Tax and accounting insights for Ukraine
17.06.24
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Deprivation of powers of a representative who harms a legal entity

By the nature of corporate relations, the company's shareholders should be given the opportunity to respond promptly at any time to the actions of a person who exercises representative functions to the detriment of the company's interests by depriving him or her of the relevant powers.

Termination of the powers of the President of the Ukrainian Cycling Federation (UCF) in accordance with Part 3 of Article 99 of the Civil Code of Ukraine is an action of the authorized body of the company aimed at preventing a member of its executive body from carrying out management activities.

In resolving the issue of violation of the right to hold the position of the President of the SFSU, it is not the existence of grounds for termination of the official's powers that matters, but compliance by the management body (general meeting, supervisory board) with the procedure for making a decision on such termination provided for by civil law and the constituent documents of the legal entity.

This conclusion was made by the Commercial Court of Cassation of the Supreme Court.

In this case, an extraordinary conference of the Ukrainian Cycling Federation decided to recognize the plaintiff's work as the president of the UFCU as unsatisfactory and to terminate the president's powers in accordance with Part 3 of Article 99 of the Civil Code of Ukraine.

Disagreeing with this decision, the plaintiff filed a lawsuit against the Ukrainian Cycling Federation seeking to have it declared unlawful and set aside.

The plaintiff, in particular, noted that the content of the minutes showed that it had been decided to terminate his powers as the President of the USF pursuant to Part 3 of Article 99 of the Civil Code of Ukraine, the provisions of which cannot be the basis for termination of powers of the President of the USF, whose term of office has not yet expired (due to expire in 2023), and therefore the decision to terminate the powers of the President was not properly substantiated and motivated.

The decision of the commercial court, upheld by the decisions of the Commercial Court of Appeal and the Supreme Court, dismissed the claim.

The Supreme Court, upholding the court decisions of the previous instances, noted that the termination of powers of a member of the company's executive body by its legal nature, as well as the subject matter of legal relations and legal consequences, differs from the dismissal of an employee (termination of an employment contract) based on the provisions of the Labor Code.

That is why the possibility of the authorized body of the company to terminate the powers of a member of the executive body is not contained in the provisions of the Labor Code, but in Article 99 of the Civil Code of Ukraine, i.e. it is not subject to labor law.

The exercise by company shareholders of their corporate rights to participate in its management by means of decisions made by the competent authority on the election (appointment), removal, suspension, dismissal, or recall of members of the executive body also includes the vesting or deprivation of their powers to manage the company (presidium). Although such decisions of the authorized body may have consequences within the framework of labor relations, corporate legal relations are decisive in such circumstances.

In view of the foregoing, the termination of the powers of the President of the SPFU in accordance with Part 3 of Article 99 of the Civil Code of Ukraine is an action of the authorized body of the company aimed at preventing a member of its executive body from carrying out management activities. The need for such a rule is due to the specific status of a member of the body that has received the right to manage from the company's authorized body.

By the nature of corporate relations, the company's shareholders should be given the opportunity to respond promptly at any time to the actions of a person who exercises representative functions to the detriment (or possible detriment) of the company's interests by depriving him or her of the relevant powers.

This form of protection is a specific action of the holders of corporate rights in their relations with the person entrusted with the management of the company.

The Supreme Court also emphasized that when deciding on the violation of the plaintiff's rights, in particular, the right to hold the position of the President of the SFSU, it is not the existence of grounds for termination of the official's powers that matters, but the compliance by the governing body (general meeting, supervisory board) with the procedure for making a decision on such termination provided for by civil law and the constituent documents of the legal entity.

In view of the above, the CGU SC agreed with the conclusions of the courts of previous instances that the decisions of the extraordinary conference of the Ukrainian Cycling Federation, formalized in the minutes, were adopted by the authorized body of the company and comply with the requirements of the current civil law and the charter of the USF.

Resolution of the CCC of the Supreme Court of April 4, 2024 in case No. 757/230/20.

Judiciary of Ukraine

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