The Arbitrazh Court in Perm, Russia, based its jurisdiction on Lugovoy Law and declared a loan agreement with a Czech lender nul and void. The reasoning for applying Lugovoy Law provisions was based on the restrictions in art. 5n of Regulation (EU) 833/2014 on rendering legal services to Russian entities.
Introduction
In a decision dated 7 November 2026, the Commercial Court of Perm Krai in case number A50-5430/2026 rendered a judgment on the invalidity of a Czech-Russian loan agreement and the court’s jurisdiction under Article 248.1 of the Russian Commercial Procedure Code, a provision commonly associated with the Lugovoy Law.
The court held that EU restrictions on legal advisory services impaired Russian parties’ equal access to legal representation in the Czech Republic. On the merits, it found no good-faith commercial purpose for the loan, treated it as part of a wider circular movement of funds, and declared the agreement void.
Factual Background
OOO Port City, a Russian company based in Perm, brought the claim against ZAMEK BON REPOS spol.s.r.o., a Czech company registered in Prague. The claim sought a declaration that loan agreement No. SV/3 of 7 March 2014 was invalid in the form created by a series of additional agreements concluded between 2014 and 2024. The Perm Krai prosecutor participated in the proceedings, and the tax authority, Rosfinmonitoring’s interregional office, AO Port Perm and OOO Port Perm were joined as third parties.
Under the loan as amended, Port City was required to repay CZK 32,635,000 and interest at 15 per cent per year for the period of actual use. Additional agreement No. 11 dated 13 December 2024 fixed the repayment deadline at 31 December 2025. The judgment records that Charles Butler was the Czech lender’s director and beneficial owner.
The claim was linked to earlier litigation concerning Port Perm. In case A50-17636/2023, a final judgment had invalidated transactions and ordered movable and immovable property to be returned to AO Port Perm after the court found that foreign-investment controls applicable to a company of strategic importance had been breached. That judgment also examined a separate 2015 loan of RUB 128,855,000, equivalent to CZK 52 million, and a chain of assignments through which the claim ultimately passed to Butler.
Port City argued that the funds received from ZAMEK BON REPOS were in fact used to finance AO Port Perm, over which Butler had obtained unlawful corporate control. It said that Butler controlled Port City until changes in 2022-2024 and referred to a tax notice dated 9 February 2026 questioning the economic basis for expenses under the disputed loan.
The Czech lender denied that the loan formed part of a circular funding scheme. It maintained that Port City used the money to maintain and reconstruct its own real estate, argued that the tax notice was not an authoritative act, raised the three-year limitation period, and submitted that any declaration of invalidity would require bilateral restitution. It also asked the court to terminate the proceedings for lack of jurisdiction.
Legal Considerations
Jurisdiction Under the Lugovoy Law
The jurisdiction objection was addressed first. Article 248.1(1)(1) of the Russian Commercial Procedure Code assigns certain disputes involving persons affected by restrictive measures imposed by foreign states, unions or institutions to the exclusive jurisdiction of Russian commercial courts, unless an applicable treaty or party agreement provides otherwise.
The court treated the European Union’s eighth sanctions package as a restrictive measure directed against the Russian Federation. It stated that Council Decision (CFSP) 2022/1909 introduced a prohibition on legal consultation or assistance for Russian citizens and other Russia-connected persons. On that basis, it examined whether a Russian legal entity could in practice exercise procedural rights in the Czech Republic on terms equal to other litigants.
ZAMEK BON REPOS produced a letter dated 9 September 2026 from Czech law firm PRK Partners s.r.o., which expressed potential willingness to represent Russian parties in Czech proceedings. The court found that the letter did not prove a real and equal opportunity to obtain representation because the firm identified a list of strict eligibility and screening criteria for a prospective Russian client.
The defendant also referred to the participation of a Russian citizen permanently resident in Slovakia in proceedings before Slovak courts. The court considered that example insufficient to establish that any Russian entity resident in Russia could freely exercise procedural rights throughout the European Union. It therefore held that it had competence to determine the dispute against the Czech company.
The EU Restriction on Legal Advisory Services
The judgment’s description should be read against the wording of the EU measure itself. The operative restriction is found in Article 5n of Council Regulation (EU) No 833/2014, as amended in October 2022. It prohibits the direct or indirect provision of legal advisory services to the Russian Government and to legal persons, entities or bodies established in Russia. The consolidated regulation is available on EUR-Lex.
The EU concept concerns legal advice in non-contentious matters, including commercial transactions, negotiations and the preparation, execution or verification of legal documents. The regime distinguishes those services from legal representation and from advice strictly necessary to secure access to judicial, administrative or arbitral proceedings. The General Court of the European Union confirmed that distinction in its judgments of 2 October 2024 concerning the legal-advisory-services prohibition.
The Perm court did not analyse that litigation-access exception or decide whether representation in this particular loan dispute was prohibited as a matter of EU law. Its reasoning was instead practical and comparative: the need for a Russian prospective client to satisfy strict acceptance criteria was treated as evidence that access to counsel was not equal, even though a Czech law firm had expressed conditional willingness to act. The EU General Court’s reasoning is available here.
Invalidity of the Loan
On the merits, the court applied Articles 10, 166, 167 and 168 of the Russian Civil Code. Article 10 prohibits abuse of rights, including conduct intended to cause harm, circumvention of the law for an unlawful purpose and other knowingly bad-faith exercises of civil rights. Article 168(2) treats a transaction that violates a legal rule and infringes public interests or protected third-party interests as void unless the law provides a different consequence.
The court accepted the defendant’s point that the findings in case A50-17636/2023 did not, by themselves, establish the invalidity of the 2014 loan. ZAMEK BON REPOS had not been a party to that earlier case. The court nevertheless regarded the earlier findings as relevant context for assessing the movement and allocation of funds within the group of companies controlled by Butler during the disputed period.
It rejected the submission that Port City alone had to prove that the loan belonged to the circular scheme. In the court’s view, the lender was also required to explain the economic justification and business purpose for transferring the funds. The evidence established that Port City belonged to the Butler-controlled group. The court further relied on a construction permit dated 16 April 2014 and findings in case A50-25015/2022 to reject the lender’s explanation that the money financed the maintenance and reconstruction of Port City’s own property.
According to the judgment, the funds were instead connected with the use of real estate that had been unlawfully removed from the ownership of the Russian Federation. Because the record did not demonstrate a good-faith purpose for the loan and the agreement bore unrefuted signs of a circular scheme for diverting money, the court held that the transaction constituted an abuse of rights and was void under Article 168 of the Civil Code.
The court added that the tax authority’s February 2026 notice was not decisive. The finding of invalidity rested on other evidence, including the preclusive findings from cases A50-17636/2023 and A50-25015/2022.
Limitation and Restitution
The court rejected the limitation defence. Article 181(1) of the Civil Code provides a three-year period for claims concerning the consequences or recognition of a void transaction. The judgment relied on the amended repayment date of 31 December 2025 and held that the claim filed on 9 March 2026 was timely. It also accepted Port City’s submission that the company had no real opportunity to bring the claim until Butler’s corporate control was removed in 2024.
The court also declined to order Port City to return the loan principal. Although Article 167(2) ordinarily requires each party to return what it received under an invalid transaction, the court relied on its finding that the funds were connected with the use of real estate later found to have been unlawfully removed from Russian state ownership.
Related Coverage on kdb.legal
Russian Court Upholds Lugovoy Injunction Against NET4GAS Over Czech Arbitration. A September 2026 Russian cassation decision also treated EU legal-services restrictions, lawyer refusals and the Czech appointment mechanism as evidence of unequal access to representation.
Bombay High Court Interprets Lugovoy Law and Finds no Competence of Russian Court. The 4 November 2026 post reports an Indian decision that required evidence of a concrete obstacle to the agreed foreign forum.
St. Petersburg Arbitrazh Court Imposes EUR 100m Fine Under Lugovoy Law Against ING and SocGen. This October 2026 post covers another broad application of Articles 248.1 and 248.2 in sanctions-related proceedings.
EU General Court Confirms Prohibition of Rendering Legal Services to Russian Legal Entities. This post addresses the scope of Article 5n and the exceptions for services connected with access to proceedings.
Outcome
The Commercial Court of Perm Krai granted the claim and declared loan agreement No. SV/3 of 7 March 2014 invalid in the form created by the listed additional agreements. It ordered ZAMEK BON REPOS spol.s.r.o. to reimburse Port City RUB 50,000 in court fees. The judgment states that it may be appealed to the Seventeenth Commercial Court of Appeal within one month.
KDB.legal Koch Boës advises on all kind of sanction related disputes and arbitrations.
