The Russian Constitutional Court has excluded fines for tax offences from the scope of secondary liability
Pepeliaev Group advises of the legal position of the Russian Constitutional Court on whether fines for tax offences of a debtor should be included in the amount of secondary liability of a controlling person.
In its Resolution No. 50-P dated 30 October 2023, the Constitutional Court checked the constitutionality of the provision of article 61.11(11) of the Bankruptcy Law, according to which the amount of secondary liability consists of the amount of register and current claims outstanding owing to an insufficiency of the debtor's property.The Constitutional Court’s Resolution No. 20-P dated 30 October 2023 on the case of checking the constitutionality of articles 61.11(9) and 61.11(11) of the Federal Law “On insolvency (bankruptcy)” further to a complaint of Ms L.V. Vaulina.
Facts of the dispute
In a case of a company's bankruptcy, claims for secondary liability were brought against its director and sole member in the amount of the entire tax debt, including arrears, default interest and fines. The claims were satisfied by the court and confirmed by courts of higher instances. The amount of liability included all liabilities of the debtor, including fines for tax offences.
As a result of the defendant’s appeal to the Constitutional Court, a Resolution was adopted, and its main provisions are summarised below.
1. Tax penalties imposed on a debtor may not be recovered from controlling persons by way of secondary liability
The Constitutional Court confirmed the previously existing approach according to which secondary liability is tortious in nature and related rules on the recovery of losses should apply in these situations (articles 15 and 1064 of the Civil Code of the Russian Federation).
With this in mind, the constitutional interpretation of the above related rules given in Resolution No. 39-P of the Constitutional Court dated 8 December 2017 is applicable to article 61.11 of the Bankruptcy Law regarding the amount of secondary liability.Resolution No. 39-P of the Constitutional Court “On the case involving checking the constitutionality of the provisions of articles 15, 1064 and 1068 of the Civil Code of the Russian Federation, article 31(1)(14) of the Tax Code of the Russian Federation, article 199.2 of the Criminal Code of the Russian Federation and part one of article 54 of the Criminal Procedure Code of the Russian Federation in connection with the complaints of G.G. Akhmadeeva, S.I. Lysyaka and A.N. Sergeev” dated 8 December 2017.
It also addressed the issue of the scope of losses to be recovered by an individual, but in the situation where such citizen commits a tax crime, rather than a civil offence.
A different approach would create a situation in which:
persons who contributed to an organisation’s tax evasion and received a negative criminal legal assessment of their actions do not bear the burden of paying a fine for the organisation;
whereas the controlling persons whose actions have not received such an assessment bear this burden under secondary liability.
As a result, the Constitutional Court stated that article 61.11(11) of the Bankruptcy Law does not contradict the Constitution of the Russian Federation, since it is not a basis for collecting fines for tax offences of the debtor as part of secondary liability.
The reasoning of the Constitutional Court is largely confined to references to its earlier positions. It is important to give a reminder of the reasons for the different approaches to the compensation of losses in respect of the amounts of default interest and fines for tax violations. In the ruling in question, the Constitutional Court drew attention to their different legal nature, which was previously explained in other resolutions of the Constitutional CourtSee, for example, Resolution No. 6-P of the Constitutional Court “On the case regarding checking the constitutionality of the provisions of articles 81(4) and 123 of the Tax Code of the Russian Federation in connection with the complaint of Open Joint Stock Company Taif” dated 6 February 2018.
Default interest is compensation for losses of the state treasury in the case of a delayed payment of taxes. Fines, on the other hand, are punitive in nature and are a punishment for an unlawful culpable act. The latter, in fact, goes beyond the tax obligation as such.
In its Resolution No. 39-P dated 8 December 2017, the Constitutional Court emphasised that when collecting losses in connection with a bankrupt debtor's non-payment of taxes, this person compensates for the damage caused to the debtor (creditors), and is not responsible for the debtor's tax offences.
2. The defendant's personal and family circumstances do not affect the amount of his/her liability
The Constitutional Court refused to accept for consideration the Defendant’s complaint regarding the constitutionality of the provisions of articles 61.11(9) and 61.11(11) of the Bankruptcy Law insofar as they do not allow the court to reduce the amount of secondary liability depending on the property and family status of the person held liable.
In this context, the Court referred to its own position from Ruling No. 2644-O dated 14 December 2021 and noted that personal circumstances unrelated to the subject matter of the dispute and unrelated to the mitigation of adverse consequences of their wrongful actions cannot be considered a basis for reducing the amount of liability.
At the same time, the Constitutional Court recalled examples of such groundsParagraph 29 of the Review of judicial practice on the resolution of disputes regarding the Constitutional Court dated 26 April 2023; Ruling No. 308-ES16-6482 (24, 25) of the Constitutional Court dated 7 July 2022.
there are circumstances other than the defendant’s actions that caused the debtor’s insolvency;
the damage caused by the defendant is obviously disproportionate to the volume of the register of creditors’ claims;
the defendant actively shows remorse, for example, in the form of repaying the harm caused or contributing to finding the property of the debtor or other beneficiaries.
This position confirms that it is necessary to place the correct emphasis when defending against secondary liability. We draw attention to the growing practice where the rule of protecting a business decision is applied in disputes on secondary liability and to the importance of justifying actions in economic terms. A significant factor that may affect the amount of liability and whether it is imposed at all is the good faith and status of the claimant in the dispute.
At the same time, facts not directly related to the subject matter of the dispute and the debtor’s business may also be useful, for example, in a situation where the court chooses provisional remedies.
Rights of controlling persons to challenge decisions of the tax authorities and court rulings connected with the debtor’s tax liabilities
In addition, the Constitutional Court confirmed the constitutionality of article 61.11(9) of the Bankruptcy Law in the context of whether the person held liable has sufficient mechanisms of legal defence available in a dispute on imposing secondary liability, initiated based on a decision of the tax authority.
The court issued a reminder that, in relation to claims of the tax authority, controlling persons have the following rights:
to raise their objections in disputes regarding the inclusion of the Federal Tax Service’s claims in the register of creditors and regarding secondary liability being imposed on controlling persons;
to appeal against rulings to include the tax authority’s claim in the register of creditors’ claims (it is checked whether the controlling person was able to determine the actions of the legal entity and to initiate an appeal by the taxpayer against the tax authority’s decision);The Constitutional Court’s Rulings No. 1153-О dated 31 May 2022, No. 2645-О dated 29 September 2022 and Nos. 783-О and 882-О dated 25 April 2023.
to participate in a tax dispute of the debtor as a third party, and, if a court ruling has already been adopted in this case, to appeal against the court’s ruling in appeal and the cassation courts.
What to think about?
There is no direct indication in the Resolution in question that it is possible to apply it retrospectively to disputes of persons other than a claimant. Therefore, it cannot serve as a basis for reviewing judicial acts already handed down, based on new and newly discovered circumstances. However, the Resolution should be taken into account by a court while it is reviewed according to the appeal and cassation procedure (including by the Supreme Court) and should be used when the parties construct their position.
If there is a risk of secondary liability being imposed for the debtor’s tax liabilities, we recommend that the composition of such liabilities be analysed in advance. This will make it possible to do the following:
to reduce the risks of being held liable under secondary liability where the presumption of fault in “taking a company to bankruptcy” is applied (article 61.11(2)(3) of the Bankruptcy Law);
if necessary, to reclassify the claims from secondary liability to the recovery of losses;
to reduce the amount of liability by excluding fines.
Help from your adviser
Pepeliaev Group’s lawyers have considerable experience in protecting controlling persons from secondary liability and from recovering losses. We are ready to provide not only effective support of relevant court disputes, but also to help create conditions to eliminate or minimise the risks of such liability: to implement anti-bankruptcy compliance, to provide a preliminary assessment of the risks of restructuring a business, of corporate decision-making, of transactions and of structuring personal assets.