Liability of Directors in Russia

Russia adheres to the German model of corporate governance, where a different combination of the following managing institutions may be employed: representative (or general) director; board of directors; board of internal auditors; and finally, shareholders. Everyone in this management sector (except shareholders) may be termed “director” and are subject to a special “director’s liability”.

Artem Sirota

Sirota & Mosgo Law Firm
+7 495 234 18 75

Russian directors are expected to “act in the best interest of the company, and to discharge their actions in good faith”. If a breach of this fiduciary duty causes any harm to the company, directors guilty of breach should provide compensation.

The scope of fiduciary duty is not statutory fixed and thus is interpreted by courts on a case-by-case basis. Only a few definite principles have been worked out up to now. Courts usually decide that the duty is breached if (i) a director acted ultra vires, (ii) a direct intent to harm a company was proved (iii) a violation of applicable laws and regulations is proved. Beyond these types of cases, Russian courts display reluctance in finding directors guilty of breaching their fiduciary duty.

However if a breach is proved, the director is obliged to compensate all losses of the company. If several directors are guilty of breaching a duty, they are treated as jointly and equally liable. Most liability rules are mandatory, i.e. it is impossible to modify them by contractual means; however the necessity to allow such modification is often discussed and thus might be adopted in the future.

In the case of insolvency there are some additional grounds for triggering directors’ liability.

For example when the director does not report a company’s anticipated insolvency to the court.

Directors may be sued either by the company itself or a derivative suit may be filed by any shareholder. Recently, new legislation on procedural rules for dealing with derivative suits have been introduced.

Company violations of the Russian public laws and regulations are usually attributable to the general director who may be sued in its personal capacity together with the company. Ordinarily used sanction for such violation is an average monetary fine. In cases of most severe violations criminal sanctions such as high fines and imprisonment may be invoked.

Directors may use several means of protection. First, a director should abstain from acting out of his mandate. Secondly, a director should always check compliance with the law; obtaining a recommendation from a legal adviser shall not shield from liability but may help to mitigate it. Thirdly, a director is permitted to allocate responsibility with one of its subordinates in a particular field of public compliance. Fourthly, in case of most risky decisions a director may seek authorization from higher managing bodies and even shareholders. Finally, a director may insure liability risks; unfortunately Russian insurance law does not allow insuring all applicable risks, thus some directors seek insurance abroad.

In conclusion, the quantity of cases where a directors’ liability is at stake is constantly growing, however in retrospect this amount is still relatively small.