10 03 / 16

Raider attacks: how to act in case of illegal change of managing director and the sale of company's assets.


«Raider attacks: how to act in case of illegal change of managing director and the sale of company's assets»

Natalia Kolodezhnaya, Managing Partner of Legal Group "Paradigma"
Igor Gritsay, Senior Associate at Legal Group "Paradigma"

The essence of the case: An illegally change of the managing director occurred in the company. The new managing director, on behalf of the company, sold out the company's liquid real estate property. Member of the company (the founder) came to found out about it and acted in several directions: challenged the corporate decision of the director’s appointment, the decision of registration authority to make an entry in the Unified State Register of Legal Entities (USRLE) and real estate sale agreement.
The result: The courts satisfied the claims and annulled both the decision of registration authority to make an entry in the USRLE and the real estate sale agreement. The Company has retained the high-liquid assets on a company's books.
Case numbers: № A40-44193/15 (Moscow city Arbitrazh Court) and № 2-3254/2015 (Zamoskvoretskiy District Court of Moscow).

The circumstances of the case
K. was the sole member and the managing director of the company from the date of its foundation. He came to found out about the existing land sale agreement between the company and a person P. – his company allegedly transferred the real estate property ownership to the P. However, the K. did not take the decision to change the director and to sell the real estate objects.
Later it turned out that at the end of 2014 a person T. filed to Federal Tax Service an application on form № R14001 for making change in USRLE. The change concerned the information about the managing director of the company. It was stated that the T. is a new managing director. Entry in the USRLE has been made.
Then T., acting on behalf of the company, concluded a real estate sale agreement with P. The buyer filed to the local office of registration authority an application for real estate property rights transfer registration.

What did lawyers do
To reinstate the company’s real estate ownership rights, we decided to act in several directions:
- to apply to law enforcement agencies on the fact of faking the corporate decision by raiders. We did not expect from these actions to have much effect, but it was positive in general;
- to put the real estate property rights transfer registration on hold. For this purpose it was necessary to file an according application to registration authority;
- to annul the corporate decision of the company’s sole member and the decision of registration authority to make an entry in the USRLE. For this purpose it was necessary to draft documents for the Arbitrazh Court;
- to challenge real estate sale agreement.

Challenging the corporate decision to make change in the USRLE. The law allows challenging in court for those entries in the USRLE that are based on false information or made in contravention of the law (Art. 51 of the Civil Code of the Russian Federation).
K. as the sole member had the legal grounds for this. He has never taken a decision to elect T. as the managing director. In addition, it turned out that the filed to registration authority application on form № R14001 was also fictitious. We requested the notary, who allegedly certified that application, and he replied that he had never witnessed the authenticity of the T’s signature on the application and above that T. had never addressed to the notary on this issue.

Corporate disputes referred to the special jurisdiction of the Arbitrazh courts (Art. 1, Art . 33 and Art. 225.1 of the Arbitrazh Procedure Code ) .

In the statement of claim K. asked the court to annul as fictitious both the corporate decision to change the managing director and the registration authority’s decision to make the according entry in the USRLE.
In similar cases Arbitrazh courts satisfy plaintiff's claims for annulling the decision of registering body if such changes in the USRLE are made on the basis of documents that do not conform to the law. Courts satisfy such claims despite the fact that formally registration authority act legally – it registers the change on the basis of all necessary documents in accordance with the law.
The Presidium of the Supreme Arbitrazh Court of the Russian Federation pointed out that whether the application contains false information than it should be considered as not submitted to the registration authority (judgment of 08.02.11 № 12101/10). At the same time, it is an established case law that any false information in the application should be regarded as a lack of the document itself; it is a statutory ground for rejection of registration.

There were no copies of such a decision in the registration file, as the law does not oblige to submit this document to the registration authority together with the application.

We also proceeded from the fact that the annulling the decision of the registration authority will allow the plaintiff to bypass a delicate moment. Theoretically, a plaintiff should submit the corporate decision to a court to challenge it. However, our client didn’t have either a copy, or the original decision, which he allegedly made. Later it became clear that this decision did not even exists in paper. The decision of the registration authority was based solely on the presumption of its presence, as the notary who signed the application in theory was supposed to get acquainted with the original paper.
Changes made in the USRLE about the managing director are not associated with changes in the documents of association. Therefore, it is enough to submit an application on due form to make such changes in the USRLE (Sec. 1, Art. 17 of the Federal Law dated 08.08.01 № 129-FZ "State registration of legal entities Act"). Registration authority makes these changes on the assumption of validity of information contained in a statement.
Since the plaintiff was not possible to present to the court at least a copy of the contested decision, there was a chance that the court will deny the claims in terms of its annulment. These doubts were based on case law. For example, the Federal Arbitrazh Court of the Ural District in a similar situation stand on further: "the fact of making a corporate decision, shaped in a definite legal form, is a condition of the exercising the right to annul such decision". The Court upheld the acts of lower courts that refused to satisfy the claim for annulment of "missing" decisions. The Court does not discern the presence of the matter in issue in view of the lack of decision on paper (judgment dated 08.04.10 on the case number A47-4516/2009).
Similar precedents can be found in the cases of 2015.

A member of the company filed a suit to annul the resolution of the general meeting to change the managing director, and the decision of registration authority to register the changes; he also demanded to oblige the registration authority to recover previous information.
The Court pointed out that the member of society has the right to challenge the decision of the company, but neither the defendant nor third parties have not submitted any evidence which would confirm that the meeting was held. There have not been submitted any text of such decision. So there is no issue in this situation.
The court stressed out that since there were no documents, the entry in the USRLE is based on unreliable data and should be invalidated (the decision of the Ninth Arbitrazh Court of Appeal dated 27.03.2015 № 09AP-8840/2015 on the case № A40-78797/2014).

With this in mind, the member of the company abridged the claim in a part of the challenging his early resignation decision and election T. as a new managing director.
We consciously decided to do this step. The mere fact that a court will annul the decision of registration authority will allow to successfully annul any transaction made by T. on behalf of the company at a time when he "had" powers.
The plan was right, and the court delivered a judgement for the plaintiff in the remaining part.

The court declared as the reasons for judgment: "there are no any grounds to conclude that the filed to the registration authority application on behalf of [the company] complied with the requirements of the law, that is, a signature the of the authorized person on behalf < ... > was witnessed by a notary. As well, there are no grounds to conclude that T. has the necessary authority in this case to act on behalf of the entity."
The court also concluded: "filing an application to the registration authority based on documents just formally satisfying the requirements of the law, is not a legally ground for recognition of the legitimacy of such registration, if the information contained in these documents is unreliable, and the registration carried out in violation of the company members’ right. Otherwise, the registration authority will be obliged to make registration based on applications of any persons even though they do not have the appropriate authority"(the Moscow Arbitrazh Court decision dated 07.08.15 on the case number A40-44193/15).

"We challenged this real estate sale agreement together with the challenging the corporate decision to make change in the USRLE."

Challenging the real estate sale agreement. When T. was а «managing director», he signed the real estate sale agreement. We challenged this agreement together with the challenging the corporate decision to make changes in the USRLE.
Then the new question arose: which court to apply to? It could be either the court at the location of the immovable property due to the rules of exclusive jurisdiction (Art. 30 Civil Procedure Court) or the court at the location of the defendant. The fact is that Art. 30 of the Civil Procedural Code is about the claims for rights to immovable property. There was no dispute about the rights to object in our case, as T. applied to put on hold the transfer of rights to a buyer. Perhaps the registration authority took into account the letters of the sole member.
Since the courts usually interpret the law literally, we filed the suit to the court at the location of the object, despite of the absence of a dispute about the rights.

Interesting question

Why was it so important to file both suits at the same time and it would be wrong to get a positive decision on the corporate dispute first and then challenge the real estate sale agreement?
Sequential actions would take more time. It might be possible, that during the corporate dispute the building would be resold. So it could be much more complicated to return it to the owner. For example, there would be a need to apply for interim measures to stop the transfer the real estate property rights to furher purchasers.

We assumed that it is a void contract due to the Art. 168 of the Civil Code.
The owner shall be entitled to the rights of the possession, the use and the disposal of his property (para. 1, Art. 209 of the Civil Code). The owner has the right at his own discretion to perform with respect to the property in his ownership any actions, not contradicting the law, and not violating the rights of the other persons (para. 2, Art. 209 of the Civil Code). So the disposition of property by an unauthorized person is a major breach of Art. 40 of the Federal Law dated 08.02.1998 № 14 - FZ "Limited Liability Companies Act", Art. 53 and 209 of the Civil Code.
The deal, which violates the requirements of the law, shall be regarded as insignificant, unless the law establishes that such a deal is disputable or stipulates the other consequences of the (para. 2, Art. 168 of the Civil Code).
In addition, we have decided to include in the lawsuit a claim for invalidate of the deal due to the fact that it violates the Art. 46 of the Law № 14 -FZ (Major transaction) – it made without the approval of the sole member
Major transaction is a transaction or several interrelated transactions which are associated with the acquisition or alienation or with possibility of the direct or indirect alienation by the company of assets whose value comprises 25 and more percent of the value of the company's property. Transactions completed in the process of the company's usual economic activity shall not be deemed to be major transactions (para.1, Art. 46 of the Law № 14 -FZ).
According to the financial statements as on the date of the transaction, the value of real estate property significantly exceeded the statutory and the company's charter allowable "size". As a result, the transaction had to be approved by the sole member.
At the same time we had been skeptical about the inclusion of such a claim in the lawsuit. According to Art. 46 of the Law № 14 -FZ, major transaction can be claimed for invalidation, while the transactions that are made by an unauthorized person shall be considered null and void. In the early 2000s legal precedents adhered to the position that both of these claims cannot be included together in a lawsuit (Decision of Federal Arbitrazh Court of the Moscow District dated 02.04.2003 on the case № KG- A40/1664-03). Also, the courts proceeded from the fact that the structure of paragraph 1 of Article 166 of the Civil Code (invalid and void transactions) clearly separates the concept of these transactions: one and the same transaction cannot be invalid and void at the same time.
Nevertheless, we have decided not to give up an additional, and certainly a good reason for invalidation of the transaction. If the transaction contains several formal elements of its invalidity – being an invalid and void – it is impossible to deprive the plaintiff’s rights to indicate all the circumstances and to draw the court's attention to all the signs of the invalidity of the transaction.

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It is necessary to point out that the founder assumed that transaction has committed by an unauthorized person. Although this fact was set out by Arbitrazh Court later and during the other trial. And in case if it wouldn’t, there would be no issue to challenge the real estate sale agreement. Therefore, a judgement over the real estate sale agreement case depended upon the judgement over the corporate case.
As a last resort, if the corporate case legal proceedings would be protracted, we had planned to file a motion for stay of the proceedings until the judgement over the real estate sale agreement case would be delivered. But this was not necessary.
After the Arbitrazh Court delivered a judgement for nullify the corporate decision to make change in the USRLE, the Zamoskvoretskiy District Court has satisfied the claim for invalidate the real estate sale agreement.

What has been achieved
Legitimate managing director has regained his full power, rights and authority, and the company has retained one of the main and liquid assets.