The courts will bring negligent directors to book more often and with more severity

The draft of a resolution containing important explanations for the courts, this time – on the issue of bringing heads of legal entities to book, is being discussed in the Higher Court of Arbitration. The authors of the draft intend to stimulate the development of the practice of holding negligent directors liable for losses they cause to the companies under their control. The first discussion of the Draft Resolution “On certain issues of compensation of losses by persons, who are members of legal entity bodies” by the Plenum of the HCA of Russia was held on May 14 of 2013. Video of the session: part 1, part 2.

Advocate Anna Kotova-Smolenskaya, Doctor at Law, Associated Partner of the Law Firm "YUST" comments on the provisions of the document:

“The courts dissociate themselves from examining the actions performed by the head of the organization”

The considered draft of the resolution by the Plenum of the HCA of Russia should provide the first instance courts with landmarks and approaches in the settlement of cases of bringing directors to liability. Currently there are no explanations to the courts, exactly which actions by directors may be considered illegal towards their companies, and in this situation bringing directors to book is next to impossible. The current legislation stipulates that members of management may be brought to material and property liability in the form of exacting compensation for losses. However, the courts, unfortunately, dissociate themselves from deeply examining the circumstances and evaluating the directors’ actions, and tend to dismiss the claims to directors. They motivate their refusals alleging that the claimant (the company or its partners) failed to prove the losses. In principle, court practice on other categories of disputes shows that the fact of losses is quite difficult to prove, and the situation is even more complicated if the company head is involved.

In particular, when the claim to recover losses is presented to the director, the claimant needs to prove the fact of the losses as a result of the director’s actions (action). One also needs to prove that the respective actions (inaction) cannot be classified by their nature as normal economic risks, and instead are knowingly dishonest or were caused by the director’s grave negligence and lack of professionalism.

Therefore, all we had until recently was a dry provision in the legislation allowing to exact losses from the director. But the cases, when he could be ruled guilty, were not specified. One may say that the Board of the HCA of Russia gave the first landmark in its judgment on the case of the Kirovsky plant (judgment No. 12505/11 dated 06.03.2012 on the case No. А56-1486/2010 – Edition), where the director’s actions were evaluated from the point of view of his honesty. The adoption of the draft of the resolution by the Plenum of the HCA of Russia will signal the courts of arbitration that suits against directors should be considered and not taken formally. In its turn, this should be a serious step towards strengthening the responsibility of directors of Russian companies as well as a measure aimed at increasing the investment attractiveness of the Russian economy.

No. 13 (9479) of the “Economy and Life” newspaper dated April 5 of 2013.