Some Problems of Russian Legislation
Moscow
Introduction
Corporate legislation is, comparatively, one of the newest spheres of Russian law. Not long ago all enterprises in Russia - the then Soviet Union - belonged to the state and therefore there was no need to develop a legal basis for their activities since all enterprises were steered by the relevant soviet bodies. Now a large portion of those enterprises have been privatized. This has triggered the rapid development of that part of legislation pertaining to privately-owned enterprises. However, the legislation which regulates the activities of state (unitary) enterprises still remains in an undeveloped state. This article/essay pays special attention to only one of the issues which is raised by the current legislation - the possibility, under the laws of the Russian Federation, for state-owned enterprises to create a fully or partially owned subsidiary.
This analysis is not devoted to the practical question of whether subsidiaries of state-owned enterprises are being registered with the relevant State bodies, but is concerned with the legal problems of our legislation. And within this, in particular, the problem of whether or not such registration is possible. This is a problem which, we will argue, arises from a lack of precision and coherence in our laws.
Analysis
I.The first point at which it is unclear whether it is legally possible for a state-owned enterprise to create a joint venture (a commercial company) is contained in Articles 105 and 106 of the CC, which pertain to partially or wholly owned subsidiaries. According to Article 105, a "company" shall be recognized as being a subsidiary if another (parent) company or economic partnership, on account of its majority participation in the authorized capital of the "company", in conformity with an agreement signed between them, or in any other way, can exercise a decisive influence on the decisions which are made by the "company". In the light of this definition, it seems important to note how legal entities are classified, as given by the CC. Chapter 4 classifies commercial legal entities into three main categories:
a. Economic Partnerships and Companies (paragraph 2);
b. Production Co-operatives (paragraph 3);
c. State-Run and Municipal Unitary Enterprises (paragraph 4).
Judging by this classification and the above definition of subsidiaries, state-owned enterprises may not create subsidiaries, since Article 105 only deals with the possibility of companies or economic partnerships (a.) being the founders of this type of legal entity, but not production co-operatives (b.) and state-run or municipal unitary enterprises (c.).
This conclusion, however, contradicts the general provisions of the CC pertaining to state unitary enterprises. The CC stipulates that state-owned enterprises own their property under the right of either a). operative management or b). economic management. The latter is worthy of closer attention as it is the one more frequently used by commercial state enterprises. The legal regime of this right provides that state-owned enterprises "do not have the right to sell, rent out, mortgage, contribute as an investment into the authorized capital of another company or partnership, or dispose of in any other way, the immovable property which belongs to them, without the consent of the owner". As we can see, this provision only pertains to immovable property. This can be taken to mean that state enterprises, in accordance with the above definition, have the right to dispose of the rest of the property which belongs to them autonomously (including the right to invest it into the authorized capital of another company or partnership). As for immovable property, it may be contributed into the authorized capital of another company or partnership, according to the language of this article only pursuant to the consent of the owner has been obtained.
Therefore, it is currently possible to note a certain ambiguity between:
I). the definition of subsidiaries (which does not allow them to be created by state-owned enterprises) and;
II). the definition pertaining specifically to state-owned enterprises (which allows them to transfer property).
Given this ambiguity, one should probably pay more attention to the implications of the second definition, as it is the one which is more specifically linked to the problem with which we are concerned.
Based on the foregoing, it would be more logical to conclude that a state unitary enterprise, like other kinds of legal entities, may create a legal entity by acting as the solitary founder, or as one of the founders, of this entity, in one of the legal forms stated in the CC. The only difference between this situation and the creation of a subsidiary by a private company, is that the state-owned enterprise has to get the approval of its owner if it intends to contribute immovable property to the capital fund of the created entity. Despite the fact that the created company will be a subsidiary of the parent company, it will still not fall under the definition of a subsidiary given in Article 105.
In my opinion, this situation shows a deficiency in the aforementioned definitions of state enterprises. But the fact remains that it is not prohibited for a state-owned enterprise to create a commercial subsidiary.
II.The second point which is also not clearly described is set forth in Article 114.7 of the CC. This article states that a state-owned legal entity, which is based on the right of economic management, may establish another state-owned enterprise as a subsidiary, the latter having the status of a legal entity. Does this mean that a state-owned enterprise may not establish a company (subsidiary) in a legal form other than that of a state-owned enterprise? Probably not, but it might, however, be interpreted as having this meaning. Since, as we have seen, there is a lack of clarity in the regulations that exist, we are obliged to resort to interpretation rather than clarification. It is most likely that Article 114 pays specific attention to this issue because this method of creating state-owned enterprises is an exception from the general rule (which states that a state-owned enterprise may only be created by a state executive body). But whatever the interpretation, this provision looks slightly confusing. Probably, in this particular situation, the concept "everything which is not prohibited by the law is allowed" must be applied. Thus the problem of the creation of entities by a state-owned enterprise must be subject to the general rules of the CC which pertain to legal entities. According to these rules, which are set forth in Article 6 of the Law On Entering Into Force Part I of the Civil Code, a state-owned enterprise may create a legal entity by acting as the solitary founder, or as one of the founders, of this latter entity, in one of the legal forms stated in the CC.
Privatization Issue
Another issue which had remained outstanding for a long time, until the new Law On Privatization was adopted recently, is privatization. Part of this matter has still not been resolved. During the creation of a subsidiary, a state-owned enterprise will have to transfer its property (with or without the approval of the state body) to the capital fund of the new company which is based on the right of private ownership. Can this transfer be considered a privatization of federal property? Before July 1997 it was very difficult to give a negative answer to this question, since this type of transfer followed the formal, legal characteristics of privatization. On the assumption that such a transfer is privatization, the only legal option is for the relevant property to be put out to tender. Therefore, in these instances, the result is that state-owned enterprises will not be able to dispose of their property, simply by transferring it to the capital fund of another entity.
The new Law On Privatization states that its provisions may not be applied to situations connected with the disposal of property by state or municipally-owned unitary enterprises. Again we are faced with a question of interpretation. Does this mean that only this particular law does not come into force given the situation, or is it that since this is not a case of privatization neither it, nor any of the other relevant laws, are applicable? Based on this, the following conclusion would seem to be the one that can best be substantiated: the Law On Privatization does not consider the creation of a commercial subsidiary by a state-owned enterprise to be the privatization of state property.
This conclusion may be supported by the following. When transferring property to a subsidiary, a sate-owned enterprise acquires rights in personam in respect to this entity. It retains the right to take part in the directing of this property, as well as having the right to obtain this property (or at least part of it) after the liquidation of the said enterprise. In the latter situation, the state-owned enterprise may lose part of its property because the subsidiary must first fulfill its financial obligations towards its creditors. However, this sale of property to meet debts cannot be considered privatization. This conclusion is reached, although implicitly, through the definition of a unitary enterprise given in Article 13 of the CC. It states that a unitary enterprise shall be liable for its obligations in regard to the entire amount of property in its possession. In other words, in the case of a unitary enterprise faced with bankruptcy and without sufficient finances to pay all creditors, a court can have recourse to selling the property of the enterprise as a means of raising the necessary funds. This would take place not under the laws of privatization, but under general Civil Law.
However, it should also be noted that there is a provision in the new Law on Privatization which contradicts our conclusion in the above section, which was based on Article 3. Article 16, though, enumerates different methods of privatization and lists amongst these methods the transferal of state property to capital funds of economic partnerships and companies. It would seem, therefore, that the creation of a new legal entity in this way is a form of privatization.
How can we make sense of this disparity between the two Articles? One possible way to explain it is because privatization, as it is envisaged in Article 16, is that situation in which state owned property is disposed of by the State itself. However, when state property is disposed of by a state-owned enterprise, this is not considered to be privatization.
This apparent contradiction, and our attempts to explain it, show again that there is a difficulty to be overcome in interpreting the Law.
Conclusion
The above analysis shows that current Russian legislation, though it does not explicitly prohibit unitary enterprises from creating subsidiaries in the form of commercial partnerships or companies, contains provisions which call for certain interpretation and analysis. Some of the provisions contain unclear statements and definitions. This situation may partly be explained by the fact that this area of legal regulation is one of the newest in Russia. The new law on state and municipal enterprises, which currently exists as a draft, will probably take into account the weak points in current legislation which have been mentioned above.
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