In 30 seconds
Can I be held liable for my company’s debts?
Yes, if you controlled the company and the court finds grounds for liability.
Who is considered a controlling person?
The director, a member with a large stake, and anyone who in fact determined the company’s decisions.
What can you be held liable for?
For actions that make it impossible to pay the debts, and for filing for bankruptcy too late.
Can you defend yourself?
Yes, if you prove that you acted in good faith and reasonably in the company’s interests.
How much time do creditors have?
As a rule, three years from when the grounds became known. The outer limit is ten years from the date of the breach.
Who is liable
Subsidiary liability is a controlling person’s obligation to pay those debts of the company that could not be covered by its assets. The rules are set out in Chapter III.2 of Federal Law No. 127-FZ “On Insolvency (Bankruptcy)”, and the Plenum of the Supreme Court of Russia gives guidance on applying them in Resolution No. 53 of 21 December 2017.
A controlling person is someone who could give the company binding instructions or otherwise determine its actions during the three years before the signs of bankruptcy appeared, and afterwards (Article 61.10(1) of the Insolvency Law). What matters is actual control, not just a position or an entry in the register.
The law presumes that several groups of persons have control (Article 61.10(4) of the Insolvency Law). Such a person may prove that they did not manage the company, but the burden of proof lies with them. The following persons are presumed to have control:
- The director or the head of the managing organisation, a member of the executive body, the liquidator and members of the liquidation commission.
- A member or shareholder who, alone or together with interested persons, controlled more than half of the participatory interests or half or more of the voting shares.
- Anyone who benefited from unlawful or bad-faith conduct by the company’s management.
A nominee director can also be held liable. But if they disclose who actually ran the company or help to find hidden assets, the amount of their liability may be reduced (Article 61.11 of the Insolvency Law).
Grounds for liability
The first ground is that creditors’ claims cannot be satisfied in full because of the actions or omissions of the controlling person (Article 61.11 of the Insolvency Law). As a general rule, the amount of liability equals the total of the claims that could not be satisfied out of the company’s assets.
The second is failure to file a bankruptcy petition. If, for example, paying one creditor would make it impossible to pay the others, the director must apply to the court within one month (Article 9 of the Insolvency Law). Otherwise, the director is liable for debts that arose after that period and before the bankruptcy case was opened (Article 61.12 of the Insolvency Law).
Financial difficulties do not in themselves mean that it is time to file a petition. The Supreme Court of Russia has explained that if the director, acting in good faith, expected to overcome temporary difficulties within a reasonable time and followed an economically sound plan, no liability for the delay arises for that period (Supreme Court Plenum Resolution No. 53).
Presumptions and time limits
A presumption is an assumption made by the law that relieves creditors of part of the burden of proof. If a presumption applies, the bankruptcy is deemed to have been caused by the actions of the controlling person until that person proves otherwise. The main presumptions are listed in Article 61.11(2) of the Insolvency Law:
- Transactions entered into or approved by the controlling person, or made in their favour, caused significant harm to creditors.
- Accounting records that the company is required to keep are missing or distorted, and as a result the bankruptcy procedures are made significantly more difficult.
- More than half of the principal debt owed to third-priority creditors arose from an offence for which administrative, tax or criminal liability was imposed.
A presumption can be rebutted. The controlling person is not liable if they prove that they were not at fault: they acted in good faith and reasonably in the company’s interests without infringing creditors’ rights (Article 61.11(10) of the Insolvency Law). For example, by showing that the transaction was in the ordinary course of business, or that the bankruptcy procedure could still be carried out despite some documents being missing.
An application to hold a person liable is filed within three years from the date on which the applicant learned or should have learned of the grounds. As a general rule, it must be filed no later than three years after the company was declared bankrupt and no later than ten years from the date of the actions or omissions themselves (Article 61.14 of the Insolvency Law).
What to do in advance
A defence is best prepared before bankruptcy, while decisions are still being made. The court assesses how a reasonable director acting in good faith would have acted in your place, so it is important to back up the reasoning behind decisions with documents. To that end, it is worth doing the following:
- Keep accounting and primary documents, contracts and correspondence; when the director changes, hand them over under a handover certificate.
- Formalise major transactions with resolutions of the governing bodies and keep the calculations showing why each transaction benefits the company.
- Check counterparties and keep the information about them as at the date of the transaction.
- If financial difficulties arise, draw up a written plan for overcoming the crisis and compare it against the actual results.
- If the plan is not working and it is no longer possible to pay all creditors, do not put off applying to the court with a bankruptcy petition.
If an application to hold you liable has already been filed, a lawyer will study the case file and help to gather evidence that the decisions were reasonable and to prepare objections to each presumption.
The best evidence that a decision was reasonable is documents drawn up at the time it was made.
This material is general in nature and is not a substitute for a consultation: the outcome of each dispute depends on its circumstances.