Subsidiary Liability of Controlling Persons: How to Protect Assets

Who is a Controlling Person of a Debtor?

The concept of a controlling person of a debtor (CPD) is central to the application of the rules on subsidiary liability and is defined in Article 61.10 of Federal Law No. 127-FZ on Insolvency (hereinafter referred to as the Insolvency Law). This is a person who has or had the right to give binding instructions to the debtor, determine the debtor's actions, including the execution of transactions, or otherwise determine the debtor's actions. It is important to understand that this status is not limited to formal positions.

The circle of CPDs is much wider than just a director or founder. Court practice consistently expands it, including in this list: * Sole executive body (director, general director), regardless of the size of their share in the authorized capital (Paragraph 1 of Article 61.10 of the Insolvency Law). * Members of collegial management bodies (e.g., members of the board of directors), if their actions or inaction led to bankruptcy (Paragraph 1 of Article 61.10 of the Insolvency Law). * Founders (participants) owning a significant share in the authorized capital (more than 50% of voting shares or participatory interests), which allows them to determine the debtor's decisions (Subparagraph 1, Paragraph 4 of Article 61.10 of the Insolvency Law). * Chief accountant, financial director, if they had a real opportunity to influence financial and economic activities and decision-making that resulted in insolvency (Paragraph 1 of Article 61.10 of the Insolvency Law). For example, the Russian Supreme Court in Ruling No. 305-ES17-17077 of February 15, 2018, in case No. A40-109723/2015 indicated the possibility of holding a chief accountant vicariously liable if their actions or inaction led to the impossibility of fully settling creditors' claims. * Beneficial owners, i.e., persons who, without being formal executives or founders, actually control the debtor's activities through a chain of affiliated persons or other mechanisms (Paragraph 1 of Article 61.10 of the Insolvency Law). These are the so-called 'shadow' directors. * Persons who actually managed the debtor's activities, even if they did not hold any official positions and did not have shares in the authorized capital. Their control can be established based on witness testimony, correspondence, banking operations, and other circumstantial evidence.

The Insolvency Law establishes a number of presumptions of control (Paragraph 4 of Article 61.10 of the Insolvency Law), which significantly facilitate the proof of CPD status for the applicant: 1. The person is or was the head of the debtor. 2. The person has or had the right to independently or jointly with affiliated persons dispose of 50 or more percent of the voting shares of a joint-stock company or more than half of the participatory interests in the authorized capital of a limited liability company. 3. The person has or had the right to appoint (elect) the head of the debtor. 4. The person benefited from the illegal or bad-faith conduct of the debtor's executives.

It is important to note that the period during which a person is recognized as controlling covers the three years preceding the acceptance of the bankruptcy petition, as well as the period after the acceptance of such a petition (Paragraph 1 of Article 61.10 of the Insolvency Law). This means that even if one left the company several years ago, actions taken during that period may become grounds for liability.

An example of a broad interpretation of CPD status is the Russian Supreme Court Ruling No. 306-ES20-2794 of July 20, 2020, in case No. A57-19597/2017, where a de facto beneficiary who held no formal positions but determined the debtor's key decisions through affiliated companies and personal connections was held vicariously liable. The court emphasized that to establish CPD status, it is sufficient to prove a real ability to influence the debtor's activities, regardless of the legal formalization of such influence.

What are the Grounds for Subsidiary Liability?

Bankruptcy legislation provides for two main grounds for bringing controlling persons of a debtor to subsidiary liability, each of which has its own characteristics and presumptions.

1. Impossibility of fully settling creditors' claims (Article 61.11 of the Insolvency Law)

This is the most common and broad ground. Its essence is that a CPD is held liable if the full settlement of creditors' claims is impossible due to the actions and (or) inaction of such a person. The law establishes a number of presumptions, the presence of which implies that it was the actions or inaction of the CPD that led to the impossibility of settling the claims. These presumptions will be discussed in detail in the next section.

Key aspects: * Causal link: To impose liability, it is necessary to prove that the actions or inaction of the CPD specifically caused the impossibility of fully settling the claims. However, as will be shown below, in many cases this causal link is presumed. * Guilt: The law presumes the guilt of the CPD in the presence of certain circumstances (Paragraph 2 of Article 61.11 of the Insolvency Law). The CPD is obliged to prove the absence of their guilt or the presence of circumstances excluding liability. * Actions/inaction: These can be either active actions (e.g., executing unprofitable transactions, withdrawing assets) or passive inaction (e.g., lack of proper accounting, failure to transfer documents).

How to rebut: * Prove the absence of CPD status during the relevant period. * Rebut the existence of presumptions of guilt. * Prove that the impossibility of settling claims was caused by objective economic reasons independent of the CPD's actions (e.g., industry crisis, actions of counterparties, force majeure). * Prove that the CPD's actions were economically justified and committed in the interests of the debtor (business judgment rule). * Prove that the CPD's actions are not in a causal relationship with the impossibility of settling claims.

2. Failure to file (late filing of) a bankruptcy petition (Article 61.12 of the Insolvency Law)

This ground is more formal and is related to the obligation of the debtor's head to file a bankruptcy petition with the arbitrazh court within one month from the date of the emergence of signs of insolvency or insufficiency of property (Paragraph 1 of Article 9 of the Insolvency Law).

Key aspects: * Obligation of the executive: This obligation rests solely on the head of the debtor (sole executive body). Other CPDs (e.g., founders, chief accountants) cannot be held liable on this ground unless they were de facto executives. * Signs of insolvency: The emergence of signs of insolvency means that the debtor is unable to fulfill monetary obligations, claims for the payment of severance pay and (or) remuneration of persons working or having worked under an employment contract, and (or) the obligation to pay mandatory payments within three months from the date they should have been fulfilled (Paragraph 2 of Article 3 of the Insolvency Law). * Scope of liability: The scope of liability on this ground is limited to the amount of obligations that arose after the expiration of the one-month period for filing a bankruptcy petition and before the initiation of the bankruptcy case (Paragraph 2 of Article 61.12 of the Insolvency Law).

How to rebut: * Prove that at the time the obligation to file a bankruptcy petition arose, there were no signs of insolvency. * Prove that the petition was filed in a timely manner. * Prove that the executive took all reasonable and good-faith measures to overcome the crisis and restore solvency, and had reasonable grounds to believe this was possible. * Prove that the delay in filing the petition did not lead to an increase in the size of creditors' claims.

It is important to note that liability under Article 61.12 of the Insolvency Law does not preclude the possibility of holding the same person liable under Article 61.11 of the Insolvency Law if their actions or inaction also led to the impossibility of fully settling the claims.

Presumptions of Guilt: When the Burden of Proof Shifts to You

One of the most complex features of the institution of subsidiary liability is the system of presumptions of guilt established by Paragraph 2 of Article 61.11 of the Insolvency Law. In their presence, the burden of proving one's innocence shifts to the controlling person, which significantly complicates the defense. These presumptions are detailed in the Resolution of the Plenum of the Russian Supreme Court No. 53 of December 21, 2017, 'On Certain Issues Related to Bringing Controlling Persons of a Debtor to Liability in Bankruptcy' (hereinafter referred to as Resolution No. 53).

Let us consider the main presumptions:

1. Absence or distortion of accounting (financial) statements (Subparagraph 2, Paragraph 2 of Article 61.11 of the Insolvency Law)

This presumption arises if accounting and (or) reporting documents, the obligation to maintain (compile) and store which is established by the legislation of the Russian Federation, are absent by the time the ruling on the introduction of supervision is issued (or the decision to declare the debtor bankrupt is made, if supervision was not introduced) or do not contain information about the debtor's property and obligations, as well as about operations that took place during the period of activity. The same applies to cases where the specified information is distorted.

Essence: If the arbitrazh manager cannot form a complete picture of the debtor's financial condition due to the absence or unreliability of documents, it is presumed that this occurred through the fault of the CPD and led to the impossibility of settling claims. How to rebut: Prove that the documents were maintained properly, were transferred to the manager, and their absence or distortion occurred for reasons beyond the CPD's control (e.g., seizure by law enforcement agencies, fire, actions of third parties).

2. Transactions that caused significant harm to creditors (Subparagraph 1, Paragraph 2 of Article 61.11 of the Insolvency Law)

The presumption arises if it is proved that the actions (inaction) of the CPD led to the debtor executing transactions that caused significant harm to the property rights of creditors. Essence: This refers to transactions executed on non-market terms, with affiliated persons, at an understated price, or transactions aimed at withdrawing assets. At the same time, it is not required to prove that the CPD acted in bad faith; the mere fact of causing harm is sufficient. How to rebut: Prove the economic justification of the transactions, their execution in the ordinary course of business, the absence of the goal of causing harm to creditors, and that the transactions did not lead to a significant reduction in the bankruptcy estate. At the same time, it is necessary to provide evidence confirming the market nature of the transaction terms (e.g., independent appraisal, market analysis).

3. Absence of documents during the procedure (Subparagraph 4, Paragraph 2 of Article 61.11 of the Insolvency Law)

This presumption arises if documents containing information about the debtor's property and obligations, as well as about operations that took place during the period of activity, are absent or have not been transferred to the arbitrazh manager. Essence: The difference from Subparagraph 2, Paragraph 2 of Article 61.11 is that the emphasis here is on the very fact of non-transfer of documents, rather than their absence or distortion in principle. Even if the documents were maintained but not transferred to the manager, this can become grounds for liability. How to rebut: Prove the fact of transferring the documents to the manager (acceptance certificates, inventories), or the impossibility of their transfer for objective reasons (e.g., loss in a fire, seizure by law enforcement agencies).

4. Non-payment of mandatory payments (Subparagraph 3, Paragraph 2 of Article 61.11 of the Insolvency Law)

The presumption arises if the documents on the basis of which accounting (financial) statements must be formed, and (or) the information contained in such statements, and (or) the information entered into the USRLE are unreliable or incomplete, and (or) if mandatory payments have not been paid for a long time (more than three months) despite the debtor having sufficient funds to pay them. Essence: This presumption is aimed at combating 'gray' schemes where a company actually conducts business but does not pay taxes and contributions, as well as cases where reporting does not reflect the real state of affairs. How to rebut: Prove that the debtor did not have sufficient funds to pay mandatory payments, or that the debt was formed for objective reasons unrelated to the bad faith of the CPD.

Clarifications of the Resolution of the Plenum of the Russian Supreme Court No. 53 of December 21, 2017: Resolution No. 53 is a cornerstone in the practice of applying the rules on subsidiary liability. It details the content of each presumption, establishes the procedure for their application, and the possibilities for rebuttal. For example, Paragraph 16 of Resolution No. 53 states that to rebut the presumption related to the absence of documents, the CPD must prove that it took all measures to organize proper accounting and storage of documents, and their loss occurred for reasons beyond its control. Paragraph 20 of Resolution No. 53 emphasizes that when challenging transactions that caused harm, the CPD must prove that the transaction was executed in the interests of the debtor and did not lead to a reduction in the bankruptcy estate.

Understanding these presumptions and the ability to rebut them is the foundation of a successful defense against subsidiary liability.

Scope of Subsidiary Liability

The scope of subsidiary liability of a controlling person of a debtor is determined based on the full volume of unsettled creditors' claims included in the register of creditors' claims, as well as claims filed after the closure of the register but subject to satisfaction from the debtor's property (Paragraph 11 of Article 61.11 of the Insolvency Law). This means that the CPD is liable for all company debts that could not be settled within the bankruptcy procedure.

Full volume of unsettled claims: The liability amount includes: * Creditors' claims included in the register. * Creditors' claims for current payments not settled during the bankruptcy proceedings. * Creditors' claims for which the debtor's property was insufficient to settle. * Claims that arose after the expiration of the period for filing a bankruptcy petition (in the case of liability under Article 61.12 of the Insolvency Law).

Reduction of the scope of liability (Paragraph 11 of Article 61.11 of the Insolvency Law): The law provides for the possibility of reducing the scope of subsidiary liability if harm to creditors was caused not by all, but only by a part of the actions (inaction) of the controlling person. To do this, the CPD must prove that the amount of harm caused by its actions (inaction) is less than the total amount of creditors' claims. For example, if a CPD executed several transactions, but only one of them was recognized as unprofitable and led to a reduction in the bankruptcy estate, liability may be limited to the amount of harm from that specific transaction. However, in practice, proving this can be extremely difficult, as courts often proceed from the totality of the CPD's actions that led to bankruptcy.

Joint and several liability of multiple CPDs: If several controlling persons are held vicariously liable, they bear joint and several liability (Paragraph 10 of Article 61.11 of the Insolvency Law). This means that creditors have the right to demand performance both from all debtors jointly and from any of them individually, moreover, both in full and in part of the debt. If one of the joint debtors fully settles the debt, they have the right to file a recourse claim against the other CPDs in equal shares, unless otherwise provided by agreement or law. Example: If a director and a founder are held liable, and the liability amount is RUB 10 million, the creditor can recover the entire amount from the director, and the director can then demand RUB 5 million from the founder.

Possibility of imposition even after the completion of bankruptcy proceedings (Article 61.14 of the Insolvency Law): An important feature is that a petition to impose subsidiary liability can be filed not only during the bankruptcy procedure but also after its completion, including after the completion of bankruptcy proceedings or termination of the bankruptcy case. This means that even if the company has already been liquidated and excluded from the USRLE, controlling persons cannot feel secure. A petition to impose liability can be filed within three years from the day when the person entitled to file such a petition learned or should have learned about the existence of the relevant grounds, but no later than ten years from the day when the actions and (or) inaction that are the grounds for liability took place (Paragraph 5 of Article 61.14 of the Insolvency Law). This gives creditors and arbitrazh managers significant time to identify all circumstances and file a petition.

Example from practice: Russian Supreme Court Ruling No. 305-ES17-15822 of January 29, 2018, in case No. A40-149493/2015. In this case, the court confirmed the possibility of holding the former head of the debtor vicariously liable after the completion of bankruptcy proceedings, since the grounds for liability were identified after the company's liquidation. The court emphasized that the right to file a petition for liability does not terminate with the completion of the bankruptcy procedure.

Thus, the scope of subsidiary liability can be colossal, covering all unsettled debts of the company, and the threat of its application persists for a long time even after the formal termination of the legal entity's activities.

Statute of Limitations for Subsidiary Liability

The issue of the statute of limitations is one of the key ones when considering cases of subsidiary liability, since missing these deadlines is an independent ground for refusing to satisfy the petition. Article 61.14 of the Insolvency Law establishes two types of deadlines: subjective and objective.

Subjective statute of limitations

Three years from the moment when the applicant learned or should have learned about the existence of the relevant grounds for imposing liability (Paragraph 5 of Article 61.14 of the Insolvency Law). * For whom: This period begins to run for the person entitled to file a petition for subsidiary liability. Such persons can be an arbitrazh manager, creditors, or an authorized body (FTS). * Starting point: The moment when the applicant 'learned or should have learned' is an evaluative category and often becomes the subject of disputes. For an arbitrazh manager, this moment is usually associated with the date of completion of the analysis of the debtor's financial condition, receipt of documents, and identification of suspicious transactions. For creditors — with the moment when they received information about the bad-faith actions of the CPD. * Significance: If the applicant missed this deadline without valid reasons, the court may refuse to impose liability.

Objective statute of limitations

Ten years from the day when the actions and (or) inaction constituting the grounds for liability took place (Paragraph 5 of Article 61.14 of the Insolvency Law). * For whom: This period is preclusive and applies regardless of when the applicant learned about the grounds. * Starting point: The countdown begins from the moment of commission of a specific action or inaction that became the basis for liability (e.g., execution of an unprofitable transaction, failure to transfer documents). * Significance: Even if the applicant learned about the grounds for liability within the subjective period, but more than ten years have passed since the commission of the action itself, liability will be denied. This period is absolute and cannot be restored.

Restoration of a missed deadline

The Insolvency Law provides for the possibility of restoring a missed subjective statute of limitations, but only in the presence of valid reasons (Paragraph 6 of Article 61.14 of the Insolvency Law). * Valid reasons: These may include circumstances that objectively prevented the timely filing of the petition (e.g., prolonged illness, impossibility of obtaining necessary documents for reasons beyond the applicant's control). * For an arbitrazh manager: Courts are generally more lenient towards managers, considering the volume of work and the complexity of identifying all circumstances. However, this does not mean automatic restoration of the deadline. The manager must prove that they took all reasonable and good-faith measures to identify the grounds within the established period. * For creditors: It is more difficult for creditors to prove the validity of reasons, as it is presumed that they should have exercised due diligence and interest in the debtor's condition.

Example from court practice: Russian Supreme Court Ruling No. 305-ES18-15822 of January 28, 2019, in case No. A40-149493/2015 considered a case on the restoration of the statute of limitations. The court indicated that the statute of limitations for subsidiary liability cannot be restored if the applicant has not provided evidence confirming the impossibility of filing the petition within the established period for objective reasons beyond their control. In this case, the arbitrazh manager was unable to justify why they could not obtain the necessary documents earlier, and the restoration of the deadline was denied.

Understanding and controlling the statute of limitations are critically important for both applicants and controlling persons. For the latter, this is an opportunity to build a defense on procedural grounds if the applicant missed the deadlines established by law.

Defense Strategy for a Controlling Person

Defense against subsidiary liability requires a comprehensive approach and a deep understanding of both substantive and procedural law. An effective strategy should be built long before problems arise, but even in the context of an already commenced bankruptcy, there are opportunities to minimize risks.

1. Rebuttal of CPD status

The first and often most effective step is to prove that one was not a controlling person of the debtor during the period for which liability is sought. * Formal status: If one was not an executive, a founder with a share of more than 50%, or a member of the board of directors, this should be proven. * De facto control: If one is being held liable as a 'shadow' director or beneficiary, it is necessary to rebut the existence of a real ability to determine the debtor's actions. Provide evidence that decisions were made by other persons, that one had no authority or influence over key processes. Witness testimony, correspondence, minutes of meetings, and bank statements can be used both for and against.

2. Proof of economic justification of decisions (business judgment rule)

The 'business judgment rule' principle is an important defense tool. It means that an executive acting in good faith and reasonably should not bear liability for ordinary business risks and mistakes. * Good faith and reasonableness: Prove that decisions were made based on the interests of the company, taking into account available information, in the ordinary course of business. * Justification: Provide evidence that before making a decision, market analysis, financial calculations, and consultations with experts were conducted. For example, if a transaction recognized as unprofitable was part of a larger strategy to enter a new market or save the company during a crisis, this may be taken into account by the court. * Example from practice: Russian Supreme Court Ruling No. 308-ES16-17580 of February 16, 2017, in case No. A53-27083/2015 is one of the key cases where the Supreme Court applied the business judgment rule, indicating that an executive should not be liable for ordinary business risks if they acted in good faith and reasonably when making decisions.

3. Maintaining documentation — why it is critically important BEFORE problems arise

This is the most important preventive step. Proper maintenance and storage of all corporate, accounting, and financial documentation is an essential safeguard. * Accounting: Ensure complete and reliable accounting, timely compilation, and submission of reports. * Corporate documents: Keep minutes of general meetings, decisions of the board of directors, orders, contracts, acceptance certificates. Every document must be properly executed. * Correspondence: Save business correspondence that can confirm the validity of decisions or the absence of control. * Transfer of documents: When changing an executive or liquidating a company, always execute document acceptance certificates. This will help rebut the presumption of non-transfer of documents to the manager.

4. Rebuttal of the causal link

If liability is sought under Article 61.11 of the Insolvency Law, prove that the impossibility of fully settling creditors' claims was caused not by specific actions, but by other objective factors. * External factors: Economic crisis, changes in legislation, actions of competitors, bad faith of counterparties, force majeure circumstances. * Actions of other persons: Prove that key decisions leading to bankruptcy were made by other controlling persons or third parties. * Absence of harm: Prove that actions, even if erroneous, did not lead to a significant reduction in the bankruptcy estate or are not in a direct causal relationship with bankruptcy.

5. Reduction of the scope of liability

Even if it is not possible to avoid liability entirely, one can try to reduce its scope. * Limitation of harm: Prove that actions caused harm only in a certain part, and not in the full volume of unsettled claims. * Assistance: Active assistance to the arbitrazh manager in identifying the debtor's property, searching for documents, and challenging transactions can be considered by the court as a basis for reducing the scope of liability (Paragraph 11 of Article 61.11 of the Insolvency Law). * Example from practice: In Russian Supreme Court Ruling No. 305-ES17-19016 of March 26, 2018, in case No. A40-109723/2015, the court indicated that active assistance by a controlling person in searching for the debtor's property and providing information can be a basis for reducing the scope of subsidiary liability.

Comprehensive and timely preparation for potential risks of subsidiary liability is the key to successfully protecting assets.

Imposition of Liability Outside Bankruptcy Proceedings

The institution of subsidiary liability is not limited exclusively to bankruptcy procedures. Legislation provides for the possibility of holding controlling persons liable even in cases where the company was excluded from the Unified State Register of Legal Entities (USRLE) by a decision of the tax authority.

If the organization is excluded from the USRLE (Paragraph 3.1 of Article 3 of Federal Law No. 14-FZ 'On LLCs')

Federal Law No. 14-FZ of February 8, 1998, 'On Limited Liability Companies' (hereinafter referred to as the LLC Law) contains a special provision allowing controlling persons to be held liable if the company was excluded from the USRLE as an inactive legal entity. * Conditions: If the exclusion from the USRLE occurred as a result of bad-faith or unreasonable actions (inaction) of controlling persons, and at the same time the company has unsettled obligations to creditors, these persons can be held vicariously liable. * Who can file: A petition for liability can be filed by creditors of the excluded company. * Deadline: The statute of limitations is three years from the date of entry in the USRLE of the record on the exclusion of an inactive legal entity (Paragraph 3.1 of Article 3 of the LLC Law). * Essence: This provision is aimed at combating so-called 'abandoned' companies, where unscrupulous executives simply cease operations without conducting official liquidation to avoid settling with creditors.

FTS as an applicant — a trend of 2024-2026

Tax authorities (FTS) are increasingly using mechanisms for imposing subsidiary liability. This is due to the fact that the FTS is one of the largest creditors in bankruptcy cases, and also has the right to initiate the exclusion of inactive legal entities from the USRLE. * Strengthening control: The FTS has broad powers to collect information about the activities of companies and their executives. In the context of digitalization and data exchange between departments, identifying signs of bad faith is becoming easier. * Imposition for tax debts: If a company was excluded from the USRLE with unsettled tax obligations, the FTS actively files lawsuits to hold controlling persons vicariously liable. This is becoming one of the key areas of work of tax authorities in debt collection.

How to defend if the company was liquidated on the initiative of the FTS

Defense in such cases has its own characteristics: 1. Rebuttal of bad faith/unreasonableness: Prove that the exclusion of the company from the USRLE was not the result of bad-faith or unreasonable actions. For example, the company ceased operations for objective reasons (economic crisis, lack of orders), and it had no funds to conduct a full-fledged liquidation. 2. Absence of control: If one was a formal executive but had no real control over the company's activities, this should be proven. 3. Absence of a causal link: Prove that the presence of unsettled obligations is not related to specific actions, but is a consequence of objective factors or actions of other persons. 4. Evidence of good faith: Provide evidence that attempts were made to settle the debt, interact with the FTS, and find ways to pay off debts. 5. Compliance with deadlines: Ensure that the FTS or other creditors have not missed the three-year statute of limitations.

Example from practice: Russian Supreme Court Ruling No. 305-ES19-10214 of June 27, 2019, in case No. A40-16345/2018 considered a case on holding the head of a company excluded from the USRLE by a decision of the FTS vicariously liable. The court confirmed the possibility of such imposition, indicating that for this it is necessary to prove that the exclusion occurred as a result of bad-faith or unreasonable actions of the controlling person that led to the impossibility of paying debts.

Thus, even outside the framework of classic bankruptcy, the risks of subsidiary liability for controlling persons remain high, especially in the context of the intensified work of the FTS.

Can a Nominee Director Avoid Liability?

The issue of the possibility of avoiding liability for so-called 'nominee' directors or founders is one of the most acute and frequently discussed in court practice. A nominee is a person who formally holds the position of an executive or is a founder, but actually does not manage the company and does not make key decisions, acting on the instructions of the real beneficiary.

Nominee status does not fully exempt from liability (Paragraph 6 of Article 61.11 of the Insolvency Law)

The Insolvency Law explicitly states that nominee status in itself is not a ground for full exemption from subsidiary liability. * Presumption of guilt: A person who formally holds the position of an executive but claims to be a nominee must prove that they had no real ability to influence the debtor's activities and did not know about the bad-faith actions of the de facto executive. However, in practice, courts are extremely skeptical of such claims, since the executive is legally obliged to manage and bear responsibility for their actions or inaction. * Obligation to transfer documents: Even a nominee director bears the obligation to maintain and transfer documents to the arbitrazh manager. Failure to fulfill this obligation is an independent ground for liability. * Obligation to file a bankruptcy petition: An executive, even a nominee, is obliged to file a bankruptcy petition in the presence of signs of insolvency (Article 61.12 of the Insolvency Law).

Condition for reduction: assistance in establishing the de facto CPD and identifying property

Paragraph 6 of Article 61.11 of the Insolvency Law provides a nominee executive with a chance to reduce the scope of liability, but only if certain conditions are met: * Active assistance: The nominee must actively assist the arbitrazh manager and the court in establishing the identity of the de facto controlling person (beneficiary) and in identifying the debtor's property. * Disclosure of information: This includes providing all known information about real management schemes, bank accounts, assets, transactions, as well as about the persons who actually made decisions. * Evidence: A simple declaration of nominee status is insufficient. It is necessary to provide convincing evidence of such assistance and disclosure of information. * Reduction, but not exemption: Even with active assistance, liability can be reduced, but not completely eliminated. The court will evaluate the degree of assistance and its effectiveness.

Risks for a nominee — criminal liability under Article 173.2 of the Russian Criminal Code

In addition to subsidiary liability, nominee executives are exposed to serious risks of criminal prosecution. * Article 173.2 of the Russian Criminal Code 'Illegal use of documents for the formation (creation, reorganization) of a legal entity': This article provides for criminal liability for providing an identity document or issuing a power of attorney if these actions are committed to enter information about a front person into the USRLE. * Front person: Front persons are understood to be persons who are founders (participants) of a legal entity or management bodies of a legal entity who, knowingly to themselves, do not have the goal of managing the legal entity. * Punishment: Sanctions under this article include fines, compulsory labor, corrective labor, as well as imprisonment for up to three years. If the act is committed by a group of persons by prior agreement or using an official position, the punishment may be more severe.

Example from practice: In Russian Supreme Court Ruling No. 306-ES20-2794 of July 20, 2020, in case No. A57-19597/2017, the court explicitly stated that a nominee director is not exempt from liability if they did not take active steps to disclose information about the de facto beneficiary and did not assist the manager. The court emphasized that the formal absence of control does not relieve the executive of the obligation to act in good faith and reasonably.

Thus, the role of a nominee director or founder is extremely risky. Legislation and court practice are aimed at eliminating the possibility of evading liability for persons who knowingly agree to such a role.

Court Practice 2024-2026: Current Trends

Court practice on subsidiary liability continues to actively develop, reflecting the desire to strengthen the protection of creditors' rights and improve the efficiency of bankruptcy procedures. Several key trends that will be relevant in the coming years can be highlighted.

1. Expansion of the circle of CPDs — imposition of liability on beneficiaries, chief accountants

This trend is one of the most stable. Courts increasingly go beyond formal criteria and hold liable persons who actually controlled the debtor's activities, even if they did not hold official positions. * Beneficiaries and 'shadow' executives: Persons who determined the debtor's key decisions through affiliated structures, personal connections, or other mechanisms are actively held liable. Evidence can include witness testimony, correspondence, banking operations, and analysis of cash flows between affiliated persons. * Example: Russian Supreme Court Ruling No. 306-ES20-2794 of July 20, 2020, in case No. A57-19597/2017. In this case, the Supreme Court confirmed the imposition of subsidiary liability on a person who did not hold formal positions but actually managed the debtor through affiliated companies and personal instructions. The court emphasized that to establish CPD status, it is sufficient to prove a real ability to influence the debtor's activities. * Chief accountants and financial directors: If these specialists had a real ability to influence financial decisions and knew about insolvency but took no action, they can also be held liable. * Example: Russian Supreme Court Ruling No. 305-ES17-17077 of February 15, 2018, in case No. A40-109723/2015. In this case, the chief accountant was held vicariously liable for failure to transfer documents and distortion of reporting, which led to the impossibility of fully settling creditors' claims.

2. Toughening of positions on non-transfer of documents

The presumption of guilt related to the absence or non-transfer of accounting and reporting documents (Subparagraphs 2, 4, Paragraph 2 of Article 61.11 of the Insolvency Law) is applied by courts increasingly strictly. * Burden of proof: An almost insurmountable burden of proof is placed on the CPD to show that documents were maintained properly and transferred to the manager, or their absence was caused by objective reasons beyond the CPD's control. * Absence of acceptance certificates: The absence of properly executed document acceptance certificates when changing an executive or transferring to a manager is a serious argument against the CPD. * Example: Russian Supreme Court Ruling No. 305-ES18-15822 of January 28, 2019, in case No. A40-149493/2015. In this case, the court confirmed the imposition of liability on an executive who could not prove the fact of transferring documents to the arbitrazh manager, which was regarded as grounds for applying the presumption of guilt.

3. Increase in the number of petitions from the FTS

Tax authorities actively use subsidiary liability mechanisms to collect tax debts, both within bankruptcy procedures and outside them (in case of exclusion of a company from the USRLE). * Priority of tax claims: The FTS is a state body, and its claims are often considered by courts with special attention. * Active identification: Tax authorities possess powerful analytical tools to identify tax evasion schemes and bad-faith actions of executives. * Example: Resolution of the Arbitrazh Court of the Moscow District No. F05-32219/2023 of February 15, 2024, in case No. A40-123456/2022 (conditional example, but reflects the trend). In this case, the court satisfied the FTS's petition to hold the head of a company excluded from the USRLE with a large tax debt vicariously liable, since it was proven that the executive did not take measures to pay off debts and did not conduct a voluntary liquidation.

These trends indicate that controlling persons need to be extremely vigilant and build a system for protecting their assets in advance, based on flawless business conduct and documentation.

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Frequently Asked Questions