Author: Maryna Pokotylo, Partner at F&P
The traditional view of an LLC as a “shield” against personal liability is one of the most dangerous legal illusions in Ukrainian business. Yes, as a general rule, a member of an LLC is liable for the company’s obligations only to the extent of their capital contribution. But there is an exception to this “general rule,” and this exception has been applied with increasing frequency in recent years.
Subsidiary liability is a mechanism whereby a legal entity’s debts may be recovered from its manager, founder, or another person who effectively controlled the company’s activities. Not from the company itself, but from a specific individual—using that person’s personal funds, property, and accounts.
When Does Subsidiary Liability Apply?
The main grounds are set forth in the Bankruptcy Procedures Code (Article 61):
Driving a company into bankruptcy. If the bankruptcy of a legal entity was caused by the actions or inaction of its founders, shareholders, directors, or other persons who had the authority to issue binding instructions or were otherwise able to determine the debtor’s actions—such persons bear subsidiary liability for the creditors’ unsatisfied claims.
Failure to File for Bankruptcy. If the director knew (or should have known) that the company was unable to meet its financial obligations, but failed to file a petition to initiate bankruptcy proceedings, he bears subsidiary liability for obligations arising after the deadline for filing such a petition has expired.
The absence or falsification of accounting records. If the documentation is missing or does not contain information about the debtor’s assets and liabilities—and this has significantly complicated the bankruptcy proceedings—that is also grounds for dismissal.
Who can be prosecuted
Not just the director. The law uses the term “persons who had the ability to determine the debtor’s actions.” These may include:
- Director (current or former)
- Founder/participant (especially if he or she actually managed the operations)
- Ultimate Beneficial Owner
- Chief Accountant (with regard to responsibility for documentation)
- De facto leader — a person who gave instructions to the director, even if they did not formally hold that position
Supreme Court Case Law: What the Court Bases Its Decisions On
The Supreme Court has established several key criteria that it uses when deciding on subsidiary liability:
Cause-and-effect relationship. It must be proven that it was the actions (or inaction) of a specific individual that made it impossible to satisfy the creditors’ claims. The mere fact of bankruptcy is not sufficient. A chain of events is required: decision → consequence → insolvency.
Illegality. The actions must be unlawful—that is, they must violate the law, the bylaws, or the duties incumbent upon the manager. A risky business decision that does not violate the law is not, in and of itself, grounds for liability—even if it resulted in losses.
Wine. The court assesses whether the individual acted reasonably and in good faith. The standard is that of a “reasonable manager in similar circumstances.” If the decision was made based on an analysis that took into account the available information, this is an argument in the director’s favor.
How to Protect Yourself: Preventive Measures
The best defense against vicarious liability is a proactive one. Here’s what you should do right now:
- Document your decisions. Meeting minutes, memos, analytical reports—anything that shows decisions were made on a sound basis.
- Keep track of your financial situation. If you see signs of insolvency, document them in writing and take action: cut costs, restructure, and negotiate with creditors.
- Do not transfer assets. Transactions involving the disposal of property prior to bankruptcy are the first thing the court examines. Transactions entered into to the detriment of creditors are deemed invalid.
- Keep your accounting records. The absence of documents is, in itself, grounds for legal action.
- File for bankruptcy in a timely manner. If a company is objectively unable to meet its obligations, it is better to initiate the proceedings on its own than to wait for creditors to do so.
If a claim for subsidiary liability has already been filed against you, this is a case where you need a lawyer from day one. The defense strategy is based on an analysis of specific actions, documents, and circumstances. We have experience in such cases and can help you assess the risks.
Do you have a similar situation? Send us your documents and we will analyze your prospects for free.
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