Tax Messenger. Overview of Proposed Changes to Financial Transaction Legislation. Law Edition

Transcription

1 17 August 2017 Tax Messenger Law Edition Overview of Proposed Changes to Financial Transaction Legislation EY s Russian Tax & Law practice was named a leading Tax firm in Russia in World Tax 2017, an annual guide published by the International Tax Review. Federal Law No. 212-FZ Concerning the Introduction of Amendments to Parts One and Two of the Civil Code of the Russian Federation and Certain Legislative Acts of the Russian Federation ( the Law ) 1 was published on 26 July The amendments take effect from 1 June The changes mainly affect the regulation of factoring agreements, conditional deposit (escrow) agreements, bank deposit and bank account agreements, settlements and loan agreements. 1

2 Amendments are made to Parts One and Two of the Civil Code 2 and to the Laws on Banks and Banking Activities 3, on Precious Metals 4, on Mortgages (Pledges of Immovable Property) 5, on Bankruptcy (Insolvency) and on Enforcement Proceedings 6. Given the substantial volume of the amendments, only the most significant changes are discussed in this overview. Factoring Agreements The Law equates an agreement on financing against the assignment of a claim with a factoring agreement, putting an end to debates about the distinctions between these types of agreements. The amendments are intended to bring national regulation into line with the rules established by the 1988 Unidroit Convention on International Factoring ( the Convention ) 7. Like the Convention, the Law states that a factor must perform at least two of the following functions: Transfer money to the client Maintain records of the client s monetary claims against debtors Enforce the client s monetary claims 8 Enforce rights under agreements securing the fulfilment of debtors obligations 9 Added to the Civil Code is a third factoring model whereby a monetary claim is assigned in order for the factor to provide related services to the client (the recording, collection and transfer to the client of its receivables). When the Law takes effect, there will be three factoring models: 1. Assignment of monetary claims by a client to a factor in order for the factor to acquire those claims 2. Assignment of monetary claims by a client to a factor to secure the client s obligation to the factor 3. Assignment of monetary claims by a client to a factor in order for the factor to provide services associated with monetary claims to the client It is the factoring model that determines the factor s right to re-assign a monetary claim. Whereas at present it is not possible unless the agreement allows it, the Law makes the possibility of re-assignment dependent on the purpose of concluding the factoring agreement. In particular, if the purpose of assigning a monetary claim to a factor was for the latter to acquire the claim, then the factor has the right to re-assign the claim, but if it was to secure the client s obligation to the factor or in order for the factor to provide services associated with monetary claims, then re-assignment is not permitted. In both cases it is possible for the agreement to provide otherwise. The Law retains the provision allowing for accounting records to be maintained for a client and for other services associated with monetary claims to be provided to a client. In addition, the Law provides for the rules regarding the substitution of persons in an obligation (Chapter 24 of the Civil Code) to be applied to factoring. A lack of clear legislative guidance has led to inconsistent case law on this 2 The Civil Code of the Russian Federation (Part One Federal Law No. 51-FZ of 30 November 1994; Part Two Federal Law No. 14-FZ of 26 January 1996) 3 Federal Law No of 2 December 1990 Concerning Banks and Banking Activities 4 Federal Law No. 41-FZ of 26 March 1998 Concerning Precious Metals and Precious Stones 5 Federal Law No. 102-FZ of 16 July 1998 Concerning Mortgages (Pledges of Immovable Property) 6 Federal Law No. 229-FZ of 2 October 2007 Concerning Enforcement Proceedings 7 Concluded in Ottawa on 28 May Russia acceded to the Convention in 2014 (Federal Law No. 86-FZ of 5 May 2014). The document entered into force in Russia on 1 March The wording in the Convention is finance for the supplier, maintenance of accounts (ledgering) relating to the receivables and collection of receivables 9 The Convention specifies another function: protection against default in payment by debtors. 2

3 matter 10, but in recent years courts have tended to favour the view that the rules regarding the substitution of parties are applicable to factoring. A factoring agreement will also be subject to the rules on purchase and sale, lending and the provision of services without consideration. The Law also states that a factor has the right, when transferring funds to a client, to claim a deduction for its monetary claims under the agreement. Under the current wording of the Civil Code, a debtor has the right to reclaim amounts received by a factor directly from the factor if the latter has failed to fulfil its obligation to the client to make the payment in question or made the payment while being aware of the violation of the client s obligation to the debtor. The Law removes the clause containing this provision, from which it may be inferred that it is no longer possible to reclaim amounts directly from the factor. Conditional Deposit (Escrow) Agreement The Law introduces a new type of agreement a conditional deposit (escrow) agreement 11. Under an escrow agreement, a depositor undertakes to deposit an asset with an escrow agent for the purpose of the fulfilment of the depositor s obligation to transfer it to a beneficiary, and the escrow agent undertakes to ensure the safekeeping of the asset and transfer it to the beneficiary when the grounds specified in the agreement arise. An escrow agreement differs from the escrow account agreement which has already been introduced in the Civil Code in terms of the subject (in the latter case the escrow agent has to be a credit organization, whereas in an escrow agreement it may be any person, including individuals) and the deposited asset (only non-cash funds may be deposited in an escrow account, whereas an escrow agreement allows for the depositing of movable things, including cash, certificated securities and documents as well as non-cash funds and noncertificated securities). An escrow account agreement will be subject to the rules governing a conditional deposit agreement as well as those governing a bank account agreement. An agreement may have a term of no more than five years, and must be notarized. It is also possible for a mutual escrow agreement to be concluded, under which the escrow agent is required to transfer assets to both parties to a bilateral agreement. An escrow agent will be able to demand a fee, but the agreement may also provide for it to perform its functions free of charge. As a rule, an escrow agent will be required to make only a visual inspection of documents confirming that grounds have arisen for an asset to be transferred to a beneficiary. However, the agreement may stipulate otherwise. Assets deposited will remain the depositor s property until the escrow agent transfers them to the beneficiary. The Law on Insolvency (Bankruptcy) has been amended in this connection to include a provision whereby an asset deposited by a debtor forms part of its assets. If, however, the debtor were declared bankrupt, this would not prevent the escrow agent from fulfilling the obligation to transfer the asset to the beneficiary. It will be prohibited for a deposited asset to be seized not only to settle debts of the escrow agent, but also to meet obligations of the depositor or the beneficiary (except for the beneficiary s claim against the escrow agent for the transfer of a deposited asset). The Law lays down special grounds for the termination of an agreement. Among these are grounds whereby the depositor and the 10 Ruling of the Federal Arbitration Court of the Volga District of 2 October 2008 on Case No. A55-723/08; Ruling of the Federal Arbitration Court of the Volga District of 29 October 2010 on Case No. А /2008; Ruling of the Federal Arbitration Court of the Volga-Vyatka District of 30 November 1999 on Case No. A /99-108/5 11 The current Civil Code (Article 806.7) provides for an escrow account agreement 3

4 beneficiary jointly notify the escrow agent of the repudiation of the agreement either in writing or by another means provided for in the agreement. Escrow Account Agreement The Law establishes to whom rights to funds held in an escrow account belong. Until grounds arise for them to be transferred to the beneficiary, they belong to the depositor, and afterwards they belong to the beneficiary. The current legislation does not address this issue. Under the Law, it will not be possible to provide in an agreement for funds other than the amount deposited under the agreement to be credited to the depositor s escrow account. Bank Account Agreement The Law establishes to whom rights to funds held in an account belong. They belong to the client within the amount of the account balance except where it has been confirmed to a payee and/or its bank that it may enforce a debit instruction within a period not exceeding 10 days. This is a reference to card payment authorizations. The issue of who owns money held in an account is likely to be significant if funds in an account are seized, if operations on an account are suspended, including by blocking (freezing) the account, or where a payer is declared bankrupt. However, the wording contained in the Law has been criticized in a Report of the Association of Russian Banks (ARB) 12, in which the following points are made: It is not stated who may do the confirming The ten-day time limit is in fact not in the interests of the payee but in the interests of the issuing bank, as once the authorization code has been received it is not the payee but the issuing bank that waits for settlement documents to be received for the debiting of funds from the client s account A ten-day period is clearly insufficient for payment confirmation, given that current payment systems usually allow a longer period 13 We should also point out that the Law establishes the priority of national payment system legislation over the provisions of the Civil Code in matters pertaining to a bank account agreement involving the use of electronic means of payment. The Law requires a bank to refuse to credit funds to a client s account or debit funds from a client s account in cases provided for in law 14. The ARB Report rightly points out that the wording here is inappropriate, since it is technically impossible for a bank to refuse to credit funds. Another new development is the setting of a minimum notice period that a client which is a company or a private entrepreneur must be given for the unilateral repudiation of an agreement where there have been no funds in an account for two years. At least six months notice must be given. An important stipulation is made to the effect that the termination of a bank account agreement is not a basis for lifting an attachment imposed on funds in the account. Among other things, the Law introduces new types of accounts, including a public deposit account to be used by bodies and persons that accept amounts on deposit (notaries, courts, bailiff services, etc.) to receive funds from a debtor or another person specified in the law. A 12 Letter No. A-01/5-649 of the Association of Russian Banks of 1 December 2016 Concerning the Report on Draft Federal Law No /10 Concerning the Introduction of Amendments to Parts One and Two of the Civil Code of the Russian Federation and Certain Legislative Acts of the Russian Federation ( the ARB Report ) Дробь%2010%20Итог.pdf 13 For example, the ARB Report cites the regulations of the Visa payment system, according to which the period in question may be up to 45 (forty-five) days 14 For example, for the purpose of compliance with requirements established by Federal Law No. 115-FZ of 7 August 2001 Concerning the Countering of the Legitimization (Laundering) of Proceeds of Crime and the Financing of Terrorism 4

5 bank with which such accounts are opened must have internal resources of at least 20 billion roubles. It is established that a bank may conclude a joint bank account with multiple individuals. The persons concerned will be considered to own the funds in such an account in proportions corresponding to the amounts deposited by each of them or by third parties on their behalf, unless otherwise provided in the bank account agreement. Another important development is the possibility for funds to be withdrawn from accounts within a group of bank accounts, including where they are held by different persons, if there are insufficient funds in a payer s account. Such withdrawal would not cause the payer s account to be overdrawn. This provision may lead to the wider use of centralized money management (cash pooling) systems within corporate groups in Russia. Bank Deposit Agreement At present, deposit and savings certificates may be either bearer or registered. When the amendments come into force, all such certificates will be registered securities. The Law allows for a savings certificate to be issued only to an individual, including a private entrepreneur, and for a deposit certificate to be issued only to a company. The Civil Code as it stands does not make this division 15. It will be possible for certificates to be issued subject to immobilization, meaning that they may be placed in the custody of a depositary, including the bank which issued them if it has a depositary s licence. In this case, the rights of the certificate holders would be laid down in a single certificate whose particulars would be determined by the Bank of Russia. Precious Metal Bank Deposits and Accounts There are to be new rules governing the attraction of deposits (demand and fixed-term) from individuals and companies in the form of precious metals, excluding coins. The only current regulation is in the relevant Bank of Russia Statute 16, which provides for the opening of two kinds of metal accounts: A safe custody metal account (for storage without depositing and investment) and A depersonalized metal account (for depositing and investment) Banks will invest deposited precious metals in their own name and at their own expense. It will also be possible for transfers on precious metal bank accounts of individuals and companies, including correspondent banks, to be effected at their instruction. Banking operations and other transactions will take place using refined gold, silver, platinum and palladium in ingot form, metals recorded in precious metal accounts, and coins of precious metals (for example, the sale of collectors coins). Features of a precious metal bank deposit will include: The possibility for a bank to pay back either metal of the same type and weight or an amount of money equivalent to the value of the metal together with interest The non-application of compulsory deposit insurance rules, of which a client who is an individual must be notified by the bank in person before an agreement is concluded There are also related amendments and additions 17 to the list of banking operations, which will include: 15 We should point out that this division has become standard practice among Russian banks 16 The Statute Concerning the Performance by Credit Organizations of Operations Involving Precious Metals in the Territory of the Russian Federation and the Procedure for the Performance of Banking Operations Involving Precious Metals, as approved by Order No. 50 of the Bank of Russia of 1 November The only such banking operation referred to in the Law Concerning Banks and Banking Activities as it stands is Attraction of deposits of and investment of precious metals. 5

6 The attraction of deposits (demand and fixed-term) of precious metals, excluding coins, from individuals and companies The investment of attracted precious metals in the bank s own name and at its own expense The opening and maintenance of bank accounts for individuals and companies in precious metals, excluding coins of precious metals The making of transfers on precious metal bank accounts of individuals and companies, including correspondent banks, at their instruction Settlements The Law provides for a court to charge an intermediary bank, a payee s bank and a payer s bank with joint and several liability in the event that they are at fault for the non-execution or improper execution of a payment order. A payer s bank may be charged with joint and several liability if it made the choice of intermediary bank. Currently, the Civil Code only allows for the intermediary bank to be held liable. Settlements by means of orders for the transfer of funds without the opening of a bank account are designated as a separate type of settlement by payment order, which essentially amounts to a codification of provisions of the Federal Law Concerning the National Payment System. The Law, however, only allows for such transfers to be made by means of depositing cash, putting it out of step with the core law 18, which provides for transfers to be made using electronic money or prepaid cards. As far as letter of credit settlements are concerned, the Law provides an open-ended list of letter of credit procedures aside from the making of payments to the payee and the payment, acceptance or discounting of a bill of exchange issued by a beneficiary. The current legislation presents a closed list. It is also provided that a letter of credit is irrevocable by default unless otherwise stated in its text. Another important addition is the stipulation that a bank must make a visual inspection of documents submitted. However, the Law does not elaborate any further on this. The Law also introduces the concept of a transferable letter of credit 19, for which rules are already contained in UCP However, the transfer of a letter of credit to another recipient would take place not at the will of a nominated bank, as in UCP 600, but only with its consent. Although this is reminiscent of a cession, the rules concerning the assignment of rights will not to apply to a transferable letter of credit. It will not be permitted for the performance of a letter of credit to be re-assigned to a third recipient. Also new is the rule concerning the joint and several liability of the issuing bank and the confirming bank for the non-performance or improper performance of a letter of credit provided that the payee presents documents required by the letter of credit and complies with other conditions of the letter of credit. Cession With a view to protecting a new creditor against abuses by a debtor, the Law requires a debtor to inform a new creditor of any grounds for objections within a reasonable time after being notified of the assignment of a claim; otherwise it will forfeit the right to cite those grounds later on. The fact that the other party to a transaction was aware that assignment was prohibited would affect the possibility of an assignment agreement being declared invalid at the suit of the debtor only where it is the right to receive 18 Federal Law No. 161-FZ of 27 June 2011 Concerning the National Payment System 19 A transferable letter of credit is one that allows for performance to a person designated by the payee if such performance is provided for by the conditions of the letter of credit and the executing bank has expressed its consent to such performance 20 ICC Uniform Rules and Customs for Documentary Credits, 2007 Revision No. (UCP 600) 6

7 non-monetary performance that is being assigned. At present this is the case for the assignment of any claim. Loan Agreement The amendments allow for the existence of a loan agreement in consensual form rather than only as a real contract as is currently the case 21. This means that if there is a time gap between the conclusion of a loan agreement and the issuance of a loan, the borrower will be able to litigate against the lender for the issuance of the loan if the latter fails to fulfil the obligation to transfer the loan amount to the borrower (this is not possible at present). At the same time, a lender has the right to repudiate an agreement in whole or in part if circumstances arise which clearly indicate that the loan will not be repaid on time. This amendment also opens the way for lending lines (analogous to credit lines), including revolving loans. Such loans have hitherto only existed in the form of gentlemen s agreements without any legal protection. It should be added that a loan agreement will always be a real contract where the lender is an individual. The amendments will make it permissible for securities to be the subject of a loan agreement, but do not make clear whether this includes nonfungible securities (such as a bill of exchange), the lending of which would be contrary to the essence of the agreement. Courts are currently divided in their views on this issue 22. It also remains unclear whether the lending of electronic money is possible. A consensual agreement may be repudiated both by the lender (before the loan is granted if it becomes clear that the loan would not be repaid on time) and by the borrower (if he carries on business activities and notifies the lender of his withdrawal from the agreement before the loan is received). According to the Law, a loan would be deemed to have been repaid not from the moment when funds are credited to the lender s account, but from the moment when funds are received by the bank with which the lender holds an account. This is effectively an instance of case law being translated into statutory law. Also new is the provision that a lender s consent to the early repayment of an interest-bearing loan granted to a company or a private entrepreneur may be expressed in the loan agreement itself. There will therefore be a contractual mechanism for circumventing the current prohibition on the early repayment of a loan granted to companies or entrepreneurs. The amendments provide for a loan agreement concluded in written form to be contested on the grounds of the non-provision of funds using witness testimony not, as now, where there has been malicious collusion on the part of a representative, but where the loan agreement was concluded in detriment to the interests of the borrower. In the event of a failure to comply with a condition concerning the special-purpose use of a loan, the lender will be able not only to demand the early repayment of the loan and the payment of interest, but also to repudiate the agreement. Credit Agreement The amendments add to the Civil Code a provision which additionally permits a creditor to demand the early settlement by a company or a private entrepreneur of credit and other amounts due, including credit charges, in cases stipulated in the agreement (so-called events of default ). The right to lay down additional 21 Consensual contracts are deemed to have been concluded from the moment when the parties reach agreement on all essential conditions, whereas real contracts are considered to have been concluded from the moment when property is transferred under the agreement or performance is otherwise commenced 22 Ruling of the Federal Arbitration Court of the East Siberian District of 6 November on Case No. А /2012; Ruling No. А /05-F /05-S2 of the Federal Arbitration Court of the East Siberian District of 7 December 2005; Ruling No. Ф /2004(А ) of the West Siberian District of 28 September 2004; Ruling No. F /97 of the Urals District of 27 November 1997 on Case No. А60-812/97-S2; Ruling of the Federal Arbitration Court of the Volga District of 15 May 2007 on Case No. А /

8 conditions for the early settlement of credit is currently supported by arbitration court rulings 23. New Provisions Concerning Individuals A loan agreement between individuals has to be in written form where the amount of the loan exceeds 10,000 roubles, rather than ten times the minimum wage 24 as is currently stipulated, and a loan will be assumed to be interest-free where an agreement is concluded for a sum not exceeding 100,000 roubles. In addition, the concept of usurious interest is introduced, meaning a charge for borrowing that is two or more times greater than interest ordinarily charged and is therefore excessively onerous for the borrower. Where such interest charges are established in an agreement between individuals or between an individual as a borrower and a person who is not a professional consumer lender, a court will have the right to reduce the amount of interest to the amount ordinarily charged in comparable circumstances. Another important development is the provision to the effect that where a term or demand deposit made by an individual is certified by a savings certificate, the agreement may include a provision whereby the individual waives the right to receive the deposit on demand. At present, any such provisions are considered void. We should point out that the inclusion in a savings certificate of a waiver of the right to withdraw a demand deposit on demand is, in our view, illogical, since the whole point of a demand deposit is that funds are released on the depositor s demand. Funds held in deposits certified by a savings certified are now to be insured within the deposit insurance system. We shall conclude by adding that the amendments also remove provisions allowing for the issuance of a bearer savings book. It will be recalled that a registered savings book, unlike a savings (deposit) certificate, is not classed as a security. Authors: Ilya Murzinov Ruslan Akhmetov Maxim Korostelev For additional information please contact the authors of this publication: Georgy Kovalenko + 7 (495) Georgy.Kovalenko@ru.ey.com Ilya Murzinov Ilya.Murzinov@ru.ey.com 23 See, for example, Ruling No. 09AP-6796/2016 of the Ninth Arbitration Appeal Court of 2 September 2016 on Case No. А / Federal Law No. 82-FZ of 19 June 2000 Concerning the Minimum Wage sets the minimum wage for the purpose of the calculation of payments associated with civil-law obligations at 100 roubles a month as from 1 July

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