An attempt to hold the CEO liable is stopped

Defense of a Company CEO against Joint and Several Liability in Bankruptcy Proceedings

Our goal in representing the client was to prevent holding the ex-CEO jointly and severally liable in bankruptcy proceedings, protect his personal assets, and his prevent criminal prosecution. This engagement is a continuation of the previous, which was to thwart a hostile takeover attempt against one of the Factories a mid-size non-ferrous scrap-metal processing business in the Sverdlovsk region.

The Factory belonged in equal shares to two owners. One of the co-owners attempted to defraud the other of his share, using falsified documents (including a bogus power of attorney and a fictitious trust over the shares), replaced the company's management, and sold off some of expensive products and raw materials. We successfully sued on behalf of the defrauded co-owner who regained control over the company and its assets.

In the meantime, however, the company incurred a considerable debt which the adverse party used as a pretext to initiate bankruptcy proceedings and had a hostile receiver appointed by court. We procured for the assignment of some of the client's assets to others before the adversary initiated filed for bankruptcy, which effectively depreciated the Factory as a takeover target. For good measure, the client also incurred a substantial operating debt.

Unable to control the client's bankruptcy process — in fact, leaving the takeover target with hard-to-sell low liquid assets had made our involvement in the bankruptcy proceedings unnecessary, — we concentrated on preventing the imposition of joint and several liability of the company's ex-CEO. We filed a series of actions solely to demonstrate (and have it of court records) that the ex-CEO withheld no company documents, and to establish in a legal procedure that the CEO had never committed anything to prejudice the company or its creditors.

In the meantime, representing the factory's ex-CEO on the matter of disclosure in the bankruptcy proceedings, we demonstrated that he was not guilty of not having procured for proper safekeeping of the company's records or documents. The outcome of the civil procedures had a positive effect on the criminal investigations initiated on the receiver's applications against the ex-CEO — both the police and procurator's office dismissed the charges and refused to open criminal cases.

As a result, when the receiver motioned to the court for holding the Factory's ex-CEO jointly and severally liable, the aggregate of the judgments and evidence gathered in the preceding proceedings persuaded the court to dismiss the motion. The receiver, who has now abandoned his attempts to hold the ex-CEO liable, is seeking to complete the bankruptcy proceedings, while we are thwarting the attempts with the purpose to run up the adversaries' expenses on the bankruptcy process and to secure a proper criminal investigation instituted on our application against one of the adversaries in connection of fraud committed against the Factory. Сurrently, the adversary claim to impose joint and several liability on the client's ex-CEO has been dismissed and the company's bankruptcy process is in its completion phase.

Our comment:

The significance of the case for the Russian legal system consists in creating a body of case law on the joint and several liability of bankrupt companies' managers, specifically, approaches to conditions and grounds for imposing such liability, admissible evidence in demonstrating the validity and grounds for holding managers jointly and severally liable, and, in addition, in identifying solid defenses against the imposition of liability on actions filed by hostile parties.

We have demonstrated that:

  1. the question as to whether joint and several liability ought to be imposed cannot be answered automatically based on statutory grounds only;
  2. it is necessary to take into consideration all factual circumstances;
  3. that others' fraudulent evasion of duty may exclude the managers' liability;
  4. courts must take into account that managers' ability to act in companies' best interests in fact depends on their ability to act in this or that manner.

The case was carried out by Alexey Filippov, Head of practice, INTELLECT-S.

Bankruptcy, Business Transactions

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