On 20 October, a business discussion entitled ‘The Liability of Businesses and Controlling Parties in Times of Financial Crisis’ was hosted in Moscow by EPAM. Partners Valery Eremenko, Victoria Burkovskaya and Evgeny Raschevsky, Counsels Vera Rikhterman, Sergey Kalinin and Alina Kudryavtseva, Senior Associate Julia Bobrova and specially invited experts discussed key trends, problems and solutions for business leaders.
The discussion was prompted by the increasingly stringent approach to business liability that has been consistently adopted in legislative and law enforcement practices over the last few years.
One of the most important trends discussed at the meeting was the significant increase in the number of proceedings seeking to recover losses incurred as a result of incorrect business decisions taken by CEOs, board members and controlling parties. In addition, liability laws concerning managers and business owners are becoming more stringent in cases of company bankruptcy; for example, the law on bankruptcy has been supplemented with a new section on subsidiary liability. The number of successful claims for damages as a penalty for improper performance of obligations is also growing. These developments were reviewed by the Firm’s experts and invited guests over the course of the discussion.
The first session focused on liability for incorrect managerial decisions. The welcome address was delivered by the event moderator, Partner and Co-head of the Firm’s Litigation Practice Valery Eremenko. Valery covered the history of the development of liability as an institution in modern practice, provided statistics relating to cost recovery disputes, noted the increasing amounts of costs recovered, and identified the latest major cases involving subsidiary liability.
Senior Associate at the Firm Julia Bobrova covered typical managerial errors. In her presentation, Julia explained that courts may recover from the company head any losses resulting from the approval or entering into of unfavourable transactions, or from unjustified managerial decisions concerning employee payments, as well as losses incurred due to the company head launching a ‘parallel’ business which has absorbed a large portion of the company’s earnings, and losses due to the elapse of the statute of limitations and waiving of counterparty debt. In order to mitigate the risks of being held liable, the professionals advise that liability risks should be regularly monitored, and the burden of risk distributed among key personnel. In addition, businesses should comply with corporate legislative requirements, insure against civil liability, and collect evidence of the economic rationale of deals prior to entering into them. Files should be assembled on any substantial transactions and decisions prior to departure from a company or expiry of a term of office, and a proactive approach taken in any court dealings.
The first session ended with an intriguing report on the criminal risks facing senior managers given by Partner Victoria Burkovskaya, who heads up the Firm’s White Collar Crime Practice. Victoria identified the current most commonly applied rules of the Russian Criminal Code providing for the liability of company heads, including Article 201 ‘Abuse of Office’, Article 193.1 ‘Foreign Exchange Transactions to Make Foreign or Russian Currency Transfers to Non-Resident Accounts Using Forged Documents’, Article 174 ‘Legalisation (Laundering) of Moneys or Other Properties Purchased by Other Persons through Crime’, Article 174.1 ‘Legalisation (Laundering) of Moneys or Other Properties Purchased by a Person as a Result of Crimes Committed by Them’, Article 159 ‘Fraud’, Article 195 ‘Bankruptcy Misconduct’, and Article 196 ‘Deliberate Bankruptcy’. Victoria gave examples of the typical factual allegations in relation to each article and flagged the key elements of crimes that are common in practice.
The second session focused on discussing the risks faced by managers and owners in the event of company bankruptcy. Counsel Vera Rikhterman reported on the more stringent liability of debtor controlling parties (DCPs) at bankruptcy. Practice has shown that over the last 15 years, the institution of subsidiary liability has undergone significant changes, the most important of which were introduced under the 2016–2017 reform. Along with the reform of the subsidiary liability process and mechanism for substantiating a claim, the notion of DCPs has been extended. Vera pointed out that the law on bankruptcy has been supplemented with new presumptions with regard to both qualifying a party as ‘controlling’, and establishing a causal link between DCP actions and debtor bankruptcy, whereby the burden of proof shall lie directly with that party. Vera additionally emphasised that such parties shall in any case be obliged to prove that they are not guilty. In her report, she described in detail the way in which the presumption of benefit to identify a DCP operates, and gave explanations regarding the point at which the risk of a claim being filed to impose subsidiary liability on a DCP arises, and the point at which there becomes a risk that the court will grant injunctive relief against both DCP assets, and the assets of third parties also controlled by the DCP. Vera also covered the most significant risks for the controlling parties’ assets, including attachment of property and other injunctive measures, initiation of DCP bankruptcy, termination of lender obligations to controlling parties, enforcement against assets in foreign jurisdictions, and so on. The risks cited were supported with examples from current practice which reflect the wider legal trends.
Counsel Sergey Kalinin, who heads up the Firm’s Tax Practice, spoke on the liability senior managers might bear for non-compliance with tax law and how such risks may be mitigated. Sergey discussed the potential recovery of tax arrears from affiliated parties (Article 45(2)) of the Russian Tax Code) and explained which transactions qualify as triggers.
Leonid Afendikov, Managing Director at Alvarez & Marsal, gave a presentation on ‘Key Practical Aspects of Pre-Bankruptcy Management’. Leonid explained that management actions at risk of being challenged might be taken prior to, as well as during bankruptcy, in four key areas: ‘normal’ business operations, dubious financial transactions, dubious property transactions, and fraudulent accounting. He noted that almost all actions and decisions of a company head may be challenged under bankruptcy proceedings, but thorough elaboration of such actions and decisions, alongside a commitment to transparency and adherence to the arm’s length principle, will significantly mitigate managerial risk.
At the beginning of the third session, Partner Evgeny Raschevsky, Head of the Firm’s International Arbitration and Litigation Practice, covered the mechanisms for holding managers liable in foreign jurisdictions. Evgeny’s presentation was particularly focused on the choice of jurisdiction and means of proof.
In his presentation, Sergey Bukreev, Board Director at Cunningham Lindsey Russia, claimed that a loss adjuster report may be used to prove a loss. Sergey started by giving the definition of a loss adjuster according to the Charter of the Chartered Institute of Loss Adjusters (CILA): a loss adjuster “shall be a person whose predominant activity is the investigation, management, quantification, validation and resolution of Property, Casualty or any other losses (whether insured or not)”. The loss adjuster is tasked with ascertaining the cause and nature of the losses, identifying detrimental impact, collecting evidence, establishing causal relationships, calculating and substantiating damages, conducting technical analysis and substantiation, and making recommendations to minimise losses. Sergey compared adjusters to appraisers, mediators and experts, covered the importance of adjusters in terms of the general approach to proving a case in the arbitration courts and evaluating a report in commercial and arbitration courts, and discussed what the future might hold for adjusters.
Wrapping up the event, Counsel Alina Kudryavtseva covered the enforcement of judgments, tracing of debtor assets and disclosure of asset holding structures, in a presentation entitled ‘Show Me the Money’. A review of Federal Bailiffs Service data shows that only 15% of enforcement proceedings result in actual enforcement. This means that a favourable judgment does not guarantee the actual protection of the recoverer’s rights. Alina looked at the reasons behind such low levels of efficiency in the state enforcement system, and explored possible avenues for legislative development, including creating a private bailiff institute, increasing bailiff motivation to actually enforce judgments and enhancing communication between recoverers and bailiffs. In addition, the presentation recommended efficient measures for obtaining debtor compliance, and covered the cross-border aspects of enforcement, including searching for overseas assets with the assistance of foreign governmental authorities, detective and forensic agencies.
The event was attended by over 80 people, including vice presidents, directors general and their deputies, and heads of legal departments at major Russian and international companies.
