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INTRODUCTION

Russian law does not recognize the common law concept of a trust in which the trustee holds legal tide to the corpus of the trust and the beneficiary has beneficial ownership. Under Russian law, it is not possible to have different "rights of ownership" in the same property at the same time. As a result, there is no concept of beneficial ownership under Russian law. As follows from pars 1 and 2 of Article 209 of the modern (post-Soviet) Russian Civil Code, all the elements of the right of ownership are vested in the owner of the property only. The owner has the discretion to transfer to other persons the right of possession, use or management of the property, but if he does, the entire undivided right of ownership will continue to be vested in him.

Under Russian law, there is an instrument which may, at first glance, resemble the common law trust. This instrument, a contract of entrusted management of property, is dealt with in Chapter 53 the Russian Civil Code. However, on a detailed analysis, the similarities between the two instruments do not go further than the similarities of their respective names. While the English translation of the term "entrusted management" suggested above is not the only possible one, the potential for confusion between the Russian "entrusted management" instrument and the common law trust is substantial. Therefore, it is prudent to exercise great care to avoid using any terminology alluding to a trust or any other equitable concept under common law. Otherwise, the greater risk is that the common law practitioner will be misled.

BASIC FEATURES OF A CONTRACT OF ENTRUSTED MANAGEMENT UNDER RUSSIAN LAW

As mentioned above, the basic rules which govern a contract of entrusted management are contained in Chapter 53 (Articles 1012-1026) of the Russian Civil Code. These rules are imperative and non-discretionary in their nature. Article 1012 defines a contract of entrusted management as a contract whereby one party (the settlor) transfers to another party (the entrusted manager) its property for a fixed period of time, with the entrusted manager undertaking to manage the property in the interests of the settlor or another person (i.e. a beneficiary) as instructed by the settlor.

The property which may be transferred into entrusted management includes enterprises, factories, land/ real estate, securities, exclusive rights and other assets (par.1 of Article 1013). A contract of entrusted management must be made in writing (par.1 of Article 1017) and must contain certain essential terms (par.1 of Article 1016), the absence of which renders the contract invalid ("non-concluded"). These requirements stand in contrast with a declaration of trust under common law which in many instances does not require a written form and may be made orally.

A contract of entrusted management may not be entered into for a term exceeding 5 years save where a statute provides otherwise in relation to particular types of property (par.2 of Article 1017). However, if at the end of the term of the contract none of the parties notifies the others about its termination, its operation will be regarded to be extended for a further term of the same duration as the original contract.

There are some particular requirements that apply to certain types of property to be transferred into entrusted management. For example, the transfer of land/realty must be made in the specific form prescribed by the law for a contract of sale and purchase of land/realty (par.2 of Article 1017). Furthermore, such a transfer must be registered in the State Registry.

Par.1 of Article 1012 specifically provides that the "transfer of property into entrusted management does not result in transfer of title (right of ownership) to the property to the entrusted manager." Thus, this provision makes it abundantly clear that tide to the property under entrusted management is retained by the settlor in its entirety. In this respect the Civil Code might reflect a prevalent cultural attitude in Russia of resistance to relinquishing tide to property to another person, even if it is done for the benefit of family members or other beneficiaries. Personal "trust," as the default rule, does not extend that far.

PURPOSE AND ADVANTAGES OF A CONTRACT OF ENTRUSTED MANAGEMENT

Confronted with the differences between the common law trust and the entrusted management instrument, a common law practitioner understandably might ask these questions: If legal title remains with the settlor, what is the practical purpose of an "entrusted management"? Does it offer any tax advantages? What happens to the assets in case of the death of the settlor? How can the assets be protected against claims brought by creditors of the settlor? The answers to some of these questions will accentuate further the deep divide between the concept of trust in common law jurisdictions and the instrument of entrusted management under Russian law.

Firstly, it should be pointed out that transfer of assets into entrusted management does provide for certain protection as regards those assets. As set out in par.2 of Article 1018 of the Civil Code, the settlor's creditors cannot enforce their claims against the assets transferred into entrusted management, except in case of the insolvency or bankruptcy of the settlor. In the latter case, the contract of entrusted management is deemed to be terminated, and the assets in question form part of the estate available for distribution among creditors. However, the new rules in relation to individual insolvency (bankruptcy) are not yet in force. Also, they require further amendments to other laws that are yet to be made. This complicates enforcement of creditors' claims as against the assets transferred by an insolvent individual settlor into entrusted management. Therefore, it may be concluded that wh ere the settlor is a natural person, his assets under entrusted management currently enjoy more protection fr om claims brought by his creditors than do the assets of a corporate settlor.

Another practical purpose of entrusted management is to benefit from the particular legal status and industrial or technical expertise of a professional manager. For example, there are a number of activities which require a license under Russian law, such as acting as a participant in a stock market, certain activities in the construction industry and so on. The owner of the property in question may not necessarily possess such a license. Or he might not possess the requisite specialist knowledge and skills for the proper operation or use of those assets. In that case, the owner may wish to transfer the assets into entrusted management to be managed for his own benefit or otherwise.

As to the tax consequences, since full legal title to assets remains with the settlor, he bears full responsibility for tax compliance. The law does not provide for any preferential taxation regime as regards the assets under entrusted management. As a result, the settlor and the beneficiaries will have to pay profit/ income tax at normal rates.

Entrusted management under Russian law may not be set up under a will. Common law trusts, on the other hand, are commonly created through wills. Thus, under Russian law, while wealthy individuals can use the mechanism of entrusted management to distribute benefits to their beneficiaries during their lifetimes, when they die the contract of entrusted management automatically terminates (par.1 of Article 1024 of the Civil Code) and the assets revert into the deceased's estate. The beneficiaries, however, might become fully and absolutely entitled to those assets by virtue of the rules governing inheritance, a result most likely to favour the decedent's close family members.

There are other instruments under Russian law which may be employed in the context of asset management, such as an ordinary contract for provision of services. However, a contract of entrusted management has advantages compared to other contracts. Not only does it afford protection to the assets against creditors' claims (which is not available under an ordinary contract for provision of management services), but it is also characterised by a considerably higher extent and scope of liability of the entrusted manager as opposed to a service provider under an ordinary contract. Russian law contains no rule imposing a duty of care on a service provider.

DUTY OF CARE

As follows from par.1 of Article 1022 of the Civil Code, the entrusted manager owes a duty of care to both the settlor and the beneficiary. The scope and the extent of this duty are as yet not fully developed by the courts. But the entrusted manager is personally liable for any damage or loss caused by his lack of due care in the fulfillment of his obligations under entrusted management. This liability, however, may be avoided by proof that the chain of causation was interrupted by an event of force-majeure or by an act of the settlor or any of the beneficiaries. The settlor may claim actual damage and loss of profit; the beneficiary may only claim loss of profit.

Also, the law provides for a mechanism whereby activities of the entrusted manager may be monitored. Thus, the entrusted manager must prepare and submit to the settlor and the beneficiaries a report on his activities in relation to entrusted management in accordance with the terms of the contract of entrusted management (par.4 of Article 1020 of the Civil Code).

The purpose of these measures is to protect and preserve the assets that are transferred into entrusted management. However, their effectiveness will depend on willingness of die courts to provide adequate protection to asset owners by developing the scope and the extent of the concept of the duty of care in the context of entrusted management.

OTHER PROTECTIVE MEASURES

In some situations, Russian courts interpreted various legislative provisions as imposing limitations on the authority of an entrusted manager. Thus, in the case of Izotermika v. Luch-S, the assets under entrusted management were shares in a Russian limited liability company. The entrusted manager brought a claim contesting validity of a shareholders' meeting. The court dismissed this claim on the grounds that the claimant, in his capacity of an entrusted manager, had no standing to contest corporate decisions. The court stated, in particular, that a contract of entrusted management concerning shares in a company "does not provide for transfer to the entrusted manager of all rights and obligations of a shareholder in the company, and in particular the right to participate in corporate governance of the company”. This decision was mainly based on s.43 (1) of the Russian Law on Limited Liability Companies and par.3 of Art.1020 of the Russian Civil Code.

Also, settlors themselves can introduce further controls to strengthen the protection of their assets under entrusted management. A contract of entrusted management may lim it the authority of the entrusted manager to manage assets in a particular way. An example of this can be found in the case of ZAO "CMD" v. 000 "UKMD" (DU) and 000 "Firma Manor”² There the settlor under a contract of entrusted management contested a lease executed by the entrusted manager on the grounds that the contract of entrusted management required the settlor's prior written consent, which the entrusted manager had failed to obtain. The court ruled that such a requirement in a contract of entrusted management was valid, and it permitted the settlor to claim damages from the entrusted manager for its breach.

CONCLUSION

The concept of entrusted management is new and still developing in Russia. Thus, judicial views on it are also at an embryonic stage. Nonetheless, the market for the services in connection with entrusted management is growing rapidly. This market has been boosted by the growth of the industrial, real estate and stock markets in Russia in recent years. As a result, companies providing professional property management services are growing in numbers, which is a strong indicator of the development of this market. Yuri Bortnikov is a Russian lawyer working for the Moscow office of Vegas Lex, a Russian law firm. He can be reached at Bortnikov@vegaslex.ru. Ekaterina Sjostrand is a Russian qualified lawyer and a qualified English barrister practicing from 13 Old Square, Lincoln's Inn, London. She can be reached at ekaterinasjostrand@13oldsquare.com, caterina@sjostrand.co.uk.