You pay off your company's debts personally - Subsidiary Liability in Russia

In Russian law there is such a concept as «subsidiary liability», simply put, this is when the director, or another person controlling the company, has to pay the company's debts. In some countries, such a concept does not exist. Let us figure out when such liability may arise and for whom.

WHAT IS IT?

Subsidiary liability is the right to collect the debts of a legal entity from other related persons if the legal entity cannot pay them off on its own. Let us say, a business is declared bankrupt. The bankruptcy trustee starts selling off property to repay all its debts. The proceeds from the sale of the property may be not enough to satisfy the obligation; then the remaining money will be written off from other persons related to this legal entity.

This measure is applied to prevent abuses in business activities.

WHO CAN BE HELD LIABLE?

Not everyone can find themselves in this situation, but only those who had a direct influence on the company's financial decisions. E. g., founders, directors, chief accountants and even top managers may be held vicariously liable for debt repayment if their actions led to the firm's insolvency.

However, if you left the company more than 3 years ago, this responsibility cannot be placed on you.

HOW IS GUILT PROVEN?

Involvement in bankruptcy is proven by means of concluded contracts and completed / not completed work and services, by certificates for delivery of work or services, by the fact of transfers of funds for work or services, by minutes of meetings at which decisions were made, and by issued orders.

First of all, the judge should be convinced that the managers intentionally took some actions to lead their business to bankruptcy, while unintentional errors in management or accounting may be forgiven.

Subsidiary liability is assigned, e. g., when:

• fictitious transactions were carried out, or contracts were made with fly-by-night companies,
• the transactions made resulted in losses, e. g., a store purchased products for 2 million rubles and sold for just 1 million - here the economic feasibility and transparency of the transaction are in doubt;
• no supporting documents;
• transactions requiring approval by the board of directors or founders were made by the one person alone;
• the insolvency of the enterprise was obvious, but the impending bankruptcy was not declared in a timely manner - the management is obliged to declare bankruptcy to the commercial court no later than 30 days from the time when the business became insolvent.
• the management forged documents, failed to report to the Federal Tax Service, concealed assets, or evaded taxes.

But proving that mistakes were made due to inexperience or external economic problems, rather than malicious intent, can sometimes be difficult.

Also, remember that there is a presumption of guilt in this case - unless the director or other responsible person actively proves that they did everything possible to keep the company solvent, they will most likely be found liable.

WHO ELSE MAY BE HELD LIABLE?

The list of potential subjects of subsidiary liability is not limited to managers alone. Former managers, relatives, or friends - all those who could influence decision-making and benefit from this - can be found guilty of the firm's bankruptcy. This can happen if it is confirmed that real estate, transport and other valuables were purchased for private use with business money. E. g., the manager's relatives do not have large incomes, but suddenly after withdrawing money from the company's accounts, they purchase houses, cars, shares, and bonds. The assets can be taken away if it is proven that they were in fact paid for by the organization.

By the way, affiliated companies, that is, companies that could influence the decisions of the debtor business, can also be held financially liable to creditors (e. g., if these companies have the same owner).

WHAT HAPPENS IF THE DEBTORS DO NOT HAVE MONEY?

If the person who controlled the company has no property, creditors may demand subsidiary liability in the future when income appears. E. g. if the debtor receives dividends on shares, this money can be taken to write off the debt.

In addition, there may be a ban on travel abroad, as well as the arrest of the accounts of not only the debtor themself, but also their family members.

The property of the debtor brought to justice will also be sold, except for the only housing and essential items. I. e., apartments, houses, cars, jewelry and large household appliances can be sold.

HOW TO AVOID LIABILITY?

In addition to the things that were listed in the middle of the article, i. e., forgery of documents, failure to report to the Tax Service, conducting questionable transactions, etc., the following may lead to subsidiary liability of controlling persons:

• Giving loans from a legal entity to yourself or affiliated persons;
• Withdrawing the company's assets before bankruptcy;
• Spending corporate money on your own needs;
• Concealing property and money from a trustee during bankruptcy.

If you feel that your company will soon be unable to repay its debts and its continued existence is unprofitable, we recommend contacting our team to help you avoid subsidiary liability.

Need legal help? Feel free to contact us:
Tel: +7 909 961-19-09
Email: legalsolutions@inbox.ru
Visit us: Moscow, Zubovskiy bulvar, building 4/1, office 308



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