The Banking Litigation Law Review: Russia
Disputes involving banks in Russia are heard by commercial courts and courts of general jurisdiction. Commercial courts hear economic cases between parties that engage in entrepreneurial activities (e.g., where a bank seeks to recover debt from a legal entity or an individual entrepreneur). Courts of general jurisdiction hear disputes involving individuals that are unrelated to entrepreneurial activities (e.g., where an individual approaches a court to terminate a consumer loan agreement).
Two criteria are used to determine the competent court: parties and subject matter. Bankruptcy cases and corporate disputes are an exception to this rule because they will always be heard by commercial courts.
It should be noted separately that previously, a considerable portion of disputes involving banks were heard by arbitral tribunals, that is, non-state courts formed in line with the requirements of the law. In view of the 2015 arbitration reform, however, banks were deprived of the opportunity to create such arbitral tribunals and today, almost all disputes involving banks are heard by state courts.
Litigation in commercial courts and courts of general jurisdiction is governed by special codes of procedure: the Russian Commercial Procedure Code for commercial courts, and the Russian Civil Procedure Code and Administrative Procedure Code for courts of general jurisdiction. The latter Code applies to disputes with a public-law element (e.g., where a bank files a claim to declare a normative legal act unlawful). It should be noted, however, that there are very few such disputes involving banks today.
Legal proceedings in Russia are almost always oral and conducted with the participation of the parties. The court would hear the parties, experts, witnesses, while other evidence (subject to rare exceptions) would be examined directly in the courtroom during the hearing.
Apart from oral proceedings and a direct approach to the same, litigation in Russia is also subject to the principles of dispositivity and adversarial proceedings.
The principle of dispositivity means that the parties are free to choose their remedies and exercise their procedural rights after such a choice has been made.
The principles of adversarial proceedings imply that each party must prove the circumstances it relies on or, if necessary, refute the circumstances invoked by its opponent. For some disputes, this principle is limited at the level of legislation or court practice that may provide for the active role of the court, release of a party from the burden of proof, or reallocation of that burden. In reality, however, these restrictions are often disregarded and the burden of proof fully lies with the parties.
Russian adversarial proceedings are special in that evidence may be submitted throughout the entire litigation before the court of first instance and, in exceptional cases, before a court of appeal.
Legislative regulation of the operations of banks in Russia can be divided into two large blocks. The first one includes regulations of economic (private-law) relations between banks and other market players, and the second includes the public-law regulations of the banking sector.
Private-law relations of banks are governed primarily by the Russian Civil Code, as well as a number of other laws, such as Federal Law No. 353 dated 21 December 2013 on Consumer Loans and Federal Law No. 102 dated 16 July 1998 on Mortgage (Pledge of Real Estate).
Public-law rules for the banking sector are found in such laws as Federal Law No. 177 dated 23 December 2003 on Insurance of Deposits with Banks of the Russian Federation, Federal Law No. 115 dated 7 August 2001 on Combating Money-Laundering and Financing of Terrorism, Federal Law No. 395-1 dated 2 December 1990 on Banks and Banking Operations, as well as in the numerous regulations of the Bank of Russia.
Significant recent cases
The Russian Supreme Court has recently taken an active stance in defending the interests of individuals as regards consumer lending and the rendering of other banking services. For example, in April 2020,2 the Court held that a bank may not avoid paying bonus interest on deposits or unilaterally change the terms of accrual of such interest, if such changes worsen the consumer's position. And the contract terms or the bank's local acts entitling it to do so cannot remove this prohibition.
In another Ruling,3 the Russian Supreme Court established that charging additional fees for servicing operations is not permitted where the bank introduced such fees after entering into the bank account agreement with the given client, and there is no proof of amendments to the contract terms or the client's consent to the fee. Furthermore, the law does not entitle banks to charge any special fees related to combating money-laundering.4
In 2020, the Russian Supreme Court also addressed the priority of creditors in cases where a credit facility is secured by a pledge of the debtor's promissory notes.5 The Court ruled that such security is not traditional; however, structuring relations in this way allows the bank to effectively control the debt burden on the debtor on the part of other creditors (endorsees), who provided such security. That is, the pledgor's claim is in fact subordinated (its priority is lower) as compared to the bank's claim.
Furthermore, it is expected that in 2020, there will be cases on the recovery of damages from the controlling persons of banks arising in view of the Bank of Russia's expenses related to the resolution of banks. These are the banks, whose solvency deteriorated, yet the Bank of Russia did not revoke their licences and instead took measures to restore their solvency. Previously, the management and beneficiaries of banks would have to compensate damages only in case of the bank's bankruptcy, while now there is an aspiration to apply this liability to resolution as well. For instance, on 28 August 2020, the Moscow Commercial Court recovered 198 billion rouble from the former management of the Moscow Industrial bank.6 Similar claims are pending before courts with respect to the controlling persons of Bank Otkritie (around 290 billion rouble) and Promsvyazbank (around 280 billion rouble). It is as yet too early to speak of a trend because there is so far just one case heard by the court of first instance; however, overall, its judgment appears to be logical. Furthermore, it can hardly be expected that the Bank of Russia would forego this avenue for having bad faith management compensate the expenses it incurred while restoring a bank's solvency.
Recent legislative developments
The changes in the Russian banking laws in 2019–2020 were caused by two important factors. First, the increasing introduction of IT leads to the digitalisation of the banking sector and the securities market.
For instance, from 1 January 2020, Russia legalised crowdfunding— investing via special online resources (investment platforms).7 The law prescribed requirements to the platform's operator and the party raising investments, as well as requirements to the rules of the investment platform, the means and procedure of investing. These changes are directly related to the banking sector because crowdfunding often serves as an alternative to a bank loan.
On 20 July 2020, Federal Law No. 211 on Making Financial Transactions Using Financial Platforms came into full effect. Such platforms may be used to execute transactions for the rendering of such services as banking, insurance, services in the securities market, and transactions with financial instruments. This law promotes further development of digital interaction in rendering financial services and enhances competition in the bank lending market.
Additionally, from 1 January 2021, another law – Federal Law No. 302 of 31 July 2020 on Amending the Federal Law on Credit Histories to Modernise the System for Forming Credit Histories – will come into force. That Law provides for the creation of a new digital (simplified and updated) system for checking the debt burden of borrowers before granting them consumer loans.
The second factor is the covid-19 pandemic that has triggered the adoption of numerous acts to support individuals and entrepreneurs, including through easy-term loans and grace periods under mortgages. For instance, a large package of relevant amendments was stipulated in Federal Law No. 106 of 3 April 2020 on Amending the Federal Law on the Central Bank of the Russian Federation and Certain Legislative Acts of the Russian Federation as Regards the Specifics of Changing the Terms of Credit Facilities and Loan Agreements.
Here, it should be noted separately that the legislator is also pursuing the policy of protecting consumer interests in rendering banking services to them. Thus, in June 2020, new rules entered into effect8 limiting fees for transfers between consumer accounts opened with the same bank. These amendments were intended to eliminate the currently existing interregional discrimination of the consumers of banking services in the form of higher fees for interregional transfers.
Changes to court procedure
In late 2019, Russia completed a major project for the unification of its procedural laws. The system of courts of general jurisdiction and the rules of the Russian Civil Procedure Code were brought in line with the system of commercial courts and the rules of the Russian Commercial Procedure Code. These amendments affect a significant portion of disputes involving banks and individuals.
First, it is now unconditionally possible to challenge judgments before a cassation court. Previously, this possibility was conditional because it depended on the decision of the 'filter' judge who could either refer or refuse to refer a cassation appeal to the cassation court for hearing. The number of cassation appeals that made it through this procedure was small, as appellate and cassation review was performed by the same court. Nowadays, however, separate cassation courts of general jurisdiction have been created and are functioning.
Second, litigants before courts of general jurisdiction must now send the copies of their procedural submissions and evidence to the opposite party themselves, which significantly relieves the courts and accelerates the litigation.
Moreover, in late June 2020, the Plenum of the Russian Supreme Court issued two resolutions9 regulating the consideration of cases by appellate and cassation commercial courts. The resolutions explain and supplement many rules of the Russian Commercial Procedure Code, which is pertinent to economic disputes involving banks. An important addition as stated within the resolutions was the need for judges to ensure that their judgments comply with previous court decisions. In other words, the Russian Supreme Court resolved that in hearing cases, lower courts must be guided by the precedents it created.
Privilege and professional secrecy
Under the Russian laws, credit organisations must keep the operations, accounts and deposits of their clients and correspondent banks secret.
However, bank-client privilege in Russia is not absolute and falls under numerous exceptions. For instance, information on accounts and operations may be provided to courts, tax authorities, law enforcement authorities, the audit chamber, court bailiffs, or an insolvency receiver in a bankruptcy case.
Banks and their employees may be held liable for violating the bank-client privilege under the civil, administrative or criminal laws. Criminal responsibility for this offence is very rare, but it is often invoked together with responsibility for other offences, such as, for instance, fraud. Civil law liabilities in the form of recovery of damages and administrative liability are not common in practice.
This is why banks very often broadly interpret the exemptions from bank-client privilege provided by the law. For example, in early 2019, the Russian Supreme Court looked into11 whether banks may disclose information to the Russian Federal Antimonopoly Service, contrary to the provisions of Federal Law No. 395-1 dated 2 December 1990 on Banks and Banking Operations. The Law does not mention the Federal Antimonopoly Service among the parties that may receive information subject to bank-client privilege. On the basis of its trial of the case, the Russian Supreme Court held that disclosure in that instance would violate the bank-client privilege until the law is amended accordingly.
Other types of professional privilege include attorney–client privilege, audit secret, notarial secret, insurance secret, and trade secret. In disputes involving banks, the attorney-client privilege that allows exchanges of information with an attorney and reliance on confidentiality is most relevant. The rules for an attorney's storage and use of information, as well as liability for violating the same, are governed by Federal Law No. 63-FZ dated 31 May 2002 on Legal Practice and Advocacy in the Russian Federation, the Code of Professional Ethics of Attorneys (adopted by the First National Congress of Russian Lawyers on 31 January 2003), as well as by local acts of the attorney chambers. Therefore, in approaching lawyers for legal services, banks should take care that their representatives hold the status of attorneys.
Sources of litigation
The principal operations of banks concern issuing loans, and therefore a considerable portion of all disputes involving banks comprises disputes on the recovery of debt from borrowers and guarantors, as well as on levying execution on pledged assets. Unfortunately, pre-judicial dispute settlement and levying execution on pledges assets are inefficient tools in Russia; hence, banks prefer to go to court.
In general, the loan portfolio of Russian banks has changed in recent years because the general public is increasingly using credit cards, auto (car) loans, mortgages and other types of consumer loans. According to the Bank of Russia statistics,14 since 2015, the number of consumer borrowers has increased by 6.6 million, and in 2019, it reached 39.5 million. Each year, the volume of loans to legal entities continues to grow, while the dynamics for overdue debt remain at the same level. The Bank of Russia's data15 show that the share of bad and distressed debt in the banking sector's loan portfolio in 2018 amounted to 11 per cent, and 12.2 per cent in 2019.
The second category of disputes involving banks are the disputes related to bank (independent) guarantees (as security of performance of obligations). Obtaining bank guarantees often serves as a mandatory precondition for contracting business with large enterprises and making state contracts in the Russian market. Such cases are so common that on 5 June 2019, the Russian Supreme Court released a Review of Court Practice of Resolution of Disputes Related to the Application of the Laws on Independent Guarantees.
We must separately note that banks are active in challenging non-normative acts of the Bank of Russia (such as, for instance, acts on the violation by a given bank of the mandatory ratios, failure to provide information or provision of incomplete or false information). Recently, the number of such disputes has receded (which might be due to the decrease in the number of banks), yet they still account for an appreciable share of cases initiated by banks.
Finally, the banks' activity in bankruptcy cases should be mentioned. Banks may be debtors, but more frequently they are major creditors for both legal entities and individuals, and they can also act as respondents in cases on challenging transactions.
The number of bankruptcy disputes in Russia has over the past few years been multiplying every year: thus, in 2018, commercial courts were seized with around 59,500 bankruptcy cases, while in 2019, their number already reached 85,500.16 Additionally, the majority of such cases were individual bankruptcies that amounted to 50,700 cases in 2019 against 32,400 in 2018.
Interpretation of the rules governing separate banking institutes, in bankruptcy cases, enables a deeper understanding of such rules, which is exceptionally useful for the practice of applying the law. Therefore, in looking for precedents, it is advisable to pay attention to the practice of courts in bankruptcy cases.
1 Dmitriy Bazarov is a partner, Anton Pomazan is a senior associate and Alexandra Alfimova is an associate at BGP Litigation.
2 Ruling of the Russian Supreme Court No. 80-KG20-1 dated 14 April 2020.
3 Ruling of the Russian Supreme Court No. 16-KG18-57 dated 2 April 2019.
4 Ruling of the Russian Supreme Court dated 30 June 2020 in Case No. 5-KG20-54-K2.
5 Ruling of the Russian Supreme Court No. 308-ES19-17398(2) dated 21 May 2020 in Case No. A32-27828/2015.
7 Federal Law No. 259 dated 2 August 2019 on Raising Investments Using Investment Platforms and on Amending Certain Legislative Acts of the Russian Federation.
8 Federal Law No. 434 dated 16 December 2019 on Amending Article 29 of the Federal Law on Banks and Banking Operations.
9 Resolution of the Plenum of Russian Supreme Court No. 12 dated 30 June 2020 on the Application of the Commercial Procedure Code of the Russian Federation in the Examination of Cases before a Commercial Court of Appeal; Resolution of the Plenum of Russian Supreme Court No. 13 dated 30 June 2020 on the Application of the Commercial Procedure Code of the Russian Federation in the Examination of Cases before a Cassation Commercial Cour.
11 Ruling of the Judicial Chamber on Economic Disputes of the Supreme Court of the Russian Federation No. 305-AD18-18535 dated 1 February 2019 in Case No. A40-199212/2017.
13 Resolution of the Plenum of the Russian Supreme Court No. 24 dated 9 July 2019 on the Application of the Rules of Private International Law by the Courts of the Russian Federation.
14 Bank of Russia Information and Analytical Commentary 'Analysis of Consumer Lending Trends in 2015-2019 Based on Credit History Bureau Data' at: https://cbr.ru/Content/Document/File/85889/20191101_dfs.pdf.
17 Resolution of the Plenum of the Supreme Court of the Russian Federation No. 7 dated 24 March 2016 on the Application by Courts of Certain Provisions of the Civil Code of the Russian Federation on Liability for Breach of Obligations.