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Business Petersburg quoted Roman Prokofiev in “A Father’s duty: The heirs of business debtors will be responsible for subsidiary liability” 20 February 2020 Source: Business Petersburg The heirs of business debtors will be responsible"

Source: Business Petersburg

The heirs of business debtors will be on the list of individuals with subsidiary liability in bankruptcy cases.

At the end of last year, the Economic Collegium of the Supreme Court of the Russian Federation considered two disputes on subsidiary liability. Lawyers believe that the decisions in these cases put the families of businessmen at risk. In the first case, lower courts refused to recover money from the underage children of Vadim Samylovskyh, the owner of the Alliance construction company, which went bankrupt in 2017, after additional taxes of 311 million rubles.

In the second case, the creditor extended subsidiary responsibility to the heirs of Mikhail Shefer, the owner of the Amur Product oil service company. The businessman had failed to compensate Amur Product, a daughter company of Rosneft, for losses, so the creditor sued his children. The courts denied the claim of the creditor, who turned to the Supreme Court of Russia.

In both cases, the Supreme Court overturned the decisions of the lower courts and sent the cases to new hearings.

In the Alliance case, the Economic Board, while agreeing that the minor children could not control their father’s company, drew attention to the circumstances that the courts did not clarify: did the children become the real owners of the property their parents had given them, and from which of the claimants did the creditor want to obtain satisfaction? In the case of Amur Product, the Supreme Court of the Russian Federation stated that the inheritance includes everything, both property and debts.

It is not that simple.

“Business owners should understand that simply transferring their assets to relatives does not ‘cleanse’ these assets but only puts their loved ones in a difficult situation,” said Roman Prokofiev, a lawyer with the Restructuring and Bankruptcy Practice of the ART DE LEX law firm.

Nevertheless, according to Attorney Vladislav Shestakov, a partner at FREMM law firm, it will be really difficult for heirs to defend themselves: “The law does not provide any tools for this, and as a result, a person who may not have had anything to do with the debtor will have to challenge the presumptions established in the law and overcome other obstacles. It is true that the Supreme Court of the Russian Federation stated that the courts should assist the heirs in the collection of evidence.” “For the time being, I see it as too little too late. I need more detailed explanations on this issue,” which is how Mr. Shestakov assesses the order of the Russian Supreme Court.

The main tool

According to lawyers, subsidiary liability, as a legal tool, is increasingly becoming a part of bankruptcy cases and is changing from a secondary to a major component of the proceedings. According to Attorney-At-Law Shestakov, since 2017, there has been an avalanche-like growth of both submitted and satisfied applications to assign subsidiary liability to individuals controlling debtors’ assets. The law firm Borenius Russia follows the growth of the amounts claimed in such disputes: in 2015-2018, there was an increase from 3 billion to 183 billion RUB.

Experts explained the many reasons for employing this tool. For example, merchants regularly use bankruptcy to “restructure” a business, which in fact implies the elimination of accumulated accounts payable. In some industries, such as retail, experts believe that this practice has reached catastrophic proportions. The amount of money that creditors manage to get in bankruptcy proceedings on unsecured debts is just a small percent of what they should receive.

A tractor driver’s debt

Two state structures, the Federal Tax Service and the Deposit Insurance Agency, played a major role in the development of court practice in cases of subsidiary liability. The Federal Tax Service, which collects tax debts, is one of the largest creditors, while the DIA acts as a bankruptcy trustee for banks.

In St. Petersburg practices, as lawyers noted during interviews that BP conducted, there have been no cases, thus far, similar to those the Supreme Court of Russia has considered. Still, there are unusual situations. Within the framework of the insolvency proceedings of CJSC Tekhosnachenie, which was involved with construction and installation, Sergey Menzherov, a tractor driver, faced subsidiary responsibility for 16 million RUB. According to the arbitration case file, he was the general director of the company in 2014-2015, but since 2011, he simultaneously worked as a tractor driver. The Arbitration Court of St. Petersburg and the Leningrad Region dismissed the case, citing statute of limitations and the lack of evidence showing that the tractor driver had actual control over the management of the company. However, the Thirteenth Arbitration Court of Appeal overturned this decision, applying the principle of subsidiary liability to the tractor driver. The key argument was the failure of the management company to comply with its obligation to transfer the documents to its successor.

Not terror but reality

The future of businessmen’s heirs (and of other family members), in the light of recent decisions of the Supreme Court of the Russian Federation, is not very bright.
Roman Prokofiev believes that “the practice after clarifications from a higher authority will no longer need any serious changes: arbitration courts will consistently shape the practice of bringing family members of the controlling person to justice, and lawyers will have to draw the attention of judges to the unique features of each dispute, justifying the need to deviate from the position of the Supreme Court.”

“Our courts, though sometimes severe, are forgiving. In such an issue as holding someone responsible for subsidiary liability, over time, the courts will find a balance between “execution” and “pardon,” remarked Attorney Shestakov. However, in our reality, the road to a bright tomorrow is usually paved with human destinies. “And someone is forced, figuratively speaking, to sacrifice themselves, so that everything will be fine. This is not horror, this is our reality," he added.

Author: Dmitry Marakulin.

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