Since 2014, in cases where corporate conflict blocks a company's activities, Russian law has allowed company members to demand the company's judicial liquidation.
Before the change in the law a company undergoing extended internal corporate conflict was virtually doomed to bankruptcy, and company members were liable for huge material losses. The situation has now changed.
Liquidation as a means of resolving conflict can bring corporate disputes to an end at an early stage and allow property to be distributed between company members after any settlements with creditors.
Conditions necessary for liquidation when liquidation is permitted to resolve corporate conflict
Liquidation can only be is carried out as the result of a court decision based on a claim by a member of the company.
According Russian legislation, a legal entity can be liquidated under the following conditions:
- if it is not possible to achieve the goals for which it was created, including in the event that the performance of the activities of the legal entity becomes impossible or significantly hampered;
- if other means of resolving the conflict have been exhausted or are impossible;
- if there are no unfair actions on the part of any one of the company members or if all participants have behaved in bad faith
The Supreme Court cites the following examples when liquidation is permitted to resolve corporate conflict
- Impossibility of making certain
decisions.
A classic deadlock, when due to disagreement between company members it is no longer possible to make decisions necessary to manage the company. For example, if for a long period a legal entity cannot be formed – as in the case of a company with two members each blocking the other as candidate, and when the corporate contract has no instructions on how to resolve such a situation.
Or, for example, if it is necessary to have the participation of all corporate members in order to conduct business. In this case, if the corporation is unable to function properly without the involvement of each member, liquidation may be the only means of resolving differences between members. - Prolonged corporate conflict,
involving significant abuses by all company members and leading to
extensive difficulties in corporate activities.
It is important to remember that if a conflict is caused by the unfair act of just one participant, then liquidation is impossible. The member should be excluded from the company and his share repaid. According to the Supreme Court, the unfairness of all members in corporate conflict does not allow for just one to be excluded. At the same Mme, it is obvious that a corporation in which all participants oppose each other is unlikely to be able to function normally. Especially if the participants are attempting to withdraw assets to own their advantage, challenging company transactions, etc. Thus, liquidation is the only way out of the corporate impasse.
Judicial practice in such processes is still at an early stage, but already allows us to draw some initial conclusions.
In general, courts follow the recommendations of the Supreme Court in liquidating companies in cases of deadlock or prolonged corporate conflict.
At the same time, courts apparently fear taking the radical step of liquidation and generally allow company members to try and find a way out of the situation themselves.
But the fact of having positive practice suggests that this mechanism can be further developed, which will allow those sharing company profits to save Mme and reduce material losses in the event of conflict situations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
