Director's liability for bankruptcy

We have already told you before in articles that the director of the enterprise is liable for losses caused to the company by his culpable actions or omissions.

However, the liability of a manager for damage caused to the enterprise is not the only liability to which a director of an enterprise may be held liable. The issue of liability for actions or inaction that led to the bankruptcy of the company deserves special attention.

In this article, we will examine in detail the conditions under which such liability arises and how courts approach the assessment of a director's actions.

Legal nature of director's liability

When a company is declared bankrupt, the question arises: can the director be personally liable for the company's debts? Yes, he can, if it is proven that his actions led to the bankruptcy.

As the Supreme Court noted in case No. 910/13909/20, the manager's liability for bringing a debtor to bankruptcy is a special type of civil liability. The court emphasized: "The essence of such liability lies in holding the debtor's manager liable as a legal mechanism for protecting and restoring creditors' rights, who, being unaware of the debtor's insolvency in a timely manner through no fault of his, entered into legal relations with him."

Simply put, if a director has brought a company to bankruptcy through his actions, he will be liable to creditors with his own property. This means that creditors will be able to collect debts not only from the company, but also from the director personally.

It is important to understand that such liability may also arise for former managers. Thus, in case No. 903/988/20, the Supreme Court emphasized: "The subject of liability is exclusively the manager of the debtor, including the former head", since the above provision does not contain any restrictions on imposing such liability on the manager of the debtor, whose powers have ceased at the time of the opening of bankruptcy proceedings."

Grounds for liability

An analysis of case law shows that several conditions must be met to hold a director accountable:

1. the presence of signs of insolvency of the enterprise;
2. causal relationship between the actions (inaction) of the manager and bankruptcy;
3. the leader's fault.

The Supreme Court in case No. 910/13909/20 established that the signs of insolvency are:

• existence of the debtor to at least two creditors of monetary obligations, the deadline for implementation of which has come and is determined by the rules of the law regulating the relevant legal relations (purchases and sales, supplies, contracts, loans, budget and tax, etc.);
• the amount of all assets of the debtor is less than the total amount of monetary liabilitiesto all creditors of the debtor, the due date of which has come according to the rules of the law regulating the relevant legal relations (purchase and sale, supplies, contracts, loans, budget and tax, etc.). That is, such a property status of the debtor according to all its indicators (fixed assets, receivables, due date of obligations, etc.), which, based on the assessment of the total value of all its assets, is clearly not able to ensure the satisfaction of the requirements for the fulfillment of obligations to all creditors, the due date of which has come, either voluntarily or in a compulsory manner prescribed by law.
• In case No. 910/3205/22, the Supreme Court also clearly emphasized the the need to have debts to two creditorsThe court refused to hold the director liable because the debtor had only one creditor.

Presumption of guilt of the director

A feature of bankruptcy cases is the legally established presumption of the manager's guilt.

In case No. 903/988/20, the Supreme Court noted: “Part Six of Article 34 of the Code of Ukraine on Bankruptcy Procedures the presumption of guilt of the debtor's manager is established in his failure to comply with the obligation specified in paragraph one of this norm, because the provisions of paragraph one of this norm define as an imperative obligation the manager of the debtor to apply to the court with an application to initiate bankruptcy proceedings."

However, this presumption is rebuttable. A manager can avoid liability if he proves that:

• the financial difficulties were objective in nature;
• he took all possible measures to prevent bankruptcy;
• acted in good faith and reasonably in the interests of the enterprise.

An example of refuting the presumption of guilt is case No. 903/988/20, where the manager proved that the enterprise had significant receivables in the amount of UAH 58,410,204.74 under the agreement on the provision of financial assistance, while the payables amounted to only UAH 40,406,875.97. That is the debtor's assets in the form of receivables exceeded his payablesThe court took this evidence into account and refused to hold the director liable, since the presence of signs of insolvency at the time of the obligation to apply to the court was not proven.

Actions indicating bankruptcy

The example of case No. 910/13909/20 shows which actions of the manager are considered by the courts as evidence of bankruptcy. In this case, the court found the following violations on the part of the manager:

1. Alienation of the company's property (in particular, vehicles) without using the funds received to repay debts to creditors.
2. Changing the name of the company and its location.
3. Changing the manager to a citizen of another state immediately after the above actions are taken.

At the same time, the court drew attention to the sequence of actions of the manager: first the alienation of property, and then the change of the name, location, and management of the company, which together indicated an intention to evade repayment of debts to creditors.

An analysis of court practice shows that the mechanism of holding directors accountable for leading a company to bankruptcy actually works. Courts are willing to hold directors accountable for the company's debts if it is proven that it was their actions that led to the bankruptcy.

However, one should not forget that The mere fact of the bankruptcy of a company is not a basis for the director's liability – it is necessary to prove a causal link between his actions and bankruptcy.

Source: League Law