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Personal risks of CEO's


November 27, at the Fireplace Room of the Free Economic Society of Russia the International club "Business Partnership" and the Business Club "Women of future Russia" held a round table discussion "Personal risks of the Directors when doing business", which continues the series of seminars "Practicing successful business"

Main speaker was the lawyer, Chairman of the Moscow City Bar Association "Dorogomilovskaya" - Natalia Nikolskaya.

Introducing the speaker, head of the club Olga Irzun noted:
– Risks of the leaders, founders and senior executives are quite high because of high responsibility for the business. At the round table, we consider the question of personal and property liability of the CEOs, talk about the relationship with the creditors, the problems associated with the bankruptcy of companies, the risk of loss of personal property. We'll model and disassemble various situations associated with the possibility of loss of personal assets and discuss options for scripting, allowing to reduce these risks to a minimum.

In her speech, Natalia spoke about ways to protect property rights and choosing the optimal position in difficult situations:

– Practice and laws are constantly changing in Russia. When the principal called me for advice in 2008, I advised them not to sign a personal commitment not to bear personal responsibility. And it worked. Now, each of its principal I say: even if you haven't signed anything, but have missed something in your business as CEO, or have tacitly agreed with some questionable actions, have not provided specific points, and as a result your company or clients have any damage – it may come to that you will be personally liable for all losses (does not matter thousands, millions or billions of it). That is how the jurisprudence and regulatory framework have changed in recent years.
 
Here at our meeting we have present executives and members of the boards, entrepreneurs. It's important to remember that if your activities, the activities of the company lead to losses from third parties, your business will be in charge. If the property of the organization, creditors can make claims to you personally. Execution may be levied for the wife (husband), the manager or owner of the company.

Natalia offered to look at the specific situations that may occur such personal responsibility:

– For example, as a result of incompetent actions of the head of the company, it has suffered losses. For instance,the CEO signed unfavorable contracts, sold the property at markedly lower price. Founders in this case, can present a direct claim for damages to the director. The court will not take into account if there was a malice in his actions or not. The court just finds out that there is enough good faith at the director's actions at the conclusion of contracts. It should be noted that the concept of «good faith» has now become a key definition. In this case, it is rather difficult to prove that action was «good faith». It is necessary for the head to provide evidence that the property, for example, was estimated in accordance with all the rules, then it was put up for auction, and no one has offered higher amounts than that for which it was sold. To resume, the evidence base needs to be very persuasive so the court can found the actions «good faith», otherwise it will not happen.
 

Another situation, that is becoming more common, is concerning businesses coming to bankruptcy. When the assets of the enterprise are not enough to pay off the claims of creditors, his managers and owners comes to vicarious liability, the amount of which was not enough to cover the debt, the management and the shareholders have to pay out of their own funds.
Ten years ago, these rules were prescribed, but almost never used. Now they are used very actively.

Let's consider a very common scenario, when a company gets into a difficult financial situation. When all signs of bankruptcy are obvious, the head shall apply to the Arbitration Court for bankruptcy within two months. But in our country so do only ones. Most often CEO is trying to refinance, sell the property to attract more customers to dial advances, and «get out». While he's continuing to make deals as a legal entity, almost knowing that the company is in bankruptcy condition. It is quite common for Russia. As a result, the financial hole is growing and the situation is only getting worse. So, all these frantic attempts to save the situation or, conversely, inaction when the bankruptcy is almost inevitably, lead to the fact that
the company's debt is increasing, and the company is unable to repay financial obligations. If funds are not sufficient, recovery of loans will be paid from personal property of manager or founder.
 
Natalia gave recommendations to prevent similar situations. At the end of the meeting, the roundtable participants were able to ask the speaker questions and discuss their concerns.

In closing remarks, the head of club Olga Irzun thanked the speaker for her lecture and invited all participants to the next New Year's meeting.


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