How to Recover Damages against a Director General: Practical Aspects

Valeriya A. Grinina, School of Governance and Politics, MGIMO University

Abstract. In the following article, the author examines the corporate aspects of the legal status of a chief executive officer who may be held responsible for inflicting damages on a legal entity. Due to novelties introduced to Russian civil and corporate law this topic is highly topical and needs to be developed more precisely. The results of the study will help shareholders, management and other people concerned in resolving corporate disputes related to losses incurred due to guilty actions or omissions of a director.

Key words: corporate liability; chief executives; civil law reform; damages; rights of shareholders; unfairness; unreasonableness; fiduciary relations.

Introduction. The article you are going to read dwells upon the topic of the liability of corporate executives. One of the main trends of recent judicial practices are the proceedings on recovery of damages against a CEO who made incorrect business-decisions, and this gives rise to a broad discussion among legislators and leading lawyers in Russia.

Topicality. The topic of the article is of great current interest because of the recent civil law reforming started in 2014, which introduced new rules to the Russian Civil Code setting forth the main liability principles.

Literature Review. The topic under discussion is ill-developed since the relevant regulation hasn’t been adopted until lately. The main source of information is Art. 53.1 of the Russian Civil Code [1], as well as official judicial commentaries of the Supreme Arbitration Court on it.

Theoretical Background. The main idea of the article is revealed in the concept of corporate liability that means that if a person authorized by law or by constituent documents to act on behalf of the corporation breaches the bona fide provisions and intentionally causes any damage to the corporation6 he or she will be held liable.

Study. A Director General always presumably acts in good faith on behalf of the Company and its shareholders, and if the actions of a Director General cause any adverse effect, the shareholders are entitled to claim for damages. There are several types of bad practices the Director General can conduct, but not all of them are specified directly in the federal legislation. Despite of it, the courts went beyond the settled approach and sometimes use extended construction when dealing with such corporate disputes [2].

Not only the shareholders can claim damages – the newly appointed Director General is also entitled to it. Parties to a corporate agreement can be sued for inflicting harm as well. Courts have the power of discretion to determine any reasonable amount of damages. Both circumstances that evidence the presence of the damage and the cause-and-effect link between these circumstances and the occurrence of the harm have to be proven. The claimant also has to prove the unfairness of the director’s actions, which led to adverse effect, while the director can refer to a high level of risk of the business activities in general. Courts usually set a high value on expert evidences [3].

The Plenum of the Supreme Arbitration Court of the Russian Federation in its resolution № 62 dated 30 July 2013 [4] which is thought to be one of the turning points in the practice of corporate dispute resolution in Russia has explained what is meant by “unfairness and unreasonableness of actions” of a CEO. For example, a director was acting mala fide if:

• There was a conflict of interest;
• He was concealing information about closed transactions from the shareholders of the organization or misrepresented any facts relevant to such transaction;
• He effected a transaction without corporate approval required by law;
• He is withholding documents concerning conditions which led to adverse effect with respect to the company after termination of his powers;
• He knew or should have known that his action or omission at that time didn’t meet the interests of the company, for example, if the director consummated a transaction on designedly disadvantageous conditions for the company or with a counterparty that is designedly unable to perform its obligations (e.g. transactions with a fly-by-night company).

According to the same resolution, each time the court has to decide whether the challenged action was within the scope of duties of the director with due regard to the range of activities of the company, the nature of the particular action etc. A transaction on disadvantageous conditions is a transaction in which the price or any other conditions substantially differ (worsen) from those on which under comparable circumstances legal enteties commence similar transactions. Action or omission of the director is deemed to be unreasonable if:

• He makes such decisions without considering information that is significant in this particular case;
• He doesn’t undertake any actions to receive appropriate and sufficient information before making this particular decision that are common for business practices under similar circumstances;
• If the transaction is consummated in disregard of internal procedures usually required or adopted in this company for similar transactions.

Methods. Both general and special legal techniques have been used while conducting this study. To examine the text of statutory instruments outlined above, the author used technical, dogmatic and hermeneutical methods of legal research, which helped to analyze all provisions with reasonable care. To draw necessary conclusions out of the legislative regulations, such general methods as induction and deduction, analysis and synthesis, specification, comparison, analogy and model examination were applied [5].

Procedure. The study was conducted by analyzing the text of statutory instruments, official judicial commentaries of the Supreme Arbitration Court and current court practice regarding this topic, as well as by comparing the Russian approach to similar approaches in other countries, for example in America.

Results. Some of the main damages a Director General is to reimburse are as follows:

• Monetary damages awarded on wittingly disadvantageous transactions.
• Moneys transferred to a counter-party without any supporting documents.
• Deficient income due to discount selling.
• Release of a debt.
• Monetary amount paid under a deal that hasn’t been duly approved (for example, if there is no approval by the board of directors which is necessary according to the charter).
• Penalty paid due to the fault of a Director General.
• Costs incurred for the construction and further demolition of a building if a proper permission wasn’t obtained.
• Sums of money or bonuses paid in excess of what is set forth in the employment agreement (e.g. if the director has given himself a pay rise without the authorization of the board of directors or if he pays wages to an employee who obviously can’t cope with his duties at work).
• Additional tax assessments resulting from activities of a fly-by-night company.
• Losses incurred due to a suspension of the company’s activities.

Discussion. Although the main principles of corporate liability were introduced to Russian legislation during the civil law reforming, several problems still exist.  So, it is not to a full degree clear whether disputes of such kind are subject to the consideration of the courts of general jurisdiction or of the commercial courts of Russian Federation, because it is being argued whether the CEO merely represents his company and thus is considered to be a part of the business itself or the meaning of the employment relations between the director and the chairman of the board of directors prevails and thus forms a civil law dispute. Furthermore, it can be difficult to prove the amount of damages, because there is no established court practice yet – the court can determine the amount at its own discretion. And at last, a Director General is presumably believed to be innocent until proven guilty which is usually very difficult to do.

Conclusion. Summing up the abovementioned, it is nowadays obvious that much effort has been applied to adopt the corporate liability concept in Russia to the exigencies of modern times and to adjust it to the Anglo-American approach based on confidential fiduciary relations consisting of duty of care and duty of loyalty.

References:

[1] Civil Code of Russian Federation, Part I (ad. 21/10/1994 by the State Duma, ed. on 05/05/2014).

[2] Makarova O.A. Corporate law. Manual // M.: Wolters Kluwer Russia. – 2005, p. 267.

[3] Hasbulatov R.I. International entrepreneurship // M.: Prospect. – 2015, p. 38.

[4] Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation №62. Some issues on the corparate damages recovery (dat. 30/07/2013). http://www.arbitr.ru/as/pract/post_plenum/90841.html

[5] Sirih V.M. Methodology of the juridical science // M.: Norma-INFRA-M. – 2012, p. 24.