Skip to main content
Article

Liability & risks for LLC owners & management in Russia

Liability and risks incurred by LLC owners

Neither JSC shareholders nor LLC participants are liable for the obligations of their company, and they bear the risk of losses only to the extent of the value of their contributions thus enjoying limited liability.

Nevertheless, there are situations in which a parent company may be held liable for the obligations of its subsidiary: a parent company entitled to give instructions binding upon its subsidiary is jointly liable with the subsidiary for transactions concluded by the latter following such instructions. This joint liability stands for both LLC and JSC, and also in the event of insolvency of a subsidiary, be it LLC or JSC. If a parent company instructs its subsidiary to perform certain actions knowing that they would result in insolvency, the parent company will be held liable for the subsidiary's debts if the subsidiary's assets are insufficient to cover its liabilities.

The federal law on limited liability companies provides that LLC participants are not liable for the company’s obligations and bear the risk of losses associated with the company's activities to the extent of the value of their shares [1]. This is the basic meaning of a business organization established as a limited liability company.

The participants who have not paid their shares in full are also jointly liable for the company’s obligations to the extent of the value of the unpaid portion of their shares in the company's share capital.

In case of insolvency (bankruptcy) through the fault of the company’s participants entitled to give instructions binding upon the company, or otherwise having the opportunity to determine the company’s actions, subsidiary liability for the company’s obligations may be imposed on the participants if the company’s assets are insufficient[2].

Under Russian law, subsidiary liability means that a creditor must file claims against the principal debtor before filing them against the person who, in accordance with the law, other regulations or conditions of the obligation, is jointly liable with the principal debtor (i.e. the person who bears subsidiary liability).

If the principal debtor fails to satisfy the creditor’s claim or the creditor has received no reply to the claim within a reasonable time period, this claim may be presented to the person who bears subsidiary liability [3]. Creditors cannot demand satisfaction of claims against their principal debtor from the person who bears subsidiary liability, if the claims can be satisfied by offsetting counter-claims against the principal debtor or by incontestable collection of funds from the principal debtor.

Before satisfying any claim, the person bearing subsidiary liability must notify the principal debtor, and in case of litigation, request the principal debtor to participate in the case.

The law requires to prove in court the fault of participants in case of insolvency. The court should establish a causal link between the action (inaction) of the company’s participants entitled to give instructions binding upon the company, or otherwise having the opportunity to determine its actions, and the company’s insolvency (bankruptcy).

Russian law provides that a causal link is established in the following cases:

a) if the abovementioned persons have used their right (opportunity) to influence the company (as represented by its officers) to make decisions resulting in legally significant actions (e.g., increase or decrease of share capital, issuance of debt securities, reorganization, conclusion of or withdrawal from a major transaction, etc.);

b) if these persons, having the necessary information, expertise, technical abilities, etc. certainly knew that their instructions or other action affecting the adoption of decision by the company’s officers would inevitably lead to insolvency (bankruptcy)[4].

Court practice on similar cases suggests that such claims are rarely met and always followed by criminal prosecution of the individuals at fault.

It is important to note that in case of subsidiary liability what is considered for the satisfaction of creditors' claims is the company’s assets. So, even if individuals are found guilty of bankrupting their company, they will not be held liable for the company’s debts, if the company’s own assets are sufficient to pay off the company’s creditors.

Liability and risks incurred by other persons participating in the management of LLC

The chairman and members of the board of directors (supervisory board), the person acting as the company’s sole executive body (general director, etc.), members of a collegial executive body (board, directorate, etc.) and the company manager are the other persons in addition to the company’s participants entitled to give instructions binding upon LLC, or otherwise having the opportunity to determine its actions. The abovementioned persons are liable to the same extent as LLC participants as described above.

Also, irrespective of whether or not there are grounds for initiating bankruptcy proceedings, board or supervisory board members, the person acting as the company’s sole executive body , members of the company’s collective executive body, and also the company manager are liable to the company for any damages caused to the company by their inappropriate actions (inactions), unless other grounds and extent of liability are established by law [5].

It follows that the members of the board of directors (supervisory board), members of the collegial executive body who voted against the decision that caused damages to the company, or those who did not vote, will not be held liable in such case.

Regular business practices and other circumstances relevant to the case are taken into account to determine the grounds and amount of liability for members of the board of directors (supervisory board), the sole executive body, members of the collegial executive body, as well as the company manager.

If several persons are liable, they will be held jointly liable to the company. The company or its participant will in this case be entitled to file a claim for compensation of losses caused to the company by a member of the board of directors (supervisory board), the sole executive body, a member of the collegial executive body or by the company manager.

Moreover, Russian labor law provides that the company’s general director assumes, as the company’s sole executive body, full financial liability for any direct damage caused to the organization [6].

The financial liability of a limited liability company’s chief accountant may be determined in the employment contract with such employee and may be set to the full amount of damage caused to the employer [7].

In addition, the officers and managers of a limited liability company, like those of any other business organization, may be held criminally liable for committing economic offenses such as, for example, evasion of tax payments, evasion of tax payments through non-submission of tax returns or other documents required under Russian law or by providing false information in tax returns (Article 199 Russian Criminal Code). The penalty for such offenses is RUB 100,00-RUB 300,000 or the offender’s salary or other income for a period from one to two years, or compulsory labor for up to two years with or without disqualification to hold certain posts or engage in certain activities for up to three years, or arrest for up to six months, or imprisonment for up to two years with or without disqualification to hold certain posts or engage in certain activities for up to three years.

If the same actions are intentionally committed by (i) a group of persons or (ii) on an especially large scale, the following penalty will be imposed: a fine from RUB 200,000 to RUB 500,000 or the offender’s salary or other income for a period from one to three years, or imprisonment for up to six years with or disqualification to hold certain posts or engage in certain activities for up to three years.

Russian criminal and administrative laws do not expressly provide for offenses directly relating to the performance of chief accountant’s duties in a limited liability company.

However, gross violation of bookkeeping rules and submission of financial statements is an example of administrative offense that can be committed by the chief accountant, as well as the general director of a limited liability company (Article 15.11. Russian Code of Administrative Offenses). For such violation, officers are brought to administrative liability and may be subject to a fine of RUB 2,000-3,000.

Gross violation of bookkeeping rules and submission of financial statements occurs in case of:

  • Misstatement of accrued tax amount by at least 10%;
  • Misstatement of any record (item) in financial statements by at least 10%.

_________________________________________

[1] Article 2 Federal Law No.14-FZ On Limited Liability Companies dated February 08, 1998  

[2] Article 3(3) Federal Law No.14-FZ On Limited Liability Companies dated February 08, 1998 

[3] Article399 Russian Civil Code

[4] Article 3(3(2)) Federal Law No.208-FZ On Joint Stock Companies dated December 26, 1995 

[5]  Article 44 Federal Law No.14-FZ On Limited Liability Companies dated February 08, 1998 

[6] Article 277 Russian Labor Code

[7] Article 243 Russian Labor Code

Feel free to contact us if you have any legal related questions.

Share