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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 necessary accounting and reporting documentation of the assets of the debtor is missing or the relevant information reflecting the economic activity of the debtor is incomplete or untrue, which did not allow identifying the assets which could be used to settle the creditors’ claims; or
  • the director made an agreement for alienation of debtor’s assets which was invalidated.

The director of the debtor may also be subject to subsidiary liability if he or she fails to perform his or her obligation to file a petition for declaring a debtor bankrupt when the debtor meets the criteria for bankruptcy.

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 eventually results in the company’s inability to settle in full its creditors’ claims.

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;
  • 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.

If the director is ‘nominal’ (the concept of a ‘nominal director’ is new to Russian legislation and was introduced in 2017), he or she can reveal the person who gave the directions and actually controlled the debtor, therefore limiting his or her own liability. The director may also help to identify the assets of the debtor by providing documents or information.

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 the moment that he or she becomes or should have become aware of such risks. A company’s head is also obliged to publish the information regarding the company’s difficult financial situation which can lead to non-performance of the obligations towards its creditors.

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

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