Liability of an LLC’s general director

LEGAL DIGEST \ 20.11.2019

A general director, as a sole executive body of a limited liability company (“LLC”), must act in good faith and reasonably when he exercises his competencies (article 44(1) of Federal Law No. 14 “On limited liability companies” dated 8 February 1998, or the “LLC Law”), where good faith and reasonableness are evaluative concepts. Therefore, when similar court disputes arise, a court evaluates, in each separate case, evidence that confirms or refutes that the general director acted in good faith and reasonably.

A general director should have an accurate and in-depth idea of the limits of his/her liability within the scope of his/her activities and of possible legal ways of mitigating such risks of being held liable as a company’s sole executive body.

At present, Russian legal practice has elaborated the following approaches to acts (an omission) of a general director being treated as bad faith and unreasonable:

1. Actions confirming that a general director’s actions are bad-faith actions[1]:
   • Acting when there is a conflict between company’s interests the and the personal interests of the general director;
   • Concealing or misrepresenting information regarding a transaction to the company’s members;
   • Closing a transaction without approval by the company’s management bodies, as required by the law or the company’s charter;
   • Once his/her powers are terminated, a general director does not hand over the documents containing information regarding adverse consequences for the company;
   • When he/she has committed actions that he/she knew or should have known would entail adverse consequences for the company;
2. Facts confirming that a general director’s actions are unreasonable actions[2]:
   • A decision was made taking no account of known and relevant information in the situation at hand
   • A decision was made without obtaining additional information which is usually requested under similar circumstances in accordance with common business practice
   • A decision was made without the procedure being observed that the company has adopted for consummating transactions (e.g. the general director did not approve the transaction with the legal department, accounts department, etc.)

The general rule is that the general director is accountable to the company for the losses caused to the company through his/her wrongful acts (an omission) (article 44(2) of the LLC Law) if it was proven that such actions were bad-faith or unreasonable actions, including cases when actions (an omission) of the general director were not in line with standard business risk or common business practices (article 53.1 of the Russian Civil Code (Part I)  No. 51-FZ dated 30 November 1994).

Please note the importance of complying with the above requirements. The reason behind this is that when a company goes bankrupt or cannot satisfy all the creditors’ claims, a general director, as a company’s manager, can be subject to subsidiary liability, if it is impossible to discharge creditors’ claims in full owing to the conduct of the general director[3].

Types of liability that can be imposed on a company’s general director:

• Financial

Example: full financial liability of a company’s manager is stipulated if an employer’s available assets have reduced or the condition of such assets has worsened, and also if the employer needs to bear expenses or make excessive payments to acquire or restore property or to compensate the damage its employee has caused to third parties (article 277(1) of the Russian Labour Code No. 197-FZ dated 30 December 2001; clause 5 of Resolution No. 21 of the Plenum of the Russian Supreme Court dated 2 June 2015 “On certain issues courts encounter when they apply legislation regulating the labour of a company’s manager and members of the company’s collegial executive body”).

• Administrative

Examples: liability for offences in the sphere of finance, taxes and levies, insurance and the stock market (Chapter 15 of the Russian Code of Administrative Offences No. 195-FZ dated 30 December 2001, the “Administrative Code”), a violation of migration legislation when foreign nationals are employed or engaged under contracts for services (articles 18.9 and 18.15 of the Administrative Code), a violation of fire safety requirements (article 20.4 of the Administrative Code), etc.

• Criminal

Examples: liability for laundering money or other property illegally acquired by other people (article 174 of the Russian Criminal Code No. 63-FZ dated 13 June 1996, or the “Criminal Code”), a violation of requirements of tax legislation (article 199-199.2 of the Criminal Code), the illegal receipt and disclosure of information that constitutes a commercial, tax or bank secret (article 183 of the Criminal Code), etc.

• Subsidiary liability under a bankruptcy case

Please contact Acsour’s experts on any issues concerning the specification of the limits of liability of the general director when he/she conducts the company’s business and possible legal ways in which it is possible to mitigate such risks of being held liable as a sole executive body of the company.

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[1] Clause 2 of Resolution No. 62 of the Plenum of the Russian Supreme Commercial Court dated 30 July 2017 “On certain issues of how losses are compensated by persons who are members of a legal entity’s management bodies”.

[2] Clause 3 of Resolution No. 62 of the Plenum of the Russian Supreme Commercial Court dated 30 July 2017 “On certain issues of how losses are compensated by persons who are members of a legal entity’s management bodies”.

[3] Chapter II.2. of Federal Law No. 127-FZ dated 26 October 2002 (as amended on 3 July 2019) “On insolvency (bankruptcy)”