Secondary liability of parties controlling a legal entity that has been removed from the unified state register of legal entities under an administrative procedure
Pepeliaev Group advises about special aspects of proof in cases to impose secondary liability on parties controlling a legal entity removed owing to being dormant from the Unified State Register of Legal Entities.
The company's creditors are objectively limited in proving that the parties controlling the debtor were not acting reasonably and in good faith because they are not involved in corporate relationships. Moreover, the creditors have no access to documents that contain information about the business activity of the company and the parties controlling it. Therefore, if the creditor who is the claimant is required to prove that the damage incurred was caused by the conduct of the parties that controlled the debtor, this would invariably lead to the inequality of arms for the claimant and the defendant.
For this reason, to impose the burden of proving all legally significant circumstances only on the creditor violates the principle of equality of arms. Therefore, when the claimant files a corresponding claim with the court, its procedural obligation with respect to proof is limited to submitting evidence that (1) the company has been removed from the Unified State Register of Legal Entities and (2) the company has failed to discharge its obligations to the claimant.
When the claimant is an individual consumer, a presumption already applies that the controlling parties have not been acting in good faith.
On the other hand, the controlling parties’ procedural obligation is to explain to the court the reasons for which the company was removed from the register and to provide evidence that their conduct was lawful. In the case of a refusal to provide explanations or if the explanations are obviously incomplete, if the defendant fails to provide the corresponding documents to the court, the court imposes on the controlling parties the burden of proving that the acts of the parties which controlled the company were lawful and that there was no connection between these acts and the impossibility to discharge the obligations to the creditors.
At the same time, for liability to be imposed on the controlling parties, it is necessary that the removal of the company from the Unified State Register of Legal Entities and the resulting impossibility for it to discharge the debt be connected with the acts of the parties controlling the company and be caused through their fault and by their acts (omissions) committed unreasonably and/or in bad faith.
This approach to the allocation of the burden of proof may also be used when the claimant is not an individual.
At the same time, the winding up of a legal entity through the liquidation or bankruptcy procedure with all debts being discharged significantly reduces the risks of the controlling parties’ acts being classified as not having been undertaken in good faith .
In its recent Resolution No. 20-P dated 21 May 2021[1], the Russian Constitutional Court placed particular emphasis on liabilities imposed on controlling parties in connection with a legal entity being liquidated and on issues connected with the allocation of the burden of proof in disputes to impose secondary liability on controlling parties in connection with liabilities of a liquidated legal entity.
The claimant to the Constitutional Court had been unable to collect a penalty and losses from a limited liability company removed from the Unified State Register of Legal Entities because it was dormant. When she tried to impose secondary liability on the former member of the company, the courts concluded that the claimant had failed to prove that these parties were not acting in good faith.
By virtue of article 62(2) of the Russian Civil Code, regardless of the grounds for the decision to liquidate a legal entity, including if the operation of it is has actually been discontinued, the founders (members) of the legal entity are obliged to perform acts to liquidate it at the expense of the property of this legal entity, and if this property is insufficient, the founders (member) of the legal entity are obliged to perform such acts jointly and severally at their own expense.
Cases are not unusual when members of a company avoid liquidating it when debts (unsettled liabilities) exist, and such companies are subsequently removed from the Unified State Register of Legal Entities under an administrative procedure.
The controlling parties’ failure to perform an obligation to liquidate the company when the latter has debts to its creditors as at when it is removed from the Unified State Register of Legal Entities, particularly when the court has already upheld a creditor’s claims against the company, may evidence that these parties have intentionally neglected their corporate duties and acted in bad faith. Therefore, article 3(3.1) of Federal Law No. 14-FZ dated 8 February 1998 “On limited liability companies” enables creditors to impose secondary liability on the parties who have controlled the company if their not acting reasonably or in good faith has resulted in the company’s liabilities not having been discharged.
The claimant to the Constitutional Court had been unable to collect a penalty and losses from a limited liability company removed from the Unified State Register of Legal Entities because it was dormant. When she tried to impose secondary liability on the former member of the company, the courts concluded that the claimant had failed to prove that these parties were not acting in good faith.
The Constitutional Court’s position on the obligations of controlling parties
In addition to other corporate obligations, members of a limited liability company (also, a “company”) bear an obligation to properly conduct a liquidation aimed, among other things, at ensuring that the creditors’ interests are complied with.By virtue of article 62(2) of the Russian Civil Code, regardless of the grounds for the decision to liquidate a legal entity, including if the operation of it is has actually been discontinued, the founders (members) of the legal entity are obliged to perform acts to liquidate it at the expense of the property of this legal entity, and if this property is insufficient, the founders (member) of the legal entity are obliged to perform such acts jointly and severally at their own expense.
Cases are not unusual when members of a company avoid liquidating it when debts (unsettled liabilities) exist, and such companies are subsequently removed from the Unified State Register of Legal Entities under an administrative procedure.
The controlling parties’ failure to perform an obligation to liquidate the company when the latter has debts to its creditors as at when it is removed from the Unified State Register of Legal Entities, particularly when the court has already upheld a creditor’s claims against the company, may evidence that these parties have intentionally neglected their corporate duties and acted in bad faith. Therefore, article 3(3.1) of Federal Law No. 14-FZ dated 8 February 1998 “On limited liability companies” enables creditors to impose secondary liability on the parties who have controlled the company if their not acting reasonably or in good faith has resulted in the company’s liabilities not having been discharged.
 | We should note that previously, the Constitutional Court has stated on multiple occasions that parties avoiding performing the required acts to terminate a legal entity in the framework of liquidation or bankruptcy procedures prescribed by the law were not acting in good faith[2]. |
The Constitutional Court’s position regarding the allocation of the burden of proof
In cases to impose secondary liability on members of a company which has been removed from the Unified State Register of Legal Entities because it is dormant, the burden of proof lies primarily with the defendant and not the claimant.The company's creditors are objectively limited in proving that the parties controlling the debtor were not acting reasonably and in good faith because they are not involved in corporate relationships. Moreover, the creditors have no access to documents that contain information about the business activity of the company and the parties controlling it. Therefore, if the creditor who is the claimant is required to prove that the damage incurred was caused by the conduct of the parties that controlled the debtor, this would invariably lead to the inequality of arms for the claimant and the defendant.
For this reason, to impose the burden of proving all legally significant circumstances only on the creditor violates the principle of equality of arms. Therefore, when the claimant files a corresponding claim with the court, its procedural obligation with respect to proof is limited to submitting evidence that (1) the company has been removed from the Unified State Register of Legal Entities and (2) the company has failed to discharge its obligations to the claimant.
When the claimant is an individual consumer, a presumption already applies that the controlling parties have not been acting in good faith.
On the other hand, the controlling parties’ procedural obligation is to explain to the court the reasons for which the company was removed from the register and to provide evidence that their conduct was lawful. In the case of a refusal to provide explanations or if the explanations are obviously incomplete, if the defendant fails to provide the corresponding documents to the court, the court imposes on the controlling parties the burden of proving that the acts of the parties which controlled the company were lawful and that there was no connection between these acts and the impossibility to discharge the obligations to the creditors.
At the same time, for liability to be imposed on the controlling parties, it is necessary that the removal of the company from the Unified State Register of Legal Entities and the resulting impossibility for it to discharge the debt be connected with the acts of the parties controlling the company and be caused through their fault and by their acts (omissions) committed unreasonably and/or in bad faith.
This approach to the allocation of the burden of proof may also be used when the claimant is not an individual.
What to think about and what to do
The court practice demonstrates that removal from the Unified State Register of Legal Entities as such cannot be treated as irrefutable evidence that the parties controlling the company have not acted in good faith which has resulted in obligations to the creditors not having been discharged.At the same time, the winding up of a legal entity through the liquidation or bankruptcy procedure with all debts being discharged significantly reduces the risks of the controlling parties’ acts being classified as not having been undertaken in good faith .
Help from your adviser
Pepeliaev Group's experts are ready to provide legal support to companies and individuals on any matters arising in connection with a company being liquidated or liability being imposed on the controlling parties of a legal entity and to provide recommendations on how to select the best business solutions on corporate law issues.[1] The Constitutional Court’s Resolution No. 20-P dated 21 May 2021 “On the case of checking constitutionality of article 3(3.1) of the Federal Law ‘On limited liability companies’ further to a complaint of Ms G.V. Karpuk”.
[2] Resolutions of the Russian Constitutional Court No. 580-O dated 13 March 2018; No. 581-O dated 13 March 2018; No. 582-O dated 13 March 2018; and No. 2128-O dated 29 September 2020.