Secondary liability of parties controlling a legal entity that has been removed from the unified state register of legal entities under an administrative procedure
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 partiesIn 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.|
The Constitutional Court’s position regarding the allocation of the burden of proofIn 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 doThe 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 .