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Owners’ Instructions Resulting in Director’s Liability of Approximately RUB 20 mln

06.06.2018

Vladimir Zakharov, Lawyer, Head of Moscow Office

Source: General’nyi Direktor

This article serves to insure against: liability for damage incurred by the company and violation of the law.

The general director of the company is appointed by the shareholders or members of the company. Supposedly, the director should act in the interests of the company owners. And this is usually so until such interests violate the law and affect the rights of other persons.

The owners’ instructions often relate to schemes with the company’s property, relations with banks, tax and other inspection bodies. Even if it is the owner who receives all benefits, the director is primarily responsible for the violation of the law. For instance, for the company’s evasion from paying taxes.

The fact that the director – as a hired employee – exercised the will of shareholders who, in turn, received income from the unpaid taxes, does not release the director from liability. In this case, even a properly executed resolution of the general meeting of members or shareholders will not be of much help.

Let’s look at a few common instructions of owners that seem to be safe and harmless for the directors.

Sale of shares at an understated price

In 2013 the Supreme Court of Arbitration clarified that the director may be liable for damages, even if his/her action was approved by the general meeting of members or shareholders (paragraph 7 of the Resolution of the Plenum of Supreme Court of Arbitration dated 30.07.2013, No. 62).

Case

The company belonged to two members with 50 percent shareholding each. After one of the shareholders left the company, the other decided to sell his share for 7.5 thousand rubles. In fact, the share cost several tens of millions of rubles. The hired director, being instructed by the owner, has entered into a relevant purchase and sale agreement.

A few years later, the company, with the new director in position, filed a claim for damages against the former director. He was accused of making a deal unprofitable for the company. The director’s reference to the fact that he executed the decision taken by the company member was of no help. As a result, the director was ruled to recover RUB 5 mln (Resolution of the Arbitration Court of the West Siberian District dated 19.05.2017, No. F04-936/2017 in the case No. А45-14058/2016).

Sale of the company’s property to the relatives

The law allows the sale of property to shareholders, their relatives or companies controlled by them. Such transactions are considered to be the related party transactions and must be approved by the general meeting of members. If the director enters into a similar transaction, he/she should remember that he/she is liable not only to the company and its owners, but to the creditors as well.

It is quite risky to conduct related party transactions in a period when the company is experiencing financial problems even if the director signs the sale and purchase agreement with the approval of all members.

In this case if the company goes bankrupt and can not settle accounts with its creditors, then the director will be brought to subsidiary liability. He/she will have to pay off the debts at the expense of his/her personal funds in the event that the firm does not have enough property to repay the debt.

Director paid RUB 20 mln for selling the company’s property when it was on the verge of bankruptcy

Case

Director, with the consent of the sole shareholder, sold the vehicles belonging to the company. Moreover, the said vehicles were sold to persons affiliated with the shareholder. The company went bankrupt shortly thereafter and was unable to settle accounts with creditors, as well as pay all taxes due.

After the bankruptcy proceedings, the director and the shareholder were brought to subsidiary liability. They were charged for more than RUB 20 mln. The court ruled that the related party transaction led to the company’s losses and inflicted damage to the creditors. The fact that the director sold the company’s property with the consent of the shareholder did not help in the court (Regulation of the Federal Arbitration Court in Ural District dated 03.04.2014 in the case No. А07-17182/2010).

Surety for the company
In general, there is nothing wrong with the director’s surety for the company. Provision of a surety is a standard condition for obtaining bank loans.

However, if the director acts as a guarantor, then the entire amount of debt may be collected form him/her. If the director is not the owner, it is better to refrain from the surety. In case the bank insists on the surety, the director shall first assess the risk of company not being able to repay the loan.

RUB 17 mln were collected from the director as a guarantor upon termination of the agreement

Case

The company received a loan from the bank under the director’s surety. The loan agreement provided that the surety shall cease upon termination of the employment relationship of the director with the company. The director dismissed. Later, the company failed to make the loan payment and the bank filed a lawsuit against the former director for debt recovery.

The Supreme Court noted that the condition provided for in the contract can not be the reason to terminate the suretyship. As a result, the director’s dismissal did not help – he was ruled to repay a debt of RUB 17 mln (Ruling of the Judicial Panel in Civil Cases of the Supreme Court dated 05.12.2017, No. 9-KG17-14).

Violation of labour law

Owners often try to save on fire alarm or fire fighting systems, overalls and personal protection equipment, as well as mandatory medical examinations.

In order to draw attention of labor inspection, one complaint from an employee or minor industrial accident is enough. During an investigation all violations will quickly be detected. It is not worth saving when it comes to people’s lives and health. The general director will be held liable for all violations. At best, he/she will get by with fine, but he/she may also face disqualification or even criminal proceedings.

In certain cases it is better to come into conflict rather than jeopardize your own safety

Case

At the request of the owner the general director did not send workers to a periodic medical examination in order to save. There was a slight accident at the field – the concrete worker broke several fingers.

During the investigation the labor inspectors detected violations of Articles 212, 213 of the Labor Code. The check revealed that the director had already committed such violation. As a result, the court decided to disqualify the director for a year, and he was dissmissed (Resolution of the Supreme Court dated 25.02.2015 in the case No. 29-AD15-1).

Bits of advice for the directors

Before following the instructions of the business owner, evaluate the possible risks for yourself. Won’t you be held liable for negligence? If the director understands that the transaction will cause damage to the company, he/she may refuse to enter into it, regardless of the direct instruction of the owners. In certain cases it is better to come into conflict rather than jeopardize your own safety.

It entirely depends on how the relationships are built up between the owners and the director. Sometimes the director can persuade business owners to refuse actions that violate the rights of creditors or other company members.

It’s worth remembering that very often it is the owner who enriches by illegal actions, for example, by deceiving creditors and withdrawing assets. While general director is not. Yet this does not release him/her from liability.

 
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