Newsletter: Foreclosing “C”-type accounts: new trend or extraordinary measure?

****Dear Ladies and Gentlemen!****

Since 2022 restrictions are imposed with respect to transactions with persons from “unfriendly” countries in the Russian Federation. Thus, for a certain number of transactions/operations (i.e. issuance/repayment of loans, execution of financial instruments, distribution of dividends/profits etc. for the amount exceeding RUB 10 million) the Decrees of the President of the Russian Federation establish the procedure for their execution through crediting funds to the “C”-type bank account without their preliminary clearance with the Sub-Commission of the Government Commission for Control over Foreign Investors under countersanctions rules.

The regulation prohibits the foreclosure or granting of interim injunctions on funds credited to the “C”-type bank account. For example, in accordance with Presidential Decree No. 95 as of March 05, 2022 funds and securities recorded at "C"-type bank accounts may not be foreclosed under enforcement documents, seized, be subject of recovery of mandatory payments, other injunctions under the court decisions and regulations.

It was clear that funds paid to the “C”-type bank account fall under restrictions on their further use and can only be consumed, for instance, for payment of taxes, duties, fees and other mandatory payments payable to the budget; transfers for the purchase of federal loan bonds; payment of commissions to the authorized bank servicing the account etc.

Based on the legal position of the Bank of Russia, forced debiting of funds from the “C”-type bank account is permitted only for the purposes expressly provided for by law. Case law has also established the approach that funds credited to the “C”-type bank account cannot be foreclosed or subject to injunctions.

However, in a recent decision under a lawsuit brought by the Prosecutor’s Office against Ukrainian authorities and U.S. banks, ****the court granted interim injunctions in respect of funds at “C”-type bank accounts****:

• The court stated that Presidential Decree No. 95 only regulates the possibility of property disposal by the non-resident itself in respect of funds received on the special “C”-type bank account as a result of its business activities.

• The court ruled that Presidential Decree No. 95 does not restrict the seizure of a non-resident's funds held in the “C”-type bank accounts when the non-resident is a defendant.

Consequently, the court issued a ruling that admitted the established interpretation above of the rules on foreclosability of the funds credited to “C”-type bank accounts. The full text of the ruling in Russian is available in case No. А41-88750/2024.

We see a risk in further development of such an approach to the interpretation of the Presidential Decrees and expansion of the possibility of foreclosure of funds at “C”-type bank account. However, it is the ruling of the trial court yet which may be appealed. We will keep an eye on the issue and will report in case of significant changes.