Generally speaking, wrongful trading is the special form of liability where a director of a company is liable for damages towards the creditors for the mismanagement of an insolvent company.
A special feature of the wrongful trading concept is that it may give rise not only to the liability of the director of the company but also to the liability of the director, management, employee of the parent company or even of the grandparent company (so called shadow director).
The pandemic and the related measures taken to restrict social contacts are challenging many businesses. In this summary we would like to draw your attention to the above special aspect of the situation: executives of foreign parent companies can potentially be held liable under the laws of Baltic/CEE/SEE countries for certain acts and decisions relating to their Baltic/CEE/SEE subsidiaries.
Please see below an overview of Belarusian laws on this matter.
The principal rule of the liability of the directors
Directors (in Belarusian: руководитель) under Belarusian law are natural persons, who perform management of the company. The director is only a sole management body.
Generally, members of the company’s management bodies are liable towards the company for damages incurred by the company due to their intentional actions. The liability of senior officers employed by the company is also regulated by Belarusian labour law, which requires the employees to reimburse real damages caused by failure to duly perform their job duties.
Special liability regime for directors in threatening insolvency
Belarusian bankruptcy legislation does not have a concept of wrongful trading. Belarusian concept of concealing or deepening insolvency can be reverted to as an analogue to wrongful trading.
When will a threatening insolvency situation occur?
According to Belarusian law, if repayment of debt to one or several creditors entails the company’s inability to repay the debts to other creditors, senior officers of the company, entitled by the articles of association, have to file an application for the insolvency of the company within one month from the date this inability emerged.
Should the senior officer fail to do the filing, his or her further actions may be qualified as concealment of insolvency or as deepening of insolvency.
What are the legal consequences if the director breaches the special duty described in section 2?
If the senior officer does not file an application for insolvency within the specified period he or she may be subject to:
– joint and several subsidiary liability for the debts of the company;
– criminal liability for concealment or deepening of insolvency.
The type and extent of the senior manager’s liability will differ on the case by case basis.
Does this wrongful trading liability apply to persons other than the directors?
Yes, this liability is also applicable to shareholders of the company, accountants of the company and any other persons that actually impacted the decision making process in the company – for instance, the so-called shadow directors of the company.
Who is a shadow director?
Belarusian law does not contain the legal definition of a shadow director. However, for the purposes of insolvency a shareholder or any other person which de facto gives orders to the senior officers of the company and has a dominant influence on the company’s decisions can be qualified as a shadow director
How to determine if the company is in a threating insolvency?
To determine if the company is in a threating insolvency one usually tracks the following key accountancy solvency ratios: Debt to Assets Ratio (calculated by dividing total debt of a company by its total assets), Debt to Equity Ratio (the ratio of total liabilities of a business to its shareholders’ equity), Debt to Capital Ratio (measures the proportion of interest-bearing debt to the sum of interest-bearing debt and shareholders’ equity). The first ratio (Debt to Assets Ratio) is a ratio which measures debt level of a company as a percentage of its total assets and indicates of a company’s financial risk, the risk that the company’s total assets may not be sufficient to pay off its debts and interest thereon. Since not being able to pay off debts and interest payments may result in a business being wound up.
Though the concept of wrongful trading is unknown to Belarusian law, Belarusian legal regulations set liability for senior officers for failure to timely file for bankruptcy and concealment or deepening of insolvency. Shareholders, accountants and other persons who de facto influence the company’s decisions may be brought to criminal liability and subsidiary liability for the debts of the company. In order to avoid the risks of such liability it is strongly recommended to take due control over company’s solvency ratios by constantly monitoring balance sheets of the company.