Temporary management of property of foreign persons
Pepeliaev Group advises that on 25 April 2023 the Russian President signed the Decree “On the temporary management of certain property”.[1]
The Decree was adopted as a retaliatory measure to the actions of hostile foreign states and international organisations aimed at divesting the Russian Federation and Russian legal entities and individuals of rights of ownership and/or at restricting their right of ownership.
The Decree provides for a possibility of introducing temporary management with respect to certain categories of property of foreign persons that are connected with hostile foreign states and persons who are controlled by such foreign persons (“persons of hostile foreign states”).
Please find below the main provisions of the Decree.
1. The grounds for introducing temporary management of property:
A regime of temporary management of property will be established if:
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Russia and/or Russian legal entities or individuals have been divested of ownership title to property located in hostile foreign states and/or property rights;
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the above rights have been restricted;
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there is a threat of such divestment or restrictions;
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there is a threat to the national, economic, energy or other types of security of Russia and its defence capability.
Comment
Please be reminded that on 22 May 2022, during the first reading, the State Duma passed draft law No. 104796-8 “On external administration that involves managing a company”. In terms of its focus the Decree is close to the above draft law although it deals with temporary management rather than external administration. However, there is a number of fundamental differences. The main ones are: the grounds are different on which management bodies of foreign persons are banned from controlling assets; there are no criteria for temporary management to be introduced depending on, for example, the field of the person’s activity, the degree of its influence on the market and the nature of the actions of owners of foreign assets in Russia (continuing activity or, on the contrary, departing from the market). What stands out is that when grounds are listed for temporary management to be introduced it is not mentioned with regard to persons who are connected specifically with a state that has restricted or suspended the rights of Russian companies and individuals.
2. Temporary management may be introduced with respect to the following property of persons from hostile foreign states:
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movable and immovable property located in Russia;
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securities and membership interests in the issued (reserve) capitals of Russian legal entities;
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property-related rights.
An appendix to the Decree sets out a list of securities (shares) of three Russian legal entities with respect to which temporary management is being introduced.
Comment
Judging from the fact that the list appended to the Decree has empty boxes, there is every reason to believe that plans are to extend the list. This is likely to be as Russia’s response to the facts which have already occurred or may occur in future of ownership rights of Russia and/or of Russian legal entities or individuals being divested/restricted with respect to their foreign property.
3. Temporary manager
The Federal Agency for State Property Management (in Russian, abbreviated to ‘Rosimuschestvo’) has been determined as a temporary manager. However, the Russian President may vest the functions of a temporary manager in other persons, including further to a proposal of Rosimuschestvo.
A temporary manager will be vested with the powers of an owner of assets which are subject to temporary management, other than the power to dispose of the property.
A temporary manager’s duties include the following: inventory-taking of the property that is subject to temporary management and ensuring the safe-keeping of such property.
Comment
The procedure of temporary management is not regulated in detail and Rosimuschestvo’s specialists have no relevant professional background or practical skills, while the list of functions of a temporary manager is limited and there are no provisions regarding its liability. All this may result in a company’s financial standing being worsened during the period of temporary management. Considering that duties of a temporary manager may be vested in other persons, we recommend that relevant proposals and substantiation should be directed to Rosimuschestvo.
Financing temporary management of property
Expenses on temporary management of property are financed out of the income from using such property.
What to think about and what to do
We recommend that foreign persons from hostile states who have performed actions to terminate or restrict rights of Russian companies and individuals to their property should take into account the potential loss of control over their assets when they plan their activities.
This risk applies to persons who are connected with such hostile states via citizenship, place of registration, the place where such persons primarily do business or the place where they primarily generate profits. Above all, the companies that should give thought to this are those whose activities are essential for ensuring the sustainability of the economy and a stable business environment, including in a particular constituent entity of the Russian Federation, as well as companies that are winding down their operations on the Russian market.
Such factors as a loss of control over assets owing to temporary management being introduced should be taken into account when current agreements are revised and new agreements are drawn up and when transactions are being planned to sell assets and depart from the Russian market or restructure the business.
Help from your adviser
Specialists from Pepeliaev Group’s bankruptcy and anti-crisis protection of business practice provide legal support in the area of anti-crisis management and in defending various categories of persons within the scope of various asset management models where such assets belong to legal entities and individuals. We are ready to assess the risks of supervision being introduced and devise hands-on recommendations for how such risks should be managed.