Legal Tools to Combat Abuses in Structuring Corporate Financing
30.07.2025
In corporate practice, it's not uncommon for intra-company financing to be structured as a loan. While seemingly straightforward, this arrangement can become problematic in the event of a corporate conflict. A business partner may attempt to recover funds or gain control over the company by enforcing the "loan" agreement – treating what was in fact a capital contribution as debt.
In bankruptcy proceedings, Russian courts have developed mechanisms to deal with this behavior. Most notably, the subordination of claims from affiliated parties and broader restrictions on creditor rights for controlling persons serve to protect the integrity of the bankruptcy estate.
These principles were formalized in the Review of Judicial Practice on Claims by Controlling and Affiliated Parties in Bankruptcy, approved by the Presidium of the Russian Supreme Court on January 29, 2020. Under these rules, a shareholder's disguised loan may be subordinated or disregarded to prevent manipulation of creditor status.
But when bankruptcy proceedings have not been initiated, these special rules don’t apply. In such cases, it becomes crucial to use general civil-law mechanisms – particularly challenging the validity of the loan agreement.
One effective strategy is to prove that the loan agreement is a sham transaction (a transaction that conceals a different legal relationship). Under Article 170(2) of the Civil Code of the Russian Federation, a sham transaction is void, and the court must apply the rules relevant to the parties’ actual intent.
If the true intent was to finance the company’s operations or increase its capital, then the transaction should be treated as a capital contribution, not a debt. As per Article 66(1) of the Civil Code of the Russian Federation, such contributions form part of the company’s assets and are not subject to repayment, except in specific cases (e.g., profit distribution, liquidation, or buyout of a shareholder’s interest).
In a notable ruling, the Moscow District Commercial Court refused to enforce a loan repayment. The court found the loan to be a sham – it’s true purpose was to create artificial debt to gain access to the company’s assets (Ruling dated December 25, 2023, Case No. A40-78706/2022; see also the similar Ruling from April 10, 2023, Case No. A40-1094/2022).
To succeed in court, it's necessary to demonstrate that the parties’ conduct aligns more closely with equity financing than with a true loan arrangement.
Courts may look at the following indicators:
- No formal loan agreement was executed; only a reference in the payment purpose field.
- The agreement lacks clear terms regarding the loan amount, disbursement schedule, or repayment deadlines.
- The loan purpose is vaguely defined (e.g., “financial support”).
- Interest is absent or set at a nominal rate; no collateral or penalties for non-payment are stipulated (though sometimes parties include these to simulate real debt).
- The actual payments and amounts do not match the loan documentation.
- The lender took no action to collect overdue amounts for a prolonged period or issued additional “loans” despite non-payment.
Challenging the loan’s validity can help the company:
- Prevent recovery under the sham loan;
- Pursue damages against the shareholder who acted in bad faith;
- Seek exclusion of the abusive party from the company (for LLCs).
