Many have heard about subsidiary liability, but not everyone understands what exactly is hidden behind this foreign word. The essence needs to be known, at least, to managers and owners of companies, since it is this category that is being held vicariously liable and sometimes the amounts are very substantial – figures in hundreds of millions of rubles are increasingly appearing in judicial practice.

So, let's figure it out.

Subsidiary liability is an exception to the general rule that the founder of a company is not liable for its debts and bears the risk of losses within the limits of his contribution to the authorized capital. The head of the company is its employee and, as a general rule, is also not responsible for the company's debts. The absolutization of these rules led to the fact that unscrupulous entrepreneurs did not repay debts, withdrew the remnants of property from the company and left creditors with nothing.

At the same time, they maintained their previous lifestyle, often continued to conduct business under the same name, but with a different  TIN. The law enforcement agencies responded to the victims' appeals with «you have a civil dispute,» and the civil courts applied the «principle of property isolation of a legal entity» (limited property liability or unlimited irresponsibility). Over time, cynicism gained critical mass and a reaction was required.

The first response of the state was to expand the opportunity to challenge transactions on the eve of bankruptcy, so that the withdrawn assets could be given to creditors. In some cases, this is a very effective mechanism, especially when it comes to real estate. However, the overall statistics of debt repayment in bankruptcy remained (and remains) low.

Therefore, the next step was an exception to the rule of property isolation. Now this rule is a benefit for bona fide entrepreneurs whose business has failed due to market factors. Those who intentionally allowed bankruptcy or, for market reasons of bankruptcy, withdrew assets instead of paying off debts, must pay off creditors with personal property.

This was also not enough, and the third step was to strengthen criminal prosecution for non-repayment of debts (usually qualified as fraud or abuse of authority). Evidence of this is the content of the media, which have become similar to a criminal summary, where the heroes are entrepreneurs and officials.

For example, a common tactic of collecting tax arrears has become the initiation of a criminal case if the company cannot pay the accrued amounts. And this means that it is too late to deal with the problem after the tax audit, and forecasting and proactive preparation for the audit are necessary.

But that's another topic

In general, the efficiency of debt collection through bankruptcy is growing. There is even an opinion that in terms of subsidiary liability, the pendulum has swung too much in the other direction, and it's time to limit its use.

Statistics show that the number of filed claims for subsidiary liability in the 1st half of 2018 increased by 52%, compared to the same period in 2017, the share of satisfied claims for recovery of losses from controlling persons increased from 2 to 36% in 3 years, and the average amount of liability per 1 person – 79 million rubles.

Please note - the share of satisfied applications is really high. And this is despite the fact that bankruptcy managers submit applications for subsidiary liability even when there are no grounds for this – simply in order to absolve themselves of responsibility.

It is important to understand that subsidiary liability does not occur automatically, i.e. the director will not be charged only for being the director of a bankrupt enterprise. It occurs if the actions or inaction of the controlling person led to the inability to repay debts. This may be the sale of assets without equivalent payment, the issuance of non-refundable loans, the transfer of money to one-day firms, the failure to take measures to recover accounts receivable, the absence of primary documents confirming accounts receivable, etc.

Bankruptcy creates a very high risk for the director and a fairly high risk for the founders. The director's risk is higher, since the law prescribes presumptions, upon the occurrence of which the burden of proof is transferred to the defendant. That is, there are presumptions of guilt, in which the director must already prove that he is not guilty of the inability to repay debts.

For example, if the accounting records reflect property that does not really exist (inventory balances, inventories, accounts receivable), the court is likely to hold the director accountable, although this may not be done for the purpose of deception, but because of an accountant's error, a client manager's shortcomings, who did not collect the necessary documents from the counterparty, etc.

Another reason for bringing to responsibility is the late filing of a bankruptcy application to the court. It is rightly noted that bankruptcy in Russia is not an anti–crisis recovery, but a post-crisis liquidation procedure. In order not to bury, but to heal the business, it is necessary to start the bankruptcy procedure earlier, while there is something to heal.

Therefore, the law encourages not to delay the application. But the reality is that after declaring bankruptcy, there are practically no chances of recovery, so the position of the directors and owners is partly understandable.

In this situation, it is very important that the manager has a reasonable plan to get out of the crisis situation. Competent economic planning and legal registration can get rid of subsidiary responsibility.

For example, we were able to protect the client because we proved to the court that the client had a plan to cover the losses accumulated earlier due to the portfolio of existing orders, the availability of production facilities to fulfill them, and negotiations on debt restructuring.

What if there is no chance of recovery anymore, and the inevitable bankruptcy is ahead? The principle of timely treatment applies here: the earlier the disease is diagnosed, the greater the chances of salvation.

When an application for prosecution has already been submitted, there are very few options for protection, since the plaintiff has already collected evidence of guilt. It is difficult to explain to the judge (and they are criticized for the inefficiency of justice) why the director did not organize normal work on storing documents, why he transferred money to one-dayers and issued irrevocable accountable amounts and loans to the founders.

We advise you not to neglect claims about the transfer of documents to the arbitration manager. A seemingly insignificant dispute about the demand for documents may predetermine the loss of the case for prosecution.

For example, in our practice there is a case of successful protection of the head on the basis of electronic correspondence, photos from the phone and the 1C database. If we hadn't paid attention to this data, it would have been very difficult to protect it.

In order not to be excruciatingly painful later, managers should perform at least the following actions:

Know and have copies of documents defining your powers and responsibilities (articles of association, employment contract, job description, resolutions of shareholders' meetings and the board of directors). This is especially true for companies with a more complex corporate governance structure;

Establish a legally formalized system of delegation of authority between subordinates: approve job descriptions, orders of authority, local regulations of the organization. Then the explanations that the director cannot know and control everything will not be unfounded;

When making complex transactions (large real estate, securities, etc.), receive from subordinates a written conclusion (certificate, memo) on the feasibility of the transaction: that the price corresponds to the market, that the purchased object has been checked, and there are no risks. Abroad, the standard business practice in large companies is to contact third-party consultants, legal companies on complex issues not only in order to obtain new information, but also to insure the head, who makes a decision taking into account the professional opinion of a disinterested person;

Adhere to the rules of countersigning of documents before signing by the director (visas of lawyers and other specialized services, especially concerning the economic conditions of transactions). In large companies, the head does not always read and understand the essence of the documents he signs. If there are no visas, then all responsibility lies with the signatory;

In case of approval of transactions by higher management, keep a written confirmation (if there are no formal documents, it may even be correspondence in messengers). Do not neglect business plans, budgets, reports on the state and prospects of the company and measures to improve efficiency. This may help justify delaying bankruptcy;

Establish the rules of document management, which would ensure the important documents safety (these may be folders with paper documents in the secretary's cabinet and electronic document management);

Be sure to keep certified copies of important documents before you leave;

Seek professional legal assistance in a timely manner. When choosing, pay attention to the existing positive experience of conducting such projects.

The implementation of these recommendations, coupled with a well-chosen line of defense, will significantly increase your chances of not being guilty without guilt.

How can the director protect himself from subsidiary liability
Ildar Bagautdinov
Senior Partner
6 декабря 2018