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In the bankruptcy case of PJSC JSCB Baltika, claims to have secondary liability imposed were raised by DIA against five defendants, including a member of the Board of Directors and a member of the bank’s Management Board who had the authority to consummate transactions under a power of attorney.
The court of first instance refused to impose liability on the members of the collective management bodies, but the court of appeal and cassation court did not agree with this. By imposing liability on members of the Board of Directors and the bank’s Management Board, senior courts considered that the transactions they consummated under a power of attorney resulted in bankruptcy, as they formed the assets of the credit institution by increasing bad loan debt and acquiring illiquid shares. In addition, promissory notes of the bank were contributed to the issued capital of the company, which conducted no real economic activities.
The Supreme Court noted that credit institutions differ by the following:
The 3rd criterion is that the defendant is the initiator of or an accomplice in such behaviour and/or a potential beneficiary.
If the transaction or approval or other decision or action of the controlling person was performed on the basis of a positive opinion or recommendation of the company’s relevant division, it is assumed that the actions of the defendant did not deviate from the standards of reasonableness and good faith usually applied in this area of activity (the rule on the protection of a business decision).
The burden of refuting this presumption lies with the plaintiff. The latter must prove that, based on the essence of the transaction, its extreme disadvantage for creditors was obvious to the defendant, or that the defendant was conclusively aware of a violation of the principles of objectivity in the preparation by the relevant division of an opinion or of the insufficiency of information regarding the relevant counterparty.
The Supreme Court gave an example of circumstances that testify to the reasonableness of a business decision and the good faith of the senior management or managers of a credit institution:
The best protection against secondary liability is preventing it and forming a personal business archive that confirms the basis of decisions taken and transactions consummated (including recommendations of specialised departments), as well as the circumstances that influenced their implementation.
Since the approach developed by the Supreme Court is applicable to any company with a complex management structure, it is necessary to think about improving the company’s structure, its corporate documents in order to record in detail how functions are allocated between divisions and the job responsibilities of managers.
Persons in control should be precluded from circumventing or violating corporate and legislative rules.
Pepeliaev Group’s specialists have considerable experience in supporting the current activities of financial and other organisations from the point of view of anti-bankruptcy compliance (restructuring the business, corporate decision-making, transactional support, acquisition of assets, the protection of transactions contested in bankruptcy cases).
We successfully implement legal protection of controlling persons in disputes over secondary liability and are ready to provide comprehensive legal support in order to eliminate or mitigate such risks.