Sellers caught on parole

The Supreme Court of the Russian Federation (SC) clarified what the seller of an asset can give assurances about and in which case a penalty can be collected from him. The sellers of the LLC promised to transfer a problem-free asset to the buyer, but soon after the sale, the Central Bank withdrew the license from the company. The courts refused to recover the penalty, but the SC considered that the assurances protect against future claims, and the sellers of the asset cannot plead ignorance of violations of the law. The buyer got a chance to recover the damages. Lawyers say that the institute of assurances, new to Russia, is important for mergers and acquisitions, as well as the purchase and sale of real estate.

The Supreme Court published a decision on a dispute arising from a breach of assurances about the circumstances (Article 431.2 of the Civil Code). The story is connected with the sale of the forex broker Trustforex LLC. In August 2018, Alexander Alexandrov bought an 81.2% stake from Crislaid Trading Ltd for RUB 102.2 million. and 18.8% from six citizens for 19.7 million rubles.

Under the terms of the contract, the individual sellers gave a number of assurances.

Firstly, that there will be no claims against the LLC from third parties, including authorities. Secondly, that by the time the share is transferred, the LLC will retain the status of a professional participant in the securities market, the right to be a forex dealer under the license of the Central Bank, meeting all the requirements. If the assurances are unreliable, the party undertakes to compensate for the losses or pay a penalty in the amount of the price of the share.

A few months later, in December 2018, the Central Bank revoked the license from Trustforex due to violations of the law. Alexander Alexandrov filed a lawsuit against the sellers for the recovery of 19.7 million rubles. penalties due to false representations. The Moscow Arbitration Court rejected the claim, deciding that assurances can only be about “specific fait accompli, for the accuracy of which the party must be held responsible”, and “all consequences from the results of the LLC’s activities that are not related to the activities of the sellers arise from the buyer.” In addition, according to the court, the buyer should have appealed against the decision of the Central Bank, which he did not. The appeal and cassation agreed with this.

Mr. Alexandrov complained to the Supreme Court, considering such an interpretation and conclusions to be incorrect. The presence of claims against the company depends on its activities, the compliance of which with the law “may be the subject of assurances from the participants of the legal entity,” the complaint says, and seven out of ten violations that caused the license to be revoked “were committed before the contract was certified.” The case was transferred to the Economic Board of the Armed Forces, which sent the dispute for a new consideration.

The SC explained that assurances allow a party to “take on special responsibility for providing information to the other party and thereby spread the risk of undesirable consequences.”

At the same time, you can also assure “the grounds for the occurrence of a circumstance that can manifest itself in the future and can cause losses.”

Information about a company’s violations of the law or obligations affects the buyer’s intention to enter into a contract or the price of an asset, VS noted. Therefore, the seller is responsible for the negative consequences of the identified violations and is not entitled to refer, among other things, to ignorance about them. The revocation of a license from an LLC allows claims to be made against sellers, the Supreme Court recognized, and the buyer himself is not obliged to dispute the claims of the Central Bank, if this is not written in the contract.

Norms on assurances appeared only in 2015, but have already become widespread. Valeriy Zinchenko, senior partner at Pen & Paper, notes that they are used in various cases, “from real estate purchase and sale agreements between citizens to major M&A transactions.” The buyer of an asset “even with a thorough check is not always able to reveal all its hidden flaws,” explains Aleksey Kostovarov, partner at Liniya Prava.

The decision of the Supreme Court “is precedent-setting and is aimed at the development and proper enforcement of the institution of assurances,” says Julius Tai, Managing Partner at Bartolius. According to Mr. Kostovarov, it gives the courts “a good guideline when considering similar disputes.” From the position of the Supreme Court, it follows that the buyer of the shares secured himself “from adverse property consequences by the very fact of receiving assurances,” adds Valery Zinchenko. In his opinion, the Supreme Court also protected buyers “from unreasonable limitation of the list of assurances and their unnecessarily narrow interpretation.”

Ekaterina Volkova, Anna Zanina