On 14 August 2023 the Tenth Arbitration Court of Appeal1 invalidated a real estate purchase and sale deal completed without the permission of the Government Commission for Monitoring the Implementation of Foreign Investments in the Russian Federation (hereinafter referred to as the “Government Commission”). On 16 October 2023 the Arbitration Court of the Moscow District2 upheld the decision of the Court of Appeal, confirming the illegality of such transactions bypassing the procedure provided for by current legislation.
Since the end of February 2022, a number of Presidential decrees have been adopted in Russia, which established a special procedure for making transactions with “persons of foreign states committing unfriendly actions”. Thus, Presidential decree No. 81 of 01 March 2022 (hereinafter referred to as the “Decree No. 81”) established a ban on transactions (operations) involving the emergence of ownership rights to securities and real estate carried out (executed) by residents with persons of foreign states committing unfriendly actions without the permission of the Government Commission.
At the same time, Decree No. 81 established that persons of foreign states committing unfriendly acts are:
- foreign persons associated with foreign states who commit unfriendly actions against Russian legal entities and individuals (including if such foreign persons have the citizenship of these states, the place of their registration, the place of preferential conduct of their economic activities or the place of preferential extraction of profits from their activities are these states), or
- persons who are under the control of these foreign persons, regardless of the place of their registration or the place of their primary economic activity.
The official explanation of the Bank of Russia No. 2-OR of 18 March 2022 determined that the residents are the persons specified in Article 1 of Federal Law No. 173-FZ of 10 December 2003 “On Currency Regulation and Currency Control”. These include, in particular, individuals – citizens of the Russian Federation and legal entities established in accordance with the legislation of the Russian Federation.
In August 2022, a real estate purchase and sale agreement was concluded between Bauer Technology LLC (a Russian legal entity whose sole participant at the time of the transaction was a legal entity established in accordance with the legislation of the Federal Republic of Germany) and a Russian individual entrepreneur, based on which the transfer of ownership rights to 4 real estate objects to an individual entrepreneur was registered.
The Tenth Arbitration Court of Appeal, recognizing the transaction as invalid, indicated that in accordance with Article 168 of the Civil Code of the Russian Federation, a transaction that violates the requirements of a law or other legal act may be declared invalid. The main consequence of invalidation of the transaction on this basis is bilateral restitution, that is, the return of everything received under the transaction by each of the parties (in this case, the return of the real estate objects to Bauer Technology LLC and the return of funds to an individual entrepreneur).
At the same time, the Court of Appeal pointed out that this transaction requires permission from the Government Commission, despite the fact that it was formally made between two residents. Thus, the Court of Appeal confirmed that Russian legal entities under the control of foreign “unfriendly” persons should also comply with the restrictions established by Presidential decrees.
The decision of the Arbitration Court of the Moscow District is currently published only in the operative part – this review will be supplemented after the publication of the decision in full.
1 Resolution of the Tenth Arbitration Court of Appeal No. 10AP-11990/2023 of 14 August 2023 in case No. A41-101031/22
2 Resolution of the Arbitration Court of the Moscow District of 16 October 2023 in case No. A41-101031/22 (operative part)