New rules for the discharge of subsidiary liability debts

The Presidium of the Supreme Court of the Russian Federation has introduced significant amendments to the rules on the discharge of citizens’ obligations related to subsidiary liability, providing answers to questions that had long remained a subject of debate within the legal community. Let’s explore the conditions under which the ‘eternal’ debts of controlling persons (CPs) of a debtor can now be discharged.

As a general rule, upon the completion of settlements with creditors, an individual declared bankrupt is discharged from any further liability for creditors’ claims. However, the law provides a list of exceptions (Clause 6, Article 213.28 of the Bankruptcy Law), which has traditionally included debts arising from subsidiary liability. The Supreme Court has now refined the interpretation of this provision, clarifying that the debts of controlling persons (CPs) may be discharged if it is proven that the actions leading to such liability were committed neither with intent nor with gross negligence.

The Supreme Court of the Russian Federation has clearly distinguished between these two forms of fault. Intent involves an awareness of the harmful nature of one’s actions and the foresight of their negative consequences, while gross negligence is characterized by a failure to observe even minimum standards of due care.

Thus, if a controlling person (CP) acted with simple negligence—for example, by approving loss-making transactions under the direction of a controlling beneficiary without deriving any personal benefit—this may serve as grounds for a discharge from such obligations. An essential prerequisite is the ‘good faith’ conduct of the individual throughout the personal bankruptcy procedure, which includes cooperation with the financial manager and full disclosure of all assets.

The Supreme Court’s clarifications have raised numerous questions. The most debated of these is the possibility of imposing subsidiary liability based on ‘simple negligence.’ Furthermore, a question arises: is the arbitration court in a controlling person’s bankruptcy case entitled to re-evaluate circumstances that were already examined during the proceedings that established subsidiary liability?

Currently, if the judicial act awarding damages does not explicitly conclude that there was intent or gross negligence, courts tend to re-examine these facts. However, case law in this area continues to evolve.

Today, the practice of discharging debts in personal bankruptcy is becoming increasingly common. The Supreme Court’s clarifications will undoubtedly accelerate the process of discharging ‘hopeless’ debts. At the same time, the nuances of proving the absence of intent and assessing the actions of controlling persons require a deep dive into the case materials. This is particularly critical when dealing with Standalone bankruptcy disputes, which address complex issues of liability and the limits of protecting the interests of controlling persons.