The Supreme Court Protects the New Director of an Effectively “Dormant” Company From Subsidiary Liability

What happened:

The Russian Supreme Court considered a case concerning the subsidiary liability of a “dormant” company director who was appointed after the debt had arisen and the company had effectively ceased its operations. The Court overturned the decisions of the lower courts.

Why it matters:

The Supreme Court defined the scope of a director’s subsidiary liability in the case of an effectively “dormant” company, taking into account the creditor’s relationship with persons who had previously controlled the business. The position is particularly relevant where a new director assumes management of a company with existing debt and ceased operations, and the creditor is connected to the company’s former shareholders or directors.

Who needs to know:

Owners and directors of dormant companies (including foreign individuals and entities with non-operating but not yet liquidated businesses), as well as investors and prospective purchasers of businesses.

General recommendations:

When assuming authority, we recommend documenting the company’s financial position, its assets and liabilities, the circumstances surrounding changes in shareholders and directors, and the transfer of corporate documents and assets. When assessing subsidiary liability risks, the new director’s relationship with former shareholders and directors, as well as the circumstances in which the debt arose, should also be taken into account.

Further details of the case are available in our latest newsletter.