Corporate Bankruptcy: Procedures and Consequences for the Director

When Is a Legal Entity Declared Bankrupt?

Declaring a legal entity bankrupt is the prerogative of an arbitrazh court, based on the presence of specific signs of insolvency. According to Paragraph 2 of Article 3 of Federal Law No. 127-FZ on Insolvency, a legal entity is considered incapable of satisfying creditors' claims for monetary obligations or fulfilling the duty to pay mandatory payments if the corresponding obligations have not been fulfilled by it within three months from the date they were due. This is the key temporal criterion that triggers the bankruptcy mechanism.

In addition to the temporal criterion, there is a value threshold. An application to declare a debtor bankrupt may be filed if the amount of claims against the legal entity is at least RUB 300,000 (Paragraph 2 of Article 6 of Federal Law No. 127-FZ on Insolvency). For individual entrepreneurs and citizens, this threshold is lower, but for companies, this exact amount serves as the starting point. It is important to note that these RUB 300,000 must generally be confirmed by a court act that has entered into legal force, except for the claims of authorized bodies (FTS) and employee claims.

Special attention should be paid to the duty of the debtor's director to file a bankruptcy petition. Article 9 of Federal Law No. 127-FZ on Insolvency establishes that the director is obliged to apply to the arbitrazh court with a petition to declare the debtor bankrupt within 30 calendar days from the date of occurrence of one of the following circumstances: * satisfaction of the claims of one or more creditors leads to the impossibility of fulfilling monetary obligations or duties to pay mandatory payments in full to other creditors; * the debtor's body authorized in accordance with its constituent documents to make a decision on the liquidation of the debtor has made a decision to file a debtor's petition with the arbitrazh court; * foreclosure on the debtor's property will significantly complicate or make impossible the debtor's economic activity; * the debtor meets the signs of insolvency and (or) insufficiency of property.

Failure to fulfill this duty may entail serious consequences for the director, up to subsidiary liability for the company's debts, which will be discussed later. Thus, the signs of bankruptcy are not just a statement of fact, but a signal for immediate action.

Who Can Initiate Corporate Bankruptcy?

Several categories of subjects can initiate a corporate bankruptcy procedure, each having its own grounds and tactical nuances. Understanding these differences is critically important for all participants in the process.

1. The Debtor (Company Director). As previously mentioned, the director is obliged to file a bankruptcy petition within 30 calendar days from the moment signs of insolvency arise (Article 9 of Federal Law No. 127-FZ on Insolvency). This is not a right, but a strict obligation. The purpose of such a rule is to prevent further deterioration of the company's financial condition and the accumulation of debts that may not be repaid. * Deadlines and procedures: The petition is filed with the arbitrazh court at the debtor's location. Documents confirming the company's financial condition, a list of creditors and debtors, and constituent documents are attached to the petition. * Tactical nuances: Timely filing of the petition by the director is one of the key factors in avoiding subsidiary liability. Delaying the process, conversely, practically guarantees being held liable. It also allows the director to control the process to a certain extent at the initial stage, for example, by proposing a candidate for the insolvency practitioner (although the court is not obliged to approve it).

2. Bankruptcy Creditor. This is a creditor whose claims against the debtor are confirmed by a legally binding decision of a court, arbitrazh court, or other authorized body (Paragraph 2 of Article 7 of Federal Law No. 127-FZ on Insolvency). The exception is claims for current payments, which do not grant the right to initiate bankruptcy. * Deadlines and procedures: After obtaining a court act, the creditor must wait for the expiration of the three-month period of non-fulfillment of the obligation and the exceeding of the RUB 300,000 threshold. Then they file a petition with the arbitrazh court. * Tactical nuances: Initiating bankruptcy by a creditor is often an instrument of pressure to recover a debt. Sometimes creditors use this procedure to gain control over the debtor's assets or to challenge transactions. Importantly, the first creditor to file a petition may propose their candidate for the insolvency practitioner, which gives them a certain advantage.

3. Authorized Body (FTS). The Federal Tax Service is the largest creditor for mandatory payments (taxes, fees, penalties, fines). The FTS has the right to initiate the bankruptcy of a debtor on similar grounds as bankruptcy creditors, but without the need to first obtain a court act on debt collection, if it concerns taxes and fees (Paragraph 2 of Article 7 of Federal Law No. 127-FZ on Insolvency). * Deadlines and procedures: The FTS files a petition after the expiration of the three-month period of non-fulfillment of tax obligations and reaching the RUB 300,000 threshold. * Tactical nuances: The FTS often acts as the initiator of bankruptcy when other collection measures have been exhausted. Its participation in a bankruptcy case is always significant, as tax authorities have broad powers to audit the debtor's financial activities and challenge transactions.

4. Employees, Former Employees of the Debtor. Employees have the right to initiate the bankruptcy of a company in the presence of arrears in the payment of severance pay and (or) wages (Paragraph 1 of Article 7 of Federal Law No. 127-FZ on Insolvency). This also requires confirmation of the debt, usually by a court act or a decision of a labor dispute commission. * Deadlines and procedures: After obtaining the confirming document and the expiration of the three-month non-payment period, an employee or a group of employees may file a petition. * Tactical nuances: Although in practice employees rarely act as initiators of bankruptcy, their claims have second-priority satisfaction, which makes their position quite strong. Sometimes this is used as an instrument of pressure on unscrupulous employers.

Each of these subjects, by initiating bankruptcy, triggers a complex legal mechanism that ultimately leads to one of the procedures provided for by Federal Law No. 127-FZ on Insolvency.

Supervision: The First Bankruptcy Procedure

Supervision is the first and, as a rule, mandatory procedure introduced in respect of a debtor after the arbitrazh court accepts a petition to declare it bankrupt. Its main goals are clearly defined in Article 62 of Federal Law No. 127-FZ on Insolvency: ensuring the preservation of the debtor's property, conducting an analysis of its financial condition, compiling a register of creditors' claims, and holding the first meeting of creditors.

The term of supervision cannot exceed seven months (Article 62 of Federal Law No. 127-FZ on Insolvency). During this period, the company continues its activities, but already under the control of an interim manager.

The role of the interim manager is central at this stage. They are appointed by the arbitrazh court and possess a wide range of powers and duties (Articles 66-67 of Federal Law No. 127-FZ on Insolvency): * Analysis of the debtor's financial condition: The interim manager examines accounting and other documentation, conducts an inventory of property, evaluates assets and liabilities, and identifies signs of deliberate or fictitious bankruptcy. * Compiling the register of creditors' claims: They accept creditors' applications for inclusion of their claims in the register, verify the validity of these claims, and form the register itself. This is an extremely important stage, since only creditors included in the register have the right to vote at meetings and the right to satisfaction of their claims. * Holding the first meeting of creditors: The interim manager organizes and holds the first meeting of creditors, where the issue of the debtor's further fate is decided – the introduction of the next bankruptcy procedure (financial rehabilitation, external management, bankruptcy proceedings) or the conclusion of a settlement agreement.

Restrictions for the debtor's director during the supervision period are substantial, although they retain their powers to manage the company's current activities (Article 64 of Federal Law No. 127-FZ on Insolvency). Without the consent of the interim manager, the director is not entitled to: * make decisions on the reorganization or liquidation of the debtor; * create branches and open representative offices; * pay dividends or distribute profits; * execute major transactions and transactions with a conflict of interest (determined in accordance with Articles 61.2 and 61.3 of Federal Law No. 127-FZ on Insolvency, as well as corporate legislation); * execute transactions related to the acquisition, alienation, or possibility of alienation, directly or indirectly, of the debtor's property, the book value of which is more than five percent of the book value of the debtor's assets as of the last reporting date; * issue guarantees and other security for the fulfillment of obligations of third parties.

Any violation of these restrictions may serve as grounds for challenging the transaction in the future and holding the director liable.

The first meeting of creditors is the culmination of the supervision procedure. At it, the creditors included in the register make one of the following decisions (Article 73 of Federal Law No. 127-FZ on Insolvency): * on the introduction of financial rehabilitation; * on the introduction of external management; * on applying to the arbitrazh court with a petition to declare the debtor bankrupt and to open bankruptcy proceedings; * on concluding a settlement agreement.

Decisions are made by a majority vote of the creditors present, with votes distributed proportionally to the amount of claims. Thus, supervision is a period of analysis, control, and preparation for making strategic decisions about the company's further fate.

Financial Rehabilitation: The Recovery Plan

Financial rehabilitation is one of the bankruptcy procedures aimed at restoring the debtor's solvency and repaying its debt in accordance with an approved schedule. However, in practice, this procedure is used extremely rarely, accounting for less than 1% of the total number of bankruptcy cases.

The goal of financial rehabilitation (Article 76 of Federal Law No. 127-FZ on Insolvency) is to preserve the company as an operating business, rather than liquidating it. It is assumed that the debtor has the potential for recovery, but requires a temporary reprieve and a structured debt repayment plan.

The conditions for introducing the procedure are quite strict and are one of the reasons for its low prevalence (Article 77 of Federal Law No. 127-FZ on Insolvency): * Petition of the founders (participants) of the debtor, the owner of the property of the debtor - a unitary enterprise, or third parties. This means that the initiative must come from persons interested in preserving the business. * Attachment of a debt repayment schedule. This schedule must provide for the repayment of all claims of creditors included in the register within the period of financial rehabilitation. At the same time, the repayment of the claims of first- and second-priority creditors must be ensured no later than one month from the date of introduction of financial rehabilitation. * Provision of security for the fulfillment of the debtor's obligations. This can be a bank guarantee, a pledge of property of third parties, a state or municipal guarantee, a surety, or other methods of security. The amount of security must be no less than the amount of obligations included in the schedule.

The maximum term of financial rehabilitation is two years (Article 80 of Federal Law No. 127-FZ on Insolvency). During this period, the company is managed by the debtor's director, but under the control of an administrative manager, who monitors the execution of the debt repayment schedule and the financial rehabilitation plan.

Why financial rehabilitation is used in less than 1% of cases – practical reasons: 1. Difficulty in obtaining creditors' consent. Creditors, especially large ones, often prefer more radical measures (bankruptcy proceedings) to quickly recover at least part of their funds, rather than waiting two years, risking further deterioration of the situation. 2. Security requirement. Finding security for the entire debt amount, especially for a large company, is extremely difficult. Founders or third parties are rarely willing to risk their assets in such a situation. 3. Need for a realistic business plan. Successful financial rehabilitation requires not just a schedule, but a detailed and convincing plan to restore profitability, which is often lacking in companies that have reached the bankruptcy stage. 4. Lack of trust. Creditors often do not trust the current management, which brought the company to bankruptcy, and doubt its ability to effectively implement the rehabilitation plan. 5. High risks for the administrative manager. They bear responsibility for monitoring the execution of the plan, which requires significant effort and qualification.

Thus, financial rehabilitation is a theoretically attractive but practically difficult-to-implement procedure that requires significant effort, financial guarantees, and a high level of trust between the debtor and creditors.

External Management: A New Manager Replaces the Director

External management is a bankruptcy procedure whose goal is also to restore the debtor's solvency, but by removing the former management and transferring management powers to an external manager. This procedure is introduced by the arbitrazh court based on a decision of the creditors' meeting (Article 93 of Federal Law No. 127-FZ on Insolvency).

Removal of the director and transfer of powers. From the moment external management is introduced, the powers of the debtor's director and other management bodies are terminated (Article 94 of Federal Law No. 127-FZ on Insolvency). All functions for managing the company pass to the external manager. They act on behalf of the debtor, dispose of its property, conclude transactions, and represent the company's interests in courts and other bodies. This is a cardinal change, meaning a complete loss of control for the former director and founders.

The term of external management is 18 months and can be extended by no more than 6 months, i.e., up to 24 months (Article 93 of Federal Law No. 127-FZ on Insolvency). During this time, the external manager must implement the external management plan.

Moratorium on satisfying creditors' claims. One of the key effects of introducing external management is a moratorium on satisfying creditors' claims for monetary obligations and mandatory payments that arose before the introduction of external management (Article 95 of Federal Law No. 127-FZ on Insolvency). This means that: * the execution of executive documents on property penalties is suspended; * the accrual of penalties (fines, late payment interest) and other financial sanctions for non-fulfillment or improper fulfillment of monetary obligations and mandatory payments is not allowed; * the running of the limitation period for claims whose execution period occurred before the introduction of external management is suspended.

The moratorium gives the company a respite from creditor pressure, allowing the external manager to focus on restoring the business.

External management plan. The external manager, within a month from the date of their appointment, develops an external management plan, which must be approved by the creditors' meeting and confirmed by the arbitrazh court (Article 106 of Federal Law No. 127-FZ on Insolvency). The plan may provide for various measures to restore solvency, such as: * repurposing production; * closing unprofitable operations; * collecting accounts receivable; * selling part of the debtor's property that is not essential for production activities (Article 111 of Federal Law No. 127-FZ on Insolvency); * assignment of the debtor's claim rights; * placement of additional ordinary shares of the debtor; * substitution of the debtor's assets.

In what cases is external management effective? This procedure can be effective if: * The business as a whole is viable, but has faced temporary financial difficulties or inefficient management. * There are assets that can be sold without harming the core business to pay off part of the debts. * There is a clear and realistic plan for restructuring, optimizing expenses, or increasing revenues. * Creditors are willing to give the company a chance to recover, rather than insisting on immediate liquidation.

In practice, external management is also used infrequently, as it requires significant effort from the manager, active participation of creditors, and, most importantly, the presence of real potential for business recovery.

Bankruptcy Proceedings: Liquidation and Settlements with Creditors

Bankruptcy proceedings are the main and most common bankruptcy procedure in practice, the goal of which is the proportionate satisfaction of creditors' claims and the liquidation of the debtor. It is introduced by the arbitrazh court after declaring the debtor bankrupt (Article 124 of Federal Law No. 127-FZ on Insolvency).

The term of bankruptcy proceedings is 6 months from the date of its introduction and can be extended by the arbitrazh court upon the petition of the bankruptcy trustee by no more than 6 months each time, but the total term rarely exceeds 18 months (Article 124 of Federal Law No. 127-FZ on Insolvency).

Bankruptcy trustee: powers and duties. From the moment bankruptcy proceedings are opened, all powers to manage the debtor's affairs pass to the bankruptcy trustee (Article 129 of Federal Law No. 127-FZ on Insolvency). They are the key figure at this stage and possess the broadest powers: * Inventory and valuation of property: Identifying all of the debtor's property, inventorying, and valuing it. * Formation of the bankruptcy estate: Including in the bankruptcy estate all of the debtor's property available on the date of opening the bankruptcy proceedings and identified during the bankruptcy proceedings. The bankruptcy estate is the totality of all the debtor's assets from which creditors' claims will be satisfied. * Sale of property: Selling the debtor's property at auctions (usually electronic) to obtain funds for settlements with creditors. * Collection of accounts receivable: Taking measures to collect debts from the debtor's counterparties. * Challenging transactions: This is one of the most important powers of the bankruptcy trustee. They have the right to challenge the debtor's transactions executed before bankruptcy if they violate the rights and legitimate interests of creditors (Chapter III.1 of Federal Law No. 127-FZ on Insolvency). This will be discussed in more detail in a separate section. * Maintaining the register of creditors' claims: Final formation and maintenance of the register, verifying the validity of claims. * Settlements with creditors: Satisfying creditors' claims in the priority established by law. * Representing the debtor's interests: In courts, state bodies, and before third parties.

The priority of satisfying creditors' claims is strictly regulated by Article 134 of Federal Law No. 127-FZ on Insolvency and is one of the fundamental principles of bankruptcy proceedings:

1. Out of turn, current payments are settled – these are claims that arose after the date of acceptance of the bankruptcy petition. They include legal expenses for the bankruptcy case, expenses for paying the remuneration of the insolvency practitioner, payment for the services of persons engaged by the manager, utility bills, and the wages of employees continuing to work during the bankruptcy proceedings. 2. First priority: claims of citizens to whom the debtor is liable for causing harm to life or health. 3. Second priority: claims for the payment of severance pay and wages of persons working or having worked under an employment contract, as well as remuneration to authors of intellectual activity results. 4. Third priority: claims of all other creditors, including claims for monetary obligations and mandatory payments, except for those belonging to the first and second priorities.

Secured creditors have a special status (Article 138 of Federal Law No. 127-FZ on Insolvency). Claims of creditors for obligations secured by a pledge of the debtor's property are satisfied primarily from the funds received from the sale of the pledged item. At the same time, 80% of the amount received from the sale of the pledged item is directed to repay the claims of the secured creditor. The remaining 20% is distributed as follows: 10% – to repay first- and second-priority claims, 10% – to repay legal expenses, expenses for paying the remuneration of the bankruptcy trustee, and payment for the services of persons engaged by them.

After completing all settlements with creditors and selling the property, the bankruptcy trustee submits a report to the arbitrazh court, which issues a ruling on the completion of the bankruptcy proceedings. From this moment, the legal entity is considered liquidated, and records of it are excluded from the USRLE.

Settlement Agreement: A Compromise with Creditors

A settlement agreement is the only procedure within a bankruptcy case that allows terminating the proceedings without liquidating the legal entity and restoring its activities. This is a compromise solution reached between the debtor and its creditors (Articles 150-167 of Federal Law No. 127-FZ on Insolvency).

The essence of a settlement agreement lies in reaching an agreement on the terms and procedure for debt repayment. The debtor undertakes to pay off debts on certain conditions (e.g., with a deferment, installment plan, partial debt forgiveness), and the creditors agree to these conditions, waiving further forced collection through bankruptcy procedures.

Conditions for court approval. For a settlement agreement to enter into force, it must be approved by the arbitrazh court. The court verifies compliance with the following conditions: 1. Approval by the creditors' meeting. The settlement agreement must be approved by a majority vote of the total number of bankruptcy creditors and authorized bodies included in the register of creditors' claims. Votes are counted both by the number of creditors and the amount of their claims. 2. Mandatory repayment of first- and second-priority claims. The terms of the settlement agreement cannot provide for the repayment of first- and second-priority creditors' claims in a smaller amount than provided by Federal Law No. 127-FZ on Insolvency, or in violation of the deadlines established by law. These claims must be repaid in full or secured. 3. Observance of the rights and legitimate interests of third parties. The settlement agreement must not violate the rights and legitimate interests of persons not participating in the bankruptcy case. 4. Compliance with the law. The terms of the agreement must not contradict current legislation.

Consequences of approving a settlement agreement. From the moment the settlement agreement is approved by the arbitrazh court, the bankruptcy proceedings are terminated. The debtor and creditors begin to fulfill the terms of the agreement. All previously introduced bankruptcy procedures (supervision, financial rehabilitation, external management, bankruptcy proceedings) are terminated, and the powers of the insolvency practitioner cease.

Consequences of violating a settlement agreement. If the debtor violates the terms of the settlement agreement, creditors have the right to apply to the arbitrazh court with a petition to resume the bankruptcy proceedings. In this case, all previously forgiven debts or deferred payments may be presented for collection again in full.

Practical aspects – how to reach an agreement. Reaching a settlement agreement requires significant effort and a willingness to compromise from all sides. * Openness and transparency: The debtor must provide creditors with complete and reliable information about its financial condition and recovery prospects. * Realistic plan: The proposed debt repayment schedule must be economically justified and feasible. * Negotiations: Active participation of professional negotiators or mediators is often required to find mutually acceptable terms. * Concessions: Creditors may be willing to make concessions (e.g., partial debt write-off, payment deferment) if they see a real prospect of preserving the business and recovering at least part of their funds. * Attracting new investors: Sometimes a settlement agreement becomes possible due to attracting new investors willing to invest funds in the company and ensure debt repayment.

A settlement agreement is a chance for a company to avoid liquidation, but concluding it requires significant work, trust, and a willingness to make mutual concessions.

Challenging Transactions in Bankruptcy

Challenging the debtor's transactions is one of the most powerful tools in the hands of the insolvency practitioner and creditors, aimed at replenishing the bankruptcy estate and restoring the property rights of creditors. Chapter III.1 of Federal Law No. 127-FZ on Insolvency details the grounds and procedure for challenging transactions. For a company director, this is one of the most serious risks, as a challenge can lead to the return of property previously withdrawn from the company and become grounds for subsidiary liability.

The law distinguishes several categories of transactions that can be challenged:

1. Suspicious transactions (Article 61.2 of Federal Law No. 127-FZ on Insolvency). * Transactions with unequal counter-performance. These are transactions executed within one year before the acceptance of the bankruptcy petition or after this date, if the transaction price or other conditions significantly differ to the debtor's detriment from market conditions. For example, selling property at an undervalued price, providing services at an inflated cost. Example from practice: Company "A", three months before filing a bankruptcy petition, sold its only liquid asset – a warehouse facility – to Company "B" (affiliated with the director) at half the market price, which was confirmed by an independent appraisal. The bankruptcy trustee challenged this transaction as a transaction with unequal counter-performance. The court declared the transaction invalid, obliging Company "B" to return the warehouse to the bankruptcy estate, and the funds received by it to be recovered from Company "A". * Transactions executed with the aim of causing harm to the property rights of creditors. These are transactions executed within three years before the acceptance of the bankruptcy petition or after this date, if they were executed with the aim of causing harm to the property rights of creditors, and the other party to the transaction knew or should have known about this aim. Signs of such an aim may include: gratuitousness of the transaction, execution of a transaction with an affiliated person, concealment of property, withdrawal of assets, execution of a transaction shortly before bankruptcy.

2. Preference transactions (Article 61.3 of Federal Law No. 127-FZ on Insolvency). * These are transactions that have led or may lead to one creditor being given or potentially being given preference over other creditors in respect of the satisfaction of claims. * Challenge period: * 1 month before or after the acceptance of the bankruptcy petition: If the transaction was executed within one month before or after the date of acceptance of the bankruptcy petition, and it led to a preference, it can be challenged. Here, there is no need to prove the aim of causing harm or the other party's knowledge of insolvency. * 6 months before the acceptance of the bankruptcy petition: If the transaction was executed within six months before the date of acceptance of the bankruptcy petition, and it led to a preference, and at the time of the transaction the debtor was insolvent or had insufficient property, and the other party to the transaction knew or should have known about this.

Which transactions are challenged most often: * Sale of property at an undervalued price, especially to affiliated persons. * Gratuitous transfer of property (donation). * Repayment of debt to "friendly" creditors shortly before bankruptcy, while other creditors remained unsatisfied. * Payment of wages "in envelopes" or unjustified bonuses to management. * Conclusion of loan agreements with affiliated persons without real economic justification. * Transfer of property in pledge or other security shortly before bankruptcy.

Consequences of challenging transactions. If a transaction is declared invalid, the consequences of the invalidity of a transaction provided for by civil legislation are applied. As a rule, this means the return of property to the bankruptcy estate of the debtor. If the return of property in kind is impossible (for example, it was resold to a bona fide purchaser), then its market value is recovered from the person who received the property under the challenged transaction. Funds received as a result of challenging transactions are directed to satisfy creditors' claims.

It is important for the company director to understand that challenging transactions is not only a way to replenish the bankruptcy estate, but also a potential ground for holding them subsidiarily liable if it was their actions that led to the execution of such transactions and caused harm to creditors.

Consequences of Bankruptcy for the Director and Founders

Corporate bankruptcy, contrary to popular misconception, rarely passes without a trace for its director and founders. Bankruptcy legislation contains a number of norms aimed at holding controlling persons liable for bringing the company to insolvency or for bad faith actions on the eve of bankruptcy.

1. Subsidiary liability (Articles 61.11-61.12 of Federal Law No. 127-FZ on Insolvency). This is the most serious consequence, meaning that a controlling person (director, founder, other person having the ability to determine the debtor's actions) will be liable for the company's debts with their personal property. * Grounds for liability: * Failure to file (late filing) of a bankruptcy petition (Article 61.12 of Federal Law No. 127-FZ on Insolvency). If the director failed to file a bankruptcy petition within 30 calendar days from the moment signs of insolvency arose, they may be held subsidiarily liable for obligations that arose after the expiration of this period. * Actions (inaction) that led to bankruptcy (Article 61.11 of Federal Law No. 127-FZ on Insolvency). If it is proven that full repayment of creditors' claims is impossible due to the actions or inaction of a controlling person, they may be held subsidiarily liable. Such actions include: * Distortion or destruction of accounting and other documentation. * Failure to transfer documents to the bankruptcy trustee. * Execution of transactions declared invalid within the framework of bankruptcy. * Withdrawal of assets, causing harm to creditors. * Failure to fulfill the duty to maintain accounting records. * Scale of liability: Subsidiary liability is full and unlimited, meaning the controlling person is liable with all their property for the company's unpaid debts.

2. Compensation for damages (Article 61.20 of Federal Law No. 127-FZ on Insolvency). In addition to subsidiary liability, controlling persons may be held liable in the form of compensation for damages caused by their bad faith or unreasonable actions. For example, concluding deliberately disadvantageous transactions, misuse of funds, which led to a decrease in the bankruptcy estate.

3. Disqualification (Paragraph 12 of Article 61.11 of Federal Law No. 127-FZ on Insolvency, Article 14.13 of the Russian Code of Administrative Offences). A controlling person held subsidiarily liable or found guilty of committing an administrative offense related to bankruptcy (for example, fictitious or deliberate bankruptcy) may be disqualified. Disqualification is the deprivation of the right to hold executive positions in the management bodies of a legal entity, or to carry out entrepreneurial activities in managing a legal entity. The term of disqualification can range from 1 to 3 years.

4. Criminal liability. In some cases, the actions of the director or founders may fall under the articles of the Russian Criminal Code: * Deliberate bankruptcy (Article 196 of the RCC). This is the commission by a director or founder of actions (inaction) knowingly entailing the inability of a legal entity to fully satisfy the claims of creditors for monetary obligations and (or) fulfill the duty to pay mandatory payments. It is punishable by a fine, forced labor, or imprisonment for up to 6 years. * Fictitious bankruptcy (Article 197 of the RCC). This is a knowingly false public announcement by a director or founder about the insolvency of a legal entity. It is punishable by a fine or imprisonment for up to 6 years. * Unlawful actions in bankruptcy (Article 195 of the RCC). For example, concealing property, property rights or property obligations, information about property, its size, location or other information about property, transferring property into other possession, alienating or destroying property, as well as concealing, destroying, falsifying accounting and other accounting documents reflecting the economic activity of a legal entity, during bankruptcy or in anticipation of bankruptcy.

These consequences underscore that the role of the director on the eve of bankruptcy and during the procedure itself requires maximum good faith, transparency, and strict compliance with the law. Ignoring these requirements can lead to catastrophic personal consequences.

Managed Bankruptcy: Myths and Reality

In the business environment, one can often hear the term "managed bankruptcy," which implies the possibility of conducting a bankruptcy procedure with minimal losses for the owners and management, and sometimes even preserving assets or the business. Many years of practice show that this is a dangerous illusion, which in most cases leads to much more serious problems than those they tried to escape.

Why "managed bankruptcy" is an illusion. The idea of "managed bankruptcy" is usually built on several erroneous assumptions: 1. The ability to choose "one's own" insolvency practitioner who will act in the interests of the debtor. Although the debtor can propose a candidate for the manager, the final decision is made by the court, and then by the creditors' meeting. The insolvency practitioner is obliged to act in good faith and reasonably in the interests of all creditors, not just the debtor. They bear liability for violating this duty. 2. The ability to "hide" or "withdraw" assets before the start of the procedure. Modern bankruptcy legislation (Chapter III.1 of Federal Law No. 127-FZ on Insolvency) gives the insolvency practitioner broad powers to challenge transactions executed several years before bankruptcy. Any attempts to withdraw assets will be identified and challenged, and the property returned to the bankruptcy estate. 3. The absence of personal liability for the director and founders. This is the most dangerous misconception. As we have already discussed, subsidiary liability, compensation for damages, disqualification, and even criminal prosecution are real risks for controlling persons. Judicial practice on holding persons subsidiarily liable is becoming increasingly strict and extensive.

Risks for the director when attempting a "managed bankruptcy": * Challenging transactions. Any transactions to withdraw assets, sell property at an undervalued price, or pay off debts to "friendly" creditors will be carefully examined and, most likely, challenged. This will lead to the return of property and additional expenses. * Subsidiary liability. Attempts to conceal information, fail to transfer documents, or commit bad faith actions during bankruptcy are direct grounds for holding a person subsidiarily liable. Delaying the filing of a bankruptcy petition, which is often part of a "managed" scenario, also leads to subsidiary liability. * Criminal prosecution. If the director's actions are qualified as deliberate or fictitious bankruptcy, or unlawful actions in bankruptcy, this will entail criminal liability, up to imprisonment.

How to act correctly: timely recourse to an attorney. The only correct strategy in the conditions of a company's financial crisis is not an attempt at "managed bankruptcy," but controlled risk management. This means: 1. Timely recourse to a qualified attorney or insolvency practitioner. As soon as the first signs of insolvency appear, it is necessary to conduct an audit of the situation. 2. Honest assessment of the financial condition. Do not hide problems, but objectively assess assets, liabilities, and prospects. 3. Development of a strategy. Together with a lawyer, determine the best path: an attempt at restructuring, negotiations with creditors, or, if inevitable, good faith and timely initiation of a bankruptcy procedure. 4. Compliance with the law. Strict fulfillment of all requirements of Federal Law No. 127-FZ on Insolvency, provision of complete and reliable information, cooperation with the insolvency practitioner. 5. Minimization of risks. A lawyer will help identify potentially challengeable transactions, assess the risks of subsidiary liability, and develop a plan to reduce them.

Remember that bankruptcy law is aimed at protecting the interests of all creditors. Attempts to bypass it or use it in the personal interests of management inevitably lead to negative consequences. Transparency, good faith, and professional legal support are the real tools for minimizing losses in a difficult bankruptcy situation.

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