In order to assess the implications of such ministerial discretion over the affairs of British companies in Russia, it is important to assess the legal status of British companies there. In many respects, British companies shared the same legal
privileges as their Russian counterparts. However, it is worth exploring a particular legal disability that British companies suffered from; their position in relation to Russian bankruptcy law. These legal difficulties are important to consider in terms of the wider context in which British companies entered the Russian market for the rest of this study, but in the present analysis it is conceivable that these difficulties would have reinforced the power of the state over foreign enterprise through the use of the Senate as the highest court of appeal against legal decisions of the courts.
British nationals were able to conduct business in Russia under the 1801 convention of peace, navigation and commerce.85 However, even this early agreement stipulated that the laws, decrees and special regulations regarding commerce and industry in the two countries applicable to foreigners were not affected by it.These privileges survived intact into the period 1892 to 1914. Foreigners of every nationality had the right to live in Russia, and their persons and real estate were also under the
protection of Russian law.86 Foreigners were also allowed to enter into agreements,
85 TNA, FO 93/81/3, Convention of Peace, Navigation and Commerce, 5 June 1801.
deeds, and obligations of any kind between themselves and Russian subjects, as long as these agreements complied with Russian law. They also had the right to bequeath their property to foreigners as well as to Russian subjects.87
Although British companies operating in Russia had the same legal status as Russian companies under Russian law, it was not until the Anglo-Russian commercial treaty of 1904 that judgments relating to commerce delivered in a British court could be valid in Russia, and vice versa. 88 This agreement complemented the 1881 senate ruling that, ‘A judgment delivered in a court of law in one country may be valid in another country only in cases where the execution of judgments is allowed by the laws of the latter, or by treaties dealing with this subject.’89 However, the
implications of this law exclusively affected companies engaged in the importing and exporting business with Russia, involved in disputes over breach of contract for the delivery of goods, payment, etc., because articles 2 and 8 of the typical conditions for operations for the operation of a foreign company within Russia stipulated that the trial of disputes between the company and government institutions and private persons should be effected on the basis of the law in force in Russia and Russian courts, and overrode the terms of the above agreement.90
This had serious implications for multinational British companies that established manufacturing subsidiaries and undertook branch selling in Russia, because the Russian law to which they were subjected incorporated certain deficiencies that would have proved extremely disadvantageous to a British multinational acting as a creditor to its subsidiaries, agencies or clients in Russia. The most serious of these deficiencies was complications that could arise due to features of the Russian bankruptcy law. As will be discussed below, British companies often took
precautions to avoid being overexposed to Russian creditors in the event of a default, and were reluctant to extend credit to Russian customers.
87 SZ, Nos. 833, 834.
88 TNA, 93/81/60, Mutual Recognition of Joint Stock Companies, Britain and Russia, 16 December
1904.
89 Rastorguev, English Companies in Russia, 73.
The bankruptcy law that was active in the period 1892-1914 was promulgated in 1800.91 Although it was subsequently divided between the various volumes of the digest of laws in 1832, it survived largely intact, with only minor alterations until the end of the Imperial period. According to the law, a board of primary creditors was to be established in order to determine the type of bankruptcy (articles 8-12). For this purpose, the law distinguished between three different types of debt: ‘accidental’, ‘reckless’, and ‘malicious’. Bankrupt individuals were automatically assumed by the law to fall into the ‘reckless’ category, unless it could be proven that the bankruptcy occurred ‘accidentally’ due to natural disaster, enemy invasion, or a fall in prices or market activity that also affected other merchants (article 2). If it was found by the creditors that the bankruptcy was ‘reckless’, they could proceed to rank the claims on the bankrupt’s estate for satisfaction in preferential order by majority rule, and how the bankrupts estate should be administered to satisfy those claims (articles 25-34).
The implication of the bankruptcy law for foreign companies was that where they acted as creditors for subsidiary companies, agencies, and branches in Russia, as was largely the norm for foreign direct investment in Russia, they could not participate in the first rank of creditors who decided how the debtor’s estate should be divided, because their claims were subordinated to those arising from Russian subjects. According to Article 4 of the conditions of foreign companies operating in Russia, ‘The personal and real estate belonging to the Company within the limits of the empire, and all the payments accruing on behalf of the company should be convertible to the preferential satisfaction of the claims which may arise from its operations in Russia.’92 Therefore, their claims on the bankrupt party were placed in a less preferential position by the Russian liquidators than claims arising from Russian sources.
A Senate ruling in 1907 reinforced this application of the law as regarding the status of a foreign company as a creditor of a subsidiary. The Senate decided that in the case of the Belgian-operated Kharkoff Mechanical Works, the claims of the Belgian stock holders and Central Exchange and Public Funds trust should only be paid by the estate of the Kharkoff Mechanical Works after the satisfaction of claims arising
91PSZ 1-19692, 19 December 1800.
from creditors in Russia. The Belgian company had argued that the debts of their subsidiary to them arose out of their subsidiary’s operations in Russia, as they had effectively operated as an investment fund for the purchase of machinery and materials for use in Russia. However, the Senate in their judgment explicitly separated the operations of the company in Russia from its financial transactions with overseas individuals and companies. Further, extending this guarantee to the foreign creditors could open the system to abuse by allowing them to claim against all the company’s assets, some of which may be located abroad, at the expense of Russian creditors.93 This ruling therefore placed British multinationals in a
precarious position, because they would not be able to participate in the first rank of creditors appointed by the local authorities to divide up the bankrupt estate. By not participating, they put themselves in a position open to abuse by unscrupulous Russian creditors.
Further complications to this system were also caused by the restrictive policies of the Russian government with regards to foreign individuals or companies having control over lands located in restricted areas such as Poland, the Western Provinces, and the Caucasus. In Poland and the Western Provinces, foreigners were banned outright from taking possession or acquiring properties to which they were
creditors.94 In the Caucasus, they could not take control of a bankrupt’s estate unless it could be proven to be used for the establishment of factories or metallurgical industry.95
Foreign companies could also be disadvantaged by this law if they acted as a creditor to a Russian subject or company. Because the board of creditors to a bankrupt estate was formed locally and not advertised particularly well, British companies were often not aware of their existence. This led to abuses whereby British companies were defrauded out of large sums by bankrupt parties in Russia. Even by 1911, this problem was highlighted by British officials in Russia, who highlighted the trend whereby bankrupt persons often colluded with the board of creditors in order to
93 Decisions of the Senate (Civil Department), 1907, no. 68, cited in Rastorguev, English Companies
in Russia, 62-72.
94 PSZ 3-4268, 14 March 1887.
obtain an ‘accidental bankruptcy’ ruling or preferential treatment in the case of the administration of their debts by the board.96 Even Barrett, an advocate of Anglo- Russian trade and investment, warned British companies to be careful of extending credit in Russia because the system of the appointment of the board of creditors lent itself to many possibilities to defraud foreign firms.97
Therefore, Russian law regarding bankruptcies put British companies at a severe disadvantage. This disadvantage worked at two levels. Firstly, due to the preference given by the law to Russian creditors to a bankrupt estate, the investments of British companies would have been very insecure, as in the result of a bankruptcy of a subsidiary, the British company would have been unlikely to satisfy any claims that it had upon the property of the subsidiary through ownership of stock. Equally as problematic were the problems that could be caused by the bankruptcy law for the recovery of debts from Russian debtors. These problems would not have encouraged the development of trust and stable expectations of the Russian business environment if such laws could be manipulated by Russian debtors or creditors to the
disadvantage of British companies, and thus were a serious obstacle for the development of a stable business environment in Russia. As this aspect of the law was not amended, British companies would have approached the Russian market from this basic position of distrust throughout the entire period, and would have affected their views and understanding of the Russian commercial courts system.