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Newsletter. Changes In Part One And Part Four Of The RF Civil Code




June- August 2013

As part of the implementation of the Concept of Civil Law Development, the RF President signed the Federal Law on the Amendment of Part One (I)(3) of the Civil Code (adopted by the State Duma on June 21, 2013 and approved by the Council of Federation on June 26, 2013) on July 2, 2013. The changes concern the objects of civil rights, in particular, the provisions on complex and indivisible things, securities, protection of intangible benefits. The changes will come into force on November 1, 2013.

Below are the key changes made in the RF Civil Code (the “CC”):

Objects of civil rights

The amended CC contains provisions determining the objects of civil rights. Now, things include cash and paper securities, whereas bank money and paperless securities are qualified as other property. Thus, the legislator put an end to the dispute whether bank money and paperless securities are things. The term indivisible thing has been specified: the qualifying sign of an indivisible thing is its involvement in civil circulation as a single object of property rights, but such thing may have components. The CC introduces a new term single immovable complex which means “buildings, constructions and other things that are inseparably connected physically or technologically and are united by a common purpose”, “if the title to the said objects taken together is recorded in the Consolidated State Register of Rights to Real Estate as to one immovable thing”. Single immovable complexes fall under the rules on indivisible things. The rule on the belonging of fruits, products, income has been changed. According to the new dispositive rule, they belong to the owner of the thing. Previously, the general rule stated that fruits, products and income belonged to the person who used the things on lawful grounds.

The chapter on securities has been fully restated. Now, it includes three parts (paragraphs) containing general provisions on securities, paper securities (i.e., documents meeting the set requirements and certifying the rights of obligations and other rights which may be exercised or transferred exclusively on production of such documents) and paperless securities (the rights of obligations and other rights which are fixated in a resolution on the issue or another deed of the issuer and which may be transferred exclusively in accordance with the set rules on recording of such rights). The majority of the changes are aimed at overcoming a certain obsoleteness of the previous CC provisions and at bringing them in compliance with more developed special laws on securities.

The amended CC formulates the rules on the types of security, subjects of the rights certified by a security and the manner of transfer of the rights under the security. As before, paper securities are classified as bearer, order and registered. However, if previously an issue of any type of security was free and could only be limited in cases specifically stipulated by the law, now there is a general limitation concerning bearer securities – they may be issued or distributed exclusively in cases expressly stipulated by the law. Paperless securities are now regulated by the rule which states that unless the law or the specifics of fixation of rights to paperless securities stipulates otherwise, such securities “are governed by the rules on registered paper securities whose owner is identified in accordance with the relevant records”.

The unconditional rule that a paper security not meeting the set form and not containing obligatory details is void has been revoked. According to the amended CC, such document is not a security but still constitutes a written proof. The cornerstone provision on the joint and several and equal liability of all endorsers and the person who issued a paper security has been revised. Currently, unless the law provides for otherwise, the endorsers bear liability for invalidity of the rights certified by a security in all cases, and for performance under the security – exclusively if there is a special reservation. The general provisions on a reclaim of the thing from another’s illegal possession apply to paper securities as well, but with account for the specifics established for the latter. The right to reclaim paper securities from another’s illegal possession belongs to their lawful owner at the time the security was disposed of. Bearer securities as well as registered and order securities may not be reclaimed from a good-faith purchaser, if the latter certify monetary claims. The person to whom a paper security was returned from another’s illegal possession may demand that the good-faith purchaser transfer everything received under the security (including property purchased in the exercise of the preemptive right) as of the time the purchaser should have learned about the unlawfulness of his possession (or received a court notification of the lawsuit), and the bad-faith purchaser return everything received under the security and compensate losses.

Special attention is paid to abuses in the event of loss of securities as the result of unlawful actions. According to the new rule, the rightholder may claim that the person who purchased its security from a third party (regardless of whether such third party is a goof-faith purchaser) return (or compensate the price of) the security, if such owner of the security illegally furthered the loss of rights by the rightholder or knew or should have known about the rights of other persons to the security. The novel seems to be designed to suppress legitimation of rights to securities through a chain of possessions.

The amended CC sets forth the procedure for reinstatement in the rights attaching to a paper security: voiding and reinstatement in the rights – for bearer securities; in court on a claim for performance under the security by the obligated person (with a prior written request to all obligated persons to suspend performance to the security bearer) – for order securities; in a special procedure for cases on the establishment of facts having legal effect – for registered securities. In the event of loss of records on the owners of registered paper securities the keeper of such records must immediately publish the corresponding announcement in the mass media publishing information on bankruptcy for the rightholders to be able to produce registered securities for restoration of the records. They should do it within three months following the date of such publication. The records must be restored within one month upon expiration of the term for the production of securities by their owners.

With respect to paper securities, the amended CC has adopted the institute of immobilization existing in foreign law (used essentially for the transfer of securities into a paperless form), i.e., transfer “for safe keeping to the person who is entitled by the law to keep paper securities and (or) record rights to securities”. In such case, the rights attaching to the immobilized securities are further transferred and exercised in the manner established for paperless securities.

The new provisions on paperless securities are essentially aimed at eliminating the previously existing omissions and flaws in the regulation of the legal treatment of paperless securities by bringing the CC in compliance with the laws on the issue of securities and include the rules on recording of, carrying out of operations with, use, transfer of rights attaching to securities, etc. Noteworthy are the following novels: establishment of the joint and several liability of the issuer and the record keeper for losses caused by any violation of the procedure for recording of rights; the requirement to make a corresponding record in the register to give rise to a pledge or other encumbrance of the right certified by the security; the possibility to restore the records of rights in the event of loss of the security.

The CC fixates remedies available the owners of paperless securities which in many ways are similar to the remedies stipulated for the owners of paper securities. In the event of improper writing off of paperless securities their owner is entitled to claim return of the securities or purchase by the guilty person of the same securities in organized bidding or compensation of the cost of new securities, or claim provision of securities into which the alienated securities were converted (if such conversion took place). However, a good-faith purchaser may not be required to return paperless securities which certify the monetary right of claim or were purchased in organized bidding. At the same time, the rightholder may claim return of everything received under the paperless securities and a compensation of losses caused to him. If an unentitled person exercises the right to participate in the management of the company and in the passing of resolutions by the general meeting of shareholders, the corresponding resolution of the general meeting may be contested within three months from the time the rightholder became aware of it, but in any event within one year from the date of the resolution. The amended CC also provides for a mechanism of restoration of the records of rights to paperless securities on the basis of a court decision.

Intangible benefits
The provisions on intangible benefits and the means of their protection have been made more specific. Now, intangible benefits may be, inter alia, asserted in court through recognition by the court of the fact of a breach of the personal non-property right and publication of the court’s decision, or protected by a prohibitory injunction. If the information defaming the honor, dignity or business reputation of a citizen has become widely known and therefore the disclaimer cannot be brought to everybody’s knowledge, the citizen is entitled to claim that the information be removed and its further dissemination be suppressed by seizure and destruction without any compensation of the corresponding media produced for dissemination of the information. The similar right to claim removal of the defaming information may be exercised in the event of its dissemination in Internet. The amended CC makes it possible to apply similar rules with respect to dissemination of any false information about a citizen. As before, the rules on protection of the business reputation of a citizen are applied to the protection of the business reputation of a legal entity (except for the provisions on compensation of moral harm). Section I(3)(8) of the CC is also supplemented with provisions on the protection of a citizen’s private life. Under the general rule, collection and storage, dissemination and use of any information about a citizen’s private life are allowed exclusively with the citizen’s consent.

Protection of intellectual rights in the information-communication networks
Federal Law on the Amendment of Certain Legislative Acts of the Russian Federation on the Issues of Protection of Intellectual Rights in the Information-Communication Networks, dated July 2, 2013, No. 187-FZ (the “Law”)

Upon adoption of that sensational Law, Part IV of the CC was supplemented with Article 1253.1 on the specifics of responsibility of an information intermediary.
An information intermediary is a person that transfers materials to the information-telecommunication network (including Internet), a person that makes it possible to place materials or information in such network, and a person that makes it possible to access materials in the network. An information intermediary bears liability for any breach of intellectual rights if proved guilty. The intermediary may also be required to remove the information infringing upon the exclusive rights or limit access to such information. The CC sets conditions under which the person that transfers materials to the network does not bear liability for such transfer: the person is not the initiator of the transfer, does not change the materials, does not know and cannot know that the IP results are used illegally. The person that makes it possible to place materials in the network does not bear liability for any infringement of intellectual rights if it did not know and could not know that the IP results were used illegally and timely took necessary and sufficient measures to prevent the infringement (upon the corresponding written inquiry or request of the rightholder).

Article 1302 of the CC on the security for a claim in cases concerning copyright infringement has been supplemented with the provision on the possibility of an injunction in the form of a limited access in cases concerning infringement of exclusive rights to films in the event of their placement in the information-telecommunication networks (if there are grounds to believe that the infringement took place).

The changes came into force on August 1, 2013.

State registration of a legal entity

In connection with the adoption of Federal Law on the Amendment of Certain Legislative Acts of the Russian Federation to the Extent of Counteraction to Illegal Financial Operations, dated June 28, 2013, certain changes were made in some of the CC provisions.
Article 51 of the CC on state registration of legal entities has been supplemented with provisions on the consequences of recording in the Consolidated State Register of Legal Entities (the “CSRLE”) of untrue information about a legal entity or the failure to record requisite information in the CSRLE. The amended CC fixates the presumption of veracity of the information recorded in the CSRLE and the right of the participants of commercial circulation to a compensation by the legal entity of losses  caused by non-provision/untimely provision of information/provision of untrue information about the legal entity to the CSRLE. Recording of untrue information in the CSRLE or recording of information with violation of the procedure set by the law may be contested in court. There is a new provision on the obligation of the registrar to check the veracity of information about the legal entity before recording it in the CSRLE. In cases stipulated by the law the registrar must inform interested persons about the proposed changes in the charter of the legal entity and about the right of those persons to submit their objections against such changes. Gross violations of the law at the time of setting up of a legal entity which cannot be remedied may become the ground for invalidating the state registration of the legal entity.

Article 63(3) of the CC has been supplemented with the rule on the obligations of the liquidating commission to apply to the arbitration court claiming bankruptcy of the legal entity if the property of the legal entity under the liquidation is insufficient for satisfying creditors’ claims or if there are signs of bankruptcy of the legal entity.

Insofar as credit organizations have been granted the right to terminate a bank account contract (pursuant to the changes made in the Federal Law on the Counteraction to Money Laundering and Terrorism Financing, dated August 7, 2001, No. 115-FZ), the CC rules on termination of a bank account contract (Article 859) have been supplemented with the provisions on the manner of termination at the bank’s initiative. The contract is deemed terminated upon expiration of sixty days following a written notification to the client. Once such notification is sent, the bank may not carry out any operations in the client’s account, except for remittance of mandatory payments to the budget, charging of interest, remittance of the balance to a special account of the Central Bank (money is remitted by the bank to that account if the client has not appeared to receive it and did not leave any instructions about remittance of the money to another account).

The changes came into force on June 30, 2013.