22 10 2021
Liability of Founding Shareholders and Officials at Bankruptcy of Limited Liability Partnership
The very name of organizational legal form defines the characteristic and main peculiarity of Limited Liability Partnerships (hereinafter - LLP), which is in the following – liability of founding shareholders towards creditors is limited with limits of charter capital.
In particular, basing upon the direct norm of Law, LLP is the partnership found by one or several people: the capital of the partnership is divided into the parts defined by charter documents, and participants of Limited Liability Partnership are not liable for its debts and bear the risk of losses, related to the activity of the Partnership.
Section 1 of Article 8 defines that participants of Limited Liability Partnership are its founders, and people who obtained the share of the Partnership property after its incorporation.
With respect to abovementioned, the capital in Limited Liability Partnership is divided into shares, proportional to contributions of participants, and participants (proprietors) of LLP, despite the fact that they are not liable for its debts, but bear the risk of losses related to the activity of the LLP, within the limits of their contributions. Thus, at incorporation of LLP, proprietors themselves define the limits of responsibility and risks which they are ready to bear in course of their entrepreneurial activity, which, undoubtedly, is one of the best business tools.
Despite the limited liability of proprietors, every rule has exclusions. In this case, to follow and ensure the lawful rights of creditors having the claims to property of LLP within the frameworks of bankruptcy procedure of the company, the legal instrument is provided – subsidiary liability of founders.
One of the reasons of bringing of business proprietors to subsidiary liability is in the situation when Partnership is primarily incorporated for temporary generation of profit, and at deliberate pushing to bankruptcy. If after the bankruptcy procedure it is discovered that the property of company does not cover the indebtedness, the participant/founder himself may be brought to responsibility.
The developed mechanism of bringing of business proprietors to liability is necessary, first of all, for creditors of insolvent debtor, because in cases of impossibility or unwillingness to execute the property and financial liabilities, proprietors might use different methods of avoidance of property levy. These methods are, for example, conclusion of economically insubstantial affairs with rogue firms, donation of part of the property, wasteful spending, overestimation of expenses and other methods of asset stripping. Nevertheless, these items are related to mala fide proprietors only, whose goal is, as it was said before, the generation of maximal profit.
Creditors shall know that if Partnership does not have enough property to cover the existing indebtedness, the sum of indebtedness might be collected from personal assets of participants only in case if it is proved in course of administrative or criminal procedure, that the bankruptcy of Partnership was caused by actions of its participants.
To bring the people, denoted in the law, to subsidiary liability, it is necessary to have due decrees of prosecuting authorities, or correspondent court decisions.
This means that these people shall be brought to administrative or criminal responsibility. At that, issue on the appearance of subsidiary liability for debts of bankrupted company may appear only in case if the guilt of these people in pushing to bankruptcy is proved.
I would like to emphasize several important moments related to the bankruptcy of legal bodies:
1.In case of Partnership bankruptcy, creditors have the right to claim for compensation of debt both by company and by its owner.
2.It is important to remember that creditors shall prove that the bankruptcy was caused by illegal actions or inaction of the company administration.
3.With the aim to exclude the reasons for bringing to subsidiary liability, at the presence of director, founders shall control the activity of the company.
4.It is necessary to develop the control system that shows the real image of current activity of the Partnership, otherwise, you will have to bear the responsibility for ignorant or fraud actions of the director.
5.At that, it is important to monitor the conditions of accounting. Falsification of documents or their damage might be the proof of deliberate bankruptcy, and, as consequence, appearance of subsidiary liabilities.
6.If it is impossible to fulfil the estate liabilities, we recommend the independent start of bankruptcy procedure, without waiting when the authorized body or creditor starts it.
Author: Gohar Avetisyan, Lawyer in MG Partners