In its Spring newsletter, CONSULEGIS International Litigation & Arbitration Specialist Group presented an abbreviated overview of 23 jurisdictions’ legal views on the topic of when courts may disregard a corporate entity to make owners of the entity personally liable for the debts of the entity—what is commonly thought of as “piercing the corporate veil”.
Among the contributors to writing on the topic are five legal advisors from Horizons addressing six countries’ legal points of view, including China, Korea (DPRK), Mongolia, Qatar, Russia and Pakistan. In this post, we offer the entry on Russia.
by Lucia Myriam Netti
Given the general principle of the “limited liability”, in the Russian legal system, it is first necessary to differentiate the position of the shareholders before and after registration of the limited liability company (“LLC”) with the Russian Authorities.
Before state registration of the LLC, the shareholders shall be jointly and severally liable for the obligations connected with the establishment of the company and arising prior to the registration. This situation changes only partially after the state registration, in which case even if the shareholder’s actions being subsequently approved by the shareholders general meeting, the company’s liability for such obligations may not exceed one-fifth of the paid-up capital.
It shall also be considered that if the state registration of a company is allowed by regular laws without a requirement for pre-prepayment a part of the capital, the shareholders shall be jointly and severally liable for obligations of the company arising prior to the full payment of the capital.
In addition to the above, below is a summary of instances where this principle of the limited liability is not fully applied to LLC enterprises in Russia.
1. Cases related to the contributions.
The shareholders shall be jointly and severally liable for company’s obligations a) if they have not paid for their shares in full and within the value of the unpaid part of the shares; or b) under some conditions, in the case of contributions in kind and if the company’s assets are insufficient.
2. Cases related to the parent company.
- Except in certain situations, the parent company is jointly and severally liable with the subsidiary for transactions entered into by the latter pursuant to binding instructions or with the consent of the parent company.
- In the case of insolvency (bankruptcy) of a subsidiary caused by the parent company, the latter is subsidiary liable
3. Cases related to bankruptcy/insolvency.
In the case of a company being liquidated due to insufficient assets to satisfy creditors, the shareholders may be judged severally liable for the company’s obligations and in cases where the company is insolvent (bankrupt) due to their fault and if the shareholders failed to file the suit with a commercial (arbitrazh) court.
Furthermore, in the case of controlling shareholders, in general, they shall be severally liable for the obligations of the company upon the insufficiency of the company’s assets.
The corporate veil may be pierced if the shareholders commit a breach of duty, forgetting that the principle of limitation of liability cannot be understood as a shield behind which they can act freely.
There is one basic notion for avoiding courts disregarding the general principle and making the shareholders personally liable: the shareholders shall not act thinking exclusively about the value of their share and without consideration for the company’s management; and shall not cause losses due to their factual and unwarranted interference in the company’s management.
Lucia Myriam Netti is Horizons Corporate Advisory regional partner for Europe, Russia and Belarus. If you would like to talk with a specialist about corporate liability in Russia or other countries, email us at firstname.lastname@example.org, and we’ll have a Horizons professional contact you.
Please visit our website at horizons-advisory.com