According to Article 87(3) and Article 96(3) of the Civil Code of the Russian Federation (hereinafter — CC RF), the legal status of a limited liability company and a joint-stock company, the rights and obligations of their participants and shareholders respectively are determined in accordance with the СС RF and the Federal Laws on LLCs and JSCs.

Para. 2 of Article 65.3(4) of the CC RF sets forth a list of rights of members of the collegial governing body of a corporation, namely: « ...the right to receive information about the corporation's activities and to get acquainted with its accounting and other documentation, to claim damages caused to the corporation (Article 53.1), to challenge transactions made by the corporation on the grounds provided for by Article 174 of this Code or the laws on corporations of certain organizational and legal forms, and to demand the application of the consequences of their invalidity, as well as to demand the application of the consequences of invalidity of void transactions of the corporation in the manner prescribed by Article 65.2(2) of this Code».

The tools provided to members of the board of directors allowing them to bring indirect claims in the interests of the company have been practically not used in the decade passed since the introduction of the said provision which turned out to be «dead». The overwhelming majority of cases in which this provision was applied are related to the realization of the right of a member of the board of directors to receive information on the company's activities.

In turn, cases on recovery of damages by a member of the board of directors in accordance with Article 65.3(4) of the CC RF almost never occur. It seems that this, not least of all, may be due to a gap in legal regulation and contradictions generated by the courts regarding the very existence of the right (by law, i.e. without a power of attorney) of the members of the collegial governing body of the corporation to file such claim.

Thus, according to Article 44(5) of the Law on LLCs and Article 71(5) of the Law on JSCs, the range of persons having the right to apply to the court with a similar claim is limited only to the company itself and its participants or shareholders, respectively. It would seem that the CC RF, which gives a similar right also to a member of the board of directors, and special laws on companies in this case complement each other, and there is no contradiction.

Moreover, if one regards such a discrepancy as a collision, the provision of Article 65.3(4) of the CC RF should be applied as a higher priority. The Federal Law, which implemented Article 65.3 of the CC RF, stipulates that the provisions of legal acts before their harmonization with the provisions of the CC RF shall be applied only to the extent that they do not contradict the CC RF as amended by this Federal Law [1, Art. 3(4)]. The priority of the CC RF over special laws on companies is also emphasized in court practice (e.g. Resolution of the Third Arbitrazh (Commercial) Court of Appeal dated 05.11.2019 No. 03AP-6224/19; Resolution of the Arbitrazh (Commercial) Court of the North-Western District dated 27.12.2018 No. F07–9459/18 in case No. A56–79270/2016; Resolution of the Seventh Arbitrazh (Commercial) Court of Appeal dated 18.08.2016, No. 07AP6981/16, Resolution of the Eleventh Arbitrazh (Commercial) Court of Appeal dated 27.04.2016 No. 11AP4106/16).

Consequently, even though there are no relevant rules in the special laws on companies, members of the board of directors are still entitled to claim damages by virtue of the provisions of the CC RF.

Such approach is confirmed in court practice. For example, in the Resolution of the Arbitrazh (Commercial) Court of the North-West District dated 04.12.2018 No. F07- 15613/2018 in case No. A56–75908/2018, the court stated: «... by virtue of an express statutory provision, members of a corporation's collegial governing body, acting on behalf of the corporation, have the right to claim recovery of damages caused to the corporation» .

In addition, a recent Decision of the Arbitrazh (Commercial) Court of the Irkutsk region dated 25.03.2024 in case No. A19–7771/2023 explained the priority of the provisions of the CC RF and the existence of the right of a member of the board of directors to claim damages by the principle of lex posterior derogat priori .

However, not all courts adhere to this principle — there is also the application of lex specialis derogat generali , which in this case leads to opposite conclusions.

For example, using the wording of the Resolution of the Arbitrazh (Commercial) Court of the Moscow District dated 28.06.2018 No. F05–9934/2018 in case No. A40–21771/2018, a member of the board of directors is not entitled to claim damages on behalf of the company without a power of attorney. It was pointed out that Article 44(5) of the Law on LLCs is a special provision, and therefore has legal priority when it competes with the provision of the CC RF. Moreover, the Law on LLCs as a whole may establish exceptions to the general provisions of the CC RF on the legal status of companies and the rights and obligations of participants or shareholders.

This position seems to be fundamentally wrong. It leads to a situation where a member of the board of directors is in principle deprived of the possibility to protect the rights and interests of the company in court in a number of cases: he or she needs a power of attorney to do so, but if the damages to the company were caused by its CEO, the latter will never issue such a power of attorney.

The contrary (and correct) position of the Arbitrazh (Commercial) Court of the North-West District, set out above, however, is also partly inconsistent with the wording used by the legislator. The action “ on behalf of the corporation ” in the court's decision appears to be based on Article 65.2(1) of the CC RF, by virtue of which the members of a corporation, claiming damages, act on behalf of the corporation. The reasonableness of the application of this provision in the case at hand, however, is questionable: the said provision applies specifically to the participants of the corporation, which members of the collegial governing body may not be.

Article 65.3(4) of the CC RF does not disclose on whose behalf these persons act (their own or the corporation's) when applying to the court, nor does it contain a reference to Article 182(1) of the CC RF, which serves to refer to a situation of legal representation in Article 65.2(1).

It seems that this gap in regulation is not a conceptual problem, but only a technical error of the legislator who did not add “ acting on behalf of the corporation ” and a reference to the provision on representation in Article 65.3(4) of the CC RF.

The doctrine also notes that by virtue of a direct instruction of the law, members of a corporation's collegial governing body, acting on its behalf, have the right to claim damages caused to the corporation [2, p. 51] as its legal representatives. Several arguments can be put forward in support of this position.

Firstly, this provision contains an indication that the rights of members of the collegial governing body are exercised in accordance with the procedure established by Article 65.2(2) of the CC RF, which “ indicates the affinity of this provision with the rules on traditional indirect claims of participants ” of a legal entity [3, p. 80].

Secondly, Article 65.3(4) of the CC RF refers to Article 53.1 of the CC RF. In the explanation to the latter, the Supreme Court labelled the participants of the corporation as its legal representatives [4, para. 32]. Taking into account the identical nature of the claim for damages by participants and members of the collegial governing body, it seems that there are no obstacles to an expansive interpretation of the provision from the Resolution of the Plenum of the Supreme Court No. 27.

Thirdly, the same Resolution contains a provision according to which both a member of a company and a member of the board of directors act on behalf of the company when challenging a transaction of the latter [4, para. 32]. There are hardly any grounds for non-extending the concept of legal representation to the right to claim damages arising from the same Article 65.3(4) of the CC RF, as well as the right to challenge transactions made by the corporation.

The demonstrated gap in regulation emphasizes the need to amend the current legislation by bringing special laws on companies in line with the CC RF, which was pointed out back in 2014. In addition, “ acting on behalf of the corporation ” should be specified directly in Article 65.3(4) of the CC RF.

References:

1. Federal Law No. 99-FZ dated 05.05.2014 «On Amendments to Chapter 4 of Part One of the Civil Code of the Russian Federation and on the invalidation of certain provisions of legislative acts of the Russian Federation»;
2. Zakharova M. V. On some issues of the practice of consideration by arbitrazh (commercial) courts of disputes about the liability of bodies of legal entities to the legal entities themselves // Information and analytical journal «Arbitration disputes». 2019. № 4. P. 49–88.
3. Kuznetsov A. A. Indirect claims in the corporate law of Russia: substantive legal aspect // Zakon. 2020. № 11. P. 76–86.
4. Resolution of the Plenum of the Supreme Court of the Russian Federation No. 27 dated 26.06.2018 «On challenging major transactions and related-party transactions».