Liability of the subsidiary debtor
Peculiarities of debt recovery from a subsidiary debtor under article 399 of the Civil Code of the Russian Federation.
Subsidiary liability refers to the responsibility of a person who is not a party to an obligation, in addition to the primary debtor's liability. Subsidiary liability arises in the following cases:
- The primary debtor refuses to satisfy the creditor's claim;
- The creditor does not receive a response to their claim from the debtor within a reasonable time.
A claim against a person bearing subsidiary liability may only be made after the creditor has first sought performance from the primary debtor.
Under general principles, a legal entity is liable for its obligations with all of its property (Article 56(1) of the Civil Code of the Russian Federation). Specific norms determine the liability features of organizations with certain legal forms (e.g., state-owned enterprises, institutions, religious organizations).
The founder (participant) of a legal entity or the owner of its property is not liable for the obligations of the legal entity, nor is the legal entity liable for the obligations of its founder (participant) or owner (Article 56(2) of the Civil Code). However, there are exceptions to this rule, which often become the subject of judicial disputes.
Problems and features of imposing subsidiary liability
1. Primary Issue in Disputes Over Subsidiary Liability: The main challenge in such disputes is proving the combination of circumstances that allow for exceeding the general provisions on the liability of a legal entity and imposing the obligation for non-performance of the company's obligations on its founder (participant).
2. Challenges for Creditors: Problems may arise when creditors attempt to hold a particular individual subsidiarily liable for the obligations of business entities excluded from the Unified State Register of Legal Entities (EGRUL). In these disputes, it is crucial not only to indicate the fact of exclusion of the primary debtor from the EGRUL but also to provide evidence of the dishonest behavior of persons controlling the primary debtor and establish a causal link between their actions/inactions and the unpaid debt.
3. Participants (Founders) or Owners of Property of a Legal Entity: These parties may be held subsidiarily liable in cases where the primary assets are insufficient, such as:
- The owner of the property of a state-owned enterprise — if the property is insufficient (Article 113(6)(3) of the Civil Code);
- The owner of the property of a state or private institution — if the institution lacks sufficient funds (Articles 123.22(4), 123.23(2) of the Civil Code);
- The owner of the property of a budgetary or autonomous institution causing harm to citizens — if the institution lacks sufficient property subject to enforcement or in the event of liquidation of the institution due to insufficient assets (Articles 123.22(5-6) of the Civil Code);
- Directors and participants of an LLC — in cases where an «abandoned» company is removed from the EGRUL by decision of the registration authority, provided that the company's failure to meet its obligations (including those arising from damages) was due to the aforementioned individuals acting in bad faith or unreasonably (Article 3(3.1) of the Law on LLCs).
4. Limitations on Subsidiary Liability: In some cases, subsidiary liability may be limited. For instance, when shares in the authorized capital of an LLC are paid with non-monetary assets, the participants (shareholders) and independent appraisers bear subsidiary liability for the company's obligations up to the amount by which the valuation of the contributed property exceeds its actual value, for five years from the date of state registration of the company or amendments to the charter (Article 66.2(3) of the Civil Code).
5. State Registration Without Full Payment of Authorized Capital: If the law permits the state registration of a business entity without prior payment of three-fourths of the authorized capital, the participants bear subsidiary liability for the entity's obligations until the authorized capital is fully paid (Article 66.2(4)(2) of the Civil Code).
6. Liability of Participants (Founders) and Owners: Liability of participants (founders) and owners of a legal entity for its obligations may arise in cases specified by the founding documents, provided that the inclusion of relevant provisions is allowed by law. For example, such provisions are permissible in production cooperatives and associations (unions).
Grounds for imposing subsidiary liability
To impose subsidiary liability in court, three facts must be proven: the existence of grounds for holding the primary debtor liable, compliance with the sequence of claims, and the inability of the primary debtor to satisfy the creditor's claim.
Existence of grounds for holding the primary debtor liable
The liability of the subsidiary debtor is additional and arises only when there are grounds for the liability of the primary debtor. In claims for subsidiary liability, defendants typically argue the absence of grounds for holding them liable for the primary debtor's obligations. Such disputes often arise when the primary debtor is removed from the EGRUL by decision of the registration authority.
Case Example. A company (plaintiff, creditor) filed a lawsuit against N.G. Magdiyev (defendant) seeking to hold him subsidiarily liable for the obligations of another company (debtor) and to recover damages. The plaintiff justified its claim by citing confirmed unpaid monetary obligations of the debtor, the debtor's removal from the EGRUL, the defendant's authority as a participant and director during the period of relations between the debtor and creditor, the defendant's failure to take actions to settle the debt, and his unreasonable and bad-faith conduct. The courts of the first and appellate instances granted the claims.
Disagreeing with the judicial acts, the defendant filed a cassation appeal, arguing that the courts failed to consider that the debtor was removed from the EGRUL during a period when the defendant was neither a participant nor director, that no causal link was established between the defendant's actions and the non-payment of the debt, and that there was no evidence of his unreasonable or bad-faith conduct.
The cassation court upheld the lower courts' findings, noting that subsidiary liability can be imposed only if it is established that the administrative removal of the debtor from the EGRUL and the resulting inability to pay the debt were due to the actions (inactions) of the controlling persons and their fault, resulting from their unreasonable and/or bad-faith actions (inactions). The burden of proving the absence of fault under general rules of delictual liability lies with the defendant.
Rejecting the defendant's arguments that there were no grounds for his subsidiary liability since he was neither a director nor participant at the time of the debtor's removal from the EGRUL, the courts reasonably noted the fictitious nature of the increase in the debtor's authorized capital and the appointment of a new participant, who subsequently assumed the role of director.
The courts correctly stated that during the management of the debtor's financial and economic activities, the defendant committed intentional actions that led to the accumulation of debt and non-payment despite having sufficient free funds at the time to settle the debt. Moreover, aware of the obligation to pay the debt, the defendant withdrew from the list of participants (Ruling of the Volga District Arbitration Court dated November 30, 2023, Case No.A65-23353/2022).
Compliance with the sequence of claims by the creditor
Judicial practice holds that the requirement for the creditor to first approach the primary debtor may be considered satisfied if the creditor submits a written demand and receives either a refusal or no response within a reasonable time. This position was established in the Resolution of the Plenum of the Supreme Court of the Russian Federation and the Plenum of the Higher Arbitration Court of the Russian Federation dated July 1, 1996, No.6/8 «On Certain Issues Related to the Application of Part One of the Civil Code of the Russian Federation» (Paragraph 53).
Moreover, according to case law, simultaneous claims against both the primary and subsidiary debtors do not contradict Article 399(1) of the Civil Code.
Case Example. A company (plaintiff) filed a lawsuit against a federal state budgetary institution (defendant) to recover debts for maintenance and repair of common property and provision of utility resources for an apartment; in the event of insufficient funds from the primary debtor, the plaintiff requested recovery from the Russian Federation through the Ministry of Defense. The courts of the first and appellate instances granted the claims.
The subsidiary defendant disagreed with the judicial acts and filed a cassation appeal, arguing that the insufficiency of funds of the primary debtor was not proven and that the plaintiff did not provide evidence of approaching the primary debtor.
The cassation court noted that, contrary to the subsidiary defendant's argument, simultaneous claims against the primary and subsidiary debtors do not contradict Article 399(1) of the Civil Code. In this case, the issue of the primary debtor's financial situation is not significant, as the subsidiary liability of the property owner will arise only after compliance with the legally prescribed procedure for enforcing the court order against the primary debtor and upon establishing the fact of insufficient funds and property (Ruling of the Far Eastern District Arbitration Court dated August 15, 2024, Case No.A73-9459/2023).
However, in some cases, courts still require the filing of a separate lawsuit against the primary debtor before imposing subsidiary liability.
Case Example. A company (plaintiff) filed a lawsuit against the municipal property management department (defendant) to recover debts in a subsidiary manner. The first-instance court's decision, upheld by the appellate court, granted the claims. Dissatisfied with the judicial acts, the defendant filed a cassation appeal requesting their annulment.
The cassation court noted that in resolving disputes related to subsidiary liability, it must be kept in mind that the procedure for the creditor's preliminary approach to the primary debtor under Article 399(1) of the Civil Code may be considered fulfilled if the creditor submitted a written demand and received either a refusal or no response within a reasonable time.
The liability of the owner of a municipal state-owned enterprise's property constitutes a special type of subsidiary liability, to which the general norms on subsidiary liability under Article 399 of the Civil Code apply with specific features provided by Article 113 of the Civil Code. The peculiarity lies in the fact that the owner of the state-owned enterprise's property cannot be held liable without filing a lawsuit against the primary debtor (Ruling of the Volga District Arbitration Court dated July 9, 2024, Case No.A49-7446/2023).
Inability of the primary debtor to satisfy the creditor's claim
The absence of property for debt repayment by the primary debtor may seem straightforward to prove: providing the court with statements of open/closed accounts, information on the termination of enforcement proceedings due to the absence of property subject to enforcement, etc. However, courts sometimes erroneously consider such evidence insufficient for imposing subsidiary liability on owners.
Case Example. A creditor (plaintiff) filed a lawsuit against the Department of Property and Land Relations of the city administration (defendant) to recover funds under subsidiary liability, as the municipal state-owned enterprise had not fully repaid its debt to the creditor and lacked property subject to enforcement. The plaintiff argued that in such a case, the defendant bore subsidiary liability for the obligations of its state-owned enterprise.
Denying the claims, the first-instance court based its decision on the fact that to hold the enterprise owner subsidiarily liable, the plaintiff must provide evidence of the insufficiency of the enterprise's property, which was not done.
According to the court, the termination of enforcement proceedings due to the absence of property subject to enforcement and the ineffectiveness of all measures taken by the bailiff to locate such property do not, in themselves, indicate sufficient grounds for holding the owner subsidiarily liable for the obligations of the state-owned enterprise, which remains an active legal entity, not liquidated, and owns real estate and land plots according to the municipal property registry.
The appellate and cassation courts agreed with the findings of the lower court.
Overturning the judicial acts, the Supreme Court of the Russian Federation noted that by referring to the plaintiff's lack of evidence regarding the insufficiency of the primary debtor's property, the courts incorrectly distributed the burden of proof for material circumstances. Furthermore, the courts failed to evaluate the fact that the insufficiency of property was confirmed by a judicial act that had entered into legal force. The judicial acts were annulled, and the case was remanded to the first-instance court for reconsideration (Order of the Supreme Court of the Russian Federation dated March 12, 2024, No.41-KG23-73-K4).
There exists a position in judicial practice that Article 399(1) of the Civil Code does not link the possibility of claiming against a subsidiary debtor with establishing the insufficiency of funds or property of the primary debtor or the impossibility of recovering the debt from the primary debtor; thus, the mere absence of a response from the primary debtor to the creditor's claim suffices.
However, the question of whether the creditor must file claims against the subsidiary debtor should be resolved considering a combination of various circumstances (the presence of unresolved disputed legal relationships with the primary debtor, their uncertain nature until resolved by the court, the creditor's reasonable grounds to rely on the voluntary execution of the court decision by the primary debtor, etc.). Therefore, while the mere absence of property of the primary debtor grants the creditor the right, not the obligation, to file a claim against the subsidiary debtor, the creditor may reasonably expect that the primary debtor can independently settle the debt under a combination of other circumstances.
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As the analysis of judicial practice shows, the main disputes between creditors and persons subject to subsidiary liability concern attempts by defendants to contest the grounds for claims against them and point out violations in the sequence of claims (in the absence of a separate court order for debt recovery from the primary debtor). However, judicial practice in such disputes is well-established, and if such errors occur at the level of first or appellate courts, they are corrected in cassation.
Source: Article by Svetlana Lebedeva, INTELLECT, published in the «Economic Journal-Lawyer» newspaper (No.4 (1352) / 2025)
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