Liability of the CEO of a company in Russia

1) Can a CEO of a private company be personally liable for the acts/omission and / or obligations of the company?

Pursuant to labor legislation (Article 277 of the Labor Code of Russian Federation), the CEO bears full financial liability for direct damage caused to the company. Furthermore, in accordance with civil legislation, the CEO is obligated to compensate for losses incurred by the company, if the CEO violated the duty of loyalty or duty of care (Article 53.1 of the Civil Code of Russian Federation), upon the claims of the company's participants/shareholders. 

In the event of the company's insolvency, if the company's assets are insufficient to satisfy the creditors’ claims , the CEO may be held subsidiarily liable for the company's obligations for bringing to bankruptcy (at the same time, it must be proved that it was the CEO's actions that led to bankruptcy)  and for failure to file a bankruptcy petition (Articles 61.11., 61.12. of the Federal Law "On Insolvency (Bankruptcy)"). 

The CEO bears administrative liability for violations of tax, labor, and other types of legislation. The CEO bears criminal liability for offenses such as failure to pay wages for more than two months, large-scale tax evasion, fraud, and abuse of authority.

2) In which cases may a CEO incur civil liability in connection with performance or a failure to perform his duties?

The CEO bears civil liability to the company for losses caused by his/her guilty, unfair or unreasonable actions (inaction), provided that the company or its participants prove: the dishonesty and/or unreasonableness of the CEO's actions (including if his/her actions (inaction) did not comply with the usual conditions of civil turnover or the usual business risk) the occurrence of losses and a causal relationship (clause 1 of Article 53.1. of the Civil Code of the Russian Federation). The CEO is obliged to prove the absence of his/her guilt, good faith and reasonableness of his/her actions.  At the same time, since the CEO has an independent duty to act in the interests of the company, the fact that the actions of the CEO are approved by collegial bodies or participants is not a reason for refusing to satisfy the claim for damages. 

3) What violations may trigger administrative liability of a CEO as a company official?

For improper performance of organizational, administrative, or administrative-economic functions within the company, the CEO bears administrative liability as a public official. Typical administrative offenses for which the CEO is liable can be divided into the following categories:

• Taxes, fees, and accounting (untimely filing of tax and accounting reports; gross violation of accounting record-keeping rules; failure to provide information required for tax control);
• Labor legislation (non-payment or delayed payment of wages, vacation pay, and other mandatory payments; unlawful employment in the Russian Federation of foreign nationals or stateless persons without proper permits);
• Business (entrepreneurial) activity (entrepreneurial activity without a license or in violation of licensing requirements; violation of cash-register equipment rules, such failing to issue receipts; liability for fictitious or deliberate bankruptcy and improper actions in bankruptcy proceedings);
• Corporate governance (violations of procedures for convening, preparing, and holding general meetings of  participants of an LLC, as well as a failure to comply with statutory  requirements for storing corporate documents);
• Personal data protection and confidentiality (unlawful collection, storage, use, or dissemination of citizens' personal data; breaches in handling confidential information).

4) Under what circumstances may a CEO face criminal liability?

Since the CEO is a person performing administrative and managerial functions within a company and, as a rule, the person authorized to sign documents on behalf of the company, law enforcement authorities often view the CEO primarily as a subject of a crime committed on behalf of the company.

The most common types of crimes for which CEOs are prosecuted include:

• fraud, i.e., the misappropriation of another’s property by deception or abuse of trust (for example, where funds are received under a contract and the obligations assumed are not fulfilled, or where the price of goods, works, or services is artificially inflated under a government contract) (Article 159 of the Criminal Code of the Russian Federation (hereinafter - the Criminal Code));
• evasion of tax payments (where the amount of tax arrears exceeds RUB 18.75 million) (Article 199 of the Criminal Code);
• abuse of authority, i.e., the use of powers contrary to the legitimate interests of the organization and for the purpose of deriving benefits for oneself or others, or causing harm to others (Article 201 of the Criminal);
• unlawful receipt of remuneration for the performance or non-performance of actions within one’s authority, or for using one’s official position to facilitate such actions (or omissions) in the interests of the person providing the remuneration or other persons (Article 204 of the Criminal Code);
• giving a bribe to a public official (Article 291 of the Criminal Code);
• manufacture, storage, transportation, or sale of goods and products, or the performance of works or provision of services that do not meet safety requirements (in cases where harm to health or death of a consumer results) (Article 238 of the Criminal Code);
• violation of occupational health and safety requirements resulting in grievous bodily harm or death (a CEO may be held liable where no other person has been formally designated as responsible for occupational health and safety) (Article 143 of the Criminal Code);
• non-payment of wages committed out of mercenary or other personal interest (where partial non-payment exceeds three months or full non-payment exceeds two months) Article 145.1 of the Criminal Code).

5) Can a CEO be held liable for the actions of subordinates, in particular, if he delegates a part of his authorities?

The employer (legal entity) is responsible for the harm caused by the employee to third parties on the basis of Article 1068 of the Civil Code of the Russian Federation. At the same time, the employer has the right of recourse against the employee.

The head is responsible to the legal entity for the resulting losses (paragraph 3 of Article 53 of the Civil Code of the Russian Federation) in cases of unfair (or) unreasonable performance of duties related to the selection and control of actions (inaction) of representatives, employees of a legal entity, as well as improper organization of the management system of the legal entity, according to clause 5 of                                     the Resolution No. 62 of the Plenum of the Supreme Arbitration Court of the Russian Federation dated July 30, 2013 "On certain Issues of Compensation for Losses by Persons who are Members of the Bodies of a legal entity" (hereinafter - the Resolution No. 62).

The CEO, therefore, may be liable to the company for losses if he/she has chosen an employee in bad faith or has not organized control over his/her actions.

The Supreme Court of the Russian Federation clarified in paragraph 6 of the Resolution of the Plenum dated December 21, 2017 No. 53 "On certain issues related to bringing persons controlling the debtor to responsibility in bankruptcy" that a head who is formally a member of the bodies of a legal entity but did not carry out actual management (nominal head), for example, completely transferred management by another person on the basis of a power of attorney does not lose the status of a controlling person.

6) Does the business judgment rule apply to a CEO?

An analog of the business judgment rule is applied to CEOs in Russia, which is referred to in legal doctrine and judicial practice as the rule of ordinary business (entrepreneurial) risk. 

The Supreme Arbitration Court of the Russian Federation indicated in paragraph 1 of the Resolution No. 62 that, since judicial control is not intended to verify the economic feasibility of decisions taken by managers, the CEO cannot be held accountable for losses caused to a legal entity in cases where his/her actions (inaction) that caused losses did not exceed ordinary business (entrepreneurial) risk. 

The Supreme Court of the Russian Federation confirmed this position in paragraph 25 of the Resolution of the Plenum No. 25 dated 06/23/2015. 

Judicial practice and doctrine distinguish the following elements of this rule:

1) Integrity: the CEO acts in good faith if there is no conflict of interest or the conflict is disclosed to him/her in advance and the necessary corporate approvals of his actions are obtained; information is not hidden from the participants of the legal entity (paragraph 2 of the Resolution No. 62). 

2) Reasonableness (due diligence): the unreasonableness of the CEO's actions is considered proven when, in particular, he/she made a decision without taking into account relevant information known to him/her; before making the decision, he/she did not take actions to obtain necessary and sufficient information, which are common for business practice under similar circumstances (paragraph 3 of the Resolution No. 62).

3) Focus on the interests of the company: the CEO's decision was aimed at making a profit (the main interest of a commercial organization according to clause 1 of Article 50 of the Civil Code of the Russian Federation).

7) Can a CEO be held liable for his actions or omission after termination of their office?

Termination of office does not release the CEO from liability for acts or omissions committed during their tenure. Under Art. 53.1 of the Civil Code of the RF and Art. 277 of the Labor Code of the RF, a claim for compensation of losses caused to the company can be brought against a former CEO. The statute of limitations for such claims is generally three years. Similarly, administrative and criminal proceedings for violations committed by the CEO while in office can be initiated after the resignation, provided the statutory periods for bringing to liability (e.g., statute of limitations under Art. 4.5 of the Code of Administrative Offences of the Russian Federation) have not expired.

8) Can a CEO’s liability be limited by an employment contract, articles of association or internal corporate documents?

The possibility to limit liability is restricted by law and public policy. Full financial liability for direct damage caused to the company is established by law (Art. 277 of the Labor Code of the Russian Federation ) and cannot be reduced by agreement. As for civil liability for losses caused by unfair or unreasonable actions (, any agreement to limit or eliminate it is void (clause 5, Art. 53.1 of the Civil Code of the Russian Federation). The company's charter or internal documents may establish additional grounds for liability, but cannot limit the statutory minimum.

9) Is a CEO liable for failure to comply with the tax, accounting and other reporting requirements?

The CEO bears administrative, criminal, civil, and subsidiary liability for failure to comply with requirements for submitting tax, accounting, and other reports, such as statistical reports. 

Thus, the Code of Administrative Offences of the Russian Federation (hereinafter – the Administrative Code) provides for the administrative fines for missing deadlines for filing tax returns (Article 15.5 of theAdministrative Code) and for failing to provide information for tax control purposes (Article 15.6 of theAdministrative Code for a company’s officials. 

For gross violation of accounting and reporting requirements, a fine from 5,000 to 10,000 rubles is stipulated, and in case of a repeated violation — up to 20,000 rubles or disqualification for up to 2 years (Article 15.11 of the Russian Code of Administrative Offences). 

For violation of the rules for submitting statistical reports, fines from 10,000 to 20,000 rubles are stipulated for the first instance and up to 50,000 rubles for a repeated violation. 

Criminal liability is stipulated for substantial amounts of tax, levy, or insurance premium evasion (Article 199 of the Russian Criminal Code) or for delayed wage payments (Article 145.1 of the Russian Criminal Code). 

In addition, under labor (Article 277 of the Russian Labor Code) and civil legislation, the CEO is obligated to compensate the company for losses (Article 53.1 of the Russian Civil Code) arising from his/her bad faith actions, including fines and penalties assessed for tax violations.

10) What practical steps can a CEO take to mitigate the risks of his criminal, administrative and civil liability?

Since even ordinary CEO decisions (for example, postponing payment to a counterparty) can be interpreted by investigating bodies as abuse of authority (art. 201 of the Criminal Code) or fraud (art. 159 of the Criminal Code), it is necessary to follow corporate procedures for approving major transactions and internal approval regulations, organize KYC counterparties (verification of credentials, beneficiaries, lawsuits and signs of insolvency, business reputation). 

To reduce the risks of bringing to subsidiary and criminal liability (Articles 196-197 of the Criminal Code; Articles 61.11–61.13 of the Federal Law "On Insolvency (Bankruptcy)") in case of the company’s  bankruptcy, the CEO may, in particular, implement control over "financial triggers" of insolvency (cash gaps, delays, arrests/collection, termination of lending, lawsuits with creditors, etc.), coordinate with the general meeting of participants/shareholders and/or record anti-crisis measures: debt restructuring, negotiations with creditors, cost reduction, sale of non-core assets. 

In order to minimize the risks of imposing of administrative liability on CEO, it is possible, in particular, to introduce regulations on compliance with legal requirements in such areas as taxation, personal data protection and competition, labor protection, migration matters; appoint the employees responsible for compliance in the respective areas and monitor on a regular basis the proper performance of their duties by these employees, including organizing internal inspections /audits.

Authors: Yana Dianova, Andrey Borovkov, Anna Kritsyna, Alena Ivanova, Alisa Palant, Aleksandra Levenkova