Constitutional Court: Use of Legal Entity for Unlawful Purposes Justifies Recovery from Participant

PRObankrotstvo reports that the Constitutional Court of the Russian Federation has refused to process a complaint challenging provisions of the Civil Code that allowed a court to recover a share in the share capital from a business entity participant as damages recovery in a claim filed by the Deputy Prosecutor General (Case No. 771-O).

Anna Aktanaeva, Head of Dispute Settlement Practice at FBK Legal, commenting on the case, explains why this matters:

The Constitutional Court’s position in this case effectively confirms a broad interpretation of the liability mechanisms for business entity participants in cases of abuse of the corporate form.

In refusing to hear the complaint, the Court proceeded from the premise that current regulations permit the levy of execution on a participant's share not only in the classic scenario of satisfying the claims of their creditors, but also in situations where the corporate structure itself is used as an instrument for causing harm. In doing so, the Constitutional Court once again confirmed the permissibility of the basic instrument of ‘piercing the corporate veil’ in a functional rather than formal sense: what becomes key is not the participant's status as such, but the nature of their conduct and the use of the legal entity for unlawful purposes. This approach aligns with the general principles of civil law regarding the inadmissibility of abuse of rights and the priority of restoring violated rights.

Most importantly, the Court did not formulate a new rule, but rather legitimised already established practice, in which a share in the share capital is treated as an independent object of execution when other assets are insufficient and there is a causal link between the participant's actions and the damages caused.

Under the general framework, the levy of execution on a share is permitted by court order when the participant's other property is insufficient, and the Constitutional Court effectively confirmed the applicability of this mechanism in more complex tort structures.

For practice, this decision has two key consequences. Firstly, it increases the risk of personal property liability for participants in situations where a legal entity is used as a ‘shell’ for unlawful activity. Secondly, it expands the range of tools for claimants (including public authorities) to effectively strip corporate control in compensation for harm. At the same time, the Constitutional Court's decision does not eliminate the need to prove a combination of circumstances: the unlawful purpose for using the legal entity, the participant's control, and a causal link to the damage. Otherwise, there is a risk of arbitrary interference in corporate relations, which would contradict the basic principles of legal entity autonomy.

Overall, the Court's position is in line with the recent trend towards increasing the liability of controlling persons and bringing corporate and tort remedies closer together, but at the same time requires courts to adopt higher standardisation of abuse criteria to avoid blurring the boundaries of legal entity independence.