the number of shareholders).

Cumulative or not?
The Charter of a company may set down a provision that a dividend that has not been
disbursed or has been partially disbursed on preference shares of a particular type may be
accumulated within a term as also set down in the Charter. Such shares are deemed to be
cumulative preference shares. If there are no such provisions in the Charter, any preference
shares issued are deemed to be non-cumulative in respect of dividends payable to their
owners.

(e)

Mandatory audit?
A decision by a company to pay dividends is taken by the shareholders in general meeting,
often subject to executive recommendation. This decision in itself has no bearing on whether
an annual audit is mandatory.

(f)

Situations in which the payment of a dividend is prohibited


The company may not adopt a decision on payment of a dividend in the following
circumstances:

1066

if the share capital as set down in the Charter is not paid up in full;

if all of the stock has not been purchased;

if the company displays signs of insolvency as laid down in the law On


Bankruptcy, or will do so if the dividend is paid;

if the net assets of the company is less than the Charter capital, plus the value of the
reserve fund, plus the excess over nominal value of the liquidation value of the
issued preferred stock, or if the payment of the dividend will result in such a deficit.

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


The company may not adopt a decision on the disbursement of a dividend unless a decision
has been made to pay the dividend in full, including the dividend due on cumulative
preference shares.
The company may not adopt a decision to disburse dividends on preference shares of a
particular type unless a decision has been taken to disburse dividends in full on all types of
preference shares that confer priority over those subject to the disbursement.
Announced dividends may not be disbursed if the company displays signs of insolvency as at
the date of disbursement or will do so as a result of the disbursement. The disbursement is
also prohibited if the companys net assets is less than the sum of its authorised capital, its
reserve fund and the surplus of the liquidation value of issued preference shares over nominal
value, or if this deficit will arise as a consequence of the disbursement.
Answer 52 OAO Z
Tutorial note: The question tests the candidates understanding of the rights of shareholders by
reference to the percentage of shares owned in a company limited by shares. The rights set out in this
answer are cumulative shareholders described in part (ii) have all the rights of shareholders in part
(i); those in part (iii) have all the rights of shareholders in parts (i) and (ii)etc.
(a)

Rights to information and participation in management


(i)

1% shareholding

A shareholder with at least 1% of the voting equity in a company has the following rights:

information on the registered owner, the number of shares, the category of shares
and nominal value of shares belonging to them;

the list of persons entitled to attend the general meeting, though the addresses may
only be furnished with consent of the relevant shareholders;

to vote at the general meeting on the basis of one vote per share;

to litigate for losses caused to the company against a director, general director,
member of the management board or directorate, management organisation or
manager.

(ii)

2% shareholding

A shareholder owning at least 2% of shares in a company has the following additional rights:

to propose matters to be considered by the general meeting of shareholders and have


these placed on the agenda;

to nominate candidates for the Board, collective executive body, internal audit
commission and accounts commission;

to nominate a candidate for sole executive body.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(iii)

10% shareholding

A shareholder owning at least 10% of shares in a company has the following additional rights:

to convene an Extraordinary General Meeting, subject to the ownership threshold


being in place as at the date of the request;

to require an audit of financial and economic activity of the company at any time.

(iv)

25% shareholding

Shareholders with at least 25% of the voting shares of a company are entitled to access to the
accounting documents of the company and to sight of the minutes of meetings of the
collective executive body.
(v)

50% shareholding

The general meeting of shareholders is deemed to be quorate if it is attended by shareholders


owning in aggregate more than half the issued voting shares of the company.
(vi)

75% shareholding

A majority of at least 75% of holders of voting shares is necessary to float new ordinary
shares in excess of 25% of existing issued shares. This same threshold applies to securities
convertible into ordinary shares.
A majority of at least 75% of holders of voting shares is also required to approve a major
transaction where the subject matter is valued in excess of 50% of the balance sheet value of
the companys assets.
(b)

Significant shareholdings
A person intending to acquire more than 30% of the total number of ordinary or preference
shares of an open company limited by shares, considering the shares belonging to such person
and its affiliated persons, must forward a public offer concerning acquisition of the said
shares addressed to the owners of the shares of the corresponding types (voluntary offer).
A person who acquired more than 30% of the total number of ordinary or preference shares of
an open company limited by shares or other emission securities convertible into shares,
considering the shares belonging to such person and its affiliated persons, must forward a
public offer concerning acquisition from other owners of the shares of the corresponding
types and owners of emission securities convertible into shares, addressed to the owners of
the shares of the corresponding types and owners of emission securities convertible into
shares, within 35 days from the date of entry of the record on the bankbook (obligatory
offer).
The price for the securities indicated in the obligatory offer cannot be less than the weighted
average price under the results of the bidding of the organizer of the bidding on the securities
market six months prior to the forwarding of the obligatory offer to the Financial Monitoring
Service.
After receipt of voluntary or obligatory offers the board of directors of an open company
limited by shares obtains recommendations on such public offer including estimation of the
price of the purchased securities. The company limited by shares must forward the above
offer within 15 days from the date of the receipt together with the recommendations of the
board of directors to the owners of the securities to whom the offer is addressed.

1068

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


The owners of the securities to whom the voluntary or obligatory offers are addressed must
forward a notice on selling the securities, to the address indicated in the voluntary or
obligatory offers within the term of acceptance of the offers. From the date of receipt of the
offer by an open company limited by shares, this must be:

not less than 70 or more than 90 days, in case of voluntary offer: and
not less than 70 or more than 80 days in case of obligatory offer.

On receipt by the open company limited by shares of the voluntary or obligatory offers, any
person is entitled to present a competitive offer on the corresponding securities. The price
for purchase of the securities in the competitive offer cannot be less than the price indicated
in the voluntary or obligatory offers.
If in case of execution of the obligatory offer a person has purchased more than 95% of the
shares in the open joint stock company (J-SC), this person must within 35 days from the date
of purchase forward to the owners of securities, having a right to demand redemption of the
securities, a notice on their right. A bank guarantee must be attached to the notice. The
owners of the securities are required to present claims on redemption of their shares within six
months from the date of forwarding the notice. A person buying more than 95% of shares of the
J-SC must buy the rest of shares of the J-SC under the claims of the owners of shares.
Within 6 month from the date of the expiry of the term for claiming redemption of shares the
owner of 95% of shares may demand other shareholders to sell shares to him.
Answer 53 CAPITAL AND FINANCING
(a)

Meaning of share
A share is a security representing the owners equity in a company. The stake that the owner
has is represented by the nominal value of the share as determined by the Charter of the
company. As such it defines the rights of the holder and any limitations on those rights.
The relationship of a shareholder with a company, and indeed with other shareholders, is
quasi-contractual, with the mutual rights and obligations arising from ownership of the share
determined by the Charter and other constitutional references. The terms of the relationship
may be dependent on the type of share held. For example, preference shares usually carry a
right to a fixed dividend while the dividend payable to ordinary shareholders is usually
established with reference to realisable profits.
As a contribution to risk capital, the share is a claim against the company. This claim is
deferred until the company ceases to exist, except where statute law or the constitution of the
company provide for redemption of the share. Even when the company ceases to exist, the
right to claim against the share is subordinated to the claims of others, including the liquidator
and creditors.
The share also signifies rights in relation to participation in decision taking. In the Russian
Federation, the general meeting of shareholders is the supreme decision taking body of the
company, though rights to participate are usually confined to holders of ordinary shares. The
shareholder has a right to attend meetings, vote at meetings or in absentia, and subject to
various thresholds determined by law, propose matters for inclusion on the agenda or
meetings and nominate directors. Shareholders can also convene extraordinary general
meetings, again subject to the provisions of law.
Subject to the constraints imposed by the constitution of the company, the share is a type of
transferable security. Is can be gifted, sold, bequeathed or otherwise transferred. It can be
mortgaged or pledged. Under certain circumstances it can be forfeited.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(b)

Differences between rights of shareholders and rights of creditors


The rights of a shareholder are defined when the company comes into existence or when a
new class of share is issued. The rights are set out in the Charter of the company, though
general legal rights are also defined by statute law.
The rights to participate in decision taking are laid down in the relevant federal laws.
Although preference shareholders can be denied a right to participate in meetings and voting,
their contribution to the company is limited to 25% of the capital, so the majority of
shareholders enjoy the right to express their views and where appropriate take decisions on
the future of the company.
Shareholders have a right to a dividend if declared. In the case of preference shareholders this
is usually fixed and often cumulative, being carried over if a dividend cannot be paid in a
given year. Ordinary shareholders have a right to a dividend to the maximum recommended
by the directors. The directors recommendation cannot be set aside by the subsequent
general meeting, though dissatisfied shareholders can act collectively to express their
disapproval in other ways.
The right to withdraw capital is constrained by law, the extent of this being defined by the
type of company and whether redeemable shares have been issued.
The relationship of a company with its long-term creditors is entirely different to that of the
company-shareholder relationship.
A creditor has a contractual relationship with the company, with the rights and obligations of
the two parties defined not by the Charter but by the specific terms of the credit. As debtor,
the company enters into a series of binding covenants with the creditor, the most important of
which is to repay the capital and make payments of interest according to the terms of the
contract. There may be additional covenants, usually designed to reinforce the position of the
creditor on default by the company. As payment of interest and repayment of capital is
contractual, these obligations are mandatory, irrespective of the profitability of the company.
Generally, creditors have no rights of participation in the decision taking of the company.
However, their rights to demand full repayment are triggered by events determined by law,
such as reorganisation. In the event of insolvency, they are also constrained until the business
of the external manager is concluded.

Answer 54 SHARE PLACEMENT


Tutorial note: This question tests knowledge of matters relating to the placement of shares by closed
subscription and rights of pre-emption of shareholders.
(a)

Legal requirements
Placement of shares by closed subscription entails issuing shares to a limited number of
persons. The law On Companies Limited By Shares lays down regulations in respect of
placement by closed subscription. In addition, the Charter may make additional provisions if
they do not conflict with statute, or if the law is silent on the matter.
All shares placed by closed subscription require the support of a decision of the general
meeting of shareholders, passed by at least a 75% majority. This majority is also required if
ordinary shares exceeding 25% of the ordinary shares already placed are to be issued, and
where registered securities convertible into ordinary shares exceeding 25% of those already
placed are to be issued.

1070

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


In other cases, a simple majority vote of the shareholders is required. The shareholders may
delegate the placement of additional shares to the board of directors except in cases where a
75% majority is required.
The Charter of the company may specify a greater majority of votes necessary to implement
the placement.
(b)

Restrictions on share price


The placement price of shares must be at par (nominal) value or in excess of this. Shares
cannot therefore be placed at a discount to par.
The placement price is decided by the board of directors, using the market value of the shares
as a benchmark provided this is not lower than the par value. The price struck for those who
enjoy rights of pre-emption may be lower than that for other purchasers provided the
differential does not exceed 10%.

(c)

Regulations applicable to pre-emption rights


Pre-emption rights are laid down by the law to ensure that the rights of existing shareholders
are not compromised in favour of third parties (non-shareholders).
Rights of pre-emption apply to shares placed by open subscription and shares placed by
closed subscription where the shareholder did not vote in favour of an issue.
The right of pre-emption is determined with reference to the shares that the individual already
holds on a pro rata basis.
The process requires the company to issue a notice to affected shareholders specifying the
number of shares to be placed, the placement price, an explanation of how pre-emption rights
have been determined and the time limit for exercising rights. In response, the shareholder
wishing to exercise the right must make an application to the company stating the number of
shares required together with personal details.
Shareholders with rights of pre-emption may choose to pay for the shares in monetary form
even if the issue provides for non-monetary contributions.

Answer 55 ZAO MUSICMASTER


(a)

Non-monetary contributions
The law On Companies Limited By Shares states that the consideration paid towards
statutory capital may comprise money, securities, other property or titles to property and any
other rights capable of monetary valuation.
A closed company limited by shares may therefore accept contributions to its statutory capital
in both monetary and non-monetary form. This would have to be with the consent of the
founders, who agree to the size of the statutory capital of the company, the categories and
value of shares and how they are to be paid for at the time of formation of the company.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(b)

Appraisal of assets contributed


Natashas contribution to the share capital of the company is real estate. This would be
evaluated at the time of the formation of the company at the behest of the founders of the
company. If the property is contributed after the company is formed and shares are issued to
her once the company is operating, the property will be evaluated on instruction from the
board of directors.
The property has to be evaluated by an independent expert who is competent to place a
valuation on the asset. The appraiser must make an assessment free of influence by Natasha
or her colleagues.
Once the property is valued, shares can be issued to a value corresponding to that of her
contribution to the business. The valuation of assets in terms of money produced by the
founders of the company and the board of directors of the company must not exceed the
valuation assessed by an independent appraiser.

(c)

Use of property
The real estate is Natashas contribution to the company on or shortly after its formation. As
such, she owns shares in the business in return for the contribution and therefore no longer
has any right over the asset that formerly belonged to her. The shareholders of a company
have a claim against the company but do not own a proportion of the assets on an individual
basis. How the property is used is therefore a matter for the shareholders acting as a
collective decision taking body. It would be inappropriate as well as unworkable for Natasha
to expect 40% of the premises to be used for purposes dictated by her on the grounds that she
owns 40% of the capital.
Although Natasha has little individual control over the way in which the resources of the
business are used, she is in a relatively strong position as the main shareholder of the
company. As such, she has the ability to exert a strong influence at general meetings. If she
can persuade one other shareholder to vote with her, any decision requiring a simple majority
can be passed routinely. For votes requiring a 75% majority, she would need the support of
three more shareholders, which may prove more difficult.
As a major shareholder, Natasha can also propose items for inclusion on the agenda of the
general meeting of shareholders and nominate persons to serve on the board of directors. She
can also convene an extraordinary general meeting.
Although it is generally up to the shareholders to decide on the way in which the business is
run, including the retail operational model it is based upon, Natasha may have some power to
prevent the disposal of the premises. If the book value of the premises is 25% or more of the
assets of the company as at the last financial reporting date, the transaction is regarded as a
major transaction under the law On Companies Limited By Shares. As such, the
transaction will require the unanimous consent of the board of directors, or failing that a
majority of the shareholders present in general meeting. The majority requirement increases
to 75% if the book value of the asset exceeds 50% of the companys assets. The outcome
would ultimately depend on the support or lack of support from the other shareholders for
Natashas case.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(d)

Implications
The auditors of a company are appointed by the founders on formation of the company and
thereafter by the general meeting of shareholders.
It is the duty of the auditors to make all necessary enquiries in order to discharge their
statutory functions. This routinely involves access to financial and other documents made
available by the company but also the right to have explanations to all reasonable enquiries
made of the executives and other management of the company. Failure to make such
enquiries simply because the executives of the business are too busy would constitute a
breach of the duty of care owed to the company.
If Natasha does not cooperate with the auditors there may be serious consequences. They
may at best bring this to the attention of the members in the form of a qualified report or at
worst convene an extraordinary general meeting to bring the lack of cooperation, and its
possible consequences, to the attention of the shareholders. Ultimately, they may decide that
it is impossible to form an opinion and report to this effect when addressing the shareholders.
If the auditors resign, this could also create serious problems. Potential replacement auditors
would probably be alert to the situation and may refuse office. The new auditors would
probably be more and not less searching in their enquiries as a result.
It is a relatively simple matter for Natasha to remove the auditors of the company provided
she has the support of her fellow shareholders. Auditors are appointed for a fixed period, and
on expiry of that period the general meeting of shareholders can replace one audit firm with a
new one. However, this would hardly solve Natashas dilemma, as the new auditors are likely
to be alert to the circumstances and make similar enquiries in the course of their future work.
If the auditors are removed ahead of expiry of their term of office this would constitute a
breach of contract and render the company liable to pay compensation. It would also have
serious ramifications for the perceived integrity of the company.

Answer 56 DIVIDENDS AND REDEMPTION


(a)

Factors limiting right to pay dividends


The Federal Law On Companies Limited By Shares governs the rights and limitations of
companies in respect of the payment of dividends.
A dividend is a distribution of profits to the shareholders in a company. It is the reward to the
shareholder for putting up risk capital. Dividends are paid out of profits on a quarterly or half
yearly basis as interim dividends or as an annual distribution.
Dividends are recommended to the general meeting of shareholders by the board of directors.
However, an implicit contradiction of the Federal Law On Companies Limited By Shares in
this respect is that the recommended dividend cannot be set aside by the shareholders. If they
feel that a larger dividend should be paid, the shareholders can take many actions, including
the removal of directors and executives, but they cannot award themselves a higher dividend.
In making their recommendation, the directors have to balance their consideration of the
appropriate dividend with the perceived need to retain profits for reinvestment in the
company.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


However altruistic the directors may wish to be, there is a practical limit to the size of
dividend that may be declared. This is the value of net realisable gains made by the company,
or put another way, the maximum that may be withdrawn from the company without
necessitating a reduction in capital. If a company wishes to reduce its capital, it must invoke
the procedures laid down in federal law for this purpose.
Many companies have different classes of shares, the terms of which are laid down in the
Charter. It is usual for preference shareholders to be paid a fixed dividend. If the company
does not have the financial resources to pay this fixed dividend in any given year, the right is
carried over to the following year, ahead of the claims of other shareholders, unless the
Charter stipulates otherwise.
The dividend payable to ordinary shareholders is not fixed and is therefore entirely dependent
on the directors recommendation.
Dividends may not be paid at all if the Charter capital is not fully paid up, if there are
symptoms of insolvency or if the value of net assets is less than the reserve fund. They also
cannot be paid ahead of the claims of shareholders who have the right to redeem shares.
(b)

Redemption
Circumstances
The shareholders of a company limited by shares have a legal right to redeem their shares if
the company is reorganised, if the company concludes a large scale transaction or if
amendments are made to the Charter that infringe the rights of the shareholders.
Procedure
The redemption price of the shares is determined by the board of directors. However, this
cannot be less than the market value of the shares estimated by an independent appraiser. The
appraiser must make this estimation discounting the effect on the share price of the decision
to redeem.
If a general meeting is convened to take decisions that may give rise to a right of redemption,
the agenda circulated in advance of the meeting must indicate this and inform the recipients of
the redemption price and how applications may be made for redemption.
Any shareholders wishing to exercise their rights to redeem shares must serve notice on the
company within 45 days of the relevant decision. This notice must include an address for
communication and an indication of how many shares are to be redeemed.
The total value of funds set aside for redemption may not exceed 10% of the value of net
assets. If this is inadequate, shareholders may partially redeem on a pro rata basis.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 57 DIMITRI
(a)

Legal relationship between issuer and purchaser


Ordinary and preference shares represent partial ownership of the business. They represent a
claim on the company for risk capital invested to fund the enterprise.
The nature of the relationship between the shareholder and the company is quasi-contractual.
Shares of different classes are issued by the company under the terms of the Charter, which
sets out the rights and obligations of the parties to the transaction. For example, the Charter
states the type, nominal value and number of shares to be issued by the company. Of
particular importance to the investor is the right to a dividend if declared and to certain
constitutional rights in relation to decision taking, though these differ for ordinary and
preference shareholders.
The relationship between the shareholder and the company is a permanent one in that the
redemption of shares can only be effected in a manner that is consistent with the provisions of
the Charter or federal law.
Federal law also lays down powerful rights in favour of the shareholder.
Company bonds are loan capital and the relationship between the investor and the company is
therefore a contractual one of debtor to creditor. The terms of issue of the bond set down the
rights and obligations of the parties. Of most importance to the investor are the rights to
annual interest and to redemption of capital. Unlike a share in a company, a bond is not
permanent capital.

(b)

Rights of owners to participate in shareholders meetings


The ordinary shareholder has significant rights of participation in the affairs of the company
limited by shares. As a partial owner of the business, the shareholder has the right to notice of
general meetings, to attend these meetings and to participate in decision taking.
The general meeting of shareholders is of huge importance in relation to decision taking.
There are many matters that fall within the exclusive competence of the general meeting and
it is for the shareholders alone to decide these. The shareholders elect the board and
executive body and have complete control over the constitution of the company.
Federal law establishes a number of thresholds through which shareholders have an increasing
amount of influence according to the percentage of shares held in the company.
Preference shareholders generally have less influence over the companys affairs. They
cannot vote on routine matters. However, they can exercise a right to vote if the company is
to be reorganised or liquidated, or where decisions are to be taken that will materially affect
their interests. For example, they can vote if their fixed dividend is not paid or underpaid
(including unpaid cumulative dividends), and also on matters that will change or restrict their
rights.
Holders of corporate bonds do not have any voting rights in the company as their assets
represent loan capital. They do however have the right to be informed of major issues such as
a proposed reorganisation or liquidation of the company.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(c)

Realising cash in short-term


Shares in open companies limited by shares and company bonds are transferable and
marketable, but the ability to realise cash in the short-term is dependent on the perceived
attractiveness of the investment to buyers and sellers. The most suitable type of investment
for the company described in the scenario is therefore dependent on market conditions.
Shares in closed companies limited by shares are also transferable and marketable, but there is
less immediate prospect of finding an investor in the short-term should cash be required.
Unless the terms of the Charter so provide, the investor cannot demand that the company
redeems the shares, as redemption is only provided for in specific instances dictated by
federal law. It is unlikely that such events will coincide with the investors requirement for
liquid funds.
Company bonds are transferable should buyers be willing to invest and in practice can
sometimes be more marketable than shares. The investor can purchase bonds with maturities
that match known future cash requirements, and the debtor is contractually obliged to return
the capital to the investor on the maturity date. Unexpected demands for cash may be met
immediately by liquidating holdings of bonds, depending on market conditions.
For all of these investments, there is no guarantee that sale in the parallel market will realise
sufficient cash for the investors requirements, as their capital value will fluctuate with the
underlying performance of the company.
As registered transferable securities, both shares and bonds may be used as security for an
obligation, though the underlying risk makes them unattractive as collateral for some lenders.
There is however a prospect that the securities can be used as collateral to raise cash if
required urgently.

(d)

Risks and regular returns


Ordinary shareholders are legally entitled to a dividend if declared. The dividend is
dependent on the recommendation of the directors, which in turn will depend on the profits
generated by the company and the need to retain profit for reinvestment. The dividend is
therefore not guaranteed and will vary from year to year. If the company does not make a
profit then it cannot pay a dividend at all, which means that the investor has no return on risk
capital.
Preference shareholders usually receive a fixed dividend and are therefore more certain of the
return on the securities held. However, this is not guaranteed, as the dividend may be
underpaid if the company makes little profit or not paid at all if the company is unprofitable.
Unless otherwise specified in the Charter, the right to a fixed dividend carries over to the next
year if it is unpaid or underpaid in the current year. Such shares are said to be cumulative.
Furthermore, accumulated rights and current rights rank ahead of the dividends payable to
ordinary shareholders. Preference shares therefore carry less risk in relation to regular income
as long as the company is profitable. The downside of this is that when the company is highly
profitable the preference shareholders dividends do not increase.
Company bond holders are entitled to interest and not dividends. The interest is a contractual
obligation expressed in the terms of issue of the bond. The return is usually fixed, though
floating rate bonds may be issued. The interest must be paid by the company. Failure to do
so triggers crystallisation rights as set out in the terms of issue of the bond. In the event of
default the bond holder can litigate for the debt. Therefore, the bond holder has the same
certainty of income but is not dependent on the profitability of the company. There is still an
element of risk in that the company may encounter periods of illiquidity that compromise its
ability to make interest payments.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(e)

Risks in the event of liquidation


The Federal Law On Insolvency (Bankruptcy) lays down specific provisions in relation to
the claims against the company by holders of different types of security.
It is a general principle of law that creditors should be paid ahead of shareholders in the event
of insolvency. Therefore, the claims of owners of company bonds rank before the claims of
any shareholders in the company. This applies not only to the capital due to the bond holders
but also any unpaid interest. Generally, secured creditors rank before unsecured creditors.
All creditors have a right to statutory notices at the observation stage and when the company
is under external management. They also have a right to participate actively in the process.
From the above it follows that the shareholders take a greater risk than bond holders. In the
event of insolvency it is the shareholders who are most likely to lose some or all of their
investment. When a company is liquidated the preference shareholders often rank before the
ordinary shareholders in relation to return of capital. The Charter of the company may make
specific provisions in this respect.

Answer 58 STATUTORY CAPITAL


(a)

Process to increase
A company may increase its statutory capital by either a decision of the general meeting of
shareholders or a decision by the board of directors. In either case, the powers may be
exercised within the provisions laid down in the Charter.
If the decision is taken by the general meeting of shareholders, a simple majority is required
to authorise the increase, which is normally effected by increasing the number of the
companys shares. Once sanctioned it is necessary to amend the Charter of the company.
For a decision to be taken by the board of directors it is necessary for the directors to be
unanimously in favour of this. The increase may be achieved by placing additional shares. In
order to maintain the rights of existing shareholders in terms of proportionate voting powers,
any placing of additional shares is made on a pro rata basis. The value of the increase cannot
exceed the net assets of the company less the combined value of the reserve fund and
statutory capital.

(b)

Process to reduce
A reduction in share capital may only be sanctioned by the general meeting of shareholders.
This is again subject to the provisions of the Charter of the company.
The decision to reduce share capital may be implemented by either reducing the par value of
all shares in the company or through a buyback (acquisition and repayment of shares).
If this reduction is approved the creditors of the company must be notified within 30 days.
The creditors may then demand repayment of monies due to them plus any compensation for
losses suffered.

(c)

Reserve fund and net assets


Reserve fund
The purpose of the reserve fund is to provide for losses incurred by the company and for the
redemption of bonds and buybacks of shares if the company has no other means of achieving
these actions.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


The reserve fund is stated in the Charter but must comply with the statutory minimum value.
The value of the reserve fund is accumulated by annual allocations of profit, again subject to
statutory minimum amounts.
Net assets
The net assets of the company are the difference between its assets (working capital and fixed
assets) and liabilities (all obligations due to third parties). This has obvious significance in
relation to the solvency of the company. If the nets assets of the company fall to a level
below the value of the statutory capital, the company is compelled to decrease the statutory
capital to a level no greater than the net assets.
Answer 59 ZAO VOLATILE
(a)

Effect on income of fluctuating trading performance


Ordinary shareholders
The income of ordinary shareholders is entirely dependent on the trading performance of the
company and directly related to profitability. When the company performs well and makes a
profit its dividends are likely (but not guaranteed) to be higher than when the company
performs badly. The ability of the company to pay a dividend is dependent on its ability to
make distributions out of profit and the decision of the board of directors on the proportion of
profit that should be retained and ploughed back for reinvestment. Although the decision of
the directors is a recommendation to the general meeting, the federal law On Companies
Limited by Shares does not permit the shareholders to overturn this recommendation.
Therefore, the holders of ordinary shares are directly exposed to the trading experiences of the
company and the decisions of the directors. For the company in the scenario, this means that
the ordinary shareholders have a reduced prospect of income from dividends and little
prospect of their shares increasing in value when the company performs badly. However,
when the company increases its profitability, the ordinary shareholders should benefit from
both dividend and capital growth.
Preference shareholders
Preference shareholders are in a better financial position than ordinary shareholders when
there is a downturn in profitability. Subject to provisions in the Charter, preference
shareholders are paid a fixed dividend and are therefore entitled to the same income every
year assuming that the company makes a profit. However, if there are no funds for
distribution then even the fixed dividend cannot be paid.
The preference shares issued by most companies carry a right to accumulation through which
any unpaid dividend in one year carries over to the next year before the ordinary shareholders
are entitled to any distribution. This is the default situation if there is no reference in the
Charter as to whether preference shares are cumulative or not.
Preference shareholders are at a disadvantage in comparison with ordinary shareholders when
the company is generating a high level of profit and where the directors recommend a
substantial dividend. The income of the preference shareholders is fixed regardless of the
performance of the company. In such cases, the benefit from the prosperity generated by the
company mainly falls to the ordinary shareholders.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Holders of long-term debt
Holders of long-term debt are in a contractual debtorcreditor relationship with the company.
They receive interest and not dividends. Therefore, the regular payment of income to the
creditor is a contractual obligation that must be met, irrespective of whether the company is
profitable or not. Therefore, the holders of long-term debt are certain to be paid provided the
interest cover is adequate.
(b)

Circumstances for redemption of capital investments


A company limited by shares is said to have perpetual succession which means that the
company will continue to exist in its registered form even though its shareholders may be
transient. Share capital is not intended to be an investment that can be realised in the same
way as (for example) a savings account or a bond. The capital is generally regarded in law as
permanent capital.
There are, however, certain instances in which shareholders may demand redemption of their
shares. The most obvious example of this is where the Charter envisages that shareholders
can exercise this right and when a company is liquidated even though it is solvent.
Shareholders may demand redemption of their investments on reorganisation of the company.
In this scenario the company has transformed and proposes to spin off a division into a
separate company. Either proposal would result in the shareholders being able to demand
redemption of their shares.
Redemption of shares is also permitted where the company enters into a major transaction,
but only in favour of those who voted against the major transaction or did not vote at all.
Shareholders may redeem their shares if the general meeting of shareholders takes a decision
that directly and adversely affects the rights of shareholders.
Lastly, redemption of shares is an automatic right if one individual or entity obtains 30% or
more of the companys equity.
In all instances the shares are purchased by the company at a price struck by the board of
directors, which in turn may be no lower than the market value estimated by an independent
appraiser.
The creditors have similar rights to recall their capital ahead of schedule when a company
decides to reorganise or enter into a major transaction. They are also able to claim for full
repayment if the company proposes to reduce its statutory capital.
Some loan capital is convertible into shares, in which case the loan is redeemed and
immediately transferred into equity.
Lastly, long-term creditors have a contractual right to redemption when the credit is scheduled
for full repayment.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(c)

Rights of holders to participate in decision-making


As a general rule, only the ordinary shareholders in a company limited by shares have the
right to vote. However, the voting rights are laid down in the Charter, which may make
specific provisions in relation to voting powers provided these do not conflict with the
provisions of the federal law On Companies Limited by Shares. The normal situation is
that ordinary shareholders have the right to one vote per share issued, starting from the point
at which the tabulation commission recognises the entry of the shareholders name in the
register.
Preference shareholders cannot usually vote on routine decisions at the general meeting of
shareholders. However, there are instances in which a right to vote is invoked. They can vote
on matters relating to liquidation and to reorganisation. Therefore, the preference
shareholders of the company in the scenario would be able to vote on the two reorganisations.
Preference shareholders also have a full right to vote if the company does not pay the
dividend (or cumulated dividend) and this right is retained until such time that dividends due
are paid in full.
If the company proposes to restrict or otherwise alter the rights of preference shareholders,
then the affected shareholders have a right to vote on the issues that will affect them. In such
cases, the proposed changes require a 75% majority in favour with reference to separate votes
by both the general shareholders and the affected shareholders.
Additional voting rights may be envisaged by the Charter of the company.
Holders of long-term debt have no voting rights as their relationship with the company is
conceptually different to that of shareholders. However, in the event that insolvency
proceedings are invoked, then all creditors have a right to be consulted, and a right to active
involvement in the decisions taken by the manager responsible.

(d)

Priority of claims of investors


The Civil Code lays down the priority for repayment of monies due to the various
stakeholders in an insolvent company.
As a general rule, creditors are paid before holders of any shares in the company. In turn,
secured creditors are paid before the claims of unsecured creditors are addressed.
Repayment to preference shareholders ahead of ordinary shareholders is not an automatic
legal right in the event of liquidation. The rules for payment are established in the Charter of
the company, which may specify that certain classes of share represent higher claims than
others. If the Charter is silent on this issue, the claims of preference shareholders are met
alongside holders of ordinary shares.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 60 MINIMUM MONTHLY PAY
Minimum monthly pay is set by the government of the Russian Federation. It is an amount
that nobody actually receives, or indeed could live on. It is used as a yardstick for certain
calculations.
The minimum monthly pay figure is set by the government and revised upwards periodically.
It is used as a multiple to set certain fines, sanctions and penalties. It is common to speak of
fines being ten times monthly minimums or 100 times monthly minimums. This has the
obvious advantage over setting these figures in absolute terms. Rather than having to revise a
whole range of fines to enable them to maintain their real value against inflation, it is only
necessary to revise the multiple.
In the context of company law, minimum monthly pay is used to determine several limits
under the federal laws On Companies Limited by Shares and On Limited Liability
Companies.
The minimum size of statutory capital of a company limited by shares is 1,000 times
minimum monthly pay. The equivalent figure for a limited liability company is 100 times
monthly minimum pay. If the founders assets of a new enterprise is over 200,000 times
minimum monthly pay it is necessary to obtain a notice from the anti-monopoly authority.
The same multiple applies to permissions for merger and acquisitions, again from the antimonopoly authority. The multiple for mandatory external audit is annual sales of 500,000
times minimum monthly pay (and balance sheet assets of 200,000 times).
Answer 61 OAO ZVEZDA
(a)

Parties to the deal


LLC Technoproject concluded with LLC Ensk a contract of sale of shares, being the agent
under the contract of mandate concluded with the issuer of shares, OAO Zvezda. According
to the general principles of a contract of mandate, set by the Civil Code of the Russian
Federation, rights and obligations under a deal concluded by an agent are possessed by the
beneficiary. Therefore, the actual seller and the party to the contract in question is OAO
Zvezda.

(b)

Is there interest?
With respect to OAO Zvezda such a deal is a deal in which there is interest, since the General
Director of the purchaser, LLC Ensk is a member of the Board of Directors of OAO Zvezda.

(c)

Order of conclusion
A deal in which there is interest must firstly be approved by the Board of Directors or by the
General Meeting of the company. In the given case, since the amount of placed ordinary
shares exceeded 2%, the decision upon the deal should have been made at the General
Meeting by the majority of shareholders that were regarded as not having interest in the deal.

(d)

Consequences of non-observance
A deal in which there is interest, concluded with infringements of the requirements set by
Federal law, may be regarded as void (disputable)

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Right to file claim
The right to go to court in that case belongs to the company or its individual shareholder.
Therefore, the claim of a shareholder of the Zvezda company is to be allowed.
Answer 62 TRANSACTIONS
The aim of this question was to test the candidates understanding of transactions in which there is an
interest by companies limited by shares.
(a)

Who may be interested?


The persons that may be interested in a transaction carried out by a company limited by shares
are:

any director of the company;

any person carrying out the decisions of the Board of Directors of the company,
such as the General Director or an executive;

any shareholder who owns one-fifth or more of the companys voting shares;

any shareholders who together with affiliates owns one-fifth or more of the
companys voting shares;

any individual who can confer a mandate on behalf of the company.

In turn, the law On Companies Limited By Shares specifies that such persons are deemed to
be interested if they or connected persons:

are a party to the transaction;

derive some benefit from the transaction;

participate in the transaction as an agent, representative or other intermediary;

own, in their own right or collectively with affiliates, one-fifth or more of the voting
shares of the counterparty to the transaction, or of an agent, representative or other
intermediary to the counterparty;

participate in the management of the counterparty to the transaction or an agent,


representative or intermediary to the counterparty;

are otherwise specified in the Charter as being interested persons.

Connected persons in the context of this law are the spouse, parents, brothers, sisters, half
brothers, half sisters, step parents and step children.
(b)

1082

Interests that must be disclosed

The names of companies or other legal entities in which they own, autonomously or
jointly with connected persons, one-fifth or more of the voting shares.

The names of companies or other legal entities in which they hold managerial or
executive positions.

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)

Actual transactions in which they would be interested persons.

Planned future transactions in which they would be interested persons.

There are specific exclusions to the rules on transactions in which there is an interest. An
interest is deemed not to exist where:

(c)

there is only one shareholder who also acts as the only decision taker;

all shareholders would be deemed to be interested persons;

the transaction relates to priority rights of acquisition of additional shares or


convertible securities;

the company is to acquire its own shares/securities;

the company is to redeem existing shares/securities;

the company is to merge with another or be acquired by another where the


counterparty already owns in excess of 75% of the voting shares.

Approval procedure
A transaction in which there is an interest may be approved by:

the Board of Directors; or


general meeting of shareholders.

The Board may take the decision provided that:

the meeting is quorate; and


there is a majority of directors in favour, excluding those deemed to have an
interest.

If the meeting is inquorate or the required majority cannot be achieved, the decision must pass
to a general meeting of shareholders. Where there are more than 1,000 shareholders, if all of
the directors are interested persons the decision must pass to the general meeting of
shareholders.
Transactions that may be approved by the general meeting include:

transactions in assets where the value is 2% or more of the balance sheet value of
the companys assets as at the last accounting date;

placements by subscription or sale of ordinary shares or convertible securities


exceeding 2% of ordinary shares or convertible securities already placed.

The transaction does not require approval of a general meeting where the terms of the
transaction do not differ significantly from the terms of transactions already concluded in the
course of ordinary business activity prior to the time that the person was deemed to be an
interested person. This rule applies to transactions between recognition of the person as an
interested person and the date of the subsequent annual general meeting.
The general meeting may adopt a decision to approve a transaction between a company and
an interested person in the course of ordinary economic activity. The shareholders may
specify the maximum amount of the transaction.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(d)

Consequences for violation of the law


If there is a violation of the rules on transactions in which there is an interest, the transaction
may be deemed invalid on receipt of a complaint by the company or a shareholder.
The interested person bears personal responsibility to the company for losses caused. If
several persons are deemed to be interested persons, they share responsibility for losses on a
joint and several basis.

Answer 63 LEGAL ROLES


Tutorial note: The requirement to compare and contrast tests understanding of the respective roles
of the internal audit commission and the external auditors.
Similarities
There are numerous similarities in the functions of these bodies. Both are required by law for certain
types of economic entity, fulfil a control function in relation to economic activities carried out by the
company and are appointed by the shareholders of the company at the annual general meeting. Both
have to discharge their duties acting independently of the management of the company. Both may
convene an extraordinary general meeting of the shareholders if they deem it necessary to inform the
shareholders of relevant facts or circumstances, or if they feel that certain actions would be in the best
interests of the shareholders.
Internal audit commission
All companies limited by shares and LLCs with more than fifteen shareholders must elect an internal
audit commission.
The internal audit commission is a management body but must act independently of management. It
may only be formed for the statutory purpose of supervising and controlling the economic activity of
the company and can therefore not fulfil any other delegated functions.
The internal audit commission can only be elected by the general meeting of shareholders. The law
lays down specific voting provisions. Shares representing the holdings of the board of directors and
other managerial bodies do not carry a voting entitlement. Conversely, members of the internal audit
commission are not entitled to become directors of the company or sit on any managerial body.
As well as exercising a control function, the internal audit commissions opinion is required prior to a
general meeting of shareholders approving the financial accounts of the company.
External auditor
An external auditor is required in all open companies limited by shares and in other companies where
their assets and annual business turnover exceed thresholds dictated by law. In addition, most financial
institutions must have an external auditor. In other instances, shareholders with shares in excess of
10% of the total statutory capital may demand that an external audit be carried out.
The purpose of external audit is to provide the shareholders and management with an independent view
on the financial situation of the company, and to confirm that the records are a true and accurate
reflection of the companys activities in the relevant accounting period. To this end, the external
auditor may demand information and explanations from the company in order to discharge its
responsibilities.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


In practice, the external auditor is chosen by the company, but the appointment must be ratified by the
general meeting of shareholders. Once ratified, a contract is formed between the company and the
auditor. Thus, the relationship with an external auditor is a contract for service with an external body,
whereas the relationship with the internal audit commission is a contract of service. In some cases,
formal ratification by the meeting can be retrospective.
Answer 64 BOARD OF DIRECTORS
(a)

Roles
The provisions relating to the board of directors and the executive body are laid down in the
Federal Law On Companies Limited By Shares. The precise role of each is decided in
practical terms by the size of the company and the nature of its activities.
Board of directors
The board of directors may also be referred to as the supervisory council. Its purpose is to
exercise general guidance for the company and to decide on all matters that do not fall within
the exclusive competence of the general meeting of shareholders. In smaller enterprises the
board may not be required, so the law permits companies with less than 50 shareholders to
dispense with the need for a board. If this is the case, all decisions will be vested in the
shareholders meeting.
For other companies there must be a board of directors. The directors are elected annually
and can serve for an unlimited number of terms of office. The shareholders meeting may
determine the terms of reference of the directors, either in the founding Charter, by amending
the Charter or through ongoing decisions at general meetings. The shareholders also decide
on the number of directors, though the law prescribes that companies with more than 1,000
shareholders must have at least seven directors and companies with more than 10,000
shareholders must have at least nine directors.
Executive body
The executive body is responsible for the day-to-day operations of the company limited by
shares. It may either be collegial (a group of executives) or a single person or entity. The
shareholders meeting may sometimes decide to delegate executive powers to an external
management organisation or to an individual entrepreneur.
The executive body deals with a wide range of operational matters, including acting in the
companys name, representing its interests, carrying out transactions on behalf of the
company, dealing with human resources matters and issuing instructions and directions.

(b)

Matters within exclusive competence


The real power in a company limited by shares lies with the shareholders meeting. The
exclusive competence of the board of directors is to deal with those matters, which lie outside
the exclusive competence of the shareholders meeting, or have been delegated to the board
by the shareholders meeting.
Some matters can only be dealt with by the shareholders meeting subject to a
recommendation by the directors. These include the declaration of an interim or annual
dividend, reorganisation of the company into another corporate form and confirmation of the
annual balance sheet and profit and loss account.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Subject to the provisions of the Charter, the board appoints the executive body of the
company limited by shares. If the Charter does not so provide, this task falls to the
shareholders meeting.
Major transactions of 2550% of the book value of the companys assets can be approved by
the board of directors, but only on a unanimous basis. If this cannot be achieved, the decision
falls to the shareholders meeting.
Other matters that would normally be within the exclusive competence of the directors are:

(c)

Strategic direction of the company agreeing the strategic plan and apportioning
responsibilities for its execution;

Meetings dealing with the higher administrative matters relating to the


constitutional rights of shareholders (e.g. the list of voting shareholders, finalisation
of documents, etc);

Capital implementing decisions on increases in statutory capital, issuing and


purchasing securities, appropriation of the reserve and other funds;

Other dealing with matters charged to them by the shareholders or the Charter.

Legal and other controls that limit decisions and actions


The highest level of control is exerted by Federal Law On Companies Limited By Shares,
which stipulates the minimum requirements that must be fulfilled by the board and the
executive body, and the Civil Code, which defines the obligations that individuals and
businesses owe to others. Both the board and the executive body may bear civil responsibility
for damage to the company brought about directly as a result of their actions. This
responsibility is joint and several.
This principle extends to a sole executive body, so where an individual serves the company
under a contract for service, he may bear a liability in tort and can therefore be sued for
damages. Such relationships are regulated by the Civil Code.
The accountability of individual directors is not absolute in that any director who voted
against or abstained on a matter may be absolved from responsibility.
Executives will normally have a contract of service in the form of a labour agreement. This is
often of a fixed term nature. The contract is in itself a form of control as it enables the board
to limit the power and authority, and hence the actions, of the relevant persons.
The laws of the Russian Federation impose a highly administrative approach to control of the
companys affairs. The next level of control, therefore, is the Charter and the internal rules of
the company. These are binding on all who serve the company and on the actions of the
company as a separate entity. The Charter itself may only be changed by the shareholders
meeting, and only then if the change is consistent with federal law.
Another form of control is through external audit (where the law requires this) and through
the activities of internal bodies (e.g. the internal audit commission and the tabulation
commission). All of these activities have their own specific terms of reference but are
essentially tactical and operational organs through which control is exerted.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 65 GENERAL MEETING OF SHAREHOLDERS
(a)

Preparation
Shareholders are informed by the Board of Directors of the scheduled Meeting by:

registered mail (unless the Charter envisages another form of notifying);


written notice (with acknowledged receipt);
publication in printed mass media (if stipulated in the Charter);
additional information in other mass media (optionally).

The notice must contain:

full name and location of company;

form of holding the General Meeting (voting in presence or absentee voting);

date, time and place General Meeting is to be held, postal address to send filled-in
ballots;

deadline for accepting absentee ballots;

date of closing the list of shareholders entitled to participate in the General Meeting;

issues on the agenda;

order of access to information (annual financial reports, information on candidates,


draft decisions of the Meeting and other documents stipulated by the Charter).

Shareholders must be informed on holding the General Meeting not later than:

(b)

20 days before the scheduled date of the Meeting in general

30 days before the scheduled date of the Meeting in case the agenda contains the
issue on reorganisation of the company

50 days before the scheduled date of the Meeting in case the agenda contains the
issue on electing the Board of Directors by cumulative voting

Rules for convening an EGM


Although the law On Companies Limited By Shares does not stipulate any restrictions in
terms of the jurisdiction of an Extraordinary Meeting of shareholders when compared to its
annual Meeting, it does envisage that it is at the annual Meeting where shareholders elect the
Board of Directors (Supervisory Council), internal audit commission (internal auditor),
approve external auditor, and approve the companys annual report. However, this legal
provision should not be interpreted as a ban on considering all of the above-mentioned issues
at an extraordinary meeting should that be required in the interests of the business.
An Extraordinary General Meeting of shareholders is held by decision of the Board of
Directors (Supervisory Council) on the basis of:

board of Directors initiative;

request of internal audit commission (internal auditor) or of external auditor;

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK

request of shareholder(s) having no less than 10% of voting shares;

In the last two cases, the Meeting must be held within 40 days of the request being
submitted (70 days in case the agenda contains an issue on electing the Board of
Directors by cumulative voting, unless a shorter period is envisaged by the Charter).

The initiator draws up the issues on the agenda and options of decisions, and determines the
form of conducting the Meeting. The Board of Directors may not change them.
After receiving the request, the Board of Directors decides within five days on convening
General Meeting or refusing to convene it and within three days notifies the initiators on its
decision.
Refusal is possible only if:

the order of submitting the request has been violated;

the person submitting the request possesses less than 10% of shares;

none of the items on the agenda are within the General Meetings competence;

an item on the agenda does not conform to the requirements of the law On
Companies Limited By Shares and other legal acts of the Russian Federation.

If the Board of Directors has not taken the decision in due time, the Meeting may be convened
by the initiators, and expenses may be covered by the company according to the General
Meetings decision.
(c)

Decision-making procedure
The Board of Directors sets the date for which the list of shareholders entitled to participate in
the scheduled General Meeting is compiled according to the register.
Such a list may not be composed earlier than the decision on convening the General Meeting
is made.
In case the agenda of the General Meeting contains the issue on electing the Board of
Directors by cumulative voting, the list of shareholders entitled to participate in the Meeting
should be compiled not later than 65 days before the scheduled date of the Meeting. In
general, the list of shareholders entitled to participate in the Meeting should be compiled 50
days before the Meeting is convened.
A nominal shareholder submits, for compiling the list, information on persons for whom he
holds the shares.
Shareholders possessing not less than 1% of votes may inspect the list, while the rest of
shareholders may obtain information on their inclusion in the list.
Voting standard One voting share One vote (exception cumulative voting on electing
members of Board of Directors).
Companies with the total number of holders of voting shares over 1,000 elect its Board of
Directors only by cumulative voting. Cumulative voting for companies with a lesser number
of shareholders may be stipulated by the Charter.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Cumulative voting implies that one voting share gives to its holder the number of votes equal
to the number of members of the Board of Directors. The shareholder may vote with all its
votes for one candidate or allocate its votes between several candidates. Candidates with the
most votes are deemed to be elected.
(d)

Voting
The Board of Directors deciding upon convening the Meeting simultaneously determines the
form of voting at the Meeting (voting in presence of all shareholders, mixed voting or
absentee voting). If the General Meeting is convened by the demand of internal inspection
commission, auditor or individual shareholders of the company and the demand stipulates a
particular form of voting, the Board of Directors may not change this form.
Three forms of voting at General Meeting stipulated by law are as following:

Voting in presence of shareholders. Can also have the form of mixed voting
(shareholder having received a ballot beforehand may either send a filled-in ballot
or vote in person).

Mixed voting shareholder having received a ballot beforehand may either send a
filled-in ballot or vote in person.

Absentee voting (by sending completed ballot). There are certain restrictions to the
application of absentee voting. Thus, an absentee-voting Meeting may not
substitute a Meeting that should have had the form of voting in the presence of all
shareholders.

Absentee voting is unacceptable for deciding upon the following issues:

election of the Board of Directors, Internal audit commission, approval of external


auditor;

consideration of annual report, its approval and approval of annual financial


accounting reports;

distribution of profit including payments (declaring) of dividends, and distribution


of loss of the company according to results of financial year.

This means that ordinary Meetings may only be held in the form of voting in presence of all
shareholders or in the mixed form, when a shareholder may choose to send a filled-in ballot or
be present at the Meeting. Absentee voting is possible only for Extraordinary Meetings.
A tabulation commission draws up the protocol on the results of voting not later than 15 days
after the Meeting or after the deadline for accepting the ballots. Members of the tabulation
commission or the commissions representatives sign the protocol.
Answer 66 A, B, C & D
(a)

Amount and face value of shares after consolidation


By decision of the general meeting of shareholders, a company has the right to consolidate
issued stock, as a result of which two or more stock shares of the company will be converted
into one new stock share of the same category (or type). In such a case, respective changes
relative to the par value and quantity of the companys floated and announced shares of a
relevant category (type) must be made to the charter of the company.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


After consolidation, issued stock, the par value and quantity of stock shares for each
shareholder are:
A the quantity 4, the par value of each share 1,000,000
B the quantity 2, the par value of each share 1,000,000
C the quantity 27, the par value of each share 1,000,000
D the quantity 13, the par value of each share 1,000,000
If, in the course of share consolidation, the shareholder cannot acquire an integral number of
shares, fractions of shares must be created (fractional shares).
The fractional share confers on its owner the rights provided by a share of a relevant category
(type) within the scope corresponding to the part of a full share it represents.
For the purposes of recording the total number of floated shares in the charter of a company
all floated fractional shares are added up. If a fractional number is obtained as a result of this
the number of the shares floated is shown as a fractional number in the charter of the
company.
Fractional shares are traded on an equal basis with full shares. If a person acquires two or
more fractional shares of a certain category (type) these shares make up one full and/or a
fractional share equal to the sum of these fractional shares.
(b)

Is the ordinary shareholders meeting empowered?


According to the law On Companies Limited By Shares (art. 48) the following issues are
deemed to be within the scope of responsibility of the general meeting of shareholders:
(1)

re-organising the company;

(2)

endorsing annual reports, annual financial statement, in particular, statements of


profits and losses (profits and losses accounts) of the company and also distributing
profit, in particular, disbursing (announcing) dividends and losses of the company
according to the results of the financial year;

(3)

fractioning and consolidating shares;

Also according to the law (art. 58), the general meeting of shareholders is deemed to have a
quorum if it is attended by shareholders owning, in aggregate, more than half of the votes of
floated voting shares of the company.
As A and B are the shareholders who have registered for the purpose of attending the meeting
and they have a majority vote (60%) of the holders of voting stock of the company, it can be
concluded that the general meeting of shareholders is deemed to have a quorum.
(c)

Legal adoption of decisions


(i)

Dividend payment

The decision with regard to disbursing annual dividends is adopted by simple majority (50%)
of votes, present at the meeting, thus the respective decision in the described case has been
adopted because A has a majority vote of the holders (2/3 of votes present at the meeting).

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(ii)

Reorganisation

The decision with regard to re-organising the company has not been adopted because
according to the law (art. 49) the decision on this issue must be adopted by a general meeting
of shareholders by the majority of three quarters of the votes of shareholders owning voting
shares and attending the general meeting of shareholders (and A has only 2/3 of votes present
at the meeting).
(d)

Decision on reorganisation
In the case B voted for with regard to re-organising the company the decision on this issue
would have been adopted by a general meeting of shareholders.

(e)

Rights of shareholders
C and D (as they did not take part in the voting on reorganisation) have the right to demand
from the company to redeem shares belonging to them. The company is obliged to inform the
shareholders who did not take part in the voting or voted against the respective decision of:

their right to demand the compulsory redemption of shares;


the price and order of such redemption.

The shareholders claim to redeem the shares must be presented to the company within 45
days after the respective decision was taken. The claim must contain information on the
name, place of residence of the shareholder and the amount of shares subject to redemption.
The shares are to be redeemed at the market price determined by the board of directors.
Opinion of an independent appraiser is also taken into consideration.
In case the shares are redeemed within the process of reorganisation they are to be cancelled
by the company.
Answer 67 ORDINARY MEETING
(a)

Terms and conditions


The company must hold an annual general meeting of shareholders every year. The annual
general meeting of shareholders must be convened on the dates stipulated by the charter of the
company but at least two months after and within six months after the end of the financial
year.

(b)

Who is empowered?
The decision on convening annual general meetings of shareholders is the issue within the
scope of responsibility of the board of directors (supervisory board) of a company.
The decision of a meeting of the board of directors (or supervisory board) is signed by the
person presiding at the meeting, who bears responsibility for the correctness of the drawing
up of the decision.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Matters to be determined
This decision includes the following matters:

(c)

the place and time of holding it;


the persons present at the meeting (shareholders having the right to take part in it);
the agenda of the meeting:
the matters put up for voting and possible results of the voting with regard to them;
the decisions adopted.

Information to be submitted
An announcement of a forthcoming general meeting of shareholders must be made at least 20
days prior to the meeting and an announcement of a forthcoming general meeting of
shareholders having on its agenda the issue of re-organisation of the company, at least 30 days
prior to the meeting.
The following must be indicated in an announcement of a forthcoming general meeting of
shareholders:

the full name of the company and its location;

the form of the forthcoming general meeting of shareholders (meeting or postal


voting);

the date, place and time of the forthcoming general meeting of shareholders, the
postal address to which they can be mailed, or in the event of the general meeting of
shareholders being held in the form of voting, the deadline for receipt of ballot
papers and the postal address to which completed ballot papers must be mailed;

the date of compilation of the list of persons entitled to attend the general meeting
of shareholders;

the agenda of the general meeting of shareholders;

the procedure for getting familiarised with information (materials) offered in


preparation for the general meeting of shareholders and the address (addresses)
where one can familiarise oneself with them.

The information (materials) that must be presented to persons entitled to attend the general
meeting of shareholders in preparation for holding such a meeting is as follows:

1092

annual financial statements, in particular, an auditors report statement of the


companys in-house audit commission on the results of verification of annual
financial statements;

information on nominees to the companys executive bodies, board of directors


(supervisory board), in-house audit commission, vote counting commission;

draft amendments to the charter of the company or a new version of the charter;

draft in-house documents of the company;

draft decisions of the general meeting of shareholders; and

information (documents) stipulated by the charter of the company.

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


(d)

Re-election of general director


A sole executive body (director, director general) must operate on the basis of the charter of
the company approved by the general meeting of shareholders in which the periods of his
acting are established. The general meeting of shareholders of a company, unless the
resolution of these matters is put within the scope of responsibility of the companys board of
directors (supervisory board) by the constitution of the company, makes a decision with
regard to forming an executive body of the company every time as it is stipulated in the
charter of the company.

(e)

List of shareholders
The list of persons entitled to attend the general meeting of shareholders is drawn up on the
basis of data of the shareholders register of the company. The nominal holder of shares
submit data concerning the persons in whose interests he possesses shares on the date of
drawing up the list in order to draw up the list of persons entitled to attend the general
meeting of shareholders. The list of persons entitled to attend the general meeting of
shareholders contains:

the name of each such person and his identification details;

information on the quantity and category (type) of the shares whereby the person
has voting rights; and

the postal address in the Russian Federation to which a notice of a forthcoming


general meeting of shareholders, ballot papers (if voting requires ballot paper
mailing) and a report on the results of voting are to be sent.

Answer 68 ZAO TTT


(a)

Type of deal
The deal concluded is a major (large-scale) deal. A major deal is a deal (several related deals)
related to acquisition or alienation of property whose value is over 25% of the book value of
the companys assets as of the date of the decision on the deal (except for transactions made
in the course of usual business activity of the company and transactions implying the
placement of ordinary shares).

(b)

Which body has power to decide?


Major deals related to acquisition or alienation of property whose value is over 50% of book
value of companys assets may be effected only with the approval of the General Meeting of
Shareholders by a 3/4 majority of holders of voting shares present.
The fact that the members of the Board of Directors possess the number of shares that would
have allowed them to make the General Meeting decide positively on the deal, does not give
them the right to perform functions of the General Meeting. In accordance with the law On
Companies Limited By Shares, such deals may be effected only with the consent of the
General Meeting.

(c)

Right decision of the court of appeal


The court of appeal must reject the appeal and keep the decision of the court of first instance
unchanged, since according to the law On Companies Limited By Shares issues pertaining
to the powers of the General Meeting may not be passed for the decision of the Board of
Directors (Supervisory Council) of the company.
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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Answer 69 OAO OBLSVIAZINVEST
(a)

Convening the General Meeting


Firstly, notification about convening the General Meeting should be made not later than 20
days before the planned date of the Meeting. In case the agenda of the General Meeting
contains an issue on the reorganisation of the company, notification should be sent not later
than 30 days before the date of convening.
Notification should be sent to each person in the list of those entitled to participate in the
General Meeting by a registered letter, unless the Charter of the company stipulates another
way of written notification, or hand-delivered, or published in a mass-media edition available
to each of the shareholders (in the latter case the edition is to be named in the Charter).
Secondly, notification on convening the General Meeting should contain:

full name and location of company;

form of holding the General Meeting (voting in presence or absentee voting);

date, time and place that the General Meeting is to be held, postal address to send
completed ballots;

deadline for accepting absentee ballots;

date of closing the list of shareholders entitled to participate in the General Meeting;

issues on the agenda;

order of access to information (annual financial reports, information on candidates,


draft decisions of the Meeting and other documents stipulated by the Charter).

Thirdly, during preparation for the Meeting, shareholders are presented with the companys
annual report, including the auditors opinion on the results of the annual inspection of
financial and economic activity, the information on candidates to executive bodies of the
company, to the Board of Directors and internal audit commission. In case any amendments
to the Charter or inner documents of the company are planned to be discussed at the Meeting,
the drafts of such amendments must be presented, as well as any other information stipulated
by the Charter.
In case the shareholder requires copies of any of the documents listed above, the company is
to present them at the prime cost of the copying.
(b)

Legal implications
Certainly, the Board of Directors of OAO OblSviazInvest infringed the requirements of the
law On Companies Limited By Shares and provisions of its own Charter. However, even if
Mr Ivanov, the holder of 8% of shares of the company, had participated in the Annual General
Meeting, his vote would not have changed the decisions adopted, since the representative of
the plaintiff proved that all the decisions on the agenda were made unanimously.

(c)

Court ruling
The court will reject the claim of shareholder Ivanov.

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REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 70 COMPANY F
Tutorial note: The question posed a general meeting scenario in which shareholders were invited to
approve a major transaction. The purpose of the question was to test the candidates understanding of
voting rights of shareholders and the validity of the decision taken. It also required candidates to
comment on the rights of shareholders to redeem their shares.
A major transaction is one that deals with the acquisition or divesting of property that has a value of
25% or more of the book value of the companys assets as at the last formal reporting date, unless it is
specifically excluded by law.
(a)

Powers
The law On Companies Limited By Shares states that it is within the competence of a
properly convened general meeting of shareholders to approve a major transaction.
Therefore, assuming that the meeting was properly convened, the general meeting is within its
powers to consider the transaction.
The general meeting of shareholders is deemed to be quorate if it is attended by shareholders
representing at least one-half of the voting rights in the company. In the case of Company F,
the quorum is 50 shares (or votes). Shareholders representing 92% of the companys voting
capacity attended and voted at the meeting.

(b)

Validity of decision
A general meeting can approve a major transaction if 75% or more of the voting rights
attached to shareholders present at the meeting are cast in favour. In the case of Company Fs
general meeting, shareholders A, B and C all voted in favour. They represented 92% of the
voting rights with 80% in favour of the transaction.
The major transaction has therefore been properly validated by the meeting.

(c)

Submission of applications
The demand by shareholders who wish to redeem their shares must be submitted to the
company within 45 days of the decision by the general meeting of shareholders. This notice
must include details of the shareholders address and the number of shares that are to be
redeemed.

(d)

Taking the decision


Applications to redeem shares must be presented to the Board of the company. The decision
must be taken and redemption exercised within 30 days of the expiry of the 45 day period
described in part (c) above.

(e)

Rights of redemption
Shareholder C has no right to redeem his shares because he voted in favour of the resolution
to approve the major transaction.
Shareholder D has a right to redeem his shares as he voted against the major transaction being
approved.
Shareholder E also has a right to redeem his shares as he did not take part in the meeting.

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CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(f)

Number of shares and amounts due


The purchase of shares is carried out at the price specified in the communication to
shareholders regarding the general meeting.
The market value of each share is 100,000 roubles. The total amount to be redeemed
assuming market value is:

shareholder D 12 100,000 = 1,200,000 roubles


shareholder E 8 100,000 roubles = 800,000 roubles
total 2,000,000 roubles.

The law provides that in the event of shareholders being legally entitled to redeem their
shares, they will be paid a value determined by the Board of Directors, but this value may be
no less than the market value of the shares.
However, the net asset value of Company F is 10,000,000, so the value to be redeemed
exceeds the 10% maximum limit as set down in the law On Companies Limited By Shares.
As the 2,000,000 roubles is double the limit set by law, each shareholder entitled to
redemption of half of his shares.
Using the figures provided in the scenario, the company can redeem 10 shares. As already
stated, these will be redeemed on a pro rata basis, that is, in proportion to the demands of the
shareholders. The final situation will therefore be as follows:

shareholder A 45 shares;
shareholder B 25 shares;
shareholder C 10 shares;
shareholder D 6 shares remaining with the remainder redeemed;
shareholder E 4 shares remaining with the remainder redeemed.

The shares purchased by the company (10 shares in total) must be sold at their market value
within one year of the purchase by the company. In the meantime they carry no voting rights
and have no dividends attributed to them. Failure to divest these shares within the prescribed
time limit will lead to the shareholders adopting a decision at the next general meeting to
reduce the authorised capital of the company by redeeming the shares.
Answer 71 OAO CAET
(a)

Convening of the Annual General Meeting


Every company limited by shares must hold an Annual General Meeting of members. The
legal requirements are set down in the law On Companies Limited By Shares, augmented
where appropriate by the provisions of the companys own constitutional documents.
The meeting must be held between two and six months after the financial year end of the
company. It routinely considers election of directors, the internal audit commission and the
external auditor, receives the annual report, approves the financial accounts and allocates the
dividend payable to members if declared. The meeting is empowered to consider other
business as appropriate.
As the meeting is the main decision taking organ of the membership, every member is entitled
to attend. Holders of ordinary shares are entitled to vote, with voting power established by
the constitution of the company.

1096

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


It is the responsibility of the directors to convene the meeting, including deciding on the date,
the agenda of business to be discussed or heard and issuing notices to members.
The directors also recommend the dividend if payable. This is critical, as the meeting cannot
vote for a dividend in excess of that recommended by the directors.
Members have a right to attend in person or to be represented by a proxy. If the company
fails to notify a member of a meeting and a decision is taken with which the absent member
disagrees, that member has the right to litigate against the company. Given the history of
poor shareholder relations in the company described in the scenario, it would be in the
interests of the directors to ensure that the administration is flawless.
The list of members entitled to participate must be prepared between the date on which the
decision was taken to convene the meeting and a minimum of 50 days before the date of the
actual meeting. If cumulative voting is adopted, the relevant period is 65 days. The list of
members is available for scrutiny by any members holding at least 1% of the voting power.
The directors decide on the form that voting will take. Generally, voting may take place in
person or on a mixed basis, which combines votes cast in person with votes exercised by precompleted ballot.
The notice of the meeting must be dispatched in the manner prescribed in the Charter. This
may provide, for example, for notification through the newspapers. If the Charter is silent on
this, the notice must be issued by registered post or by other acknowledged written dispatch.
The minimum content of the notice of the meeting is prescribed by law. It must contain the
name and location of the company, information on voting protocols, date, time and venue for
the meeting, deadlines applicable to the list of members and casting ballots, agenda and
information on where members can have sight of relevant documentation.
The notice must be despatched to members 20 days before the meeting. This period extends
to 30 days if the meeting is to consider reorganization and to 50 days if cumulative voting is
to apply.
(b)

Cumulative voting
As a general rule, voting is often carried out at general meetings on the basis of one share
representing one vote. This ensures that democratic processes are observed but also means
that those who have made large contributions to the risk capital of the enterprise have an
appropriate degree of influence.
Cumulative voting may be used for elections of directors if stipulated in the Charter. Under
this method, each voting share gives the owner of the share the same number of votes as the
number of directors of the company. The member can therefore apportion all of these votes
for one candidate or spread then as desired across the candidates presenting themselves for
election.
Cumulative voting can therefore produce a profoundly different outcome to an election to that
which might apply if standard voting procedures are adopted. The member can strongly
support one or more candidates in order to tactically exclude others.

1097

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(c)

Convening a formal meeting of shareholders


Any meeting of the company that is not the annual meeting of members is deemed in law to
be an extraordinary general meeting. Such a meeting can be convened by the Board of
Directors, at the request of the internal audit commission, at the request of the external auditor
or by entitled members.
Members may convene an extraordinary general meeting if they hold not less than 10% of the
voting rights in the company.
Therefore, if the dissatisfied member has this minimum shareholding, he is entitled to call the
meeting. Alternatively, he must persuade other shareholders to join with him in petitioning
for the meeting in order to attain the 10% threshold required.
If the right to call the meeting is established, the meeting must be convened within either 40
days of the request being submitted or 70 days if the meeting is to elect directors by
cumulative voting. These periods may be varied by the Charter.
The business to be heard and discussed at the meeting is promulgated by the person or
persons calling the meeting. This may not be refused or varied by the company unless there is
conflict with the law, the necessary procedures have not been followed correctly or the
business to be heard is ultra vires in relation to the competence of the meeting.
If the dissenting shareholder is not able to attract the 10% threshold necessary, he is still able
to submit items for the agenda of the Annual General Meeting, provided he has a minimum of
2% of the voting shares.

Answer 72 MIKHAIL
(a)

Actions by board of directors


As Mikhail works under a contract of service within the meaning of the Labour Code, the
most likely course of action is that the board of directors will dismiss Mikhail from his
position as general director. The facts of the case suggest that the directors would be within
their rights to do so as Mikhails actions would seem to be contrary to the interests of the
company and may in fact inflict harm on the company.
A general director is in a position of trust and as such would be expected to keep the secrets
of the business. This is a moral issue arising from the perceived integrity that a key decision
taker should demonstrate. Releasing confidential information to a competitor is most
certainly immoral conduct (and nothing to do with networking). Mikhail has been in gross
violation of duty and could therefore be removed without delay.
If it can be established that his actions have inflicted damage on the company, Mikhail could
also be dismissed for breach of his duty as a chief executive officer.

(b)

Removal as a shareholder
Mikhail cannot be removed as a shareholder without his consent. Shares are a form of
personal property. They can be sold or otherwise transferred at the owners initiative, but the
owner cannot be dispossessed simply because of the circumstances concerning his
employment with the company or the choices made by the directors.

1098

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


The distinction must be made on the one hand between those who run the company (the
directors and other important decision takers) on behalf of the owners and the owners
themselves (the shareholders). The owners appoint the directors but the directors do not
appoint the shareholders.
Therefore, however deplorable Mikhails conduct may have been, the company cannot force
him to sell his shares or treat him differently to any other shareholder.
(c)

Rights to make representation


As a shareholder Mikhail has the right to notices of general meetings and to attend general
meetings. In addition, he can vote on resolutions placed before the meeting and address the
meeting if the points he wishes to make are consistent with matters considered.
Mikhail has 15% of the shares in the company. This gives him several additional rights. He
may inspect the list of shareholders and may propose items for inclusion on the agenda of the
meeting, provided he gives sufficient notice of his request to do so. This means that he can
influence the business that will be heard at the meeting and possibly put his arguments to all
the shareholders.
If Mikhail chooses, he can nominate persons of his choice as directors at the next general
meeting of shareholders. He may also nominate himself as a director, though of course the
existing directors have a right to reveal the full circumstances underlying his earlier removal,
which would undoubtedly influence the meeting.

(d)

Extraordinary general meeting


The shareholding threshold for a right to call an extraordinary general meeting of the
shareholders is 10%, so Mikhails holding of 15% automatically confers a right to do so.
In order to call a meeting, he must submit a formal request to the company. The company
must then convene a meeting within 40 days, or 70 days if the meeting is to consider election
of directors by cumulative voting. Shorter notice may be provided for in the Charter of the
company.
The request to convene the meeting should state the business to be considered. This cannot
be altered by the company unless any lawful matters contravene the provisions of the Charter.
The board cannot refuse the request to convene a meeting unless the request has been
submitted irregularly.

Answer 73 GENERAL MEETINGS


Tutorial note: This question tests knowledge of matters relevant to general meetings of companies
limited by shares.
(a)

Agenda
Every company must hold an annual general meeting of shareholders. The meetings can deal
with ordinary, routine business considered every year and also special business that is decided
by those entitled to place matters before the general meeting.
In addition, the law provides for the right of management, shareholders, external auditors and
the internal audit commission to convene an extraordinary general meeting as and when
required. Such meetings are normally convened to deal with important, one-off issues.

1099

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Some of the business dealt with by the annual general meeting is determined by law. The
meeting must elect the board of directors and, where applicable, the internal audit commission
and/or the external auditor. The meeting must also consider matters that fall within the
exclusive competence of the meeting as and when they arise including amendment of the
Charter, creation of subsidiaries, reorganisation and some other matters.
The business of the annual general meeting is normally decided by the board of directors.
However, holders of no less than 2% of the shares may propose one to two matters to be
included on the agenda. The Charter may make specific provisions relating to rights to
propose business, as long as these do not conflict with the law.
In order to propose matters for inclusion on the agenda, the proposer(s) must inform the
company of this in writing not later than 30 days after the end of the financial year and not
later than 30 days before the meeting. The board then has five days to consider the proposal
and either accept it for inclusion in the agenda or reject it. In the latter case, the affected
shareholder must be notified with reasons for the rejection.
The matters dealt with by an extraordinary general meeting are likely to be narrower in focus.
If convened by the board or the internal audit commission there will be a specific and definite
purpose and this will be set out in the notice issued to the shareholders. The meeting can also
be convened by shareholders with 10% or more of the voting rights, or less if the Charter so
dictates.
In all cases, the extraordinary meeting must be convened within 40 days of submitting the
request, within 70 days if the meeting is to consider the election of directors by cumulative
voting, or a shorter period if permitted by the Charter. The directors can refuse to convene a
meeting if the request is not compliant with the law or the provisions of the Charter, or if the
matters to be dealt with are outside the competence of the meeting.
(b)

Tabulation commission
The tabulation commission fulfils a scrutinising role. It is concerned with compliance with
the procedures and rules necessary to convene and hold a general meeting of shareholders.
The requirements for the constitution and activities of the tabulation commission are laid
down in the law On Companies Limited By Shares. Any company where the number of
shareholders with voting shares exceeds 100 must convene a tabulation commission.
Prior to the meeting, the tabulation commission must check the register of participants in the
meeting and their authority to vote, clarify voting protocols and determine the quorum for the
meeting (the minimum number of participants necessary to hold the meeting lawfully).
During and after the meeting, the tabulation commission is responsible for counting votes,
notifying the results of voting and registering the results in the companys records.

(c)

Quorum
The law On Companies Limited By Shares lays down the minimum numbers of
shareholders with voting rights who must attend the meeting if the business dealt with at the
meeting is to be constitutionally valid.
A general meeting of shareholders is quorate if the shareholders hold in excess of 50% of the
voting shares placed by the company.
If the meeting is inquorate it is necessary to decide a new date for the meeting with the same
agenda as the originally planned meeting. A lower quorum of 30% of voting shares may be
formed for the purpose of the rearranged meeting. For companies with more than 500,000
shareholders, the Charter may specify a smaller quorum.

1100

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 74 VOTING
(a)

Absentee voting
All holders of ordinary shares in a company limited by shares are entitled to vote, usually on
the basis of one vote per share held in the company. Voting may be done in person and in
some cases in absentia.
Absentee voting is effected by shareholders who cannot attend the general meeting. This
must be done in writing by completing a ballot form.
Absentee voting is permitted on all matters except those expressly forbidden in the federal
law. These include most of the ordinary, routine business of all general meetings:

election of members of the board of directors;


election of the internal audit commission;
appointment of the external auditor;
approval of the annual report and financial accounts;
distribution of profit/loss.

It therefore follows that absentee voting is confined to extraordinary meetings of the


company.
(b)

Cumulative voting
This special form of voting required for the election of directors in companies with in excess
of 1,000 shares that entitle the holders to a vote. In addition, companies with a smaller
number of voting shares may adopt cumulative voting by inserting a specific provision in the
Charter.
Cumulative voting enables the shareholder to cast a number of votes equivalent to the number
of positions on the board of directors. Therefore, if the company has eight directors each
shareholder has eight votes. These may be allocated entirely at the discretion of the
shareholder, who may choose to cast all votes for just one candidate or spread the votes across
a number of candidates in whatever proportion he or she desires.

(c)

Quorum
The term quorum refers to the minimum number of persons who must attend the meeting if
the decisions and other actions of the meeting are to be legally valid.
The quorum is set by the tabulation commission with reference to the register of equity
shareholders entitled to vote.
The normal quorum for a general meeting is shareholders possessing in total 50% of voting
shares. If the meeting attracts fewer shareholders any decisions taken are invalid and the
meeting has to be called again.
When a new meeting is required due to the original meeting being inquorate, a lower
minimum threshold of 30% of holders of voting shares is set. The reconstituted meeting must
have the same agenda as the original meeting.
For open companies limited by shares with in excess of 500,000 shareholders the Charter may
set a lower quorum.

1101

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


Answer 75 OAO TRUCKING
(a)

Major transaction criteria


The rules relating to major transactions are applied under the federal law On Companies
Limited by Shares and the Civil Code. The purpose of the rules is to safeguard the assets of
a company, thereby reducing risk to shareholders wealth.
A major transaction is any transaction of the company whose value is 25% or more of the
book value of the companys assets as at the end of the last accounting period. In addition,
the Charter of the company may specify transactions that will be regarded as major
transactions. The value of the transaction is estimated with reference to the market value.
A major transaction may be a large, one-off disposal or acquisition or a series of related
transactions. It may relate to acquisition or disposal of property or the company entering into
a credit agreement, such as a pledge, guarantee or surety.
If the book value of the transaction is more that 25% but less than 50% of the companys
assets, the agreement to the major transaction may be taken by the board of directors. This
must be unanimous. However, if all of the members of the board cannot agree on the
transaction the decision passes to the shareholders in a general meeting. Their decision on the
matter is taken by simple majority.
The ability of Peter and Rosa to secure the required level of support would determine whether
the transaction could go ahead. However, they own 50% of the shares in the company, so it
would be necessary for the holder of just one more share to sanction the transaction and
therefore back their plan.
The question of whether the proposed sale of the real estate will be regarded as a major
transaction turns on whether the value of the fixed assets fall within the thresholds determined
by the law.
Even if the transaction is small enough not to be regarded as a major transaction, Peter and
Rosa may bear subsidiary responsibility if the disposal price is clearly below the market value
of the assets as this would constitute a fraud against the company.

(b)

Transaction in which there is an interest


Transactions in which there is an interest are governed by the federal law On Companies
Limited by Shares. The purpose of the rules on this matter is to reduce the prospect of
interested persons from securing personal gain from the companys transactions at the
expense of the shareholders.
Transactions in which there is an interest are not forbidden, but it is necessary to follow the
legal requirements on disclosure and decision taking.
There are various parties who are considered to be able to establish an interest. These include
the directors of the company, the sole executive body or senior management, shareholders and
their associates, who may individually or collectively hold 20% or more of the shares of the
company, and persons authorised to give instructions on behalf of the company.
In this case it appears that the vehicle fleet will be sold to a company in which Peters brother
has an interest. If so, this would be regarded as a transaction in which he has an interest and
he would be excluded from voting on the matter.

1102

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


The law deemed these persons to be interested if they, their close relatives or affiliates are a
party to the transaction or benefit from it. They are also deemed interested if they own 20%
or more of the shares in an entity that is a party to the transaction, or if they hold managerial
positions in an entity that is a party to the transaction.
Those who have an interest are required to notify the board of directors, internal audit
commission or external auditor of their interests as defined above.
There are some exclusions to the rules. If there is a sole shareholder who also takes decisions
on behalf of the company, the transaction is not a major one. This also applies if all of the
shareholders of the company have an interest, where the company is buying back or
redeeming its own shares and in the event of a merger or acquisition where the counterparty
company owns 75% or more of the company being reorganised.
As the company in the scenario has more than 1,000 shareholders, the decision on the
transaction may be taken by a majority vote of the board of directors. However, those
deemed to be interested are not permitted to vote on the matter. If all of the directors are
deemed to be interested persons the decision must be taken by a majority of the shareholders
voting in a general meeting. This is a requirement if the book value of the transaction exceeds
2% of the companys assets as at the last accounting date.
(c)

Consequences of failure to follow due process


If the major transaction is approved without following the necessary procedures this is a
violation of the Civil Code. This may apply even if the transaction is subsequently ratified by
the board of directors or general meeting of shareholders. The persons responsible for the
transaction may bear subsidiary responsibility for the transaction. Furthermore, under the
minority protection provisions, the shareholders who are entitled to vote may demand
redemption of their shares if dissatisfied with the outcome of the transaction, provided they
voted against the transaction or abstained from voting.
If the company contravenes the rules on the proposed transaction in which there is an interest,
those objecting to the transaction may petition the court to declare the transaction null and
void and implement remedial measures. Shareholders possessing not less than 1% of the
shares may file a claim against individual members of the board of directors or against the
board as a collective body in order to obtain compensation for losses suffered.

Answer 76 ZAO PERITUUS


(a)

Procedure for the sale of the warehouse


Unless the decision of Creditors committee (Creditors general meeting) provides for the
following, the property must be sold at a public auction. Terms and conditions of sale of
property must be approved by Creditors committee (Creditors general meeting).
The auction must be organised by the competitive manager or by an independent organisation
on a contract basis.
The property that was not sold during the first public auction may be placed to a successive
auction or sold by the competitive manager on the basis of sale and purchase agreement.

(b)

Part of the building


The part of Kindergartens building belonging to ZAO Perituus being an object of social
importance and a childrens object must be transferred to municipal ownership.

1103

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


(c)

Turn of satisfaction
The Law provides for the following turns of satisfaction of creditors claims:
1.
2.
3.
4.
5.

claims based on injury and damage caused to health;


payments on labour contracts, employment relations, author remunerations;
claims secured by mortgage of property;
obligatory budget payments (taxes included);
other claims.

In the above mentioned situation the creditors claims will be satisfied in the following turn:

(d)

(1)

(there are no claims based on injury);

(2)

Employees working according to the labour contract, employees working without


labour contract, Mr Sidorov;

(3)

Bank Z credit;

(4)

Taxes payable;

(5)

Bank X, payment for hot water supply, other creditors.

Amounts to creditors
Total amount of property available = 3,000,000 + 730,000 = 3,730,000 roubles.
(1)

No creditors of the 1st turn are present.

(2)

Total amount of claims of the 2nd turn = (2,000 roubles 100 employees) + (1,200
roubles 100 employees 3 months) + 10,000 roubles = 200,000 + 360,000 +
10,000 = 570,000 roubles.
The claims are satisfied in full. After satisfaction of the claims of the 2nd turn
3,160,000 roubles are left.

(3)

The claim of bank Z (1,000,000 roubles) is satisfied in full. 2,160,000 roubles are
left.

(4)

Taxes (20,000 roubles) are paid in full. After payment of taxes 2,140,000 roubles is
left.

(5)

Total amount of claims of the 5th turn = 2,500,000 + 30,000 + 1 750,000 =


4,280,000 roubles. All the claims of the 5th turn are to be satisfied in proportion
calculated as 2,140,000/4,280,000 = 05. It means that each creditor of the 5th turn
will get half of amount due to him.

Finally the following creditors will receive the following amounts:

1104

Employees (100 individuals) working without employment contract 2,000 roubles


each;

Employees (100 individuals) working according to the employment contract


monthly salary equals to 1,200 roubles per month each have not been paid for
three months;

Taxes payable 20,000 roubles;

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)

Mr Sidorov (Authors remuneration) 10,000 roubles;

Indebtedness:

Credit provided by bank X 1,250,000 roubles;

Credit provided by bank Z (secured by mortgage of the warehouse building)


1,000,000 roubles;

Municipal authorities (hot water supply) 15,000 roubles;

Other creditors (goods provided) 875,000 roubles.

Answer 77 OAO KRAITEPLOENERGO


(a)

Composition
Composition is a specific type of deal that may be concluded between the debtor and
creditors at any phase of arbitration court consideration of bankruptcy. Composition is to be
approved by arbitration court. Unilateral renunciation of composition, which is already
effective, is inadmissible.
Composition is to contain provisions on the amount, order and terms of performing the
debtors obligations and/or on terminating the debtors obligations by cancellation
compensation, novation of obligation or by other means stipulated by the Civil Code of the
Russian Federation.
Besides, composition may contain provisions on:

deferral of performance of the obligation (performance by instalments);

cession of the debtors right of claim;

performance of the debtors obligations by third parties;

discount on the debt;

exchanging claims for shares;

meeting creditors claims by other means not contradicting legal acts of the Russian
Federation.

Arbitration court may rule on refusal to approve composition, on recognising it void or on


dissolving composition.
(b)

Conclusion during observation


Composition is one of the grounds to terminate the bankruptcy procedure. According to the
law on insolvency, composition is the grounds for terminating court proceedings on
bankruptcy. Composition may be concluded at any stage of court bankruptcy adjudication,
including the observation stage.

(c)

Consideration as a separate claim


The volume of creditors claims, who concluded composition with the debtor, is determined
by terms stipulated in composition.

1105

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


In the given case, in 2008 arbitration court approved composition concluded by the debtor and
creditors in the course of observation, and terminated the proceedings by adjudication ZAO
KTC as bankrupt.
According to composition, the debt of ZAO KTC to OAO
KraiTeploEnergo amounted to 150,000 roubles. Therefore, OAO KraiTeploEnergo may not
file claims on debt recovery to the amount of 3 million roubles from ZAO KTC after
composition was signed and the bankruptcy procedure terminated, since it is unlawful.
Answer 78 EXTERNAL MANAGER
(a)

Role and responsibilities


The external manager is introduced by the arbitration court at the end of the observation stage
of the insolvency procedure following the decision of the meeting of the creditors of the
company. The appointment is initially for a period of up to 12 months, which can
subsequently be extended if necessary by up to a further six months.
The external manager must balance the prospect of rescuing the company with meeting the
demands of the creditors.
The external manager effectively takes control of the companys affairs once appointed. The
appointment signals the termination of the authority of the companys management bodies
and the freezing of claims against the company by its creditors.
The external manager takes control of the companys assets and proposes, where possible, a
plan to restore the solvency of the company. If the plan is approved by the creditors it is
submitted to the court.
The powers of the external manager are broad. These include the right to restructure the
business by changing the nature of its production, termination of unprofitable aspects of the
business, credit control functions and disposal of assets.
There are limitations on the powers of the external manager. These include restrictions on the
right to carry out transactions of a significant value, increasing the outgoings of the enterprise
and restrictions on entering into transactions that fall outside the external management plan.

(b)

Alternative outcomes that may follow the submission of an external managers report
The report may be approved by creditors, in which case their demands will be settled in due
course.
If the report is not approved this will invoke insolvency proceedings and the company will be
wound up. The assets of the company will then be realised and the demands of creditors and
others met according to the priority determined by law or alternatively the priority of their
notices.
A composition may be agreed at any time during the insolvency procedure. If approved, this
will ultimately result in creditors demands being met in due course.
The external management may be prolonged in order to extend the period in which the
company may be rescued or creditors demands met.

1106

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Answer 79 OBSERVATION
(a)

Responsibilities of interim manager


An interim manager is appointed under the provisions of the Federal Law On Insolvency
(Bankruptcy). The interim manager is responsible for matters concerned with the
observation stage of the insolvency process.
The interim manager is appointed by the court of arbitration once it has decided that
observation will commence.
The interim manager is accountable for safeguarding the debtors property and making an
initial assessment of the financial position of the company. He has to establish whether there
are adequate financial resources to cover the arbitration managers fees, legal fees and
expenses and to consider the prospects of recovery. The manager must consider whether
there are indicia of spurious or intentional bankruptcy.
The creditors of the company must be notified by the interim manager that the observation
process has been instigated. They will also be invited to convene the first meeting of
creditors. This must take place at least 10 days before the end of the observation stage and
involves not only the creditors but also the management, an employee representative and the
interim manager himself.

(b)

Observation purpose and process


When an application for insolvency is accepted by the arbitration court, the court places the
company under observation. This will be done if the court is convinced that there is a
prospect of the company being unable to meet its obligations or where there is prima facie
evidence of insolvency.
Although the commencement of the observation process by no means results in eventual
insolvency in every case, the reality is that the vast majority of companies that enter this
phase do not ultimately survive. However, the laws of insolvency have become progressively
more liberal to debtors in order to enhance the prospects of saving companies experiencing
financial difficulties.
The purposes of observation are to avoid the debtor company being asset stripped and to
prepare for the recovery of the company or eventual liquidation of its assets. The Federal
Law On Insolvency (Bankruptcy) establishes a strict order of priority of claims in the event
of insolvency, and observation prevents the debtor from subordinating the rights of
preferential creditors in favour of others. It also prevents short-term enrichment of the
principals of the business should they choose to liquidate company resources for personal
gain.
During the observation stage it may become apparent that the company is able to discharge its
financial obligations or that the company is not faced with insolvency after all. If this is the
case, the company can continue as a going concern and the insolvency process is terminated.
Once a decision has been made by the arbitration court, the interim manager is appointed.
The creditors of the company and its employees are notified of the situation, and the interim
manager prepares and publishes a formal notice of observation.
While the observation process is under way, the existing management of the company may
remain in place. However, if appropriate steps are not taken by them to protect the property,
or if the interim manager is impeded in his duties, the arbitration court may remove all powers
of the management and transfer them to the temporary administrator.
1107

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK


The creditors have 30 days to file their claims against the company from the date of the
official notice. In turn, the company has a right to challenge these claims.
The interim manager convenes a creditors meeting which considers the appropriate course of
action. This may involve one of several courses of action, including a financial recovery
programme, appointment of an external manager, signing of a composition or initiating an
insolvency action.
The creditors meeting may be inconclusive, in which case it falls to the arbitration court to
decide whether to appoint an external manager, initiate financial recovery or proceed to
insolvency.
After completion of observation, the company may be placed under the control of a licensed
external manager, usually an economist, jurist or other individual with appropriate experience.
This individual is responsible for preparing a plan within one month of appointment and
submitting it to creditors.
Alternatively, the enterprise may be recuperated through a financial recovery programme, or
pre-judicial sanation, through which interested parties (usually the founders or other
stakeholders) may provide financial assistance for recuperation of the enterprise.
If the company is to be liquidated, an insolvency practitioner is appointed to realise the assets
of the company in a manner consistent with the priority of their claims under the law.
Answer 80 CORPORATE INSOLVENCY
(a)

Bankruptcy process
Bankruptcy procedures are opened by a decision of the court of arbitration. It involves
compulsory liquidation of the company. The role of the bankruptcy manager is therefore to
liquidate the companys assets and discharge its obligations where possible. Special
provisions apply to securities companies, insurance companies, agricultural entities and
organisations employing more than 5,000 persons.
Once the bankruptcy decision is made, it is prohibited to transfer any property of the debtor to
other individuals or organisations without prior permission of the creditors meeting. All
management personnel of the company are de facto dismissed and the bankruptcy manager
assumes responsibility for its assets and obligations. The bankruptcy manager must assess the
value of the companys assets (which may be considerably less than the book value) and
prepare a formal inventory. The manager also has a responsibility to make appropriate
arrangements to secure the assets. The manager may operate the insolvent companys
property if it is in the interests of the creditors to do so.
Subject to the limitations imposed by the federal law On Insolvency, the bankruptcy
manager arranges for the disposal of assets of the company and has a responsibility to apply
the funds realised for the benefit of the creditors.
The bankruptcy manager has wide discretion in dealings with creditors of the company. The
claims of creditors may be allowed or refused, depending on the priority of claims and the
monetary value that may be realised by disposals. The bankruptcy manager may also make
claims against debtors on behalf of the insolvent company.

1108

REVISION QUESTION BANK CORPORATE AND BUSINESS LAW (RUSSIA) (F4)


Settlements with creditors take place in a strict order established by the Civil Code. The
highest priority are claims arising from legal fees and charges imposed in relation to the
insolvency process, maintenance expenses, claims on liabilities that became apparent during
bankruptcy, debts arising from claims of employees under contracts of service and other
current expenses. If these obligations can be met in full any claims by natural persons for
personal injury or damage to health are then paid. Claims by secured and unsecured creditors
are the next priority. Shareholders are paid last of all if there are sufficient funds remaining to
meet their claims. Any outstanding claims that cannot be paid are cancelled.
If it is found that the founders or participants in the company brought about the bankruptcy by
their actions, they may bear subsidiary responsibility to the creditors. This also applies to
anyone with the right to give binding instructions to the enterprise.
The bankruptcy manager must report to the arbitration court giving an account of actions
taken, including a record of claims paid.
(b)

Limitations on disposal pf assets by bankruptcy manager


The powers of the bankruptcy manager are not unlimited as the federal law On Insolvency
ring fences certain types of assets.
Residential property, pre-school amenities (such as a kindergarten), any housing fund and
public facilities may not be included in the assets scheduled for disposal. Likewise, property
leased by the company, property in the companys possession but not ownership, personal
property of employees and property in trust management are all excluded.
The method of disposal of the insolvent companys property must be effected to maximise the
funds available for distribution to creditors. This is usually by public auction and bidding,
though the creditors committee may decide on an alternative method of disposal if
appropriate. Failure to dispose of property at auction may result in a further auction being
held or an alternative method of disposal being adopted.

1109

CORPORATE AND BUSINESS LAW (RUSSIA) (F4) REVISION QUESTION BANK

1110

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