Challenging a Transaction Under Russian Law: Grounds, Procedure, and Case Law

Short Answer: When and Why Transactions Are Challenged in Russia

What "Challenging a Transaction" Means and the Purpose of the Claim

Challenging a transaction is the act of bringing a court claim seeking a declaration that the transaction is invalid and requesting that the consequences of invalidity be applied. The purpose of the claim is to restore the violated rights of the parties, to return the parties to their original position, or to protect the interests of third parties harmed by an unlawful expression of will.

In our practice, we regularly handle such disputes, representing the interests of both Russian companies and foreign investors — including clients from Germany and Austria.

Key Facts About Challenging Transactions Under Russian Law

• The Civil Code of the Russian Federation divides invalid transactions into void transactions and voidable transactions
• The limitation period is one year for voidable transactions and three years for void transactions
• Following the 2013 reform, a presumption of voidability applies: a transaction is deemed valid until a court determines otherwise
• The range of persons entitled to bring a claim is strictly limited by law
• The consequence of a transaction being declared invalid is bilateral restitution

Void and Voidable Transactions: The Fundamental Distinction

What a Void Transaction Is: Grounds and Legal Consequences

A void transaction is invalid from the moment it is concluded — regardless of whether a court so declares it. Void transactions include transactions that violate statutory requirements and encroach upon public interests (Article 168 of the Civil Code as amended in 2013), sham and simulated transactions (Article 170), and transactions concluded by a legally incapacitated person.

What a Voidable Transaction Is: Who May Challenge It and When

A voidable transaction produces legal consequences until a court declares it invalid upon a claim by an authorised person. This category includes transactions concluded under the influence of a material mistake, fraud, or duress, as well as major transactions and interested-party transactions concluded without the requisite approval.

The 2013 Civil Code Reform: The Shift to a Presumption of Voidability

Prior to 2013, any transaction contrary to law was deemed void. The reform reversed this rule: a transaction that violates a statute is now considered voidable unless the statute expressly provides otherwise. This has significantly curtailed the scope for arbitrarily challenging contractual obligations.

Practical Consequences for the Parties: How Classification Affects Strategy

The classification of a transaction determines the limitation period, the range of parties with standing to sue, and the allocation of the burden of proof. When preparing a claim, it is essential to correctly identify the legal nature of the defect in the transaction — a misclassification will result in the claim being dismissed.

Grounds for Challenging a Transaction Under the Civil Code of the Russian Federation

Defects of Consent: Mistake, Fraud, Duress, and Unconscionability

Articles 178 and 179 of the Civil Code provide for the possibility of challenging a transaction entered into:

• under the influence of a material mistake as to the nature of the transaction or its subject matter
• as a result of fraud on the part of the counterparty or a third party
• under duress or coercion
• on terms extremely disadvantageous to a party due to a confluence of difficult circumstances (an unconscionable transaction)

Defects of Capacity: Legal Incapacity and Excess of Authority

A transaction may be challenged if it was entered into by a person with limited legal capacity without the consent of a guardian, or if a governing body of a legal entity acted in excess of the restrictions established by the constituent documents (Article 174 of the Civil Code).

Defects of Form and Substance

Failure to observe notarial form renders a transaction void (Article 163 of the Civil Code). Failure to observe simple written form deprives the parties of the right to rely on witness testimony, but the transaction itself remains valid unless the law provides otherwise.

Sham and Simulated Transactions

A simulated transaction (entered into with no intention of creating legal consequences) and a disguised transaction (concealing another transaction) are void by virtue of Article 170 of the Civil Code. Courts examine the true intentions of the parties and the actual performance of the transaction.

Major Transactions and Interested-Party Transactions

For business entities (khoziaystvennyye obshchestva), a special procedure for approving major transactions and interested-party transactions is established. The absence of corporate approval provides grounds for challenging the transaction by way of a claim brought by the company or one of its participants.

Special Grounds in Insolvency Proceedings

Chapter III.1 of the Federal Law on Insolvency provides for the challenging of suspicious transactions and transactions constituting preferential treatment. The relevant criteria are: inadequate (non-equivalent) counter-performance, infliction of harm upon creditors, and the counterparty's awareness of the relevant circumstances.

Parties Entitled to Challenge a Transaction: The Circle of Proper Claimants

Parties to the Transaction and Their Successors

The right to bring a claim belongs, first and foremost, to the parties to the transaction themselves and to their universal successors (heirs, reorganised legal entities).

Third Parties Whose Rights Have Been Violated

A third party is entitled to challenge a transaction if it demonstrates that the transaction directly violates its legitimate interests or creates a threat of such violation.

State Authorities and the Prosecutor's Office

The Prosecutor and the antimonopoly authority are entitled to bring claims for the invalidation of transactions in defence of the public interest.

Participants and Shareholders of Business Entities

A participant in a limited liability company or a shareholder is entitled to challenge a major transaction or an interested-party transaction concluded without proper approval, as well as a transaction entered into by a director to the detriment of the company.

The Insolvency Administrator in Bankruptcy Proceedings

In insolvency proceedings, the right to challenge the debtor's transactions belongs to the external administrator or the bankruptcy trustee, and also to creditors under certain conditions.

Limitation Periods for Challenging Transactions

The Position of the Supreme Court on the Calculation of Limitation Periods

The Supreme Court has repeatedly emphasized that the commencement of the limitation period is determined by a subjective criterion — the claimant's awareness — rather than by the objective fact of the transaction having been concluded. In corporate disputes, the moment of a participant's awareness may differ from the moment of awareness of the company itself.

Procedure for Challenging a Transaction in Court

Jurisdiction: Arbitrazh Court or Court of General Jurisdiction

Disputes between legal entities and individual entrepreneurs are heard by the arbitrazh court. Disputes involving individual consumers fall within the jurisdiction of courts of general jurisdiction.

Drafting a Statement of Claim

The statement of claim must specify the particular ground of invalidity, cite the claimant's right that has been violated, and include a demand for the application of consequences. A typical error is the simultaneous invocation of mutually exclusive grounds without any legal reasoning to support them.

Evidentiary Basis

The set of evidence required depends on the ground being relied upon:

• in cases of fraud — correspondence, expert opinions, witness testimony
• in cases of violation of corporate procedures — minutes of meetings, constitutional documents, the register of participants
• in insolvency-related challenges — valuation reports, accounting records, evidence of affiliation

Interim Measures

Prior to the delivery of a judgment, the court may impose an arrest on property, prohibit registration actions, or suspend performance of the challenged transaction. An application for interim measures may be filed simultaneously with the statement of claim or at any stage of the proceedings.

Consequences of a Transaction Being Declared Invalid

Bilateral Restitution

The primary consequence is the return by each party of everything received under the transaction. Where return in kind is not possible, compensation is made in monetary terms.

Unilateral Restitution and Preclusion of Restitution

In exceptional cases — such as transactions concluded under the influence of fraud or duress — the court may apply unilateral restitution, whereby property is returned only to the aggrieved party.

Compensation for Losses

In addition to restitution, the aggrieved party is entitled to claim compensation for actual damage and, in certain cases, for lost profits as well.

Defences Available to a Respondent Against a Challenge to a Transaction

The Principle of Estoppel

A party that has confirmed the validity of a transaction through its conduct (by accepting performance or subsequently ratifying the transaction) loses the right to challenge it. This principle is enshrined in Article 166(5) of the Civil Code.

Good Faith Purchaser

A good faith purchaser is protected against vindication and restitution if they did not know and could not have known of the defects in the transaction. The burden of proving bad faith lies with the claimant.

Typical Defence Arguments

• Absence of any violation of the claimant's rights by the specific transaction
• Expiry of the limitation period
• Use of an improper method of protection
• Actual performance and impossibility of restitution

Judicial Practice: Positions of the Supreme Court and Arbitration Courts

Key Clarifications

Resolution of the Plenum of the Supreme Court No. 25 of 23 June 2015 "On the Application of Certain Provisions of Section I of Part One of the Civil Code" is the primary reference point for courts when adjudicating disputes concerning the invalidity of transactions.

Trends in the Arbitration Courts of the Moscow Circuit

The courts of the Moscow Circuit consistently apply the principle of stability of civil commerce: where there is no actual violation of the claimant's rights, a claim is dismissed even if a formal defect in the transaction exists.

Typical Errors Made by Claimants

• Incorrect characterisation of the defect (filing a claim for voidness on grounds applicable only to a voidable transaction)
• Failure to prove that the rights of the specific claimant have been violated
• Filing a claim outside the limitation period without justifying the reasons for missing it

Checklist: How to Prepare for Challenging a Transaction

Steps Prior to Filing a Claim

1. Identify the legal ground for invalidity
2. Verify compliance with the limitation period
3. Gather and preserve the evidentiary basis
4. Assess the prospects for obtaining interim measures
5. Calculate the consequences of restitution and the economic impact

Pre-Trial Settlement

A mandatory pre-claim procedure for challenging transactions is not established by law. Nevertheless, sending a pre-trial demand may be useful for recording one's position and testing the counterparty's readiness to negotiate.

When to Engage a Lawyer

Challenging transactions requires in-depth analysis of the factual circumstances, knowledge of current judicial practice, and tactical expertise. Engaging a qualified attorney specialising in corporate and civil disputes increases the likelihood of a favourable outcome.

Frequently Asked Questions About Challenging Transactions Under Russian Law

Frequently Asked Questions

What is the difference between a void transaction and a voidable transaction?

A void transaction is invalid from the moment it is concluded regardless of any court ruling — for example, a sham or simulated transaction. A voidable transaction produces legal consequences until a court declares it invalid upon the claim of an authorised party. Correctly characterising the defect in a transaction determines the applicable limitation period, the range of proper claimants, and the allocation of the burden of proof.

What are the limitation periods for challenging transactions under Russian law?

For voidable transactions, the limitation period is one year from the date on which the claimant knew or ought to have known of the grounds for challenge. For claims seeking the application of the consequences of invalidity of a void transaction, a three-year period applies, running from the date on which performance of the transaction began. Expiry of the limitation period constitutes an independent ground for dismissal of the claim.

Who has standing to bring a claim to challenge a transaction?

The range of persons entitled to bring a claim is strictly circumscribed by law and depends on the grounds for challenge. As a general rule, the parties to the transaction and their successors in title have standing, while in corporate disputes the participants and shareholders of a company are also entitled to bring such claims. In defence of public interests, claims may be brought by the prosecutor and the antimonopoly authority, and in insolvency proceedings — by the insolvency administrator.

What is a unconscionable transaction and can it be challenged?

A transaction is recognised as unconscionable where it is concluded on extremely unfavourable terms as a result of a combination of difficult circumstances of which the counterparty took advantage. The ground for challenge is established in Article 179 of the Civil Code of the Russian Federation. The claimant must prove three circumstances concurrently: that the terms of the transaction were extremely unfavourable, that the party was in a position of hardship at the time of conclusion, and that the counterparty was aware of those circumstances.

What are the consequences after a transaction is declared invalid?

The primary consequence is bilateral restitution: each party is obliged to return to the other everything received under the transaction. If return in kind is impossible, monetary compensation equivalent to what was received is provided instead. In certain cases provided for by law, everything performed under the transaction is recovered in favour of the state.

Internal links

• Buying a Share in a Russian LLC: Legal Risks and Buyer Protection — https://www.ratanwalt.com/buying-share-russian-llc-legal-risks-buyer-protection
• Interim Management in Russia: Legal Framework — https://www.ratanwalt.com/interim-management-russia-legal-structuring-risks
• EU Sectoral Sanctions: Consequences for Russian Companies — https://www.ratanwalt.com/eu-sectoral-sanctions-impact-russian-companies-legal-guidance