Recovering losses from a director

What is happening

After a change of director, the new team finds advances paid to firms that delivered nothing and have since been struck off the register. The former chief executive does not answer calls, and the participants want to know whether they can recover the money from him personally.

For years the director signed contracts with his wife's company at inflated prices without telling the participants. The business kept going, but the margin was leaking away, and now the documents show it.

The company has paid a large fine and extra tax because of a scheme the director set up on his own initiative. The participants see this as his personal responsibility; he calls it normal business risk.

What the law says

• The Civil Code requires a person acting on behalf of a legal entity to act in its interests in good faith and reasonably, and to compensate losses caused by his fault. The same duty extends to members of collective management bodies and to persons who in fact determine the company's actions.
• Specific rules on the liability of management bodies are contained in Federal Law No. 14-FZ of 8 February 1998 "On Limited Liability Companies" and Federal Law No. 208-FZ of 26 December 1995 "On Joint-Stock Companies".
• The claim may be brought by the company itself or by a participant on the company's behalf; amounts recovered go to the company, not to the participant who sued.
• Under established case law, a director is presumed to have acted in bad faith where, for example, he entered into conflicted transactions without disclosing them to the participants or concealed information. Ordinary business risk, including a reasonable deal that turned out badly, is not in itself a ground for liability.
• The limitation period under the Civil Code is three years; when it starts running is often disputed in director liability cases and depends on when the company, acting through an independent manager or its participants, learned of the breach.
• If the company is in bankruptcy, claims against its former management are brought within the insolvency case, which is a separate procedure with its own rules.

What we do

• We review the transactions and payments for the period in question and single out those showing signs of bad faith, conflict of interest or plain unreasonableness.
• We trace links between counterparties and the director or his relatives through public registers, court records and the company's own documents.
• We quantify the losses and tie each amount to a specific act or decision of the director.
• We demand that the former director hand over documents and give explanations; a refusal becomes evidence in its own right.
• We prepare the claim, apply for interim measures over the defendant's assets and represent the company or the participant in court.
• We also defend directors against such claims, showing the business rationale for their decisions, participant approval and market terms.

What we will need from you

• The charter, the resolutions appointing and removing the director, and his employment contract.
• Bank statements and accounting ledgers for the period in dispute.
• Contracts and supporting documents for the transactions that raise questions.
• Reports from tax and other inspections and any decisions imposing liability on the company.
• Minutes of meetings at which the disputed transactions were discussed or approved, and correspondence with the director.
• The handover record from the change of director, or confirmation that documents were not handed over.