WHAT ACTIONS OF A CONTROLLING PERSON CAN SERVE AS THE BASIS FOR RECOVERY OF DAMAGES?
Not every action of a controlling person can serve as the basis for the recovery of damages in favour of the company. Courts distinguish three situations:
The first situation: a person made an obviously unprofitable deal.
This may be a deal with or without unequal consideration, including deals aimed at withdrawing assets. The court determines how reasonable and justified the actions of the controlling person are. If there are no signs of unscrupulousness in the actions of the controlling person, it is very difficult to establish unreasonableness in his/her behaviour. As a rule, courts believe that unreasonable transactions contain three components: that the deal was concluded on the instructions of the company’s controlling person, the price indicated in the contract deviates from the market price not in favour of the company, and the absence of a clear rationale and objective reasons for concluding a transaction on such conditions.
The second situation: a person committed actions that caused damage or loss of property to the corporation.
In such cases, you need to take into account how strongly the controlling person is involved in the management of the company. To prove the controlling person’s guilt in the damage or loss of the property, it is necessary to confirm a high degree of involvement of the person in the management of all company activities and that the person was entrusted with specific company property.
The third situation: a person committed actions which led to prosecution of the company.
For example, when tax authorities charge companies with fines and penalties, the director must ensure that the company respects its public duties. Therefore, if administrative or tax proceedings are initiated against the company, the fines the company had to pay can be recovered from the general director as damages. Courts apply this approach when it is not a nominee director who is to blame for the prosecution, but a controlling person.
There is a clear tendency to hold the controlling persons of Russian legal entities responsible The person who actually determines and controls the company’s activity will be responsible for losses if caused by her/his actions or non-actions.
WHO ARE CONTROLLING PERSONS, AND HOW TO PROVE THAT THEY ACTUALLY CONTROL A CORPORATION?
The reformation of the Russian laws on legal entities started in 2014. The reforms are based on the following principle: “Decisions can be made by those who are ready to assume responsibility for them.” The reforms are primarily aimed at ensuring effective control over the individuals who actually determine the company’s activity and holding them responsible. The laws of the Russian Federation establish four main criteria showing that a person controls a company.
The first criterion: participant or shareholder of the company
A participant or a shareholder of the company may influence the company’s activities due to the fact that he has a share in the authorized capital. Persons who directly or indirectly own more than 50 percent of the share in the authorized capital of the company are considered controlling persons. However, members or shareholders are not always actively involved in managing the current activities of the company. In such cases, they will not be responsible for unreasonable or unscrupulous actions of other persons, primarily the director. It is required to prove that the member damaged the financial position of the company using his/her status formally (by voting at a general meeting) or informally (by giving orders to the management).
The second criterion: shadow director and beneficiary
Sometimes a person does not have formal authority over a company and its property, but in reality this person actually manages its activities.
It is often the case that the company is actually controlled by proxies or offshore companies acting as nominees. Thus, it is possible to hide the fact that the person has a share in the authorized capital of the company. The company’s management, the founders, and the shadow director may formally (based on a shareholder agreement) or informally agree on shadow participation in the activities of the company.
In this situation, the court will assess the degree of actual involvement of the person in the management process.
The third criterion: an employee or proxy who made a transaction on behalf of a company
A person made a transaction on behalf of a company, which had a significant impact on the economic or legal situation of the corporation. Courts will check what kind of authority the person has in relation to the company and its property, whether labour functions or other powers provided by a power of attorney.
For example: a company was engaged in the fuel business and supplied jet fuel. The judges recognized an employee of the holding company as a controlling person. The court arrived at this conclusion after assessing the authority of this employee for organizing the aviation fuelling business throughout the holding based on the labour contract and other grounds.
The fourth criterion: a person who has benefited from the unscrupulous actions of the director and other persons
As a rule, if a director or another person commits unscrupulous actions in order to enrich themselves at the company's expense : the persons who have benefited from the unscrupulous actions of the director of the company are considered as controlling persons of the debtor until they prove otherwise. It is often a person who is somehow connected with the director or the controlling person that becomes the counterparty for a deal unfavourable to the company.
HOW TO PROVE ACTUAL CONTROL?
In practice, there are six basic behaviours which indicate the ability to control the company’s activity:
- He/she regularly sent recommendations and instructions to the company’s employees.
- He/she conducted meetings with employees on current corporate activities.
- He/she systematically checked the results of the company's activity, including accounting data.
- He/she participated in negotiations with third parties, acting as an official on behalf of the company.
- He/she presented himself/herself as a real director or beneficiary of the company, including in the media.
- He/she had access to the management of the company's bank accounts, including through electronic banking systems.
LLM (Hamburg), St. Petersburg
+7 / 812 / 458 58 00
+7 / 812 / 458 58 00