10.09.2020 — Supreme Court Lowers Standard of Proof in Cases against Controlling Persons in Corporate Bankruptcy Proceedings

When dealing with bankruptcy proceedings, the Supreme Court has been consistently implementing the idea of balanced allocation of the burden of proof between the parties to the proceedings. At the same time, to prevent abusive practices of controlling persons, the Supreme Court has also instructed the courts to lower the standard of proof in proceedings against controlling persons of the corporate debtor and affiliated persons. This trend can be observed both in secondary liability cases against controlling persons and in cases relating to the subordination of controlling persons’ and affiliated persons’ claims against the debtor.

In one recent secondary liability case against a controlling person of an insolvent corporate debtor, the Supreme Court clarified that indirect evidence that the controlling person’s actions led to company’s bankruptcy is sufficient to find the controlling person secondarily liable for the debts of the insolvent company. In this case the lower courts had found no grounds to hold the controlling person secondarily liable for the insolvent company’s outstanding debts, since the plaintiff failed to provide evidence that the controlling person had approved or instructed the insolvent company to enter into any disadvantageous transactions that caused its bankruptcy. The courts also found that the disadvantageous transactions did not satisfy the criterion of significance given the company’s broad scope of activities, and therefore it could not be presumed that these transactions in fact caused the debtor’s bankruptcy.

However, the Supreme Court did not agree with the lower courts and found that the courts had applied an overly stringent standard of proof to verify the plaintiff’s allegations. Meanwhile, for the purposes of finding the controlling person secondarily liable for the bankruptcy of a corporate debtor, it is sufficient for the creditor to provide consistent indirect evidence of the respondent being involved in entering into transactions that had led to the debtor’s bankruptcy (see Ruling of the Supreme Court dated 03.09.2020 No. 304-ЭС19-25557 (3) on case No. А46-10739/2017). If indirect evidence is provided, the respondent bears the burden of refuting this evidence in order to avoid being found secondarily liable, which it failed to do in that case.

In another case the Supreme Court found it necessary to additionally review the grounds for the admission of an affiliated person’s claim against the bankrupt debtor into its list of creditors, taking into account its unreasonable conduct and its affiliation with the debtor. The Supreme Court decided that the conclusion of the loan agreements with the debtor and the subsequent assignment of this debt to a third party could be directed at artificial increase of the debt to gain unjustified control over the bankruptcy procedure. In such circumstances, the Supreme Court ordered a review of the case (see Ruling of the Supreme Court dated 30.07.2020 No. 310-ЭС18-12776 (2) on case No. А68-7860/2016).