Reverse Piercing of the Corporate Veil – Russian Courts Tend To Shift Liability from Foreign Companies to Their Russian Subsidiaries

Dear Ladies and Gentlemen,

We would like to update you on recent precedent-setting judgements by Russian courts in matters involving foreign businesses that decided to leave Russia.

On 17 October 2023, the Arbitrazh court of Moscow city sustained the claim by Russian bank PJSC Sovkombank against Citibank N.A. (a US company) and its Russian subsidiary JSC KB Citibank concerning the joint recovery of US$24m in losses1. On 21 December 2023, an appeals court upheld the judgement.

As follows from the judgement, in 2017, Sovkombank and Citibank N.A. concluded a general agreement that served as the basis for further transactions between the parties. Following several transactions and mutual offsetting, Citibank N.A. incurred debt to Sovkombank. Citibank N.A. acknowledged the debt and informed Sovkombank that the money would be credited to an account that had been blocked based on sanctions. In these circumstances, Sovkombank never received the money.

Sovkombank, being governed by Russian anti-sanctions procedural rules2, filed a claim in Russian court stating that Citibank N.A. had failed to perform its obligation and also held Citibank’s Russian subsidiary liable as a co-defendant, citing the fact that it belongs to CITIBANK Group, even though the Russian subsidiary never had any agreements with Sovkombank. The Russian court acknowledged its jurisdiction despite the arbitration clause and refused to apply English law.

After considering the case, the court ruled that Citibank N.A. had violated its obligation and abused its right since it had transferred money to a frozen account without trying to perform the obligation alternatively, i.e. it should be held liable for tort rather than for breach of contract. The court also ruled that Citibank N.A. and JSC KB Citibank should be held jointly liable as their joint actions caused damages to Sovkombank. The judgement states that both Citibank N.A. and JSC KB Citibank aimed to embezzle the money despite attempting to restructure relations with Sovkombank and ensure the performance of the obligation (e.g., to change the debtor from Citibank N.A. to the Russian subsidiary). The Russian court ruled that even though the only party to the contract was Citibank N.A. and that Citibank N.A. and JSC KB Citibank are different legal entities, they should be jointly liable since they constitute an economic group, which acts as a single enterprise.

The same approach was taken in the recent cases of Russian Railways v. Siemens3 and another (confidential) сase based on a claim by a Russian bank against another foreign bank and its 100% Russian subsidiary.

This shows that Russian courts not only acknowledge that complying with anti-Russian sanctions should be considered as an abuse of rights and violation of the Russian public order per se, but also tend to hold Russian subsidiaries liable for the debts of their parent companies even though they are not parties to the disputed relations.

Case No. А40-167352/23 You can read more on this regulation in our previous newsletters here and here. Case No. А40-195006/22