Clarifications on Liability of Officers of Russian Companies

by Dechert LLP
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The Plenum of the Supreme Arbitrazh Court at the end of August 2013 published Resolution No. 62 (the "Resolution"), dated 30 July 2013, which provides a number of clarifications with respect to the liability of officers of Russian companies. 

Below is a short overview of the most important aspects of the Resolution.

  • In addition to the company’s usual executive officers (e.g. general director, member of the Board of Directors, etc.), a liquidator/liquidation committee (appointed in the event of a company’s voluntary liquidation) and the bankruptcy manager(s) (appointed during the external management and bankruptcy distribution stages of an insolvency) could also be held liable for damages incurred by the company;

  • A company’s officer is deemed liable if he acted in bad faith (e.g. acted despite there being a conflict of interests between those of his own and those of the company; concealed information or provided incorrect information to a company's shareholder; failed to obtain approval required under the law or the company’s charter, etc.) or against all sense (e.g. failed to obtain important information before entering into a transaction; failed to follow the company’s internal procedure on obtaining approval for the transaction, etc.);

  • A transaction is deemed concluded on disadvantageous conditions if it is evident that its conditions (e.g. price) are wholly unfavorable compared to other similar transactions that were entered into by the company;

  • A company’s officer may face liability if the company is held liable by state authorities for administrative or tax violations as a result of his bad faith or performance of actions against all sense. Moreover, a company’s officer may also be held responsible for bad faith/against all sense actions committed by the company’s contractors and/or employees;

  • The court may place the burden of proof from a company or its shareholder (both are entitled to claim damages) to the company’s officer if the company’s officer refuses to provide explanations for his actions or if his explanations are deemed insufficient;

  • A general director is not exempt from liability for his actions that were approved by the company’s body (e.g. the Board of Directors). As this is the case, the general director is confronted with the dilemma of being held liable for actions approved by the company's body or being dismissed for not following the company body on its approved course of action.  

  • Failure to prove the exact amount of damages should not constitute a ground for rejecting a claim. In such cases, the amount of damages is determined by court;

  • A company’s officer shall not be liable if, inter alia:

    • his actions may be considered a reasonable business risk;

    • recovery (e.g. for damages, other losses) has already been obtained by means of another remedy;

    • he voted against or did not vote for a decision that resulted in damages;

    • the unfavorable transaction was part of a series of related transactions that altogether should have been profitable;

    • the director could not have been sure as to the unlawfulness of his or his company’s actions due to the absence of a unified, official position of state authorities (should damages be imposed as a result of administrative liability).

The Resolution is a step forward in clarifying issues with respect to holding officers of companies liable for their actions and establishing the legal grounds for recovering damages for administrative or tax violations.

 

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