Legal guide for company directors and CEOs in Russia

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

Bankruptcy Moratorium

On 6 April 2020 the moratorium on initiating bankruptcy proceedings (the “Bankruptcy Moratorium”) for a period of 6 months (until 6 October 2020) came into force in relation to certain companies, including strategic and “systemically important enterprises and companies” as well as companies operating in the “most COVID-19 affected” industries. The Bankruptcy Moratorium prohibits initiating any bankruptcy proceedings in respect of such companies and restricts, among others, any share buyouts, dividend payments, enforcement against pledged assets, and penalties on, or any setoff against, any monetary obligations of such companies.

The limitations listed above affected the current business of entities covered by the moratorium, including companies that are quite unlikely to go bankrupt (eg state-owned companies). In this regard, the legislator has introduced an option to waive the application of the Bankruptcy Moratorium by publishing a refusal statement in the Unified Federal Register of Bankruptcy Data. Starting from the date of the publication, the moratorium limitations will not apply to the rights and obligations of the relevant company or its creditors. If the term of the Bankruptcy Moratorium is extended, a new refusal statement will need to be filed in order to exclude its application.

Logistics

The period until 11 May 2020 (inclusive) has been classified non-working days by Decree of the Russian President (the “Decree”). This measure is being accompanied by far-reaching quarantine measures in many regions. In Moscow non-essential businesses, shopping centres, public parks, cultural institutions, restaurants and cinemas are closed. Similar measures are being applied in many regions.

Labour and contractual obligations

According to the Decree, only certain companies which are regarded as essential for social purposes or for the purposes of fighting the COVID-19 crisis are permitted to operate. However, the current understanding is that the Decree does not restrict remote working, even though such work is sparsely regulated at the moment.

According to the Decree and clarifications by the Ministry of Labour and Social Protection, full salary must be paid during non-working days.

The Supreme Court clarified, however, that non-working days declared by the Russian President should not be treated as weekends or public holidays in their usual sense. Accordingly, the declaration of non-working days is not a reason for postponing the term of performance of contractual obligations. All statutes of limitations continue to run in the usual manner.

2. What government relief measures have been made available to directors?

In Russia, the most relevant measures for companies include:
Changes to the form and timing of annual general meetings of Russian companies in 2020 

A new law came into force to lift the ban on holding annual general meetings of shareholders of joint stock companies (JSCs) in the form of absentee voting in 2020.

Limited liability companies (LLCs) still have to hold the annual meeting in the form of joint presence; however, in relation to annual meetings to be held in 2020, the deadlines for both LLCs and JSCs have been postponed to 30 September 2020.

Free from net asset testing

Generally, the net assets of any JSC or LLC must be equal to or above the level of its charter capital as at the end of each of the last 2 financial years (or any 3 years since incorporation). If a company fails to meet this requirement, it must decrease its charter capital to the actual level of its net assets. Otherwise, the company may have to be wound up.

However, Federal Law No. 115-FZ exempts FY2020 from this net asset-testing requirement.

Repayment Moratorium Period

Until 30 September 2020 affected small- and medium-sized enterprises (SMEs) will be entitled to ask for a moratorium on loan repayment (or reduction of repayment amounts) for a period of up to 6 months (the “Repayment Moratorium Period”). During the Repayment Moratorium Period lenders may claim no penalties, prepayments or enforcement of security. After the end of the Repayment Moratorium Period, borrowers will be obliged to repay all principals and interests accrued during the Repayment Moratorium Period in accordance with the terms of their loan agreements effective before the Repayment Moratorium Period.

Introduction of reduced social contribution rates for SMEs

With effect from 1 April 2020, SMEs enjoy reduced social contribution rates in Russia. The cumulative social contribution rate applicable to SMEs is now 15% (instead of the normally applicable 30%) and applies to all salaries exceeding the minimum monthly salary.

Suspension of tax audits

The initiation of new, and the continuation of ongoing, field tax audits will be suspended until 1 June 2020. Similar measures apply to transfer pricing and currency control audits. Penalties for late submission of tax reporting or other information or documents to tax authorities will not apply during this period.
Extension of tax reporting deadlines
All Russian taxpayers will enjoy the deferral of tax reporting deadlines in Russia.

These relief measures are covered in more detail in other CMS publications (see our COVID-19 page). More generally, directors’ duties remain as before, as set out in the rest of this guide. The key duty is to promote the success of the company for the benefit of its members as a whole, and that should be the guiding principle for all actions taken by directors. 

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

During the Bankruptcy Moratorium the General Directors of companies, the list of which is specified in Federal Law, cannot be liable for failure to file an insolvency petition and also for insufficiency of the debtor’s assets to satisfy all creditors’ claims (see paragraph 12 below).

Directors duties and responsibilities

This chapter focuses on the rules relating to the management of Russian private legal entities and the duties and liabilities of their officers. Russia has two main kinds of private legal entities: a limited liability company (“Obschestvo s Ogranichennoy Otvetstvennostyu”, abbreviated to OOO and equivalent to LLC) and a joint stock company (“Aktsionernoe Obschestvo” abbreviated to AO and equivalent to JSC). These two main kinds of legal entities are often used as the form of wholly-owned subsidiaries in Russia. This guide does not address the rules for other forms of entities such as the public joint stock company.

1. What form do the management bodies take?

General Director/Management Board

The principal management body of both an LLC and a JSC can be:

  • a sole executive body, usually referred to as the general director (the “General Director”), or
  • a collective executive body, usually referred to, jointly with the General Director, as the management board (the “Management Board”), that must be chaired by the General Director unless the managerial functions are outsourced to an outside management body (see below), or
  • an outside management body, if the charter of the company provides that the authorities of the General Director may be outsourced.

The sole executive body of either an LLC or a JSC can consist of one or several persons (eg directors, chairmen) who may represent the company individually or jointly. This must be reflected in the Unified State Register of Legal Entities (the “Register”). However, the Register has not yet been amended to allow for reflecting the authorities of each of the executives. As a result, currently the general rule is that all executives indicated in the Register have equal and unlimited authority to bind the company and, thus, the four eyes principle cannot currently be implemented vis-à-vis third parties.

Board of Directors

Both an LLC and a JSC may, and in some cases must, also have a collective management body, e.g. a supervisory board or a board of directors (the “Board of Directors”). The Board of Directors is a supervisory, rather than a management, body with the powers stipulated by the Civil Code of the Russian Federation and the respective laws on LLCs and JSCs.

2. What is the role of the Board of Directors?

Under Russian law, the Board of Directors is a supervisory body and members of the Board of Directors cannot represent the company (unless such member is also appointed as the General Director or has been granted with a power of attorney by a General Director). The Board of Directors is mandatory for JSCs with more than 50 shareholders. For JSCs with less than 50 shareholders and LLCs, a Board of Directors is optional.

The authorities of the Board of Directors should be listed in the company’s charter. They typically include appointment and dismissal of the General Director and approval of certain types of transactions or transactions with the value exceeding certain thresholds. 

3. Who can be appointed as the General Director? 

There are few restrictions on who can become a General Director:

  • “disqualified” persons – such persons cannot hold the position of General Director for a minimum of 6 months and a maximum of 3 years. The company is obliged to check the potential General Director for disqualification before appointing. According to the current legislation, information on disqualified persons is published in the public domain
  • a foreign national as the first General Director of the company at incorporation – a foreign national may be appointed as the General Director of an LLC or a JSC subject to compliance with work permit regulations. The company has no ability to obtain a work permit for the General Director in the process of incorporation (until it validly exists and has a bank account). Therefore, the first General Director has to be either a Russian national or a foreign national who does not require a work permit to work in Russia (e.g. a holder of a permanent residency permit in Russia, a national of Belarus, etc.), and
  • “mass” directors (persons holding the position of General Director in more than five companies) – the appointment of such a person as General Director may attract the suspicion of the tax authorities and provoke unscheduled inspections.

4. How is the General Director appointed?

The General Director and members of the Management Board are appointed by a resolution of the general meeting of participants of LLCs or shareholders of JSCs (the “General Meeting”). The charter of an LLC or JSC can provide that the authority to appoint the General Director is delegated by the General Meeting to the Board of Directors.
The appointment of the first General Director is recorded in the minutes of the founders’ meeting of the company and these minutes are filed with the registration authorities. The company is required to register all subsequent changes of the General Director with the registration authorities. 

5. How is the General Director removed from office?

From the perspective of employment law, a General Director may resign from office at any time by giving 1 month’s prior notice to the company. This is an exception to the standard 2 weeks’ notice provision for all employees provided for by the Russian Labour Code (the “Labour Code”).

From the perspective of corporate law, a General Director may be removed at any time by a resolution of the General Meeting (unless this power has been delegated to the Board of Directors). The resolution is usually adopted by simple majority. The charter of the company may provide for a different majority requirement to pass this type of resolution.

6. What authority does the General Director have to represent the company?

The General Director is responsible for the day-to-day running of the company and has the ostensible authority to bind the company. The General Director’s power arises as a matter of law and does not require a power of attorney from any other person. In turn, the General Director may delegate his/her authority to any person by a power of attorney. The General Director deals with all issues not falling within the scope of the authority of the General Meeting and the Board of Directors (if there is one).

The General Director’s power to execute transactions is limited by law. The General Director might require the approval of the General Meeting to execute transactions that fall under the definition of “major” or “interested party” transactions. Certain restrictions on the General Director’s authority, such as a limit on certain transactions, can be set out in the company’s charter and the internal regulations of the company. However, restrictions which are set out in the internal regulations but not in the charter will be invalid and ineffective against a third party (including a third party with actual knowledge of those restrictions).

7. What contractual relationship does the General Director have with the company?

The General Director has to be an employee of the relevant company. Any employment contract that is entered into between a company and a General Director or a member of the Management Board will be subject to the provisions of the Labour Code, many of which are mandatory and override any terms and conditions specified in the individual employment contract. As a general rule, any provisions of the employment agreement which improve the state of the employee shall apply even if they contradict the obligatory provisions of the Labour Code.

In an LLC, the employment contract with the General Director can be signed either by the chairman of the General Meeting or by a participant who has been appointed by the General Meeting to sign on behalf of the company.

Alternatively, if the power to appoint the General Director has been conferred on the Board of Directors, the employment contract may be signed on behalf of the company by the chairman of the Board of Directors or a person authorised to do so by a decision of the Board of Directors. In a JSC the employment contract with the General Director is signed by the chairman of the Board of Directors or a person authorised by resolution of the Board of Directors.

The employment contract of the General Director may be terminated at any time in accordance with the provisions of the Labour Code, by a resolution passed by the General Meeting or by the Board of Directors.

8. What rules apply in respect of conflicts of interest?

Russian law contains regulations on transactions between a company and interested parties (“interested party transactions”). The rules are similar in the case of both LLCs and JSCs.

Depending on the regime chosen by the participants/shareholders and reflected in the company’s charter, interested party transactions might require the approval of the General Meeting or the Board of Directors. The General Director, members of the Management Board, members of the Board of Directors or participants/shareholders owning 1% of the voting shares/participation interests may require such approval prior to the transaction.

Approval of interested party transactions is made by a majority vote of all participants/shareholders or members of the Board of Directors who are not interested in the transaction.

“Interested parties” include the General Director, members of the Management Board, members of the Board of Directors (if established), a person “controlling” the company, or a person who is entitled to issue binding instructions to the company. These people, their spouses, parents, children, full or half-brothers and sisters, adoptive parents and adopted children and controlled persons (controlled organisations) are deemed interested in the relevant transaction.

9. What other general duties does the General Director have?

A General Director and a member of the Management Board or the Board of Directors can also be held liable for committing certain specified administrative offences in accordance with the Code of Administrative Offences of the Russian Federation (eg for breach of labour, immigration, environmental, bankruptcy or securities legislation). Penalties for administrative offences may vary from a fine to disqualification (for a period of up to 3 years). By way of example, a breach of labour legislation on a second offence can result in the disqualification of such a director for a period of 3 years.

A General Director and a member of the Management Board or the Board of Directors can be held liable for committing a criminal offence in cases stipulated by the Russian Criminal Code. Examples of where criminal liability is expressly stipulated include offences connected with the operation of bank accounts (unlawfully obtaining credit through the provision of false information to a bank), competition (entering into agreements limiting competition), commercial bribery, breach of legislation relating to the provision and disclosure of information to the securities market, insolvency (intentional or false bankruptcy) and tax (tax evasion).

10. To whom does the General Director owe duties?

The General Director’s duties are owed to the company itself, rather than to its participants/shareholders. Moreover, the Supreme Court of the Russian Federation stated that directors are entitled not to comply with the instructions of the General Meeting if this would be detrimental to the interests of the company.

11. How do the General Director’s duties change if the company is in financial difficulties?

Under insolvency law, a General Director must generally file an insolvency petition within 1 month of the applicable circumstances arising and a failure to do so may lead to the General Director incurring vicarious liability to third party creditors. 

Finally, although this section concerns the duties and liabilities of “directors”, it is worth noting that the insolvency legislation has developed a concept of a “controlling person” of the debtor (the “Controlling Person”), broadly defined as an individual or a legal entity that has, or had within 3 years prior to the signs of insolvency as well as after their occurrence, but prior to acceptance by the court of the insolvency petition, the right to give binding instructions to the debtor or otherwise determine the debtor’s actions, including making transactions or determining their conditions. Under insolvency law, it is assumed that the General Director and members of the Management Board are the Controlling Persons until proven otherwise.

The General Director as the Controlling Person may bear the vicarious liability for the insufficiency of the debtor’s assets to satisfy all of the creditor’s claims due to his actions or omissions. Such insufficiency of the debtor’s assets is assumed under the following conditions:

  • substantial damage has been caused to creditors’ rights as a result of one or more transactions of the debtor carried out by or for the benefit of the Controlling Person or approved by that person
  • accounting or reporting documents do not exist or do not contain information required under Russian law or such information is distorted at the date of commencement of insolvency proceedings, or as at the date of the declaration of insolvency, as a result of which it is significantly complicated to carry out the insolvency procedures
  • the amount of “third line” creditors’ claims arising as a result of criminal, administrative or tax offences committed by the debtor or its current or former General Directors exceeds 50% of the total amount of “third line” creditors’ claims
  • lack or incompleteness of mandatory documents at the date of commencement of supervision proceedings or at the date of declaration of bankruptcy, and
  • as of the date of initiation of insolvency proceedings, the information that is subject to mandatory entry in public registers under Russian law has not been entered or has included unreliable information about the debtor.

The court may reduce the amount of liability or discharge the General Director from it if the General Director proves that he/she was a “nominal” director and did not exercise any real control over the company’s activity and provides the court with information in relation to the real Controlling Person.

(Please also see the section on COVID-19 considerations for directors above.)

12. What potential liabilities can the company’s officer incur?

Russian law in its current form has only a limited concept of directors’ duties. The law provides that the General Director, members of the Management Board and members of the Board of Directors may be liable to the company for their “guilty actions” (“vinovnie deystviya”) but fails to define this term. 

When considering the liability of a General Director or another officer, the court will take into account the normal conditions of business in the industry concerned, as well as other relevant circumstances.

Furthermore, the Civil Code of the Russian Federation foresees that a person who actually has the ability to determine the actions of the legal entity, for instance the ability to issue instructions to its directors (e.g. its beneficial owner), must act reasonably and in good faith in the interests of such legal entity and be liable for losses caused to it.

If a General Director, members of the Board of Directors, members of the Management Board or a person who actually has the ability to determine the actions of the legal entity jointly cause losses to the legal entity, they must jointly compensate it for these losses.

In LLCs and JSCs an agreement seeking to eliminate or restrict liability of the above-mentioned persons for committing acts in bad faith is null and void.

13. How can the General Director limit his/her liability?

Currently Russian legislation does not foresee a requirement for legal entities to take out liability insurance for directors and officers. However, in practice, major Russian companies do so on a voluntary basis.

In addition, under Russian legislation for LLCs and JSCs it is currently possible to eliminate or limit director’s liability for “unreasonable acts”. This concept is rather new and the approach to formalising such limitation is still being debated. 

Zenin Vladimir
Vladimir Zenin
Partner
Moscow
Elizaveta Rakova