Avoid the fate of Atlas. How to avoid being held subsidiarily liable?
How can a conscientious CEO and/or founder (person controlling the debtor – hereinafter referred to as CDL) of a bankrupt company avoid being held secondarily liable for its obligations?
It might seem that by acting reasonably and in good faith, a CDL cannot be held secondarily liable, that in bankruptcy, the court will sort things out, the guilty will be punished, and no action needs to be taken.
However, this is one of the most common and critical mistakes, and we will now explain why.
There are three most common grounds for being held secondarily liable:
- Failure to file (or untimely filing of) a debtor's insolvency petition;
- Inability to fully satisfy creditors' claims due to the actions (or inactions) of the CDL;
- Failure to transfer accounting and other documentation to the bankruptcy trustee.
These points are independent grounds for liability, but one can also be held liable based on several of them.
So, what should a conscientious person do to avoid being held liable?
- A universal recommendation for any legal dispute is – don't let things take their course! We can state with 100% certainty that if you do not participate in proceedings at the court of first instance without a valid reason, or (even worse) you participated but for some reason did not present your legal position and documents to the court, then overturning the first instance court's decision later will be much more difficult due to the specifics of procedural law.
- If your business partners enter into unfavorable or overly risky transactions, build business models with affiliated parties, or distort accounting records, all of this can lead to subsidiary liability for you. Don't wait until the situation becomes critical and creditors initiate bankruptcy proceedings; it might already be too late.
- Under current legislation, there is a presumption of guilt regarding CDLs, so proving your non-involvement requires a strategically sound and highly thorough approach. Joining the case at the appeal or cassation stage can significantly reduce your chances of success.
We want to remind you that subsidiary liability is not "written off" during personal bankruptcy proceedings, and given the nature of company operations, it can range from hundreds of millions to several billion rubles. It's wiser to prevent its occurrence than to bear the burden of others' debts for decades.
If you suspect, or know for certain, that your partners are engaging in unreasonable or outright illegal activities within your joint company, consult with specialized experts as soon as possible. This will help you develop an appropriate behavioral model in your dealings with partners and build a strategy to protect your interests at the earliest stage.
Of course, independent audits, due diligence, and in some cases, even forensic business consultants, should not be overlooked. However, since these are very costly procedures, it's wiser to start with a consultation with specialized lawyers.
The C Cases team has extensive experience in defending against subsidiary liability claims, as confirmed by numerous court decisions from arbitration courts at all levels.
We are ready to help you assess the current situation in your business to understand what actions can be taken to protect your rights and interests.