authorities may be held subsidiary liable for the debts of their subsidiaries

Authorities can be held vicariously liable for the debts of their subsidiaries, the Supreme Court of the Russian Federation (SC) decided, setting criteria for such situations. At the same time, ex-heads of bankrupts are jointly and severally liable for debts only in case of concerted actions and mutual benefit, and the presumption of their guilt is rebuttable. Lawyers note the relevance of the issues, but call the position of the court regarding the responsibility of state bodies “evasive”.

The Supreme Court recently published two decisions on subsidiary liability at once. They are important for practice in terms of liability of directors of bankrupt companies and owners of state or municipal legal entities.

The first case concerned the debts of MAU “Zhilfond”, owned by the administration of the city of Lukhovitsy, Moscow Region. Since UIA cannot be bankrupted, and since 2017 Zhilfond has been in the process of liquidation, its creditor JSC Repair and Maintenance Department (REU) demanded that the administration as a founder be brought to subsidiary liability. The claims amounted to 0.42 million rubles. for services under a heat supply contract. But the courts dismissed the claim, citing Art. 2 of the law on autonomous institutions, according to which their owner is liable only for obligations related to causing harm to citizens. In addition, the courts noted that the administration is not a party to the contract.

But the PRUE succeeded in transferring the case to the Economic Board of the Armed Forces, which sent the dispute for a new consideration. Some organizations, by virtue of the law, cannot refuse to conclude an agreement with an institution (public agreement), among them guaranteeing suppliers, network organizations, heat and water supply organizations, which is due to the goals of “protecting the interests of energy resource consumers,” the Supreme Court explained.

The Constitutional Court of the Russian Federation (CC), in Resolution No. 23-P, noted that it was necessary to “maintain a balance of rights and legitimate interests” of all participants in these relations, therefore, it is possible to impose subsidiary liability on the owner of a budgetary institution, otherwise this is “a violation of the rights of the party that concluded and executed a public contract.” According to the Supreme Court, this position “applies equally to autonomous institutions, the legal status and regime of property of which is largely identical.” In addition, Zhilfond has not paid for heat energy for more than eight years, and due to the lack of property, REU cannot receive money. Thus, the conclusion about the impossibility of bringing the administration to responsibility “is unlawful”.

In the second case, it was about the debts of the bankrupt OJSC “Directorate of a single customer of the Gagarinsky district” (DEZ). The bankruptcy trustee of the OJSC asked to bring three ex-heads and the Department of Property of the City of Moscow to subsidiary liability as the owner of the debtor. But the arbitration courts considered that the authority in general cannot be held vicariously liable, and the directors must answer jointly and severally – this means that the entire outstanding debt of the bankrupt can be recovered from any of them.

Two of the directors appealed against these decisions, insisting that the objective reason for the bankruptcy of the enterprise was not their actions, but the transfer of property by the owner to another company – State Budgetary Institution Zhilischnik Gagarinsky District. In addition, they do not agree with joint and several liability, believing that each director should be responsible only for the documents signed by him.

The Supreme Court overturned the decisions of the courts. In particular, the board argued that the assets of the JSC, amounting to 189.9 million rubles. in 2014, decreased to 76.6 million rubles. in 2016, and, according to the financial analysis of the manager, the company began to conduct unprofitable activities only from 2018. In addition, the Supreme Court drew attention to the statement of the leaders that if the property was retained by DEZ, the company “had a real opportunity” to pay off debts. The Supreme Court stressed that the courts should have checked and assessed these circumstances.

In addition, in the opinion of the board, in order to conclude on the joint and several liability of the former directors, it was necessary to establish that they “acted in concert, coordinated and pursued a common intention to obtain an illegal tax benefit.” In the absence of evidence of this, the courts had no reason to impose liability jointly and severally. Separately, the Supreme Court noted that the presumption of bringing the company to bankruptcy by the actions of controlling persons, if more than 50% in the register of creditors are occupied by the requirements of the Federal Tax Service, is “refutable”. But the courts did not take this into account, without examining the arguments of the directors. The dispute has been remanded to the first instance for a new trial.

Indivisible Owners

Lawyers see in the decisions of the Supreme Court a position aimed at protecting private interests. They note the importance of bringing authorities to subsidiary liability, as this stimulates “a more rational attitude towards the fulfillment of their obligations to creditors by their subsidiaries.”

In the DEZ case, the economic board did not draw direct conclusions about the responsibility of the department, but did not recognize the impossibility of responsibility for the state body. Kambulat Karashev, a leading lawyer in the Lemchik, Krupsky and Partners bankruptcy practice, admits that “now the Supreme Court, for political reasons, does not want to go into the study of the issue and allow budget cuts.” But the lawyer considers it possible that “in the future, the Supreme Court will return to the issue of responsibility of state bodies for openly dishonest behavior.”

Orchards adviser Vadim Borodkin says that the economic board, for procedural reasons, could not cancel the refusal to involve the department in the subsidies – the bankruptcy trustee did not appeal against the court decisions in this part. Directors have the right to challenge decisions only in respect of themselves. At the same time, Mr. Borodkin considers it wrong to “divide the shareholders of a bankrupt into those who are subject to liability and who are not.”

Individuals who create companies to which the debtor’s property is transferred are actively involved in subsidies, but “exactly in the same situation, responsibility in a strange way becomes unacceptable in relation to the authority,” emphasizes Vadim Borodkin. In his opinion, this “obviously infringes on the interests of creditors” and “the Sun understands this”, expanding the boundaries of subsidiary liability of the owners of autonomous institutions in the Housing Fund case.

Lawyers consider clarifications on the responsibility of directors, which “correct distortions in practice,” to be no less important. According to Kambulat Karashev, now “in the presence of most of the requirements of the Federal Tax Service in the register of creditors, the courts almost always recognize the proven guilt of the company’s management in bringing it to bankruptcy, they are not interested in other circumstances and counterarguments.” Now, the approach that the decision on additional taxation is the “queen of evidence” in cases of subsidiary liability has “suffered a significant defeat,” says Sergey Lisin, partner at BGP Litigation. He calls it “revolutionary” the conclusion that in bankruptcy cases the tax decision is only one of the evidence along with others that can refute it.

Mr. Karashev expects that the courts “will become more favorable to the directors who are opposed by the decision of the tax authority”, will more carefully “investigate the real causes of bankruptcy” and impose “proportionate punishment to the leaders, based on the scale of the consequences of the illegal behavior of each.”

Anna Zanina