Responsibility of the Director General and the Board of Directors: recovery

Responsibility of the Director General and the Board of Directors in Russia and CIS

Practical Guide to Protecting the Interests of Business Owners

Mainstream

Holding the CEO or board of directors accountable is not a punitive measure. It is a strategy of asset recovery and compensation for business losses.

The question is not whether the director made a mistake. The main question is whether it is possible to recover losses from specific individuals.

Effective prosecution begins with three checks:

Is there evidence of unfair or unreasonable actions?Does the director or member of the board have assets for recovery?

If these three issues are not resolved in advance, the company can win a high-profile trial, but not receive a ruble if the defendant has no property or has started acting too late.

When the responsibility of directors is raised

The holding of the Director General or the Board of Directors accountable becomes necessary if:

• The director approved the transaction on obviously unfavorable terms
• assets are transferred to affiliated companies without counter-provision
• Management acted in conflict of interest without disclosing it
• The company suffered losses due to a deliberately unprofitable decision of the board of directors
• The tax credits were due to an aggressive scheme initiated by the director.
• The director destroyed or concealed corporate documents.
• The director continues unprofitable activities, increasing the debt of the company
• After bankruptcy, it is revealed that the management has withdrawn assets.
• Controllers should be held to subsidiary liability.
• Former CEO uses confidential information in a competing business

The mistake most owners make

Many people start with an emotional question:

How do you open a criminal case?

It’s almost always the wrong strategy in a business context.

The right question is:

What is the maximum probability of real monetary compensation?

Sometimes the best result is a corporate claim for damages. Sometimes, there is subsidiary liability in bankruptcy. Sometimes, parallel pressure through corporate security measures. Sometimes, the vindication of assets from the final acquirers. Criminal proceedings are just one tool of pressure, but are almost never an effective way to get money back.

Holding directors accountable requires not a repressive response, but a cold commercial strategy of recovery.

Step 1. Check the corporate structure and contract with the director

The first thing to study is not the correspondence or rumors, but the legal structure of the relationship.

Key points for analysis:

• charter
• Employment contract or contract with the CEO
• board of directors and committees
• protocols and decisions of management bodies
• Power of attorney issued for transactions
• internal policies and regulations for the coordination of transactions
• The scope of authority enshrined in the EGRUL
• Corporate control structure (final beneficiaries, holding, offshore)

If the charter and internal documents blur competences, proving responsibility is more difficult. But a blurred structure does not mean immunity. In many cases, the duty to act in good faith and reasonably derives directly from the law, regardless of the wording of the statute.

Step 2. Collect evidence of bad faith

It is not the owner’s suspicions that are important for the court, but the documents.

Preparation should be made for:

• Protocols for Approval of Problem Transactions
• Contracts under which damage has been caused
• payment orders and bank statements
• conclusions on non-market conditions (evaluator, financial analysis)
• corporate correspondence (e-mail, messengers, service)
• Conflict of Interest Reports (if not submitted or distorted)
• Proof of Affiliation with Counterparties
• tax reporting and inspection acts
• documents confirming the destruction of property or documentation
• correspondence where the director acknowledges the unprofitability of the transaction or promises compensation

Of particular value are documents showing that the director knew about the loss of the transaction, but deliberately went to it in the interests of other persons.

Step 3. Determine the applicable law and status of the defendant

The law applicable to the director’s liability answers the question: What rules will be used to evaluate his behavior.

In the CIS context, this is critical, as options are possible:

• personal law of the debtor company (Russian law for a Russian legal entity)
• the law of the country of incorporation of the holding (for example, Cyprus, Netherlands or BVI)
• Special conflict of laws rules if losses are caused abroad
• International sanctions restrictions affecting jurisdiction

This has an impact on:

• standard of proof of bad faith
• limitation period
• Possibility of bringing to subsidiary liability
• The corporate veil (piercing the corporate veil)
• Possibility of challenging transactions approved by the defendant

An error in determining the applicable law may result in a claim being filed where the position is weak and the time limits have already been missed.

Step 4. Selecting a mechanism for accountability

Jurisdiction and type of liability determine where and how a dispute will be dealt with.

Main mechanisms:

• Direct claim for damages from the director (art. 53.1 of the Civil Code of the Russian Federation) – to the arbitration court
• Indirect action by the participant (art. 65.2 Civil Code of the Russian Federation) – on behalf of the company, recovery in favor of the company
• Subsidiary liability in bankruptcy (chapter) III.2 of the Bankruptcy Act – in bankruptcy proceedings
• A vindication claim against third parties (if assets have gone through the chain)
• Criminal law mechanism (art. 201 of the Criminal Code of the Russian Federation – for pressure and blocking of assets
• Foreign lawsuit against the director of an offshore company

If a Russian director has moved assets to another jurisdiction, it is usually not possible to simply file a convenient lawsuit in a “home” court and expect effective enforcement. The strategy must take into account where the defendant’s property is physically located.

Step 5. Select a strategy: recovery of damages, bankruptcy or criminal pressure

Recovery of damages in arbitration proceedings

A direct loss claim is effective if:

• There is clear evidence of a bad deal or inaction
• The director is not in the process of personal bankruptcy.
• The defendant has identified assets (real estate, accounts, shares)
• The statute of limitations (three years) is not missed
• No need for emergency seizure of property

Subsidiary liability in bankruptcy

Bankruptcy is most often used when:

• The company is in crisis or has introduced a surveillance procedure
• The debtor’s assets are withdrawn and controlling persons must be involved.
• there are grounds for presumptions of guilt (for example, tax arrears)
• Not only the nominee director, but also the shadow beneficiary must be involved.

Courts in Russia and the CIS are increasingly applying the shadow director doctrine.

Criminal law mechanism

Effective not for recovery, but for:

• Quickly lock your passport and travel abroad
• seizure of personal assets in criminal proceedings
• psychological pressure for a settlement agreement
• Proof not available in civil proceedings

Negotiations

Negotiations for voluntary compensation work when the owner has a “legal battery” ready for the attack. It should be more commercially profitable for the director to recover some of the damages now than to lose everything through a court of law.

Step 6. Find the director's assets

This is the key stage without which any process loses its economic meaning.

Before filing a claim, it is necessary to understand:

• where the defendant's real estate and vehicles
• What accounts in banks can be held money
• Are there shares in other companies?
• Is not the property transferred to spouses, children, trusts
• whether there are assets in the CIS countries or far abroad (UAE, Turkey, Europe)
• Whether the director is involved in foreign trusts or partnerships
• Have you started the process of “stealing” property in response to a corporate conflict?

Winning a lawsuit against an insolvent individual is wasting resources.

Asset tracing and execution strategies should begin before the lawsuit is filed, not after the court decision.

Step 7. Impose interim measures

Interim measures are the only way to prevent the director from being “zeroed” before the decision is made.

These may include:

• arrest of personal accounts and real estate of the director
• ban on the alienation of business interests
• arrest of property of third parties (end beneficiaries under the disputed transaction)
• banning registration actions in Rosreestr and traffic police
• security seizure of shares/shares of the company
• Prohibition of renunciation of citizenship and travel abroad (in the framework of criminal proceedings)

Interim measures are particularly important if the director:

• quit and leave the country
• sells out personal property
• transferring business to relatives
• Ignoring corporate information requirements

Step 8. File a lawsuit or claim

After the collection of evidence, the analysis of assets and the imposition of interim measures, the main process can begin.

The document should include:

• Complaintiff status (company, participant)
• description of the defendant and his powers
• specific unfair actions or omissions
• Counter-calculation of losses or the amount of subsidiary liability
• causation
• evidence of intent or gross negligence
• reference to the law and judicial practice (Plenum No. 62)
• Payment of Interests for Use of Other People's Money
• penalty

Weak preparation at the start, vague wording or lack of calculation of losses almost always lead to a refusal in the claim and prejudicially weaken the position for subsequent cases.

Step 9. Get a decision

The court's decision must be enforceable.

It is important to consider in advance:

• correctness of determination of the defendant’s status (former or current director, nominal or real)
• compliance with the procedure for approval of the claim by the parties
• non-expirement
• inadmissibility of going beyond the stated requirements
• Risk of bankruptcy of the defendant in the process

Errors in the plaintiff's legitimation procedure could give the defendant the opportunity to drag out the process for years.

Step 10. Execution of the decision

Execution is the most difficult stage.

This may include:

• search for accounts and sending the execution sheet to banks
• Foreclosure of personal property abroad
• Dispute transactions on the withdrawal of property (bankruptcy of the citizen defendant)
• bailiff
• Recognition of Russian decision in foreign jurisdictions
• share-holding

In practice, the execution stage determines the commercial success of the entire project. Without a preconceived enforcement strategy, the court’s decision will remain a psychological victory.

Direct claim or subsidiary liability: pick

The choice depends not on the general “fashion” for bankruptcy, but on the specific amount of damage, the quality of the evidence base, the availability of personal assets of the defendant and the goals of the majority owner.

How to strengthen the company’s position before a conflict arises

The best protection against unfair management is built when hiring.

In the corporate management system, it is desirable to introduce:

• clear rules for approval of transactions by the board or board of directors
• Two-key system (double signature) for large payments
• regular audit under IFRS
• D&O Insurance (Director Liability Insurance)
• mandatory disclosure of conflict of interest and affiliation
• Strong compliance with loans and sponsorship
• Storing protocols on an external secure server
• Confirmation of dividends only through corporate email
• Personal Guarantees of Critical Transaction Directors

Charters and domestic policies should not be written for “quiet times,” but for a tough corporate conflict.

Common Mistakes in Holding Directors to Account

1. The company may receive a decision, but face a “naked” debtor without property.

2. Three years are calculated from the moment when the director or participant learned of the violation, and not from the date of the transaction.

3. Courts often terminate the corporate process if they see a “labor” conflict with the former head.

4. In bankruptcy, there are rebuttable presumptions of guilt of controlling persons, which are often forgotten in a normal lawsuit.

5. Ignoring the nominal status of a nominee director without assets is a futile goal. The main blow should be directed at the real beneficiary.

6. The defendant’s personal assets in Europe or the United States may not be available for enforcement proceedings due to sanctions regimes.

7. Without a parallel civil lawsuit for the seizure of property, a criminal case can end in a suspended sentence without a penny of compensation.

Checklist for the owner

Before starting a dispute, 15 questions must be answered:

Who specifically made a loss-making decision (CEO or board)?Was the transaction approved corporate?What was the conflict of interest?Is there an audit report or financial analysis proving damage?Is internal management correspondence preserved?What is the law governing the liability of this person?When the limitation period expires?Where are the personal assets of the defendant?Is the property transferred to the spouse or children in the last six months?Is there a risk of personal bankruptcy of the defendant?Is it possible to seize the assets right now?Is the ultimate beneficiary?Is jurisdiction are grounds for subsidiary liability?Is?Is.Is.Isit is possible to charge and what are the costs? Is the refund the most commercially viable?

What a strong accountability strategy looks like

A strong strategy includes five levels:

1. Corporate Intelligence Evidence Gathering, transaction chain analysis, auditing and identifying ultimate beneficiaries.

2. Personal Asset Tracing is the detection of personal assets of management and their family members in Russia, CIS and abroad.

3. Legal Strategy: Choice between corporate action, vindication, subsidiary liability and personal bankruptcy.

4. Emergency Measures Seizure, Account Lockdown, Travel Ban and Shares Alienation.

5. Enforcement Recognition of judicial acts abroad, interaction with bailiffs and real foreclosure.

Without the second and fifth levels, the first three remain academic exercises.

FAQ

Can the director be held accountable if he has already resigned?

Yeah. Dismissal shall not be exempt from liability for losses incurred during the period of management. It is important to monitor the statute of limitations.

Can I recover damages from the nominee director?

The legislation allows for recovery, but real compensation is possible only if there are assets. It is more often effective to attract the actual controlling beneficiary (shadow director).

What if the director is withdrawing the assets right now?

Immediately apply for interim measures and simultaneously initiate a corporate dispute on the prohibition of transactions without the consent of the board of directors.

Can the entire board of directors be held accountable?

Yes, members of the board of directors are jointly and severally liable for losses if they voted for a deliberately unprofitable decision or abstained, showing unreasonableness.

Does D&O Insurance Protect You From Foreclosure?

Insurance covers risks within the insured amount, but is not usually effective for intentional acts, fraud or conflicts of interest.

Which is better: Corporate Claim or Subsidiary Liability?

There's no better way. If the company is solvent, it is more profitable to file a claim for losses (the recovery will go in favor of the company). If the company is in crisis and has debts to the budget, subsidiary liability is a priority.

Can the director be held accountable for tax charges?

Tax and civil guilt may coincide. If the director created tax evasion schemes that caused losses in the form of penalties and fines, he is obliged to compensate them.

Related services

• Corporate Conflicts and Protection of Business Owners Bankruptcy and Business Restructuring
• Corporate Investigations (Corporate Investigations)
• Asset Tracing and international asset search White Collar Crime Support of M&A transactions in Russia and CIS

Related material

• How to Protect Your Company from Unfriendly Acquisition
• Risks of the nominee director: jurisprudence of Russia and CIS
• How to challenge a deal with interest
• Subsidiary liability: How to protect the personal assets of the beneficiary
• How to find the debtor’s assets abroad
• Interim measures in a corporate dispute: practical guide
• How to check the counterparty before the transaction in the CIS countries
• Checklist:
• Due Diligence Management before Buying a Business

Conclusion

Bringing the CEO and the board to justice requires not finding the culprits, but building a strategy for asset recovery.

A strong position is based on corporate intelligence, evidence of conflicts of interest, timely seizure of the defendant’s personal property and a pre-prepared execution plan – in Russia, the CIS and abroad.

In corporate conflicts, it is not the one who loudly accuses who wins. The winner is the one who understands in advance where management assets are hidden, how to freeze them before trial, and how to turn legal victory into real monetary compensation.