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06.12.2023

Corporate Litigation: 12 Supreme Court Positions in 2023 You Should Know

The practice of courts applying the law on limited and additional liability companies has always attracted the attention of lawyers and businesses. Summarizing the results of the current year, it is possible to single out several legal positions of the Commercial Court of Cassation on key aspects of corporate disputes.

Actions to ensure the claim

In the resolution dated 13.01.2023 (case No. 918/531/22), the KGS noted that the prohibition of registration actions is one of the ways to secure a claim, which is provided, in particular, by the law “On State Registration of Legal Entities, Individuals – Entrepreneurs and Public Organizations “. Under this ban, not any actions are subject to the commission, but only those that may lead to a possible violation of the rights and legally protected interests of the plaintiffs in the future, may complicate the execution of the court decision and cause difficulties in its execution. Such measures must relate directly to the subject of the claim.

The KGS concluded that the appeal by a company member of a specific decision of the general meeting, which changed the manager, does not mean that the general meeting of the company cannot make other decisions during the entire period of consideration of such a dispute by the court. If the decisions adopted by the general meeting require the registration of changes in information about the legal entity in the EDR, the court cannot prohibit the corresponding registration actions. The opposite approach will mean blocking the company’s economic activity and excessive interference in its affairs.

That is, a claim for the invalidation of the decision of the general meeting regarding the re-election of the manager and the cancellation of the corresponding registration record cannot be ensured by prohibiting a wide range of registration actions regarding the company (registration of changes to the information about the legal entity contained in the EDR, about changes in the composition and shares of the founders/ members of the company, changing the person authorized to take legal actions on behalf of the company, about changing the management bodies of the company, about changing the location of the company, about changing the size of the authorized capital of the company, transferring the registration case of the company).

Disputes between the company and its manager

A classic corporate dispute is reflected in the resolution of the KGS dated February 15, 2023 (case No. 910/8343/21). It related to the determination of an effective way of protecting the violated rights of the head of the company in the event of his illegal dismissal and whether he has the right to appeal the following decisions of the general meeting of the company, which were adopted after the dismissal of the plaintiff from the position of head of the relevant company.

The panel of judges drew attention to the fact that the claimant’s request to invalidate the decision of the general meeting of the company’s members, according to which the claimant was dismissed from the position of director, will not lead to the renewal of his violated rights, as it does not provide for his automatic renewal in the specified position. Therefore, the statement of claim should contain an additional demand for the reinstatement of the plaintiff in his position.

The court also provided that a person dismissed from the position of director of the company by the decision of the general meeting cannot sue this company with demands for the cancellation of subsequent decisions of the general meeting and the obligation to cancel the relevant state registration entries made on the basis of these decisions after when this person was dismissed from his position by a previous decision, because from the moment the person loses the powers of the executive body of the company, he cannot appeal any subsequent management decisions of the company.

The sustainability of the Supreme Court’s practice in determining the subordination of disputes to the commercial courts regarding the dismissal of the director (chairman of the board) of the company, his reinstatement, and the collection in his favor of the average earnings during forced absenteeism was confirmed by the resolution of the KGS dated March 16, 2023 (case No. 910/6133/22).

The judges referred to Article 20 of the Civil Procedure Code, which provides for a list of disputes that fall under the jurisdiction of commercial courts. Such disputes also include corporate ones. Taking into account the fact that the claims for the collection of average earnings in connection with the illegal dismissal of an employee are derived from the dispute over the invalidation of the decision of the management body of the company, the court logically referred them to economic jurisdiction.

But the Grand Chamber in its decision dated 06.09.2023 (case No. 127/27466/20) departed from the Supreme Court’s conclusions in disputes regarding the director’s voluntary dismissal in accordance with Article 38 of the Labor Code and concluded as follows.

If there was no employment contract (contract) between the company and the director, then there can be no dispute regarding its termination on the basis of, in particular, Article 38 of the Labor Code.

In both cases – when a person is elected to the executive body and an employment contract is concluded and when there are only management relations of the company without concluding an employment contract – it is the management relations that form the basis of the relationship between the company and the person who holds the position of director.

Therefore, claims for recognition of labor relations as terminated and derived from them are aimed primarily at the termination of management legal relations that exist between the director and the company, and not labor relations.

Taking into account the above, the dismissal of a person from the position of director should not take place in accordance with the provisions of labor legislation, but in accordance with the provisions of the statute regarding the procedure for convening general meetings of participants and voting on them.

Also worthy of attention is the resolution of the KGS dated 17.05.2023 (case No. 914/3433/21), in which the panel of judges reminded of the possibility of recovering from the director of the company losses caused by the payment of remuneration to himself, which went beyond the regular schedule.

Based on the conclusions of the KGS, all payments of the manager’s remuneration, the amount of which is not specified in the staff list, employment contract (contract) or exceeds the agreement with the owner of the company, are losses of this company and can be recovered from the manager in court.

Claiming a share from someone else’s illegal possession

One of the widespread manipulations was stopped in the KGS resolution of March 16, 2023 (case No. 911/2780/20). It is about appellate or cassation appeal against legal decisions of courts on invalidating contracts of sale of shares in the company and demanding them from the legal owner through filing a complaint with a spouse who was not a party to the relevant contract alienation of the share and noted that by such a deed he was deprived of the ownership right to this share as its co-owner. The purpose of such manipulation was to delay the resolution of the dispute on the merits and possible blocking of the management of the company.

The court noted that the rights of one of the spouses, who was not a party to the contract of sale of a share in the authorized capital of the LLC, are not violated during the consideration of the case for claiming the share, since these rights are protected by the spouse who concluded the contract and is the defendant in the case.

From the moment of depositing funds or other property as a deposit, such property belongs to the company itself by right of ownership, and it loses the characteristics of the object of the right of joint co-ownership of the spouses. That is, in the event that spouses transfer their property as a deposit for the participation of one of them in the partnership, the specified property becomes the property of such partnership, and the spouse acquires the right to a share in the authorized capital of such partnership. Spouses dispose of property that is in their joint joint ownership, in particular, a share in the authorized capital of the company, by mutual agreement, the existence of which is presumed. Therefore, the conclusion of an agreement on the alienation of a share in a company by one of the spouses, who is a participant in it, is carried out in the interests of the other spouse.

In case No. 910/16501/21, the board of judges of the KGS reminded (decision dated 13.06.2023) that in accordance with Article 17 of the Law “On State Registration of Legal Entities, Individuals – Entrepreneurs and Public Organizations”, a person who considers himself the owner of a share that illegally removed from its possession, must contact the owner of the share (the person indicated as the owner in the UDR) with a claim for the recovery of a share (claiming a share from someone else’s illegal possession) or a claim for determining the size of the authorized capital and the size of the participants’ shares.

This type of protection is appropriate, because a court decision, which has entered into legal force, on the satisfaction of such a requirement is the basis for making appropriate changes to the EDR.

But the court drew attention to the fact that a vindication lawsuit cannot be filed against the defendant if he did not acquire this share for payment (free of charge) from a person who did not have the right to alienate it.

Sale of shares to third parties

In the resolution dated 16.03.2023 in case No. 915/1172/20 KGS, a dispute was considered regarding the sale by a company participant of his share to a third party without proper notification of his intention to other participants, and the issue of the method of granting permission to one of the participants to alienate a third party share was also resolved person

With this decision, the panel of judges reminded that in the specified legal relationship, in the event of a violation of the order of notification of other participants, the appropriate method of protection will be a claim for the transfer of the buyer’s rights and obligations under the relevant contract of sale of a share in the authorized capital of the company.

The board also noted that although the law provides for the obligation of a participant to notify other members of the company in advance in writing about the intention to sell his share to a third party, but in the event of a violation of the established procedure, the court must check the presence of the refusal of each participant to exercise his preferential right, if this fact claims the participating seller and provides relevant evidence. If the participant in writing refused to exercise his pre-emptive right to purchase a share, including by giving his consent to the entry into the company of a third party – the buyer of the share, then the fact of his awareness of the intention to sell the share and the terms of the sale of the share is presumed, unless otherwise is proven ( for example, that the participant was misled about the essential terms of the share purchase agreement, etc.).

Third parties with independent claims were present at the general meeting of participants, where they voted to give consent to the participant to sell his share to third parties and signed the corresponding protocol. But then they appealed to the court with a claim to transfer the rights and obligations of the buyers to them in connection with their improper notification of the essential terms of the share purchase agreement. This behavior of the plaintiffs contradicts the principle of good faith in the exercise of the right, which is the basis of the doctrine of venire contra factum proprium (prohibition of contradictory behavior), which is based on the Roman maxim – non concedit venire contra factum proprium (no one can act contrary to his previous behavior).

Annulment of decisions of general meetings

The KGS indicated safeguards when appealing the decisions of the general meetings of the business association on the grounds of non-notification of the participant about the holding of such meetings in the resolution dated September 1, 2023 (case No. 909/1154/21).

Taking into account the preliminary conclusions, the court divided the violations committed during the convening and holding of the general meeting of the members of the business association into:

those that have as a consequence the mandatory recognition of decisions made at these meetings as invalid;

such, which, although allowed, do not always lead to the invalidity of the decisions of the general meeting.

Non-notification of a member of a business association about the convening of a general meeting may be grounds for invalidating the decisions of the general meeting if the member of the association proved not only the fact of non-notification, but also:

  • the existence of other grounds for invalidating the decision of the general meeting;
  • the fact that he did not participate in such meetings, did not have the opportunity to participate in these meetings;
  • decisions made at such meetings contradict the requirements of legislation and/or the charter of the business association,
  • adopted in violation of the voting procedure;
  • decisions relate directly to his rights and interests and violate them.

Audit of the company’s financial statements

The reasons for conducting an audit of the company’s financial statements were given by the KGS in the resolution dated August 1, 2023 (case No. 911/2646/21). The court emphasized that the content of the audit of financial statements includes both the verification of accounting data and financial statement indicators that reflect information about the financial condition and results of the company’s activities, for their compliance with the requirements of national accounting provisions (standards), international financial reporting standards or other requirements.

In order to initiate an audit of the company’s financial statements, a combination of the following conditions is required:

  • the presence of the initiating participant of 10 percent or more of the authorized capital of the company;
  • conclusion by such a participant with an independent auditor (auditing firm) of an agreement on conducting an audit of the company’s financial statements;
  • specifying the scope of audit services in such a contract.

According to Article 41 of the Law “On Accounting and Financial Reporting in Ukraine”, the company has two obligations: to provide the auditor with the opportunity to conduct an audit and to provide copies of documents. At the same time, the company has no obligation to provide documents that go beyond the scope of the audit of financial statements.

Termination of partnership

In the resolution dated 05.10.2023 (case No. 905/229/21), the KGS made a complete step-by-step analysis of the procedure for terminating the LLC by liquidating it by the decision of the owner and the procedure for presenting creditor claims. Including, the obligation in the court procedure of the legal entity-debtor in the person of the liquidation commission to recognize the creditor’s claims.

Within the framework of the article, it is not considered possible to summarize the content of this resolution, so in this case it is worth reading the full text of the decision yourself.

A request for cancellation of the state registration of termination of a legal entity presented to the state registrar on the grounds of violation of the order and procedure of liquidation of such a legal entity is a proper way to protect the violated rights and interests of the person. This conclusion was made by the KGS in the resolution dated 07.27.2023 (case No. 520/4005/2020).

Its consideration is not limited exclusively to checking the actions of the state registrar. After all, the court has to investigate the reasons for making such a record in terms of their legality and its impact on the rights and interests of the plaintiff.

The liquidation commission’s failure to respond to the creditor’s creditor’s claims indicates the liquidation commission’s evasion of their consideration, which is a violation of the order and procedure of liquidation of such a legal entity, provided for in Articles 110 and 111 of the Civil Code. In such a case, the creditor can protect his right by applying to the court with an appropriate claim for the obligation of the liquidation commission (liquidator) to recognize the creditor’s claims and include the creditor’s claims in the interim liquidation balance sheet of the debtor.

The Supreme Court also states that Part 3 of Article 112 of the Civil Code does not exclude the possibility of court consideration of such claims even if the creditor’s appeal to the court occurred outside the one-month period established by this norm.

The article was published in the publication “Law and Business” .

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