Directors’ Liability in Russian Federation
Article by Alina Yakhlakova
1) Are directors liable for management decisions?
Yes, directors of the company bear material responsibility for direct damages and loss of expected profit caused to the company. Director(s) may be liable accordingly for breach of Labour law, Civil and Criminal Law, Tax law and other legislation of Russian Federation. Particularly, under Insolvency (bankruptcy) law, Securities law and others.
2) What is the general criteria for being liable?
Grounds for bringing director to responsibility:
1. breach of the principle of good faith and reasonableness while managing the company
2. breach of certain laws and statutes
Grounds for claiming damages (all grounds shall take place together):
- Wrongful/guilty actions (omissions). The burden of proof is on the claimant.
- The fact of damages
- Causation (link between the damages and actions of director)
Moreover, according to the court practice, judges insist on proving the exact amount of damages and losses, otherwise, the judge may reject the suit entirely. The practice is very poor as it is very hard and difficult to prove the amount of damages.
3) Can the directors be directly liable for company debts in front of the company’s creditors without proving that directors have been guilty? In which cases?
Russian «Law on Joint Stock Companies» and «Law on Limited Liability Companies» stipulates a very strict order of approval of major deals and interested party transaction. Particularly, should the director or any other executive body conclude a deal on behalf of the company with breach of above orders, the director shall become the party of such deal and bear personal responsibility. (Anyway, the company has the right to adopt the deal).
4) Can the directors be liable in case of insolvency of the company? Is this situation of responsibility frequent in your jurisdiction in insolvency cases?
Director is liable in case of breach of the Law on Insolvency (bancruptcy). For example,if the director did not file the bankruptcy petition, he bears joint and subsidiary responsibility for the debts of the company (Article 10 Law on insolvency). Should the director breach other duties imposed by Law on insolvency, he will be held liable for damages caused by the action/omission to the third parties. For example, if the Director has not informed the creditors of the company about the features of insolvency / bankruptcy or made the deals and transactions prohibited by the insolvency procedure. Moreover director may be held liable for driving the company into bankruptcy. In these case creditors of the company may claim directly to the director if the assets of the company are not enough for settle their claims.
5) Are directors liable in the case of closing business without filing for insolvency?
Yes, a Director is responsible under the Law on insolvency (bankruptcy). Moreover a Director may be liable under criminal law.
Namely, should the director fail to file the bankruptcy petition, he will be jointly responsible for the debts of the company. Bankruptcy Law is very strict and stipulates various grounds to hold a Director responsible.
But as we already mentioned, the judicial practice is very poor and on the stage of formation.
6) Do you have a specific action to sue a director when he/she produces damages not to the company but to the creditors or shareholders? Is this legal action successful for recovering the damage suffered by the claimant?
No, there is no specific action to sue a director in Russian legislation. Arbitration courts of Russian Federation have exclusive jurisdiction for such actions (please do not confuse with International Commercial Arbitration).
7) Can other persons than directors / board members be liable? Ex. Managers, officers
No, only executive bodies of the company may bear responsibility in accordance with civil and corporate laws. Such executive bodies (director, board of directors, executive board) shall be specified in the Articles and Memorandum of Association of the company.
Other individuals (such as officers or top managers) are only employees of the company, they are not members of any executive body and bear responsibility in case of breach of Labour Law.
8) What do you estimate would be the expected time for obtaining an enforceable judgment in a legal action before Court against the directors? For example a temporary enforcement pending of Court of Appeal decision.
Minimum term – 2 months for the action in trial court.
Further, due to the specific nature of Russian court system, it may take up to 1,5 years or more to have judgment in the court of first appearance.
9) Is it feasible/convenient to include in the by-laws of the company the arbitration clause for claiming to directors? What is the expected time for the arbitration award?
There is no express prohibition in Russian legislation to state the ‘arbitration clause’ to the Articles of the company. But ‘arbitration clause’ is considered to be as an agreement between two parties to settle all disputes through arbitration that must be signed by the parties. As a Director of the company in Russian Federation does not sign the Articles, he does not express his intention to ‘arbitration clause’ and such clause is considered to be void and unenforceable.
10) What are the expected fees and costs for a law suit like this?
The costs depend on the amount of the action, its complexity and the rate of lawyers and attorneys.
11) What is/are the usual system/s for estimating the fees? Ex. Hourly rate, cap fixed budget, success fee - quota litis.It is different in each case. Each law company applies its own system for estimating the fees. Some use fixed amounts, some – percentage of the amount, some law companies bill for their services.