Have you ever considered that your business is a separate entity that can go bankrupt, while you as a director or founder remain personally liable for its debts? Many believe that liability is limited to the capital contribution. In reality, since 2017, a mechanism of secondary liability has been in force that allows creditors to recover a company's debts from its managers and owners personally. And it's not just about obvious fraudsters — those who simply failed to keep records or signed questionable transactions are also at risk.
In this article, we'll examine who is legally considered a controlling person, which actions courts interpret as culpable, how to build a defence before creditors file a claim, and which documents to keep to prove your innocence. At the end — a practical checklist and non-obvious conclusions that will help you avoid others' debts.
Who risks becoming a controlling person
Bankruptcy law operates with the concept of a "controlling person of the debtor" (CPD). This is not only the director and founder. A court may recognise as a CPD anyone who had the ability to influence the company's decisions: the financial director, the chief accountant, a board member, and sometimes relatives if they signed documents or received benefits.
In practice, attempts are often made to hold liable an accountant who formally did not make decisions but in fact handled all operations. Or the director's wife, in whose name the company's property was registered. The key criterion is not the position but the actual ability to give binding instructions.
If you are listed as a nominal director while another person manages everything, the court may recognise that person as the CPD. But even a nominee is not released from liability if they knew their status was fictitious.
Which transactions and decisions the court considers culpable
Secondary liability arises not from the fact of bankruptcy itself but from actions (or inaction) that led to the inability to pay creditors. Here are typical grounds:
- Asset stripping — selling property at an undervalue, gifting, leasing to affiliates on non-market terms. The court challenges such transactions and recovers losses from the CPD.
- Creating fictitious accounts payable — including controlled creditors' claims in the register to reduce the share of real ones.
- Failure to hand over documents — if the insolvency practitioner did not receive the accounting records, this is automatically treated as obstruction and grounds for holding the director liable.
- Misrepresentation in reporting — inaccurate information in the balance sheet concealing losses.
- Entering into knowingly disadvantageous transactions — for example, buying goods at an inflated price from a friendly company.
Important: the court assesses not only direct losses but also lost profits. If a director declined a profitable contract that could have saved the company, this too may become grounds.
The mechanism: how creditors prove fault
The procedure is as follows. A creditor (or an insolvency practitioner) files an application for secondary liability within the bankruptcy case. The court checks whether there is a causal link between the CPD's actions and the bankruptcy. The burden of proof is distributed unevenly: the creditor must show that the actions were in bad faith, while the CPD must prove their innocence.
In practice, courts often side with creditors if they see that the company operated with signs of insolvency. For example, if the director continued to enter into contracts knowing they could not be paid.
How to protect yourself before bankruptcy: strategies and documents
The best defence is prevention. Here is what you should do while the company is still solvent or just beginning to experience difficulties:
- Keep separate records — do not mix personal funds with corporate ones. Document any transfers with loan agreements or dividend payment resolutions.
- Keep all documents — contracts, acts, correspondence, minutes of meetings. Retention period — at least 5 years after the conclusion of the bankruptcy case (if one occurs). Missing documents almost guarantee a loss.
- Record decisions — if you decline a questionable transaction, put this in writing (e.g., a board resolution). This will prove you acted reasonably.
- Do not sign blank forms and do not grant powers of attorney to manage accounts without control.
- Conduct an independent valuation before selling assets — even if the buyer is "friendly".
If bankruptcy has already begun, you have the opportunity to present evidence of your innocence to the court: financial reports, auditors' opinions, correspondence with counterparties confirming attempts to recover receivables.
Typical mistakes made by managers
- Hoping for the best — many believe that if they did not strip assets, there will be no liability. But courts also hold liable for inaction: for example, for failing to file for bankruptcy when the signs were already obvious.
- Ignoring secondary liability during reorganisation — upon merger or accession, the CPD may remain liable for the new company's obligations.
- Late consultation with a lawyer — once creditors have filed an application, gathering evidence is harder. Advice is needed at the stage of the first payment problems.
How an AI twin helps in preparing a defence
Gathering a pile of documents spanning several years manually is a task of weeks. The AI twin at asibiont.com can automate part of the work: find contracts with counterparties in your email or cloud, export accounting reports, systematise correspondence on disputed transactions. It will not replace a lawyer but will help quickly build an evidence base.
For example, if you need to confirm that you attempted to recover receivables, the AI will find all letters and formal complaints regarding that counterparty and compile them into a chronological list. Or check whether document retention deadlines have been missed. This will save time and reduce the risk that something important is lost.
What to do right now
Check your risks on three points:
- Does the company have overdue debt to creditors? If so, assess whether it is time to file for bankruptcy (this is the manager's duty under certain conditions).
- Were all transactions over the past 3 years at market terms? If there were sales at undervalue, prepare a justification.
- Are documents stored in an accessible place? If not, start digitising and systematising them.
If you feel the situation is close to critical, do not wait — consult a bankruptcy lawyer. And for gathering and analysing documents, use the AI twin: it will take on the routine and help you focus on what matters.
Ultimately, secondary liability is not a death sentence but a mechanism that can be avoided if you act consciously and with evidence. Start with an audit of your risks at asibiont.com — the AI twin will help find the necessary documents and assess vulnerabilities.