16.08.2013 Sergey Bakeshin, senior associate at Maxima Legal

The Higher Arbitrazh Court of the Russian Federation answered to the questions about liability of directors

The Plenum of the Higher Arbitrazh Court of the Russian Federation issued a Resolution containing clarifications about compensation of losses by the individuals being members of management bodies of legal entities. Those clarifications are the most vital for the sole executive bodies (general directors, presidents) and members of the boards of directors and management boards of business entities and heads of unitary enterprises.

Judges of the Higher Arbitrazh Court of the Russian Federation formed quite hard-line positions with respect to directors of commercial organizations. As an example of bad faith which serves as ground for bringing the director to civil (corporate) responsibility, the Higher Arbitrazh Court of the Russian Federation specified conflict of interests of the director and the organization, lack of necessary approvals by other bodies of the organization, entering into transaction with a fly-by-night company. Unreasonableness (another ground for bringing the director to responsibility) shall be deemed proved if prior to making decision the director did not try to obtain information necessary and sufficient to make such a decision or failed to obtain customary internal approvals (for example, from the legal and accounting departments).

The Higher Arbitrazh Court of the Russian Federation proposed to consider losses incurred due to bringing the organization to tax and administrative responsibility as losses recoverable from the director. Therefore, company’s members may recover penalties paid by the company from the director.

The Higher Arbitrazh Court of the Russian Federation emphasized that as a general rule the director is responsible to choose and control over actions of representatives, employees, contractors as well as to organize system of management of a legal entity. A person claiming recovery of losses from the director is not obliged to prove their exact amount, it is enough to prove that they were incurred and the court may determine their amount independently.

The director shall not be released from liability if his bad faith or unreasonable action was approved or expressly directed by other management bodies of the company. Moreover, it is not necessary that a member who filed a claim against the director was a member on the time the actions which entailed losses occurred. It may so happen that the director becomes responsible for the decisions of the members (the director performed a decision made by the former member of the company and a new member recovers losses incurred due to such a decision from the director).

Losses can be recovered from the director regardless whether the company is able to compensate its losses in an ordinary way (for example, recover debt under an agreement or reclaim its property from unlawful possession of by other persons). However, if losses have already been repaid by other person in full, they cannot be recovered from the director.

Similarly the Higher Arbitrazh Court of the Russian Federation proposed to resolve disputes about liability of mangers and management companies, liquidators and members of liquidation commissions, administrators and receivers.