Subsidiary liability in business transfer

Subsidiary liability in business transfer. Involvement of a controlling debtor. Arbitrage practice.

Bringing the controlling debtor of a person to subsidiary liability is possible if he commits actions aimed at causing harm to the property interests of creditors. Indirect evidence of the withdrawal of property in favor of another company, the founder of which is the controlling person, despite the fact that both companies carry out similar activities in the same territory, also indicates the intention of the controlling person to harm creditors. In this case, the debt arising from the subsidiary liability of the controlling person is inherited after the death of the controlling person.

Case plot:

The company was declared bankrupt as an absent debtor. An insignificant amount of money remained in the debtor's bank accounts compared to the amount of claims of bankruptcy creditors included in the register of claims. The company had no other property that could be foreclosed on. The founder and sole member of the society died, his property passed to his heirs: his wife and children.

Due to the insufficiency of the debtor's property to satisfy the claims of creditors, the bankruptcy trustee filed an application for bringing the heirs of the debtor's head to subsidiary liability. The size of the estate was several times greater than the amount of the debt to the debtor's creditors.

The arbitration court satisfied the application for bringing to subsidiary liability in connection with the fact that it was established that the debtor's heirs continued to develop the business on behalf of another legal entity, in which the deceased head of the company was also a participant. As a result of unfair actions of controlling persons, the debtor did not have the income and property necessary to satisfy the claims of creditors. The Court of Appeal upheld the decision of the Court of First Instance.

Disagreeing with the adopted judicial acts, the wife of the head of the company, also acting in the interests of minor children, filed a cassation appeal. She believed that the courts erroneously concluded that the property was transferred to another legal entity that carried out similar activities in the same territory, since the company did not have its own property.

The District Court of Arbitration upheld the judicial acts, and the cassation appeal was left unsatisfied.

Judicial act: Resolution of the Arbitration Court of the Ural District dated 03.03.21 in case No. А60-32466/2019.

Court's findings:

1. If the insolvency practitioner or creditors, using circumstantial evidence, have convincingly substantiated the allegations that the person being held liable has the status of a controlling person and that it is impossible to pay creditors’ claims as a result of the actions of the latter, the burden of refuting these allegations passes to the person involved, who must prove why the written documents and other evidence of the arbitration manager, creditors cannot be accepted in support of their arguments by disclosing their documents and providing explanations as to how the economic activity was actually carried out.

2. The company was registered during the marriage of the head with his wife, who was brought to subsidiary liability, respectively, the company was the joint property of the spouses. This is indirect evidence that the debtor's spouse was the controlling person of the debtor.

3. The courts concluded that the recreation center was a joint business of the spouses, since the spouse of the head was directly involved in the activities of the recreation center, had entrepreneurial experience, was the head of a company with a similar field of activity, the enterprises operated within a small settlement.

4. Debt arising from subsidiary liability must be subject to the same legal regime as other debts related to compensation for damage to the property of participants, and civil law does not contain a prohibition on the transfer of disputed obligations by inheritance.

5. For the implementation of the creditor's right to judicial protection, it does not matter the moment of presentation and consideration of an application for holding the controlling debtor of a person to subsidiary liability: before or after his death. In the latter case, the claim is subject to presentation either to the heirs or to the estate and can be satisfied only within the limits of the value of the estate. In this case, it does not matter whether the property that was acquired by the testator at the expense of creditors as a result of illegal actions that entailed subsidiary liability became directly part of the estate.

Comments:

1. Despite the fact that a debt that is inextricably linked with the personality of the debtor does not pass by way of inheritance, a different rule applies in bankruptcy. If an organization is bankrupt, and the testator is recognized as the person controlling the bankrupt organization, then his debt arising from subsidiary liability will no longer be considered inextricably linked with the person of the debtor, and he will be inherited. This approach is fair because it allows minimizing the negative impact of the debtor's bankruptcy on creditors. At the same time, the controlling person, by his unfair actions, which led the company to bankruptcy, should not avoid property liability. Since the inheritance mass includes the property of the controlling debtor-bankrupt person (manager), it is logical that the claims of creditors should be satisfied from this property mass.

2. In addition, the courts analyzed all the circumstances, circumstantial evidence that the spouse of the head of the debtor was a controlling person. This conclusion followed, obviously, because the arbitration manager presented a chain of evidence that leads to the conclusion about the joint business of the spouses and the withdrawal of property from the debtor's company to another, the founder of which was the spouses, in order to evade satisfaction of claims for compensation for harm to health.

3. The debtor actually stopped its activities, there were no transactions on its current accounts, however, the same activity was carried out at the same address. At the same time, the debtor did not legally terminate its activities through the liquidation and satisfaction of creditors' claims. This only speaks of his bad faith and the withdrawal of property to another enterprise.

4. The wife of the head of the debtor asked to attach additional evidence, indicating that the debtor had no property, the district court. The court justifiably refused to admit evidence, since all the evidence had to be submitted to the court of first instance.

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