Driving debtor into bankruptcy presumption: Collection of Additional Tax Charges from a Company’s Top Management

Subparagraph 3 of paragraph 2 of Article 61.11 of the Law on Bankruptcy (the Federal Law No. 127-FZ of 26 October 2002) establishes the presumption of driving debtor into bankruptcy by controlling parties — in particular, if total outstanding additional tax charges exceed 50% of third-priority creditors' total claims in respect of the principal debt.

This provision is designed to simplify for a claimant (the Tax authority) proving the fact, that the insolvency to discharge creditors' claims has been caused by illegitimate actions on the part of the debtor’s controlling parties. In effect, the burden of proof against the claimant’s demands that the debtor’s controlling parties be held subsidiary responsible has been shifted to these parties.

This approach is being applied in increasing frequency in bankruptcy cases where the main claims relate to additional tax charges.

In Case No. А40−133 029/2020, three general directors managing the taxpayer were held subsidiary responsible in an audited period. The case eventually went to the Supreme Court of the Russia Federation.

The Supreme Court in a judgement issued in 11 of August 2023 established that the presumption of driving debtor into bankruptcy is refutable, i.e., if sufficient evidence is provided against holding the debtor’s controlling parties subsidiary responsible.

The general directors:

• stated that the main cause of the debtor’s bankruptcy was the transfer of assets from the debtor to another legal entity, rather than additional tax charges related to its cooperation with sham counterparties;
• disproved the sham nature of the counterparties;
• indicated that they had not signed any agreements with the sham counterparties, but rather performed previously signed agreements, etc.

The Supreme Court considered the general directors' arguments to be worthy of attention and remanded the case for retrial concerning their subsidiary liability for a new hearing.

The tax authorities have recently shown an increasing interest in identifying a taxpayer’s controlling parties. Already at the stage of drafting a tax audit report, tax authorities analyze who the controlling parties are, whether the taxpayer shows any indications of bankruptcy as well as whose actions have resulted in additional tax charges. This approach permits the tax authority to gather the evidence necessary to hold a debtor’s controlling parties' subsidiary responsible at an early stage, thereby providing for the collection of additional tax changes resulting from a tax audit. The case under review is a prime example of this trend.

With this in mind, it is essential to prepare for such claims by the tax authorities far in advance in order to protect top management as well as to reduce the risks of personal liability, i.e., to draft a defense file at an early stage of Tax authority control actions.

The B1 Tax Controversy team has a wealth of experience and stands ready to provide the necessary support both in tax disputes and in developing a defense position for top management.