Responsibility of the Executive Body of a Legal Entity for Fraud

Abstract

The paper discusses various legislative and enforcement approaches in the Russian Federation, USA, and Great Britain; compares the various provisions of the Plenums of the Supreme Arbitration Court of the Russian Federation and the Armed Forces of the Russian Federation on issues of good faith; analyzes the application of these provisions by the courts when considering issues of holding directors to account as a result of malpractice that entailed property damage. By the example of consideration of a number of key cases from the law enforcement practice of the courts of the Anglo-American system of law, the question of the use of tests is considered: objective and subjective integrity tests to regulate the issue of holding the executive body accountable. English and American courts resort to the criterion of good faith in very rare cases, and the fiduciary duty of directors in commercial companies was significantly limited. The approach used by the common law courts implies a minimal degree of court interference in the economic affairs of commercial companies. Holding the director accountable is allowed only in case of obvious neglect of duties or is considered in some cases based on the specific circumstances of the case. Russian courts often hold directors accountable not as a result of gross negligence or proven intentional actions by executive bodies to harm the company, but as a result of society not achieving the desired economic result. Besides, dishonesty compensates for obvious gaps in the internal corporate routine, which do not make it possible to precisely determine the boundaries of authority and the area of responsibility of the executive body. The author formulates a conclusion on the degree of admissible judicial discretion when applying the provisions on good faith to corporate relations as requiring special regulation.