Director's subsidiary liability: when company debts become personal

Executives come to me regularly having learned about a claim for subsidiary liability years after they left the company. The person has long since moved to another job, and there is a claim against him for ninety million roubles, with the court asking him to explain decisions taken in 2020. Here is how the mechanism works and what actually affects the outcome.

What subsidiary liability is

Normally a participant in a Russian LLC risks only the contribution to the charter capital, and the director risks only the job. Subsidiary liability breaks that rule: the court recovers the company's debts personally from whoever controlled it. The mechanism is set out in chapter III.2 of the Insolvency Act and applies where the company's assets were not enough to settle with creditors.

The key concept is the person controlling the debtor. That is not only the chief executive named in the employment record. Courts treat participants holding fifty per cent or more, finance directors, and sometimes people with no formal position at all as controlling persons — if it is shown that the decisions were in fact made by them. Being a nominee is no defence: a director who signed documents without looking into them will have the debt recovered from him, and only afterwards will he go looking for the real beneficiary.

The two grounds that come up most often

Inability to satisfy creditors' claims in full. This is where the manager's own conduct drove the company into insolvency: stripping assets, transactions on non-market terms, selling property to related parties shortly before the petition.

Failure to file for insolvency in time. The statute gives the director one month from the moment he learned, or should have learned, of signs of insolvency. Miss it, and he answers for the obligations that arose after that date. In practice this is the ground that works most often, because it is easier to prove: the accounts and the dates on which the debts arose are usually enough.

Why the burden falls on the director

The most uncomfortable feature for a manager is how the presumptions are built. The statute assumes the director is at fault if any one of several circumstances is present: substantial harm to creditors from transactions, loss or distortion of accounting records, or tax-related claims exceeding half of the register of creditors.

Say the records were lost during an office move or seized by law enforcement. Formally the insolvency officer cannot carry out his analysis — so the presumption runs against the director. It is for him to rebut it: to restore the correspondence, to show the seizure took place, to show that he sent requests to the tax authority.

What works in practice

Over the years of running these cases I see one pattern: the people who prevail are not the ones who speak best at the hearing, but the ones whose documents survived.

What helps: an economic rationale for the transactions — internal memos, calculations, competitors' commercial offers showing the price was a market one. Minutes showing the decision was taken by the participants rather than by the director alone. A turnaround plan: where a company was heading towards insolvency but the manager was taking reasonable steps to trade out of the crisis, courts take that into account — the position is fixed in Resolution No. 53 of the Plenum of the Supreme Court. Handover acts for the records on a change of director, signed by the successor.

What does not help: saying that "the owner decided it that way", having no legal education, or the fact of having resigned before the insolvency.

Time limits

A claim may be brought within three years of the day the creditor learned of the grounds, but no later than three years from the moment the company was declared insolvent. The insolvency procedure itself can run for years, so the real distance between the decision and the claim is often five to seven years.

One point worth noting separately: since 2017 a claim may also be brought outside insolvency proceedings — for example where the case was terminated because there was no money to fund the procedure. That takes away the familiar sense that "the case was closed, so it is over".

What a director should do now

If the company is trading normally, discipline is enough: keep the documents on major transactions together with the rationale for the price, formalise corporate decisions on matters outside ordinary business activity, and on leaving sign a handover act for the records and keep a copy.

If signs of insolvency have appeared, count the time. The month to file does not start when things become "really bad", but when it becomes clear that not everyone can be paid. That date will later be set by the court, looking at the accounts.

If a claim has already been filed, do not expect objections alone to carry it. You need the underlying material: contracts, correspondence, calculations, evidence from counterparties. Collecting it three years after the events is hard, but possible.

This material is for information only. Situations differ: in one case an internal memo saves the director, in another the absence of his signature on a particular document.

If you are facing this situation, or want the risks assessed in advance, write to us — the first consultation is free where a contract is signed.

Vladimir Kovalev — lawyer, founder and managing partner of Kovalev & Partners LLC