Protecting the clients’ interests in case of subsidiary liability in Russia
We have extensive practical experience working with clients who turned out to be involved in bankruptcy and subsidiary liability in Russia. Therefore, we can prepare and implement an individual plan to reduce risks and protect your interests in Russia and abroad based on your situation.
SUBSIDIARY LIABILITY IN RUSSIA
- Subsidiary Liability as Piercing the Corporate Veil in Russia
- Bankruptcy and Subsidiary Liability
- Bringing to Subsidiary Liability in Russia
- How Can We Help?
Probability of Subsidiary Liability
Assessing the likelihood of subsidiary liability based on a study of the client’s situation
Assessment of possible threats and implementation of measures to reduce risks in Russia and abroad
Challenging Subsidiary Liability in Court
Challenging the grounds and amount of subsidiary liability in court in Russia and abroad
Developing and implementing a comprehensive strategy to protect the client’s interests
Subsidiary Liability as Piercing the Corporate Veil in Russia
Along with the transition to the market economy, the Russian legal system had to catch up with the new reality and set new rules to regulate market relations. Many things were borrowed from the legal systems of other countries that had market relations and the corresponding legal regulations for a long time.
One of such borrowings was the concept of “piercing the corporate veil,” which was adopted and transformed into a concept of “subsidiary liability” («субсидиарная ответственность») in bankruptcy in Russia. But, unfortunately, it was interpreted and applied to result in many problems and abuses in Russia.
In countries with a Western-style legal system, corporations and limited liability companies are the primary forms of business because the liability of shareholders is limited to the amount of their contribution to the capital of the company – their shares. Only in exceptional cases can shareholders be held personally liable for the company’s debts.
For example, in the United Kingdom and the United States, “piercing the corporate veil” of a limited liability company or corporation can happen only in strictly regulated cases. First, as a rule, it should be a closed company which shares are not traded on the stock exchange. Secondly, the shareholder must be the person who controls the activities of the company. Third, the actions of this shareholder, which led to bankruptcy or other severe financial consequences for the company, should be committed with “egregious” disregard of the company’s interests in favor of the shareholder’s interests.
Unfortunately, In post-Soviet Russia, subsidiary liability was interpreted and applied differently with a deliberately low level of requirements and evidence necessary to bring a person to subsidiary liability in corporate bankruptcy.
Bankruptcy and Subsidiary Liability
The Russian authorities started to widely use subsidiary liability when the campaign to “clean up” the Russian banking sector began in 2013. By now, almost all large private banks have gone bankrupt. Next in line are medium and small banks. According to the Deposit Insurance Agency (DIA) of Russia, at the end of November 2020, out of 694 banks that existed in Russia, 344 continued to operate, and 350 were in the process of liquidation (bankruptcy).
On July 29, 2017, Federal Law No.266-FZ came into force amending Federal Law No. 127-FZ “On Insolvency (Bankruptcy)” of October 26, 2002. Another important step in reviewing the boundaries of subsidiary liability was the Ruling of the Plenary Session of the Supreme Court of the Russian Federation of December 21, 2017, No. 53 “On Certain Issues Regarding the Liability of Persons Controlling the Debtor in Case of Bankruptcy.” .
The criteria of those who can be held liable for subsidiary liability became vague. In addition, the punishment became more severe. These new rules provide virtually unlimited opportunities for bringing subsidiary liability in bankruptcy in Russia.
Bringing to Subsidiary Liability in Russia
Among other things, the new edition of clause 2 of Art. 61.11 of Federal Law “On Insolvency (Bankruptcy)” of October 26, 2002 (No. 127-FZ), introduced by Federal Law of July 29, 2017 (No. 266-FZ) establishes the presumption of guilt when deciding on bringing to subsidiary liability.
Clause 19 of the Ruling of the Plenary Session of the Supreme Court of the Russian Federation of December 21, 2017, No. 53 comments on this as follows: “When proving the circumstances that constitute the grounds for rebuttable presumptions of bringing to bankruptcy, as stated in paragraph 2 of Article 61.11 of the Bankruptcy Law, it is assumed that the actions (inaction) of the controlling person were the necessary reason for objective bankruptcies”.
How Can We Help?
Contact us and we will conduct a preliminary analysis of your situation and develop an individual strategy to protect your interests in various circumstances, including in the event of subsidiary liability.
QUESTIONS & ANSWERS:
Corporate bankruptcy in Russia has its specific features. On the formal side, one of the peculiar features of the law on bankruptcy and insolvency is a subsidiary liability. On the practical side, it is noteworthy that the bankruptcy of companies with substantial assets often involves criminal lawsuits against their controlling shareholders.
Subsidiary liability is the personal liability of those controlling shareholders of a company, which actions or inactions led to the company’s bankruptcy, as established by the court.
Subsidiary liability often arises when (1) the company is under bankruptcy, and (2) it has significant assets, or (3) the company’s controlling shareholders have significant assets.
Our team of lawyers has the experience to guide you through your legal claim. Juris Law Services works closely with business owners to ensure businesses run smoothly.
Under Federal Law “On Insolvency (Bankruptcy)” of October 26, 2002 (No. 127-FZ), the corporate bankruptcy should generally be over in 3 years. However, it all depends on how big the company is, its assets, etc. It’s not unusual when the court repeatedly extends this term. For instance, big banks’ bankruptcy could take up to 5-8 years.
WHAT WE DO
- How to Open a Business in the USA
- Trusts and Asset Protection
- Lawsuits in USA
- Bankruptcy and Subsidiary Liability in Russia