Collision Aspects of Foreclosure Upon the Share of a Participant in LLC

Nowadays Ukrainian legislation differentiates the property and liabilities of a legal entity, limited companies as well, and the natural person`s (who is a member of such a company) property and personal obligations. However, according to the article 149 of the Civil code of Ukraine, the foreclosure upon the share of a limited company, which is proportional to the part of the participant of the company in the nominal capital, is permitted only in case of deficiency of any other property for the satisfaction of creditor`s claims. In fact, the legal norms guarantee an opportunity to satisfy the creditor`s claim in such way when other procedures are already impossible.

The main issue in this case is that depending on the subject (legal entity or natural person) the dispute can be solved using both – the Civil Law and the Commercial Law. First, let`s consider a case of conducting the Civil justice according to the Civil Code of Ukraine.

The article 149 and study of the precedents lead us to the conclusion that, in order to initiate the procedure of the foreclosure upon the participatory share of the limited company, first, it is necessary to initiate enforcement proceedings in respect of judicial decisions that acquired legal force. In this case, the legislation give us two ways to satisfy creditor`s claims at the enforcement proceedings: 1) to get the value of the part in authorized capital based on the value of the property and assets of the company that corresponds to the share of the debtor (in this case the creditor will receive cash); 2) sharing the part of the authorized capital in order to foreclosure (in this case, the creditor will receive a property asset – a share in the authorized capital, that can be disposed in any way).

At the same time the current legislation contains a conflict about an initiator of foreclosure upon corporative rights, namely that it may be either a collector or executor of a decision (a public or private executor). The provision of Article 149 of the Civil Code stipulates that the right to claim the allocation of a share for foreclosure belongs only to the creditor. However, the provisions of Article 379 of the Civil Procedural Code of Ukraine, which regulates the issue of enforcing court decisions, have established that the issue of determining the debtor’s share of the property that he owns with other persons is decided by the court upon the submission of a public or private executor.

Most lawyers believe that the provisions of the Civil Code of Ukraine are more reasonable, since it depends solely on the will of the creditor, in which form he wishes to obtain the enforcement of a court decision.

Trial practice has certain advances in this matter. First, we should pay attention to the explanations in the ruling of the Supreme Court of Ukraine in case No. 6-31ts14 of September 17, 2014, which almost eliminate the discrepancies regarding the application of Article 149 of the Civil Code of Ukraine by courts. Thus, the company’s property may be allocated in proportion to the share of the debtor in the nominal capital or paid out in proportion to the share of the debtor in the company’s nominal capital at the request of the creditor. However, the payment of the value of the share of property or the allocation of the share of the debtor’s property, a proportional share of the debtor in the nominal capital, must comply with the provisions of the law and the articles of association.

At the same time, courts of another jurisdiction, namely, the economic courts of Ukraine do not have a well-established practice on this issue. Thus, the Supreme Arbitration Court (the old name of the acting Supreme Economic Court of Ukraine) in its letter dated December 07, 1995, No. 01-8/870 states that, in order to satisfy its claims by the share of the debtor in the charter capital of the economic partnership, the creditor, first of all, should contact the company with the requirement to allocate the share of the debtor, that is, the direct collection of a share is not allowed. This procedure can be applied only to full partnerships and partnerships with additional liability. On the other hand, the Supreme Economic Court of Ukraine, in its ruling of 19 February 2009, in the case No. 3/227, concluded that the enforcement cannot be applied to corporate rights, since the transfer of pledges to personal claims is prohibited.

We can conclude that satisfaction of the creditor`s claims by foreclosure upon corporate rights is not a sufficiently well-regulated procedure. At the same time, corporate rights in the current economic situation can be significantly devalued, which automatically will make the position of the creditor weak and unprotected. Therefore, in any case, the creditor should think carefully about such an offer and consult a lawyer in order to avoid uncontrolled situations with the debtor in the future.

Author: Kydalov Igor

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