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Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

A director of a debtor can be subject to subsidiary, administrative and criminal liability.

The director of the debtor may be subject to subsidiary liability for the debtor’s obligations where the debtor’s assets are insufficient to discharge its obligations if:

  • the debtor’s insolvency was caused by illegal actions of the director;
  • the director did not file a petition for the debtor’s insolvency when insolvency was anticipated due to circumstances clearly evidencing the debtor’s inability to fulfil its monetary obligations to creditors; or
  • the necessary accounting and reporting documentation is missing or the relevant information reflecting the economic activity of the debtor is incomplete or untrue.

The Criminal and Administrative Codes provide for penalties for the director of the debtor for wilful bankruptcy when he or she deliberately takes or refrains from taking actions (eg, continuing to trade) that will result in the company’s inability to satisfy in full its creditors’ claims. In such case, the director may be subject to:

  • criminal liability if his or her actions caused major damage to the debtor (ie, where the damage amounts to at least Rb1.5 million ($26,000)). The court can find the director of a debtor criminally liable to a fine of up to Rb500,000 ($8,650) or a prison sentence of up to six years; or
  • administrative liability, which is subject to a fine of up to Rb10,000 ($175) or professional disqualification for one to three years.

The parent company of the debtor is subject to subsidiary liability if the bankruptcy resulted from the wrongdoing of the parent company (ie, the contracts concluded by the debtor were made under the instruction or with the consent of the parent company).

Defences

What defences are available to a liable director or parent company?

The director must convince the court that his or her actions (or inaction) did not cause the company’s bankruptcy. Depending on the circumstances of the case, the director can lodge various defences, including:

  • evidence proving that the company’s tax delinquency was temporary and minor in nature;
  • evidence of a lack of causal relationship between the bankruptcy and the way in which he or she exercised his or her management powers;
  • if there was a change of director during the period preceding the company’s bankruptcy, a statement to this effect which specifies the previous director’s period of responsibility and the effect of the indebtedness and obligations accumulated during this period on the company’s further development; and
  • evidence that the company’s bankruptcy did not exclusively result from the director’s actions or that the effect of his or her actions was insignificant.

The parent company must prove that the bankruptcy of its affiliate was caused solely by the actions of the affiliate’s management and that the affiliate’s transactions – having led to the bankruptcy – were not undertaken pursuant to the decisions, instructions or approval of the parent company.

Due diligence

What due diligence should be conducted to limit liability?

To limit liability, directors should fully comply with their obligations under Russian law.

If there is clear evidence that the company will become bankrupt, directors are obliged to file a bankruptcy petition within one month of the signs of bankruptcy arising. Failure to do so will result in their liability for all obligations accruing thereafter.

When initiating bankruptcy proceedings, the director must notify the debtor’s shareholders about the risks of bankruptcy proceedings within 10 days of becoming aware of such risks. Failure to do so may result in a fine or professional disqualification.

The Bankruptcy Law imposes responsibility for maintenance of the debtor’s accounting and reporting documents on the director. If the relevant obligations of the debtor are not fulfilled as of the date of the bankruptcy declaration or the commencement date of supervision proceedings, the debtor’s director will bear subsidiary liability.

To limit liability, the director should exercise control over the company’s transactions and the parent company should act in good faith and with due diligence while giving instructions or consent regarding the affiliated company’s transactions.

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