Property protection tools for the administrators and founders of the company

Where does modern business start? Of course, with the choice and creation of an enterprise in a certain organizational and legal form (individual entrepreneur, LLC, JSC, etc.). As you may know, the bulk of business in the Republic of Moldova is carried out through such an organizational and legal form as LLC (Limited Liability Company) – or SRL (Societate de Răspundere Limită in Romanian).

According to the Civil Code of the Republic of Moldova (Art. 145), a limited liability company is a business company, the authorized capital of which is divided into shares in accordance with the constituent document and the obligations of which are secured by the property of the company. We emphasize that the obligations of the LLC are secured by its property.

Moreover, according to part (3) of Art. 145 (or Article 9 of the Law on LLC), the participants of a limited liability company are not liable for its obligations. They bear the risk of losses associated with the activities of the company, within the limits of their shares in the authorized capital. Is it so?

Indeed, if the company is solvent and pays the state, employees and partners on time, then the owner cannot be involved in paying the company’s bills. The created organization acts in civil circulation as an independent person and is itself responsible for its own obligations. As a result, a false impression is created of the complete absence of responsibility of the owner of the LLC towards creditors and the budget. Is it the case? Let’s answer right away: not really.

In the Republic of Moldova, both founders and administrators of an LLC can be held liable for the actions of the Company. This is stated in Art. 15 of the Insolvency Law, according to which, in the event of the debtor’s insolvency through the fault of its founders (members), members of the executive body or other persons who have the right to give instructions that are binding on the debtor, or who could otherwise influence the actions of the debtor (deliberate insolvency), these persons bear joint and several subsidiary liability to creditors regarding the insufficiency of the debtor’s property to meet the creditors’ claims.

Subsidiary (reserve, auxiliary) liability is not limited to the size of the authorized capital, but is equal to the amount of debt to creditors. That is, if a company owes a million lei, for example, then this amount will be collected from the founder of the LLC in full, despite the fact that he has contributed, for example, only 1,000 lei to the authorized capital.

In particular, the existing judicial practice clearly demonstrates the use of these norms in order to collect all debts, both from the company and from the founders, administrators and other managers.

Considering the above, it should be noted that the responsibility of the founders, the administrators is not limited, and as a result of their actions/inaction they can be held liable for the company’s debts. So, depending on the violation committed by the management of the LLC or by him/her personally, the director may be brought to administrative, material, criminal liability.

From the current norms, we conclude that the director may be brought to administrative responsibility in cases of violation of labor protection standards, regime norms, if the organization does not have a license or admission to certain work, violation of fire and sanitary safety rules.

Material liability can be expressed in the form of fines or other penalties. Fines can be imposed on a director if the damage suffered by the organization is small. In all other cases, the penalty is imposed by the court.

For unlawful acts proven by the court, the director may be subject to damages, the director may be imprisoned, with a sentence of 2 to 6 years in prison, with or without a fine, with compensation for damages. In addition, he/she may be deprived of the right to hold leadership positions for an indefinite period or for a certain period.

So, we see that as a result of economic activity, the property of both the company and the founders and the administrators may be under attack, including everything accumulated: money, house, apartment, car; that can be claimed by third parties. Given the modern realities of doing business and the onslaught of unscrupulous competitors, this property must be protected.

An important point is that it is possible to bring the controlling persons to subsidiary liability within three years from the date the debtor is declared bankrupt. To date, the number of cases of subsidiary liability of the owners and administrators of the company is large, since there is a presumption of guilt of the persons controlling the debtor until they prove otherwise.

The simplest thing is to do is to freeze the accounts, get a decision through the court and recover the funds. In practice, third parties “actively pressure” the company, directors (general, commercial, financial, board members, possibly chief accountants), i.e. those who control it. So, if you, your friend or relative were a director or other controlling person in an abandoned or bankrupt enterprise in 2014 and later, then there is a very high probability that you will – unexpectedly – be brought to subsidiary liability and deprived of your income.

One of the grounds for prosecution is the failure of the director of the company to fulfill the obligation to file an application for bankruptcy of the organization, which he/she heads, if the signs of insolvency were known to him (or should have been known). On this basis, only a director can be held liable. Other persons controlling the debtor (founders, members of the board of directors and other citizens who influence the decisions taken by the debtor) cannot be held liable in this case.

The director may also be held liable for subsidiary liability if, after the filing of the application, the procedure was terminated due to the lack of funds to reimburse court costs for the bankruptcy.

Now we are talking exclusively about security, business security, and the protection of personal assets. Often in our practice, we are faced with the fact that people are afraid to talk about the security of their business, the inclusion of international instruments in order to protect and optimize it. To talk about absolutely legal methods and tools used in the world for decades. For example, international business structuring is the norm today, and sometimes – a necessity.

Trusts as an international asset protection instrument

The peculiarity of a trust as a form of holding property is that the property of the trust does not belong neither to the founder (he/she loses ownership of it from the moment the property is transferred to the administrator), nor to the administrator (he/she only manages this property and is the formal holder of the title to the property), nor to the beneficiaries before the date of termination of the trust .

We can say that a trust is an independent owner, inextricably linked with its creator (founder of the trust) and beneficiaries. In a number of countries, including Moldova, property transferred into trust is not considered a separate type of property – property continues to be the property of the principal, which may be subject to his/her obligations.

Historically, this concept has been driven largely by non-tax considerations. So, a caring father, worried about the possible squandering of his inheritance, could, without transferring his fortune directly to his son, leave it in trust, say, to a family lawyer, appointing his son as the beneficiary. An even more common case is when a trust is established by will in favor of underage heirs. Although a new legal entity is not formed when a trust is established, the property in question acquires a special legal status: for example, it cannot be foreclosed in the event of a trustee’s bankruptcy.

Thus, the trust emerged primarily as an alternative to the will, in comparison with which it has much more flexibility. Indeed, unlike a trust agreement, a will must be publicly announced, which is not always desirable, its conditions must comply with inheritance laws, the property passes into the hands of the heirs at once, etc. In addition, the trust allows you to allocate a certain part of the property even before death of its owner, so that in the event of a possible bankruptcy of the latter, it will be beyond the reach of creditors.

Trust management as an element based on Anglo-Saxon law is planned to be introduced into the Civil Code of the Republic of Moldova. It must be said that the Republic of Moldova has already encountered this institution: in 1994, the Decree of the President of the Republic of Moldova on trust was adopted, but after 6 years its effect was terminated.

In conclusion. The use of trusts – the internationalization of a business gives it an international status, allows you to minimize aggregate taxation and other risks, protect assets – it is absolutely legal, because when implementing any scheme, not loopholes and shortcomings are used, but the features of various jurisdictions and, in particular, international legal instruments for protecting assets.

Author :  Serghei Zaharcenco

Periodical publication «FISC.MD Fiscal Monitor»