How can a good-faith CEO and/or founder (a person controlling the debtor, or "controlling person") of a bankrupt company avoid being held subsidiarily liable for its obligations?

It may seem that a controlling person who acts reasonably and in good faith cannot be held subsidiarily liable — that in a bankruptcy the court will work everything out, the guilty will be punished and no action is needed.

However, this is one of the most common and critical mistakes, and we will now explain why.

There are three most common grounds for imposing subsidiary liability:

• Failure to file (or late filing of) a bankruptcy petition for the debtor;
• Inability to pay creditors' claims in full as a result of the controlling person's actions (or inaction);
• Failure to hand over accounting and other records to the bankruptcy trustee.

Each of these is an independent ground for liability, but liability can also be imposed on several of them at once.

So what should a good-faith person do to avoid liability?

1. The universal recommendation for any court dispute: don't let the case drift! We can say with 100% certainty that if you do not take part in the proceedings at first instance without a valid reason or (even worse) you took part but for some reason did not present your legal position and documents to the court, it will be much harder to overturn the first-instance decision later because of the specifics of procedural law.
2. If your business partners enter into unprofitable or overly risky transactions, build business models with affiliated persons or distort the accounts, all of this may lead to subsidiary liability for you. Don't wait until the situation becomes critical and creditors start bankruptcy proceedings — by then it may be too late.
3. Under current law, controlling persons are presumed to be at fault, so proving that you were not involved must be done strategically and as thoroughly as possible. Joining the case at the appeal or cassation stage can significantly reduce the chances of success.

We would remind you that subsidiary liability is not "written off" in a personal bankruptcy and, depending on the company's activities, can range from hundreds of millions to several billion roubles. It is wiser to prevent it than to carry the burden of other people's debts for decades.

If you suspect, or know for certain, that your partners are conducting unreasonable or openly unlawful activities in your joint company, consult specialists as soon as possible. This will help you adopt the right approach towards your partners and build a strategy to protect your interests at the earliest stage.

Of course, you should not neglect an independent audit, due diligence and, in some cases, even forensic business consultants. But since these are very expensive procedures, it is more sensible to start with a consultation with specialist lawyers.

The C Cases team has extensive experience defending clients against subsidiary liability, confirmed by numerous decisions of arbitrazh courts at all levels.

We are ready to help you assess the situation in your business and understand what action can be taken to protect your rights and interests.