Criminal liability has been made harsher in the bankruptcy sphere

New parties subject to criminal liability under articles 195 and 196 of the Russian Criminal Code (the “Criminal Code”).

The new law has significantly expanded the range of parties which can face criminal liability for unlawful activities during bankruptcy (article 195 of the Criminal Code) and for deliberate bankruptcy (article 196 of the Criminal Code).

Instead of the listing separate special parties, the legal provisions concerning the unlawful satisfaction of financial claims of individual creditors out of a debtor’s property (article 195(2) of the Criminal Code) and deliberate bankruptcy include the debtor’s controlling persons as such parties.

Moreover, direct liability is provided for court-appointed administrators and liquidators of debtors for unlawfully satisfying creditors’ claims (article 195(2) of the Criminal Code).

The concept of a controlling entity is very broad. Based on article 61.10 of the Federal Law “On insolvency (bankruptcy)”, a person who had powers, within three years before the debtor started to demonstrate signs of bankruptcy or after that, to give binding instructions to the debtor or otherwise determine the debtor’s actions, including consummation of transactions and determining their terms can be recognised as a controlling person. Such wording allows for not only directors and members of companies, but also their beneficial owners, employees, representatives and persons who have no formal legal link to the debtor, to be classified as persons on whom liability is imposed for the unlawful satisfaction of creditors’ claims and for deliberate bankruptcy.

New classifying signs under articles 195 and 196 of the Criminal Code

The legislature has introduced harsher liability for bankruptcy crimes committed by particular categories of persons, including a debtor’s manager or controlling persons. Such increased liability has been also stipulated for crimes committed with abuse of an office.

If the above qualifying signs are present, the commission of the acts for which articles 195(1)[1]  and 195(3)[2]  of the Criminal Code provide entails a sanction, from a fine of up to RUB 500,000 to imprisonment for up to 4 years, with or without the convicted person being disqualified from holding specified positions or being involved in certain activities for up to 3 years[3].

Moreover, increased liability has been introduced for a court-appointed administrator, head of the debtor's liquidation committee (liquidator) and controlling persons (a director of such a person) for the unlawful satisfaction of the property claims of particular creditors using the debtor’s property[4].

The commission of each of the acts stipulated by article 195 of the Criminal Code by a group of persons acting in collusion or by an organised group of persons will entail even stricter sanctions: from a fine of RUB 1 million to imprisonment for up to 5 years together with the fine.

Liability for deliberate bankruptcy

The liability of beneficial owners and directors has also become more stringent for committing actions (an omission) which were known to entail the person’s inability to fully satisfy the claims of the creditors (deliberate bankruptcy) (new part 2 of article 196 of the Criminal Code). The sanction now varies from a fine of RUB 3 to 5 million to imprisonment for up to 7 years, with or without the convicted person being disqualified from holding specified positions or being involved in certain activities for up to 3 years.

A similar severe liability for deliberate bankruptcy has been provided for accessories in the form of a group of persons acting in collusion or of an organised group of persons.

The possibility of being released from criminal liability for deliberate bankruptcy and unlawful actions during bankruptcy

Under the new law, persons controlling debtor who have committed the crime for the first time can be released from liability if there is no other corpus delicti in their actions and provided they fully cooperate with investigation. In particular, if such a person:

• willingly reported the persons who benefited from illegal behaviour of the debtor;
• disclosed information concerning the property and income of such persons the volume of which would secure actual compensation of the damage caused by such crime.
  

Concealment, destruction and forgery of accounting and other records can serve as a basis for liability under 195 of the Criminal Code

It should be noted that courts in tax disputes rather frequently conclude that there are misstatements in accounting and tax records. This creates an additional risk of being subjected to criminal liability under bankruptcy-related articles.

For instance, in one case a court held that the ground for the upward assessment of taxes was the submission of “documents containing inaccurate data and not confirming the genuine nature of the business transactions made during cooperation with the contracting party”, and sided with the tax inspectorate (the Resolution of the Commercial Court for the West Siberian Circuit dated 18 June 2021 in case No. А75-10749/2020).

According to another judgment, “the taxpayer used questionable contracting parties to create the document flow aimed at overstating its costs for profit tax purposes and for applying deductions when it assessed the VAT. ... the documents contain inaccurate data...” (the Resolution of the Commercial Court for the Moscow Circuit dated 21 May 2019 in case No. A40-116767/2017).

In the Resolution of the Commercial Court for the North Western Circuit dated 20 May 2021 in case No. А21-15065/2019 the court arrived at the conclusion that “the source documents that the Company provided contained inaccurate data and did not contain any genuine business transactions”.

If a tax authority establishes such facts, the taxpayers are almost always held liable under article 122(3) of the Russian Tax Code. This not only implies a fine of 40% but also an established intent, which, in turn, entails the risk of subsequent liability being imposed under bankruptcy-related articles.

Forgery of accounting and financial documentation can serve as the ground for having criminal liability imposed under article 195(1) of the Criminal Code. The concealment of money or property of a company or of an individual entrepreneur out of which taxes, levies and insurance contributions should be paid can be classified under article 195 rather than article 199.2 of the Criminal Code if such concealment is coupled with the signs of bankruptcy.

What to think about and what to do

The legislature continues to consistently increase liability of controlling persons. Following the large-scale application of secondary liability, we can forecast an increase in the number of criminal cases instigated under the corpus delicti of articles 195 and 196 of the Criminal Code and relevant sentences to be issued.

In view of the above, increasing importance is becoming attached to anti-bankruptcy compliance, which is aimed, among other things, at preventing liability of controlling persons with regard to the business structure set up, corporate decisions adopted and transactions consummated. Special emphasis should be placed on the accuracy and completeness of accounting documents and compliance with tax legislation since tax authorities act in many cases as initiators of criminal liability being imposed on controlling persons. 

Help from your adviser

Pepeliaev Group’s lawyers boast extensive experience of providing services in risk management and criminal defence of business, including as regards the application of bankruptcy legislation. We are ready to provide full-fledged legal support in order to eliminate the risks of liability of controlling persons and to ensure qualified protection of their interests in both civil and criminal proceedings.

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[1] Article 195(1) of the Criminal Code entrenches criminal liability for the following actions (an omission) committed in cases where signs of bankruptcy are present:

[2] Article 195(3) of the Criminal Code envisages criminal liability for illegal interference with the activities of a court-appointed administrator or temporary administration of a credit institution.

[3] The following sanctions are envisaged for offences stipulated by article 195(3)(1) of the Criminal Code by a person who has abused its office or by the debtor’s controlling entity or director of such controlling entity:

[4] The liability of a court-appointed administrator, head of the debtor's liquidation committee (liquidator) and controlling persons (head of such a person) for the unlawful satisfaction of the property claims of particular creditors using the debtor’s property, provides the following: