On subsidiary liability of persons controlling the debtor

People creating a legal entity to conduct business often believe that liability for obligations will be borne solely by society itself within its property.  However, not everyone knows that in the presence of conditions specified by law, the debts of the company can be recovered from the head or founder of it.

Such a mechanism is provided for by Chapter III.2. of the Bankruptcy Law “Responsibility of the Head of the Debtor and Other Persons in the Bankruptcy Case”.

 If full repayment of creditors’ claims is not possible due to the actions and (or) inaction of the controlling debtor of the person, such a person bears subsidiary liability for the obligations of his organization.

 According to Federal Resources, in the third quarter of 2018, every third statement on bringing to subsidiary liability was satisfied by the court.

The law classifies the persons controlling the debtor as individuals or legal entities that have or had no more than three years before the appearance of signs of bankruptcy, the right to give binding instructions or the ability to otherwise determine the actions of the debtor organization, including on the completion of transactions and the determination of their conditions.

The Bankruptcy Law establishes the presumption of control of the debtor organization.  A person is recognized as controlling if:

•       was the head of the debtor, a member of the executive body of the debtor, a liquidator, a member of the liquidation commission;

•       had the right to dispose, including together with interested parties, more than 50%

•       voting shares

•       votes in the general meeting of participants of a legal entity,

•       share of authorized capital;

•       had the right to appoint the head of the organization;

•       benefited from the illegal or dishonest behavior of persons authorized to speak on behalf of the organization (for example, the person whose payment was made to under the premises lease agreement concluded at the time when the debtor had actually ceased its activities).

The provision on benefiting from unfair behavior is very controversial, as this can only indicate the implementation of not the best business qualities of the counterparty.  And the presumption of recognition of the person who allowed such behavior by supervisory would be logical if there were concerted actions.  But at the present time, the counterparty to the debtor’s transaction can be brought to subsidiary liability in the event that it concluded the transaction on terms favorable to itself and in the absence of knowledge about the dishonest actions of the debtor’s head.

 It is presumed that a person who meets one of these criteria is recognized as a supervisory along with persons affiliated with him.

It should be noted separately that the nominee leader (a person who formally is part of the governing bodies, but does not actually manage the company) does not lose the status of a controlling person.  The nominee leader is also a person who, on the basis of a General power of attorney or explicit consent, provided a third party with the opportunity to make key decisions in the framework of the business of organization. 

Consequently, the face value does not lose the possibility to influence the activities of the organization, is responsible for the actions of its representative and is jointly and severally liable with the real beneficiary.

However, in order to identify real beneficiaries, a rule appeared in the bankruptcy law, according to which the size of liability of a nominee leader can be reduced by the court, provided that he:

•       will prove that he did not have a decisive influence on the decisions of a bankrupt company;

•       will help to establish the real controlling person and / or find his hidden property or property of the debtor

In addition, the legislation contains rules that make it possible to bring to justice real beneficiaries who, from a legal point of view, do not have the right to manage the organization.

That is, the controlling person can be recognized as persons who:

•       are with these persons in relationship, in official relations;

•       have the right by proxy or by law to make transactions on behalf of the organization;

•       occupy a specific position (acting chief accountant, financial director, etc.);

•       have a decisive impact on the activities of the organization in other ways.

At the same time, the Plenum of the Supreme Court of the Russian Federation dated December 21, 2017 No. 53 “On Certain Issues Related to Holding Persons Controlling the Debtor for Liability in Bankruptcy” (hereinafter referred to as Plenum No. 53) does not allow holding these persons liable only on the basis of their position.  They can be recognized as controlling on a general basis, including using the presumptions provided for by the bankruptcy law, but the advantages arising from their situation are taken into account.

In each case, the court determines how strong the influence of the person was on the adoption of significant business decisions.

Thus, the legislator bases the recognition of a person as a controlling one on the basis of actual control over the debtor organization, and makes it possible to hold the real leaders of the organization accountable.

If a person is recognized as controlling, then the presumption of bad faith applies to him, that is, the full repayment of the organization’s debt is impossible if the following circumstances exist:

1) significant damage was caused as a result of the commission or approval by this person of significant transactions of the debtor

 2) documents of accounting and (or) reporting are missing or do not contain information about objects established by law or are distorted, as a result of which it is difficult to conduct bankruptcy proceedings.

 3) claims of creditors arising from an offense exceed 50% of all claims of creditors

 4) the documents, the storage of which was mandatory in accordance with the legislation on joint-stock companies, the securities market, etc. are missing or distorted;

 5) as of the date of initiation of bankruptcy proceedings, no information or false information about the legal entity was entered into the Unified State Register of Legal Entities and EFRS.

Based on judicial practice, in order to bring to subsidiary liability, circumstances such as the absence of documents that prevent the bankruptcy procedure from being properly conducted (the most common case is failure to transfer the organization’s documents to the arbitration manager) and the absence of fixed assets that, according to the balance sheet, were held, are taken into account  debtor.

As for the size of liability, it is equal to the total size of claims of all creditors.  If the debtor’s registry includes claims in the amount of 100 million rubles, respectively, the general director and (or) founders, as well as other controlling persons, will be jointly and severally liable with their own property.

It is also possible to bring to subsidiary liability for non-filing (untimely filing) of the debtor’s declaration of bankruptcy in court.  These provisions apply, in particular, in cases where the manager knows that the company does not have enough funds to pay off all debts, but does not file for bankruptcy.  Such behavior is also regarded as dishonest, but the amount of liability in this case is equal to the amount of debt that arose after the onset of these circumstances.

In August 2018, our employee updated the record for the amount of responslibility in a single case (excluding credit institutions).  In the bankruptcy case of LLC “BTK”, a statement on bringing four citizens to subsidiary liability in the amount of RUB 13,787.6 million was satisfied.  The previous record for the amount of liability in a separate case (excluding bankruptcy cases of credit organizations) was recorded in 2016 and amounted to 12.9 billion rubles.

 Employees of MCBA “Bureau of Lawyers “De jure” carry out, among other things, the protection of former owners and business managers in the framework of cases of bringing to subsidiary liability.

Plenum N 53 emphasizes that subsidiary liability is the exclusive mechanism for restoring violated rights of creditors.  Persons who have lost the game under the name of “business” cannot be held accountable if they acted in good faith, reasonably and in accordance with the usual conditions of civil circulation.

 Authors are lawyer Vadim Makarichev and lawyer assistant Taisiya Radchenko.