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The risks in corporate relations



11.11.2010

When creating a business each participant wishes to gain profit, but not everyone seriously studies possible risks. Usually a founder of a company asks a lawyer: What responsibility do I have as a founder? and almost in 99% of cases he is answered: The founders of an economic company are not liable for the obligations of the company, and the company is not liable for the obligations of the founders with the exception of cases, provided for by law or constituent instrument of a legal entity[1].

Its not the whole information that a businessman should know. Mobile legislation, judicial practice, forming on certain issues, reluctance of owners to ask the advice of highly qualified specialists often result in rather deplorable consequences.

 

The formation of a private company (registration of a legal entity).

Information, mentioned in the application for registration, must be reliable. The owners of property are responsible for unreliability of information in the documents, submitted for state registration, including an application for registration. Activity of economic entities, registered on the ground of false information, is considered to be illegal and is prohibited, and their state registration is recognized invalidated by a decision of a commercial court. Incomes, received from such activity, shall be recovered to the local budgets irrespective of time passed since a record day over the whole period of work.

Consequently, at the initial stage of formation of a company the founder already has a risk of recognition of his activity as illegal, also of payment of fines.

For instance, the founder has not described the amount of the charter capital and the procedure for its formation in the charter of a company. According to article 113 of the Civil Code the charter of a unitary enterprise must contain information concerning the amount of the charter fund of the enterprise and the procedure and sources for forming it. Consequently, the charter does not comply with legislation regardless of the fact that in the application for state registration the founder affirmed that statute complies with legislation, and thereby he stated false information. Since the company was registered on the basis of false information, its activity is illegal and prohibited. Paragraph 25 of the Regulations of state registration of economic entities  provides responsibility for present violation[2]. Furthermore, incomes, received from such activity, shall be recovered to the local budgets.

 

The conflicts between partners and their consequences.

Thats quite a frequent situation, when its impossible to amend the charter of a legal entity because of blocking of such a decision by one of the partners. That means a conflict between partners. Situation like this may last several years, partners are unable to negotiate and they demand disproportionately high compensations of one another. One may try to expel such partner out of the founders membership, but then dispute should be submitted to the court, and theres no guarantee that its settlement wont take longer than expected. During legal proceedings its impossible to attract additional capital to the company, to increase the charter capital, to regulate other current issues and also to liquidate a company without unanimous decision. These situations may bring the company to organizational risks, the risk of liquidity fall. Therefore a lawyer should make a close study of the charter of the company for the purpose of competence, procedure of making decisions, the quorum of general meeting, and make sure that no partner could harm the companys activity.

Example. For participation in business project 2 of 3 partners of a company decided to increase the amount of the charter capital. In the charter of the company its prescribed that its necessary to have unanimity of the general meeting on all issues concerning the competence of the general meeting, including a question of increase of the charter capital at the expense of making additional contributions by its partners. One of the partners refused to give his consent concerning the increase of the charter capital that led to impossibility to decide an issue about the participation in the project promptly. The company lost an opportunity to earn money. When determining the process of issues solution by the general meeting the partners were guided by a principle everything only jointly and only by mutual consent of all the partners. On the one hand, its fair, but there are issues that must be solved very quickly. The legislation allows solving the situation by the qualified majority (not less than two thirds) of votes of the total number of partners votes, unless otherwise provided by the charter. Thats important to take into consideration when drafting the charter.

 

The risks concerning the replacement of founders membership.

At present binding notarization of the charter is not required, and transactions of purchase and sale of shares may be performed without a notary. Theres a risk that transaction may not be realized or will be recognized as void. As a rule founders fail to take into consideration the necessity to receive consent of a husband (a wife) on settlement of the transaction. Its quite another matter if the transaction is held at a notary, where the presence of a husband (a wife) is required and his (her) consent on selling a participatory share. Furthermore, its necessary to present to registering body the documents for registration of replacement of partners membership. For third parties a new participant will become a partner only from the time of state registration and reflection in the Unified state register of legal entities and individual entrepreneurs.

One should pay attention to the price of selling of a participants share. This way, if a seller sold his share on the price that exceeds the amount, paid when forming the charter capital, then difference in prices is subject to taxation.

If with legal risks everything is more or less clear, then what is to be done with commercial risks? The company attracts independent inspectors or auditors for inspection of its activity in financial area, area of labour legal relations, corporate law. That allows to inspect the company in certain periods of time, to reveal and to amend breaches, to correct and to renew documents. The specialists decisions on such inspections are the reports about the work on mistakes, the assurance of the founders and executive body before supervisory body, in other words, the prevention.

The Due Diligence procedure becomes very essential and important nowadays. Initially, it was an independent examination of information about a company. Now its tasks considerably broadened, and the examination itself went to surface of the risk-management. The Due Diligence is very urgent in the case of the replacement of participants, the purchase of a company, various forms of reorganization.

Due Diligence provides an investor with information on the state of business, its structure, financial characteristics and risks, enough for reaching a decision to purchase a business or refuse it.

Complex control of investment project helps to recognize present and possible risks such as purchasing a business (share) at overcharge, non-payment of debts receivable, tax risks, losing the right of possession of assets, non-receipt or loss of licenses, agreements. Such inspection may become a guarantee of absence of company risks.

Some businessmen consider that when buying a business its enough to demand a balance sheet or other accounts of the company. But reports to the buyer they may submit only on a certain date, for example, on the first date of a month. And by the moment of signing of the contract on the purchase of a share or the purchase-sale of the enterprise, buying business may become a soap bubble. Due Diligence reduces risks of a purchaser and, probably, brings them to naught. So, in the course of Due Diligence, it became clear that the founders not long before selling the company formed and registered a similar company. In some degree sellers transferred business and worked connections, the base of clients to a new legal entity. Having received such information, the buyer refused to purchase a company.

Today the legislator concerning the formation of legal entities and amendments into constituent instrument reckon on consciousness of founders and diligent fulfillment of all their procedures. As an incentive for observance of corresponding norms the responsibility is provided. In this connection the founders permanently have a task to control the activity of the society and its executive organs.

 

Olga Bezliapovich, Dicsa (Belarus)

Alesia Tekhanova, Dicsa (Belarus)

Published in "Industrial and commercial law" journal, 2010/9 (95)



[1] Art. 5 of the Law of the Republic of Belarus 2020-XII dated 9.12.1992 On economic companies.

[2] Confirmed by the Decree of the President of the Republic of Belarus 1 dated 16.01.2009 About state registration and liquidation (cancellation of activity) of economic entities (together with the Regulations of state registration of economic entities, the Regulations of liquidation (cancellation of activity) of economic entities).


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