The Corporate Veil: The Most Expensive Fabric in Business is Being Torn

Amendments to the Law “On Insolvency Resolution” have expanded the grounds for imposing subsidiary liability on the owners (shareholders) of a bankrupt entity.

1. The liability of other controlling persons (the director and other persons who legally or actually managing the company) has not changed.
2. Before these amendments, controlling persons could be held subsidiarily liable if the bankruptcy had been caused by their guilty intentional acts. In other words, liability arose where the controlling person, through their actions, drove the company into bankruptcy, was aware that such actions were unlawful, understood that their consequences could result in bankruptcy, and nevertheless consciously engaged in such conduct (asset stripping, tax violations, etc.).
3. Several years ago, the introduction of this standard of liability significantly reduced the number of persons held subsidiarily liable.
4. The amendments additionally provide that the owners (shareholders) are liable for the bankrupt entity’s debts arising from:

• causing harm to life or health;
• payment of employment-related income and owed to individuals under civil law contracts.

5. Each participant is liable in proportion to their shares.
6. Other controlling persons remain liable for the above debts on the general grounds applicable to other debts, that is, where the bankruptcy was caused by their guilty intentional acts.
7. The new grounds do not apply in the bankruptcy of entities that are 50% or more state-owned, foundations, property developers’ associations, gardening associations, and similar organizations.

The amendments will enter into force three months after publication, which is expected any day now.