Foreign creditors applied to a Russian court for bankruptcy of a counterparty resident in Cyprus. Three instances denied this possibility, but the Supreme Court decided otherwise.
— Decision of Supreme Court of Russian Federation
Two residents of Cyprus entered into a dispute over non-payment of security payments of 6 million rubles under lease agreements for shopping centers in the Moscow region. The plaintiff considered that the counterparty’s activities were closely connected with the Russian Federation and therefore jurisdiction should be chosen in Russia. The three instances took the position that the company no longer operated in Russia, that it had no assets or accounts in the jurisdiction of the Russian Federation, and that the shareholder, director and secretary were Uzbek citizens. According to the courts, they cannot refer to the difficulty of bankruptcy in another jurisdiction because they themselves chose this way of managing their business (the creditor and debtor are part of the same economic group within the holding company), and the attempt not to initiate bankruptcy in Cyprus is an attempt to circumvent territorial restrictions.
The Supreme Court initially refused to transfer the case to the economic panel, but the creditor argued, under the APC, the debtor had a connection with the Russian Federation, but withdrew assets shortly before filing the complaint, and the other shareholder and director is a citizen of the RF.
— APC RF Article 27. Disputes within the competence of arbitration courts
— APC RF Article 247. Competence of Arbitration Courts in the Russian Federation in cases involving foreign persons
The Supreme Court recalled the criteria of close connection: permanent economic activity in the Russian Federation; focus on persons located in the Russian Federation.
Location of the center of interests of controlling persons in the RF or the presence of Russian citizenship or residence permit; bringing the controlling persons to responsibility in the jurisdiction of the Russian Federation.
The Supreme Court pointed out that the list of connections of the debtor with the RF is opened. If the circumstances make clear that there is a connection, it is up to the debtor to refute them. Also, the courts should further assess whether to initiate a primary or secondary case. If the debtor is only formally located in a foreign jurisdiction, the case is primary. If the debtor is located in another jurisdiction, but its assets are in the Russian Federation, it is a secondary case.
The Supreme Court pointed out that the debtor was only formally, according to the creditor’s application, located in another jurisdiction, the territoriality should be assessed before the start of the procedure, because otherwise it opens the possibility to artificially change the competence of the court, regardless of the real economic situation. The Supreme Court overturned the decisions of the 3 instances and sent the case to the Moscow Arbitration Court for consideration of the case on the merits.