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The business disputes panel of the Russian Supreme Court has issued a ruling on a case brought by Sovcombank (replaced in November 2023 by Sodeistvie Mezhdunarodnym Raschetam LLC — an independent legal entity to which the bank's frozen assets were transferred) against J.P. Morgan Securities PLC (United Kingdom) and J.P. Morgan Bank International LLC. This was reported by Kommersant. 

Subject of the dispute

Sovcombank and J.P. Morgan Securities conducted repo transactions under a 2016 master agreement. As a result, the British company incurred debts of $13.9 million, which became impossible to transfer after foreign sanctions were imposed on Sovcombank. Sovcombank filed a claim for damages in this amount against J.P. Morgan Securities and the Russian J.P. Morgan Bank International.

The plaintiff insisted that the British defendant could have paid the debt through an affiliated Russian bank, but failed to do so. Arbitrazh (commercial) courts of three instances awarded damages jointly and severally against both defendants, finding that the J.P. Morgan entities were affiliated entities, had a single decision-making centre, complied with the sanctions regime (and therefore violated Russian public policy) and jointly harmed the plaintiff.  

However, following appeals by the defendants, the case was referred to the Supreme Court's business disputes panel. The Supreme Court issued its ruling on 1 October, overturning the decisions of the lower courts. The Supreme Court found that the lower courts had not examined all the circumstances of the case and referred the case back to the court of first instance for reconsideration. The reasoning behind the decision was made public on 10 October.

What conclusions did the Supreme Court reach?

Kommersant highlights three key conclusions of the Supreme Court's business panel.

First, despite the arbitration clause, under Article 248.1 of the Russian Arbitration Procedural Code, the dispute is subject to hearing in a Russian court, since the actual reason for the British company's refusal to pay the debt was the sanctions imposed by the UK and the US against Sovcombank. Since, according to Law No. 127-FZ of 2018, retaliatory measures against foreign sanctions are taken by the Russian President, and "in the banking sector, public oversight over the fulfilment of corporate obligations that have the additional complexity of a foreign element" is exercised by the Central Bank, in the Supreme Court's opinion it was necessary to consider involving the Bank of Russia as a third party.

Second, since the dispute arose due to the foreign debtor's compliance with the national law of the state that imposed sanctions against Sovcombank, the question of "foreclosure, due to the debt of a foreign counterparty, on the property of a legal entity associated with it in Russia, if the foreign counterparty and such legal entity jointly derive income from activities in Russia" cannot be ruled out.

The business disputes panel called for the defendants' arguments regarding the possibility of unfreezing funds through administrative procedures to be examined, especially since J.P. Morgan Securities has already applied for a licence. At the same time, the Supreme Court notes that "the mechanism for unfreezing funds is itself part of the sanctions regime of an unfriendly state and cannot diminish the rights of a Russian person to judicial protection in its own national jurisdiction."

Third, the Supreme Court allowed for the possibility of considering this claim as a foreclosure, due to the British company's debts, against the property of an affiliated Russian bank, because the Russian J.P. Morgan Bank International ultimately complied with the court decision and transferred the money to the claimant. 

Although companies are independent and separate from their members, situations can arise where "unscrupulous use is made of the legal entity's structure" with the aim of harming other participants in a transaction, the Supreme Court pointed out. Thus, in exceptional cases, persons controlling a company may be held liable to its creditor if they deliberately caused the company to not fulfill its obligations and their behaviour "did not meet the criteria of good faith and reasonableness and was not accounted for by market or other objective factors, or by the business risk inherent in conducting entrepreneurial activities."

However, the courts should have assessed that the beneficiary established a Russian bank in compliance with the requirements of Russian law. To depart from the principle of ringfencing of the companies' assets, it is not enough to cite one legal entity's participation interest in another; it is also necessary to analyse the corporate structure, the procedure for concluding transactions, and the degree of participation in management, the court stressed. According to the Supreme Court, when establishing that the property and assets distributed among controlled entities should be considered as belonging to a single controlling centre, the courts must "justify the compensation of losses caused by one member of a group of companies at the expense of the property of another." 

This Supreme Court decision has strengthened the position of Russian plaintiffs in disputes with foreign counterparties that have not fulfilled their obligations and have subsidiaries in Russia, according to lawyers polled by Kommersant.