Offsetting, assignment and other types of cross-border settlements in foreign economic activity (FEA): courts are against it?
When one speaks of cross-border settlements, one usually thinks of a number of different legal structures for organising settlements between parties in different jurisdictions. In the last three years, we have supported more than 30 projects using such settlement models through assignment, assumption of debt, third-party defence, set-off, etc. (across Argentina, Brazil, Hong Kong, China, the United Arab Emirates, Serbia and Turkey).
Normally, such forms of settlement with an ‘unfriendly’ company are not objectionable to the counterparties and banks, unless the payment itself is prohibited (and there is no general prohibition, only individual prohibited transactions). For this reason, special attention is paid to any court ruling against such schemes.
Court decides in the case of Magnitogorsk Iron & Steel Works (Magnitogorski metallurgitsheski kombinat) on the invalidity of an assignment by a "hostile" person
Magnitogorsk Iron & Steel Works was unable to pay RUB 69 million to a "hostile" seller. Magnitogorsk Iron & Steel Works was unable to pay a ‘hostile’ seller from Kharkov 69 million roubles for the delivered equipment, as a result of which the seller assigned the claim against Magnitogorsk Iron & Steel Works to an Indian citizen.
The Economic Court of the Chelyabinsk Region surprisingly declared the assignment invalid, which is contrary to the developing legal practice.
MAGENTA Legal's senior lawyer, Maksim Vaskin, provided a detailed commentary on this dispute for the media, but we would like to highlight some aspects of the court's decision.
The court's decision raises questions
From today's perspective, the court's decision appears to be very incomplete and contains a number of problems:
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Magnitogorsk Iron & Steel Works wanted to recover a contractual penalty from its Kharkov supplier for late delivery (27 million roubles). The right to offset against a similar counterclaim is expressly provided for in Article 410 of the Civil Code of the Russian Federation and can be exercised unilaterally by one party. Moreover, the court could have offset this claim of the Magnitogorsk Iron & Steel Works against a new creditor (an Indian person) on the basis of an assignment under Article 412 of the Civil Code of the Russian Federation. Instead, the court invalidated the assignment, arguing, inter alia, that Magnitogorsk Iron & Steel Works had suffered a loss as a result of the assignment;
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the agreement between Magnitogorsk Iron & Steel Works and its counterparty was concluded in 2010, and some of the provisions relied on by the court had changed significantly (e.g. Article 388.1 of the Civil Code of the Russian Federation, which regulates assignment). However, it is not clear from the court's decision on which wording of these provisions it relied, which raises further questions;
- the text of the court's decision is ambiguous in the part describing the admissibility of payments under such foreign trade contracts, as if it allows an interpretation of the Russian special regime in the sense that such payments to "unfriendly" persons are allegedly prohibited, and thus all alternative settlement systems are also prohibited. However, the prevailing view among authorities, courts and lawyers is that the special regime clearly specifies certain types of prohibited payments to 'unfriendly' persons: e.g. foreign currency loans or royalties; there has never been a general prohibition and therefore such settlement systems are not prohibited.
We expect the court's decision to be appealed, which could be significant for the further use of alternative payment systems in foreign trade.
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MAGENTA Legal lawyers have many years of experience in advising in the sphere of foreign economic activity (FEA), including issues of compliance with the legislation on currency regulation and currency control. For more than 10 years of our practice, none of our clients has been brought to administrative responsibility for violation of currency legislation in any of our projects. Managing Partner Anton Shamatonov is a recommended lawyer in the field of foreign trade (according to the authoritative rating of law firms PRAVO-300 2019, 2020, 2021).