Going south - read the small print
Next year a new law on bankruptcy will come into force. It provides for even more severe sanctions.
Bankruptcy is a specific form of enforced satisfaction of claims, applied in the case of insolvency or excessive indebtedness of a company. Bankruptcy proceedings make it possible to ensure a relatively fair satisfaction of creditors, irrespective of whether their claims are due and payable or whether they have obtained an enforcement document in connection with their claims. Under the Bankruptcy Law, a bankruptcy may be declared with respect to a company which has stopped paying its debt or whose assets are insufficient to satisfy its debt. The non-payment of debt should be permanent and not temporary. In each specific case, the court checks whether there exist reasons for declaring bankruptcy.
A company is required to file a bankruptcy petition with a court no later than within two weeks of the day on which it stops paying its debts.
In the case of a joint stock company or a limited liability company, the representatives of those companies should file a petition in bankruptcy within two weeks of the date on which the company's assets are no longer sufficient to pay its debts.
If a person representing a company, i.e. a management board member, fails to meet this obligation, he might face severe legal penalties, such as criminal charges, civil liability or payments for the company's debts from his own property. There are also other consequences.
Let's look into the details. The Bankruptcy Law provides sanctions for a failure to file a bankruptcy petition.
If a person obliged to file a bankruptcy petition fails to comply with the obligation, he will be deprived of the right to carry out his own business and to perform the function of a representative or an attorney-in-fact of a company, or a member of a supervisory board or an audit board in a commercial law company or a co-operative, for a period of two to five years. This applies, in particular, to members of management boards of joint stock companies and limited liability companies.
If a management board is composed of more than one person, each member of such governing body has the obligation to file a petition in bankruptcy. Each member of the management board may therefore be subject to the liability referred to above; however, the court will review the degree of willful misconduct of each person.
It follows from previous Supreme Court judgments that the business activity prohibition may be adjudged even if a company's bankruptcy is not declared. This has a great practical significance because it occasionally happens that, despite the existence of reasons for adjudging a bankruptcy and the actual bankruptcy of a company, its bankruptcy is never declared because the company is dissolved and wound up.
What may have even graver consequences for management board members is the damages liability provided for in the Bankruptcy Law. A management board member who fails to file a bankruptcy petition is liable for any damage inflicted on a creditor due to his actions if the failure to file a petition arose from the management board member's willful misconduct. If more than one person failed to perform this obligation, they bear joint and several liability. A commercial court decides the damage redress.
The Commercial Code provides for personal and joint and several liability of management board members in a limited liability company for its debt if enforcement against the company is ineffective. A management board member may be discharged from such liability if he proves that a bankruptcy petition has been filed at the right time or that composition proceedings have been initiated, or that the failure to file a bankruptcy petition or to initiate composition proceedings did not arise out of his willful misconduct. A management board member may also be discharged from liability if he proves that, despite the fact that a petition in bankruptcy has not been filed or composition proceedings have not been initiated, the creditor has not suffered a loss.
There is no similar provision in the regulations on joint stock companies. The Commercial Code provides for the general liability of members of governing bodies of a joint stock company for damage inflicted or caused by an act, or omission contrary to law or to the Articles of Association of the company.
The Commercial Code provides for penal liability of members of a management board of a company for the failure to file a bankruptcy petition for a company if circumstances justified its bankruptcy. The failure to file a petition in this case is subject to a fine, limitation of freedom or imprisonment for up to one year.
In certain circumstances, management board members are liable up to the full value of their property for tax arrears of their company. Under tax law, all members of a management board of a joint stock company or a limited liability company are jointly and severally liable, up to the value of all their property, for overdue taxes of the company if the enforcement against the company is ineffective, unless a management board member can prove that a bankruptcy petition has been timely filed or composition proceedings (preventing a bankruptcy) have been initiated. A management board member can be discharged from such liability if he proves that the failure to file a petition or to initiate composition proceedings did not arise out of his willful misconduct, or if he identifies assets against which enforcement will be possible. So how to protect yourself against liability?
The liability of management board members for failure to comply with the obligation to timely file a bankruptcy petition of a company is very severe. Management board members, when analysing the economic condition of companies they manage, should bear in mind the regulations discussed above. It may turn out that the filing of a bankruptcy petition at the right time may, for them personally, be an important basis for being discharged from civil or penal liability in connection with the performance of their duties as management board members.
