Courts in Russia

Courts in Russia

When will Courts in Russia hold a Director personally liable for their actions under the criminal law and civil law?

For the purposes of this article, a Director means the Member of the Board of Directors or the General Director — also called as Sole Executive Body — in case the company has not a Board of Directors.

The director or the sole executive body of the company shall manage the activity of the company. Per Civil Code, Russian laws and interpretations of supreme judicial authorities of the Russian Federation, a person authorized to act on its behalf of the company by virtue of law, other legislative act or the statutory document shall act diligently and in good faith in the interests of the legal entity he represents.

The company or its members shall have the right to apply to the court for recovery of damage caused by the member of the board of directors of the company, the sole executive body of the company, member of the collective executive body or the managing director.

A person authorized to act on behalf of the company by virtue of law, other legislative act or statutory document shall be obliged to recover losses caused to the legal entity through his fault upon request of the legal entity, its founders (members) acting in the interests of the legal entity.

Said person is also liable if it is proven that in exercise of his rights and duties, he acted in bad faith or unreasonably, including circumstances when his actions (omissions) were inconsistent with ordinary conditions of civil turnover or general business risk unless other grounds and extent of liability are determined by federal laws.

The director’s actions may be proved to be committed in bad faith, in particular, when he knew or should know that his actions (omissions), when committed, were incompliant with the interests of the legal entity.

Based on the court practice concerning claims related to bringing the sole executive body of the legal entity to liability, it is definitely concluded that the actions of the general director of the entity are recognized to be unreasonable if in the course of his duties he has carried out multiple unnecessary transactions beyond usual transactions and no payments have been received in relation thereto.

In this case, the claimant should prove circumstances evidencing bad faith actions (omissions) of the director and (or) unreasonableness thereof resulting in adverse consequences for the legal entity.

In cases of compensation for damages by the director, the plaintiff must prove the loss of the legal entity. But according to the Russian Civil Code, the arbitral tribunal cannot completely refuse to satisfy the claim for compensation by the director of losses caused to the legal entity only on the grounds that the amount of these losses cannot be established with a reasonable degree of certainty. In this case, the amount of damages to be reimbursed shall be determined by the court, taking into account all the circumstances of the case, proceeding from the principle of fairness and proportionality of liability.

Lucia Myriam NETTI
Horizons Corporate Advisory
www.horizons-advisory.com