Subsidiary liability of the CEO in Russia: latest news from Supreme court

The practice of bringing the executive bodies of a company to subsidiary liability for the debtor's obligations is gaining momentum in Russia as the share of such resultative suits is increasing rapidly (4% in 2015 vs. 45% in 2018), which puts many Russian executives at risk.

 

Subsidiary liability involves imposing obligations on the controlling person (CEO, accountant, financial director, representative by POA, family member of the CEO) to compensate for financial losses incurred by private or state creditors due to the actions of the company.

 

However, there is an indicative example of non-application of subsidiary liability, provided by the latest Supreme court decision.

 

A creditor filed a claim, to hold one of the guarantor’s executives liable for non-returning of a loan. The courts of three instances upheld this claim pointing at bad faith: it turned out that the size of the assets of the organization at the time of the suretyship was much smaller than the amount of the loan obligations of the sister company.

 

Nonetheless, the Board of the Supreme Court for Economic Disputes (Resolution dated March 25, 2021 No. 310-ES20-18954, case No. A36-7977/2016) cancelled the decisions of lower courts in this part.

 

Since engagement of guarantors belonging to the same group as the borrower by banks is a steady banking practice and a usual requirement by anti-crisis financing, it could not indicate guilt of the manager in itself.

 

The manager acted in the interests of the group by assuming obligations in excess of the guarantor's financial capacity as he believed that the group will be able to repay the debt long term. As such his actions should not be considered as detriment of the creditor.

 

The Board considered the position of the lower courts as potentially resulting in the group members ceasing to finance each other not risking to hold the guarantor manager liable, which is inconsistent with the Bankruptcy Law.