SС Judge Oleksandr Banasko Revealed Issues of Bringing to Subsidiary and Joint Liability

“The goal of bankruptcy legislation is to fully satisfy the claims of the debtor’s creditors,” said Oleksandr Banasko, judge of the Judicial Chamber on Bankruptcy Cases of the Commercial Cassation Court within the Supreme Court, during the VIІ Restructuring and Bankruptcy Forum, which took place on July 13, 2022.

According to the speaker, in order to achieve this goal, the legislator has introduced certain tools, in particular: a moratorium on satisfaction of creditors' claims; measures to secure creditors' claims; the institution of joint liability of the head of the debtor; institution of subsidiary liability; invalidation of transactions; sale of property in the electronic trading system.

Highlighting the problematic issues of bringing the heads / beneficiaries of bankrupt borrowers to subsidiary and several liability, the judge pointed out that the basis of the institutions was the doctrine of "piercing the corporate veil", which was a means of protecting creditors from obvious abuses by the founders of the legal entities that control it. This doctrine was not inherent in our legal system, but taken from the Anglo-Saxon system of law.

Oleksandr Banasko also analyzed the judgment of the European Court of Human Rights of August 11, 2018 in the case of Lekić v. Slovenia, which is becoming increasingly widespread and applied in the case law of Ukrainian courts. Under the circumstances of this case, the applicant complained about being excluded from the register of a limited liability company in which he had been a minority shareholder and who had been held personally liable for the debts of that company. The ECtHR recognized that the director should have known and foreseen the possible consequences in the form of subsidiary liability. The fact that, in the presence of signs of bankruptcy of the company, he did not take measures to declare the company bankrupt as part of the insolvency proceedings, but actually extended its existence as a legal entity, despite the impossibility of fulfilling obligations, does not meet the principle of good faith in commercial practice. Accordingly, the applicant cannot benefit from this situation in the form of a discharge. The ECtHR held that the law may satisfy the requirement of predictability even if the person concerned has to avail himself of appropriate legal aid to assess the consequences that this action may have. According to the speaker, this is especially important for persons engaged in managerial activities, who are accustomed to being more cautious in the performance of their official duties. In this regard, they should be expected to take special care when assessing the risks that such activities may cause.

In the context of the topic under discussion, the speaker said that after the introduction of the Code of Ukraine on Bankruptcy Procedures, the number of cases on bringing officials of the debtor enterprise to subsidiary liability was growing exponentially, which indicated the development of this institution and that the tool was one of the means to achieve the goal in bankruptcy cases. "If we analyze judicial case law from a historical perspective, then 5-6 years ago there were actually isolated cases of the application of the institution of subsidiary liability. Now, the situation has changed dramatically, the number of such applications has significantly increased, and they are being resolved with a positive result for the applicant. The Supreme Court supports the practice of imposing subsidiary liability on the founders and managers of enterprises if there are grounds specified by the current legislation.”

As for bringing the mentioned persons to joint and several liability, according to the speaker, the number of such cases is much smaller, which indicates insufficient development of this institution. “In my opinion, the problem is that the participants in the turnover are not fully aware of the effectiveness of such tools. And it is judicial case law that is called upon to direct the vector of law enforcement of the Supreme Court in such a way as to make these institutions as effective as possible,” Oleksandr Banasko emphasized.

In addition, the judge of the Supreme Court gave detailed information on the case law in this category of disputes and analysed a number of relevant rulings of the specialized judicial chamber of the Commercial Cassation Court within the Supreme Court. He reiterated that the Commercial Cassation Court within the Supreme Court regularly prepared and published reviews of relevant case law.

The speaker also dwelled on the normative regulation of these two institutions, pointed out their significant differences and spoke about the main issues of the application of subsidiary and joint liability.