"Letter of the law": Supreme economic court explains how to expel a founder from LLC
19 Dec 2011
The Plenum of the Supreme Economic Court of the Republic of Belarus has adopted the Resolution on Certain Issues of Cases with Participation of Commercial Organizations and Their Founders (Members).
In what cases shall the economic court deliver a judgment on expulsion of a founder (a member) from LLC (ALC)? Have Belarusian economic entities been authorized to hold general meetings of its members abroad? What is the procedure to appeal the resolution of the general meeting of members? Is it possible to appeal the resolution of the supervisory board of the company? What should be done if the economic entity fails to provide its member with the information on its activities?
The above and some other issues have been discussed within the frames of the regular Letter of the Law release on air of TUT.BY-TV by the Judge of the Supreme Economic Court of the Republic of Belarus, Ludmila Kolesnikova, Secretary of the Plenum of the Supreme Economic Court of the Republic of Belarus and the program presenter Denis Aleinikov, Senior Partner of Law Group Argument.
What has caused adoption of the new resolution of the Plenum of the Supreme Economic Court upon that matter?
Adoption of resolution of the Plenum has been attributed to the alteration of the laws. The new wording of the Law on Economic Entities has come into force; some changes to the Civil Code and to the Economic Procedural Code have been introduced. The results of studies and generalization of the court practice conducted by the Supreme Economic Court of the Republic of Belarus have affected the adoption of the resolution. The subject-matter of the legal regulation of the current resolution of the Plenum which was officially published and came into force on November 23, 2011, is somewhat broader in comparison to the previous resolution of the Plenum. It concerns consideration of disputes upon foundation terms of economic entities and that of commercial organizations.
Pursuant to the substance of Article 47 of the Economic Procedural Code, this resolution of the Plenum provides explanations concerning special competence of the economic courts of the Republic of Belarus in regard to consideration of disputes upon the foundation terms. It has been noted that if such dispute participants are not just legal entities and individual entrepreneurs, but also naturals, such cases shall be referred to the competence of economic courts, and not the general courts.
Which dispute categories upon foundation relationships may be named today as the most actively practiced by the economic courts?
While generalizing the court practice we have stated that the most frequent disputes are those on appeal of resolutions of general meetings of members, on expulsion of the member from the company’s membership, on challenging the transactions. One more category has appeared, that is forcing the company to submit any information or documents to the member. Such cases have been out of our consideration before.
The peculiarity of such cases is that the laws do not specially provide such a possibility to bring such an action to the court in order to force an economic entity to provide some information to its member. Due to that reason it casted some doubt on the possibility to consider such issues in courts in general.
Another question is arising in this regard. If such issues may be considered by the economic courts what shall be declared as the subject-matter of the dispute? One of the resolutions upon a case considered in the exercise of supervisory powers in 2008 the Presidium of the Supreme Economic Court determined and considered that it is possible to choose the means of remedy stipulated by subclause 7 article 11 of the Civil Code (awarding performance of a duty in kind), and force the economic entity to provide for the information or the documents. Such actions are being considered today. It shall be taken into consideration that the duty to provide the member with the documents or the information shall be in force only subject to the will of the member to exercise its right and a certain way of manifesting its will to do so. The best way of implementing it is by means of a written appeal addressed at the economic entity with the request to submit to him any information or a document. .
There is such a problem in the Russian practice as the legal spam: minority members apply the economic entity a hundred times demanding to provide them with the information, and then go to the court. The company is often not able to process all that excessive correspondence and eventually it makes concessions and provides the minority member with the required benefits (which are not associated with providing any information) or acquires its share at a good price. Where is a borderline between the right of a person to exercise its powers of getting acquainted with the information and abuse of such a right? How shall the court react in such cases?
While answering your questing I would note that it is necessary to proceed from the principle of reasonableness and good faith in this case. If it is quite obvious that the member misuses its right, the court has every reason to implement article 9 of the Civil Code stipulating that in case of right abuse the court may deny protection of such a right.
Have you come across such cases in your court practice?
We have never come across a case in our court practice when it was refused to satisfy a claim on forcing the economic entity to provide the member with the information due to abuse of right. But as far as I am concerned the parties declared the possibility of implementing article 9 of the Civil Code by the court. For the court to implement article 9 it is necessary to prove that such an abuse of right has taken place due to the fact that the parties might have estimated similar circumstances differently. The claimant may consider it to be the way of exercising its right, and the respondent may take it as abuse of its right. The court should be very careful and impartial in evaluating all circumstances of the case in such a situation.
Although, you believe that a court, as a matter of principle, may have such a response mechanism, don’t you?
If the fact of right abuse is stated beyond all doubt, the claim shall be rejected.
Let’s imagine the situation, when the court has forced the economic entity to provide the member with the requested information, but the economic entity fails to execute the court decision. What shall the member do?
Pursuant to article 27 of the Economic Procedural Code a decision of the economic court shall be subject to mandatory enforcement. If it has not been executed, there are all grounds to take administrative action against the guilty debtor who has failed to execute the enforcement document which is not connected with any funds transfer, within the terms stated by the court or by the court executor, by virtue of part 1 article 24.10 of the Administrative Code of the Republic of Belarus, which sanction stipulates imposition of a fine upon the guilty natural person in amount of up to 50 basic units, and upon a legal entity in amount of up to one thousand basic units. There will be grounds for administrative responsibility in each case of non-execution by the debtor of the enforcement document within any other term (terms) stated by the court executor.
Let’s have a look at another category of cases – appeal of resolutions of general meetings of members. What can you say about today’s practice in this regard?
This is one of the most frequent and interesting category of disputes. A member may exercise its right according to the procedure stipulated by part 7 article 45 of the law on Economic Entities, which provides for that a member has right to appeal against the resolution of the general meeting of members. The essence of this regulation is being differently interpreted by the lawyers. Prior to adoption of the resolution of the Plenum most of the lawyers considered that a member may go to the court with such an appeal just in case if he voted against the decision or if he did not participate in voting. Although, based upon the literal interpretation of that regulation the Plenum gave its explanation that the resolution may be appealed against by any of the members including the member who withdrew or was expelled from the company, as well as by the heir or a successor, if their rights and lawful interests are being violated, as well as by the member who voted for the resolution under appeal.
Depending on who the claimant is, and whether he participated in voting or not, whether he gave an “aye” or a “nay” vote, there might be different grounds for filing a legal action. In case the member gave a “nay” vote or didn’t participate in voting, such a resolution may be hold invalid, if it does not correspond to the Law on Economic Entities and other laws or the articles of association and (or) violates the rights and lawful interests of that member. If the member took part in voting, he can appeal against the resolution upon the ground that it contradicts the Law on Economic Entities and other laws or the articles of association.
This category of cases is very topical today due to numerous mistakes made by the members while making a resolution. For example, article 39 of the Law on Economic Entities imperatively specifies that the member shall be notified of holding the general meeting. Proceeding from the context of this regulation we may come to a conclusion that if the member failed to be duly notified of the meeting it shall be interpreted as violation of the requirements stipulated by the Law on Economic Entities, and there is formal ground for holding the resolution invalid.
Will the court in any case come to a decision on holding the resolution of the general meeting invalid if one of its members failed to be duly notified?
It happens that it has been stipulated by the articles of association that the member shall be notified in a certain way; but he was notified in another way, then the issue on due notification arises. In fact, if the member had been notified, although unduly, the decision to reject the claim on holding the resolution of the general meeting invalid may be made.
The economic court shall in each case consider which legal consequences the resolution of the general meeting would result in. The following should be taken into consideration: the number of votes the member had and to what extent his presence at the meeting could have affected the results of the agenda items of the meeting. If it could not affect those results the decision on refusal to satisfy the claim may be made despite formal violation of the notification procedure.
Wouldn’t then the minority member believe to have been deprived of the management right? Let’s assume the following: having 5% in the company we do understand that he is unlikely to affect any decision, especially if the principal shareholders are present. Nevertheless, according to the law he has the management right…
The court is checking the balance of interests in this case. The court is proceeding not just from the claimant’s interests but also from the interests of the other members and is estimating the legal consequences that are likely to come to light if the decision shall be made for the benefit of the claimant (let’s say the minority member). It is possible that such a resolution of the general meeting shall approve a major transaction. Transaction made, certain legal consequences become due, the property transferred, money received. The minority member is going to the court in accordance with some formal grounds and the court determines that the violation of the law has taken place. If the court recognizes the resolution of the general meeting invalid, negative legal consequences occur in regard to the transaction made. In this case subject to all the circumstances of the case the court has right to reject the claim if the number of votes of a particular member could not affect the voting results in general.
The law stipulates a special short limitation period for appealing the resolutions of a joint stock company which comprises 6 months, and for appealing the resolutions of a limited liability company and an additional liability company it would make 2 months. Don’t you think that the appealing terms are too short? What shall the member do if he missed the term?
I don’t think that the terms are too short due to the assumption that time is playing a big role in the entrepreneurial activity. Implementing the three year limitation period someone can appeal against the resolution upon which a transaction was made just in the verge of the expiry term. And the property which had been alienated upon that transaction might be transferred further and be in circulation for several times already. It is more correctly to implement short limitation periods from that standpoint.
If for any reason this period has been missed and the member is a natural person he can exercise the right stipulated by article 205 of the Civil Code and make an application on reinstatement of the limitation period. Good reason for reinstatement of the limitation period may be disease of the claimant or any other reasonable excuse. The Civil Code does not stipulate such a possibility for the legal entities as members of the company: reinstatement of the limitation period has not been provided for them. In order to determine the commencement of the limitation period it is necessary to proceed from the point when the person became aware or must have become aware of the violation of its right.
How will the court interpret the phrase “must have become aware”?
We may see it in the example with the claim of familiarization with the documents and obtaining of information. The member did not participate in voting because he was not duly notified and was not aware that the general meeting of members was held. He got aware of that during getting familiar with the documentation or during the annual meeting. This shall be the situation when he became aware of violation of his right.
It is possible to consider that the person must have become aware of the violation of his right in case the member fails to fulfill his obligations connected with participation in the economic entity. In order to fulfill his obligations he shall be interested in what is happening in the company. If he fails to do so over a long period of time, the court may come to a conclusion that he must have become aware of that at least during the annual meeting or while participating in the company’s activities in any other situations. It shall be estimated in what manner the member was exercising his rights and was fulfilling his obligations.
Is the claim procedure upon disputes over foundation to be observed?
As long as disputes over foundation result from civil legal relationships and are to be considered in accordance with the action proceeding, the rules on observance of the claim or any other pretrial procedure have been effective. It should be taken into account that the essence of article 10 of the Civil Code implies that this claim or any other pretrial procedure shall be observed upon disputes with participation of legal entities and individual entrepreneurs. If the party of a dispute is a natural person (the member), by virtue of the law, in accordance with the common rule (part two clause 2 article 10 of the Civil Code) it is not specified that the claim or any other pretrial procedure shall be observed. Nevertheless, it may be stipulated by the legal acts that it is necessary for the parties (including if one of the parties is a natural person) to observe the mandatory claim or any other pretrial procedure.
If, for example, the member is filing an action to recover dividends, this property claim resulting from the civil legal relationships shall be considered in the action proceeding. If such a dispute has arisen between the legal entity as a member and a joint-stock company, it means that the claim procedure of dispute resolving shall be observed in accordance with the procedure stipulated in the appendix to the Economic Procedural Code.
Is it possible to appeal the resolution of such a body as supervisory board?
Appeal of the resolution of the supervisory board is rather a controversial issue. Let’s examine it. Let us assume that the member of the economic entity shall be the person who is going to appeal the resolution of the supervisory board. Pursuant to article 47 of the Economic Procedural Code, he can go to the economic court to file an action. The respondent upon such an action shall be the economic entity, i.e. the party which can act as the respondent in the economic court in accordance with the common rule. That is why composition of the parties allows the action to be considered.
As far as the nature of the disputable legal relationship is concerned, this dispute results from the foundation terms and is connected with the entrepreneurial activities. That means that this dispute may be the subject-matter of consideration in the economic court. If the application on appealing the resolution of the supervisory board is filed by the company’s member the court shall have no reasonable ground to reject acceptance of this application. Next, what claim to raise and upon which regulations of the substantive law. There are cases in the practice when the claims are raised similar to those based upon appeal of resolutions of the general meetings of members in accordance with the rules of part 7 article 45 of the Law on Economic Entities. There are also cases when a remedy stipulated by article 11 of the Civil Code of the Republic of Belarus is specified as the substantive foundation.
Presidium of the Supreme Economic Court considered an appeal in the beginning of this year with the subject-matter of the dispute consisting in recognizing a resolution of the supervisory board invalid. The decision of the economic court of first instance was recalled by the Presidium, and the case was remanded for a new trial, particularly due to the application by the court in its decision of the provision stipulated by part 7 article 45 of the Law on Economic Entities, regulating the procedure of appealing the resolutions of the general meeting of the members.
Remanding the case for a new trial the resolution of Presidium took special emphasis on the necessity to clarify which rights and lawful interests of the claimant provided by the law were violated or disputable and thus seeking relief. Apart from that, it was noted that the remedies for the civil rights have been stated by article 11 of the Civil Code. In reconsideration of the case the claim was considered in essence upon the grounds declared by the claimant, so it was rejected to satisfy the claim. That is the way the economic courts consider the claims of appealing the resolutions of a supervisory board.
Hereupon a question about the limitation periods arises. Appealing the resolutions of the general meeting of members, special short limitation periods shall be effective – 2 months and 6 months. We cannot implement the same rules for appealing the resolutions of the supervisory board in this situation, and it is coming out that it is necessary to apply a common limitation period. There is inconsistency which has not been removed by the legislator yet, because a shorter limitation period is stipulated for appealing the resolutions of general meetings of members, and for appealing the resolutions of the supervisory board the common limitation period shall be applied.
Assuming a Belarusian economic entity has just decided to hold a general meeting of members in Cyprus or in Vilnius. What do the law and the court practice say about this? Is it possible to hold the meeting of the company’s members out of the territory of the Republic of Belarus in case all the members are Belarusians or when there are foreigners among the members willing to hold the meeting at their place?
No special requirement has been stipulated by the laws in regard to the place of holding the general meeting of members. In this case it is necessary to proceed from the principle of reasonableness and good faith we already mentioned today. One should proceed from the possibilities of all the members to come to the place of holding the meeting irrespective of the place. If it is not too complex and is possible for all the members, there is no problem in that.
If a company’s member for any reason is not able to exercise its right to participate in management of the company and cannot be present at the meeting in another country, the interests of this member should be taken into account. For example, there might be any problems with opening a visa…
If they would not be taken into account, this member can later on appeal the resolution in the economic court in accordance with article 45 of the Law on Economic Entities. He can specify possible abuse of the right as foundation of the claim in case of holding the meeting out of his reach.
All that shall be examined by the court: whether he applied for a visa and whether there were any problems with that…
As far as I remember we have not had such cases in our practice.
What shall be the grounds for expulsion of the member from the LLC (ALC) membership?
Until quite recently this issue has not been considered by judicial procedure. Only resolutions of the general meetings of members on expulsion of the members were appealed against in the court. But by virtue of the amendments to the Law on Economic Entities, article 103 determines that the issue on expulsion of the company’s member shall be considered by the economic court upon the claim of one or several members having jointly at least 10% of share in the authorized fund.
The ground for expulsion of the member from membership of LLC (ALC) may be gross violation of the law, cumulative action impeding the company’s activity, and omission impeding the company’s activity.
Determining any of the three grounds by the economic court there may be made a decision on expulsion of the member from the LLC (ALC). Applying the court with such a claim the claimants shall precisely specify the legal and actual circumstances of the claim. If the claim is filed upon gross violation by the member of its obligations the claimant shall prove existence of that gross violation of obligations. This can even be a single gross violation.
What from the standpoint of the court shall be gross violation?
Guilty violation of obligations of the member of LLC (ALC) which resulted (is resulting) in the negative consequence for the LLC (ALC) and (or) which is incompatible with participation in LLC (ALC) may be recognized as gross violation. For example, in accordance with article 29 of the Law on Economic Entities it shall be prohibited to exempt a member from the obligation to make its contribution to the authorized fund. Pursuant to the Investment Code formation of the authorized fund may be expanded for a certain period of time. If the member fails to make its contribution to the authorized fund within the term stipulated by the Investment Code he is violating article 29 of the Law on Economic Entities. In this case the court might recognize such violation as gross one. Similarly, if the general meeting of members has made a decision on increasing the authorized fund and the member fails to make its contribution, it might be recognized as gross violation.
Talking about actions impeding the company’s activity it shall be cumulative action.
What shall be recognized as cumulative action by the court? Two and more actions?
More than one. Such repeated actions shall impede the company’s activity. For example, the member is exercising its management rights unfairly. He can participate in the work of the meeting but repeatedly vote against the agenda items requiring unanimous vote of all members. Or he might be an affiliated person not interested in making a certain decision by the general meeting of members. He might also be a member of any other economic entity, a competitor. If he is repeatedly preventing from making decisions, it may be recognized as abuse of right, and his actions may serve as a ground for expelling him from the membership of the company as long as they impede the company’s activity.
According to the objective side of this infringement it may be quite obvious that the member is systematically voting “against”. Is the subjective side of the issue also significant to the court, e.g. why does he give his “nay” vote?
Certainly, the court examines all circumstances; not without reason did I say that it goes about the guilty violation. If there is no guilt, the claim cannot be satisfied. It is necessary to find out why the person voted this way. May be, the member was provided with the documents untimely or the documents were provided to him at such a late point that he was not able to duly examine them.
Or he had any other reason for objection and such a vote…
If it will be stated that such voting of the member has any connection with the actions of the other members or management bodies or the economic entity itself, it may be refused to satisfy the claim on expelling the member from the company.
It has been noted in part 13 clause 31 of the resolution of the Plenum that if the violation by the respondent which was determined by the economic court was made not just due to the fault of the respondent, but also due to the fault of the claimant and (or) LLC (ALC) itself, its management bodies or in the result of their assistance or failure to take reasonable measures to exclude the violation, the economic court has right to refuse the claimant’s requirements taking into account the degree of the respondent’s guilt.
What is omission impeding the company’s activity which can serve as the ground to be expelled from the company? How many such “omissions” shall take place?
Omission may be manifested in the member’s failure to appear at the meeting. The member may be present at the meeting but not vote, e.g. be inactive. As a rule, when we talk about omission there should be more than one such facts. It is also necessary that the omission lasted a certain period of time and was impeding the company’s activity. If there is a member not interested in the company’s activity, further effective activity of the company may become impossible.
On the whole, it is worth being mentioned that expelling the member from the company is quite a complicated dispute category. This category’s claimants often fail to specify the legal foundation upon which they ask to expel the member. As a rule, they note three grounds in total hoping that the court having examined the actual facts of the case would correctly classify the events, actions or omission. It would be more correct if the claimant could precisely qualify the legal foundation he is appealing the court with.