The Finans Magazine published comments by Gennady Skutsky in an article entitled “Unlimited company”

29 June 2009

Bankruptcy. Now company executives and owners are held financially liable for their debts. The only way to avoid this is to timely file a petition in bankruptcy.

The Civil code of the Russian Federation (effective since 1994) stipulates the following: if insolvency was caused by company promoters (members) a subsidiary liability for bankrupt’s obligations may be imposed on them. This statutory provision has seldom been applied practically, since it wasn’t possible to establish direct fault of the company promoter. Besides, unscrupulous businessmen, having run into debts (including tax liability), have just re-registered their company in the name of a figurehead and nothing daunted, they declared that they have sold their businesses.

Month allowed for deliberation. Amendments to bankruptcy act which came into effect on June, 5th, introduced direct responsibility of the company's chief executive in the first instance. He is liable to file a petition in arbitration court if a company, e.g., comes within the definition of insolvency, i.e. is unable to make compulsory payments, or if payment obligations exceed the asset value. Director should also file for bankruptcy in the event that foreclosure on the company property shall essentially complicate business activity of the company or render it impossible.

Petition should be filed within one month. Should the company executive fail to do it, he shall bear subsidiary liability for the company debts. The same applies to a case when he failed to ensure proper book-keeping, and by the time of bankruptcy accounting records were lost or contained no information on assets and liabilities.

When does time limit for petition expire, if a company became insolvent before June, 5th? «Should a debtor come within the definition of insolvency, he shall be bound to file to arbitration court within one month, not only under the amended law, but also under the original law, – explains Gennady Skutsky, senior associate of a law firm “S&Kvertikal”. – Should a company become insolvent, say, before May, 1st, a period of one month shall commence prior to amendments coming into effect and the day of June, 1st has already been missed. Should a debtor file petition even at that rime when a new version of the law is in effect, it shall afford ground for holding the guilty parties liable – this time under the new rules. It should, however, be recognised that there is no unambiguous solution to the issue – we shall wait and see what attitude shall jurisprudence adopt in this respect», – concluded the expert.

Nikolay Vilchur, director of the international consulting company “Vilchur and partners” also places emphasis on the ambiguousness of the situation: “Unfortunately, we have to do with (face) change in classification of deeds committed long before the act was promulgated. Actually, controllers are held liable based on changes which are coming into effect now, however, they are held liable for acts committed when such responsibility was not stipulated by law”.

Also a notion of “person in control of the debtor” is introduced. The said notion involves majority shareholders (stockholders of LLC) or other individuals and organisations entitled to give binding instructions or otherwise determine operation of the company. The above is applicable not only as of the date of bankruptcy, but also for two years preceding this event. By introducing this notion lawmakers suppressed the practice of dodging the responsibility by re-registration of companies.

Persons in control of the debtor shall also be liable for debts of a company, but only if damage resulted from following their instructions, moreover, such persons shall be held vicariously liable: “Any creditor is entitled to require that all the persons in control (jointly or separately) perform an obligation, in full and as regards the debt, – explained Gennady Skutsky. – Should a separate person in control be found not guilty, he shall be released from responsibility, however, burden of proving not guilty lies with him”.

Given that the Personal bankruptcy act hasn’t been introduced into the Parliament yet, the LLC owner or chief executive (in small businesses they often happen to be the same person) shall be liable for company obligations to the extent of all their property - deposits, stocks, private cars, vacation homes, apartments (unless this residential space is their sole accommodation) etc. Lawmen shall deduct the respective amount from debtor’s income over a period of several years – until the debt is settled.

Is that good or bad? The new law gives to creditors (including defrauded employees, suppliers etc.) of a bankrupt company a chance of getting their money back, and also prevents irresponsible actions of businessmen creating fly-by-night companies.

This being said, no one can give creditors a 100% guarantee that their money shall be refunded in full. Actually, since a company is declared bankrupt, no penalty or interest shall be charged. And the procedure remains complicated and time-consuming – proceedings in bankruptcy last six months, moreover, should a petition be filed by parties, the court may extend it for half-year. If company in question is small (with modest property and few creditors) then the procedure shall terminate even earlier, whereas in especially difficult cases they hardly manage to complete it within 12 months. Eventually over for this period creditors shall lose approximately 15–20 %. (They should have realised such percentage of profits, if they had put money into a bank).

However, the experts are viewing this law with some skepticism: “Russian bankruptcy act needs conceptual rewriting, – believes Yury Laptev, associate professor of the St. Petersburg State University School of Management. – for instance, the USA bankruptcy act is, first of all, intended to rescue businesses, and not to protect creditors”.

Artem Zhavoronkov, partner at the Salans law firm believes that national law is just as good as American or European one, the question at issue is application of law: “we tried our best-you know the rest, – the expert said jokingly. – it is unlikely that many creditors shall recover their damages out of the assets of persons in control of the debtor. I believe that adopted amendments shall be used selectively, maybe, even for corporate raids. Anyway, we see no rush on bankruptcy courts for the moment.

According to Nikolay Vilchur, amendments may lead to decline in business activity: “Once again, we face an issue concerned with setting limits to admissible behaviour in business management. The very notion of entrepreneurship is indicative of certain risks involved. And managerial decisions inevitably result in the risk of loss – risk is a necessary evil. By certain confluence of circumstances any management behaviour can inflict damage on creditors’ interests, which is ground of liability of persons in control”.

The Finans Magazine no. 23-24 (306-307) 29.06 -12.07.2009 - Business

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