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The Issue of Application of the Limitation Period to Transactions of Interest in the Light of Availability and Efficiency of Justice in Arbitration Courts.

      Article 84 of the Federal Law On Joint-Stock Companies establishes that a transaction whose consummation presents interest and which is executed in breach of requirements specified by Article 83 of the Law may be recognized as invalid.

      The court rulings construe this rule with sufficient substantiation as attributing such transactions to voidable ones. This is done with due regard for the following. First, with regard for the rule of Article 166 of the Civil Code of RF establishing that a void transaction is invalid regardless of its recognition as such by court, while Article 84 of the Federal Law On Joint-Stock Companies specifies that it may be recognized as invalid. Secondly, with due regard for the rule of Article 168 of the Civil Code of RF establishing that a transaction failing to comply with the requirements of the law is void, unless the law establishes that such transaction is voidable. Besides, the wording of Article 84 of the Federal Law On Joint-Stock Companies which reads that a transaction presenting interest may be recognized as invalid is construed as introducing by the law voidability of such transaction. Incidentally, the Federal Law On Limited Liability Companies unequivocally attributes such transactions to voidable ones.

      Urgency of correct qualification of the above transactions relates to the necessity for ensuring a real protection of the rights and interests of joint-stock companies, since it is a common knowledge that in the course of consummation of such transactions a lot of abuses are committed which prejudice the companies considerably, and only a one-year period of limitation is established for bringing an action to recognize a voidable transaction as invalid.

      Para 2, Art. 181 of the Civil Code of RF specifies that An action to recognize a voidable transaction as invalid and to apply consequences of its invalidity may be brought within one year from termination of coercion or threat under the influence of which the transaction has been closed (para 1, Art. 179), or from the time when the claimant learned or was to learn about other circumstances serving as grounds for invalidating the transaction.

      In this connection, there arises a question of correct qualification of para 2, Art. 181 of the Civil Code of RF as applicable to transactions of interest, since any incorrect construction of the above civil law rule usually results in impossibility to protect the interests of respective joint-stock companies through arbitration courts. Taking into account that a joint-stock company is one of the prevailing business forms of profit-making organizations, a proper resolution of the problem of application of a correct limitation period to transactions of interest closed by joint-stock companies is really important.

      Let us review this issue by the example of a specific arbitration case # A40-2864/00-105-17.

      Within the framework of the case a commercial bank brought an action against a non-bank credit organization seeking recognition of the loan agreement as invalid in connection with violation of the requirements of Articles 82, 83 of the Federal Law On Joint-Stock Companies committed at the time the agreement was entered into.

      The fact of the matter was as follows. The sole executive body of the claimant (the General Director of the bank) concurrently held the office of the manager (President) of the respondent in the case. The Board of Directors of the bank was not notified by the General Director of his intentions to make a transaction and of his interest in it.

      The court judgement upheld by the court of appeal disallowed the action through lapse of the limitation period established for actions seeking recognition of a voidable transaction as invalid. The courts of first and appellate instances considered the date the transaction was effected as a commencement of the limitation period.

      The Federal Arbitration Court (case # -40/3318-00) reversed the above judicial acts. At the same time, it pointed out in its ruling that the courts of first and appellate instances had erroneously applied Art. 200 of the Civil Code of RF establishing the commencement of the limitation period. Para 1 of the Article concerned establishes that a limitation period starts on the date when the person learned or was to learn about violation of his right.

      From the viewpoint of the district arbitration court the rule of para 2, Art 181 of the Civil Code of RF should have been applied instead, which connects commencement of the limitation period for a claim seeking recognition of a voidable transaction as invalid with the cause of its recognition as such. Further, the ruling of the district court reads: Consequently, in order to check the respondents argument that the limitation period for the claim seeking recognition of the transaction as invalid pursuant to Art. 83 of the Law On Joint- Stock Companies has lapsed, the court, instead of establishing when the claimant learned about closing of the transaction, should have established when the claimant learned that the transaction was consummated with the interested party. For this purpose it should have been necessary to check whether the interested party complied with the requirements of Art. 82 of the Law and, in case the requirements have been complied with - when the Board of Directors (Supervisory Board), the internal Audit Commission (internal auditor), and the external auditor were informed of the interest in consummation of the transaction by the company... If such information had not been communicated to the bodies specified in the above rule, it should have been necessary to establish when they learned or could learn about the interest of the executive body of the company in consummation of the voidable transaction, since with this moment exactly the law (Art. 181 of the Civil Code of RF) connects the commencement of the limitation period for recognition of the transaction as invalid.

      It is our opinion that the position of the district court is correct. For, in our view, the time when the claimant learned about the transaction is not as important as, firstly, the fact that there was interest in consummation of the transaction and, secondly, whether the interested party had complied with the requirements of Art. 82 of the Federal Law On Joint-Stock Companies and when exactly it was done, and from this moment a one-year limitation period should be calculated. Thirdly, unless this has already been done, it should be clarified when the bodies specified in Art. 82 of the Law learned or could learn about consummation of the transaction of interest.

      Such approach presupposes a complete use of the mechanisms of Chapter XI of the Federal Law On Joint-Stock Companies and actually protects the interests of joint-stock companies against interested parties actions in bad faith from the viewpoint of the time limits for protection of their infringed rights. For it would be naive to assume that the protection mechanisms of a joint-stock companys interests provided for by Art. 84 of the Federal Law On Joint-Stock Companies would be applied by an interested party itself and that the party concerned would itself initiate recognition of invalidity of the transaction made by it on behalf of the legal entity in the circumstances when the bodies which by law form the will of the legal entity for conducting such transactions remain ignorant.

      Pursuant to Art. 1 of the Civil Code of RF individuals and legal entities act of their own free will and in their own interests. Therefore, the will of the legal entity cannot be considered as formed if the bodies, which are solely authorized to approve or disapprove transactions of interest, far from approving the transaction were nor even notified of it as required by Art.82 of the Federal Law On Joint-Stock Companies.

      In this sense transactions with interest consummated in violation not only of Art. 83, but also Art. 82 of the Federal Law On Joint-Stock Companies are to be considered as transactions with defect of the legal entitys will. Accordingly, the moment the defect of the will is eliminated, i.e. when the bodies authorized to form the legal entitys will for consummation of transactions of interest learned or were to learn about existence of such interest should be acknowledged as the commencement of the limitation period.

      On the other hand, such approach does not violate the rights of other persons, either, in particular counterparts of respective joint-stock companies which in this case intend to comply with all regulations specified in Chapter XI of the Federal Law On Joint-Stock Companies for transactions of interest, since the validity of their rights acquired under transactions of interest depends on this.

      Such approach ensures a required necessary availability of justice to suffered joint-stock companies (without prejudice to their counterpart rights), and simultaneously the tasks are fulfilled and the objectives specified in para 2 of the Code of Arbitration Practice of RF are attained; hence, adequate efficiency of justice in arbitration courts of RF is ensured. For in this case the judicial and arbitration mechanism specified by procedural law for protection of respective persons infringed rights and lawful interests is realized, on the one part, and, on the other part, the arbitration court furthers strengthening of law in the sphere of business and other commercial activities and prevention of violation of law by other persons. In case the above approach is rooted in court rulings such persons will be aware of impossibility to use in bad faith such legal instrument as a plea of the lapse of the limitation period.

Igor A.Prikhodko,
Doctor of Law,
Director & partner

Malkhaz Sh. Patsatsiya,
Doctor of Law,
Chief expert, associate lawyer


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