Corporate disputes. Recovery of damages from the director of a limited liability partnership LLP.

At current time, one of the most common legal forms of legal entity in Kazakhstan is a Limited Liability Company (hereinafter - LP). Like in any form of legal entity, LLP has organs, as a rule, it is the supreme body - the general meeting of its members and an executive body - the Director of the simplest form and more complex forms, in the form of collective executive bodies of government, the Soviets, as the addition of recommendation and regulatory bodies such as the Board of Trustees, audit Commission and so on.

In some cases, the supreme body, i.e. the participant and the executive body - the Director can act in one person.

However, the presence of corporate disputes directly speaks about a third party, in any way a hired executive authority LLP, i.e. Director-wage person in performing their duties may not always act in good faith and legitimately in the interests of Partnership, which in turn gives rise to corporate disputes involving labor disputes , disputes relating to signs of unfair competition, theft, violation of business ethics that incurs losses to the Company's profit shortfall, loss of confidential information and the deterioration of the Company's reputation as a whole.

This article is devoted specifically to such corporate disputes, as well as the legal aspects of the recovery of damages from the director of LLP.

To begin with, let us consider the concept of "corporate disputes" and what itself refers to "corporate disputes".

 In accordance with Article 27 of the Civil Procedural Code of RK, corporate disputes include disputes to which parties are commercial entity, association (union) of commercial organizations, associations (unions) of commercial organizations and (or) individual entrepreneurs, non-profit organization, with the status of self-regulatory organization in accordance with the laws of the Republic of Kazakhstan and (or) its shareholders (participants, members), including the former (hereinafter - corporate disputes) related to:

1) the creation, reorganization and liquidation of the legal entity;

2) membership shares of joint stock companies, shares in the authorized capital of business partnerships, the units of members of cooperatives, establishment of encumbrances and sales stemming from these rights, including the recognition of transactions with them void, except for disputes arising in connection with the division of inherited property or division of common property of spouses, including the shares of the company, the share in the authorized capital of economic partnerships, shares of cooperative members;

3) claims for damages caused to a legal entity actions (inactions) of officials, founders, shareholders, participants (hereinafter - participants of the legal entity) and other persons;

4) recognition of invalid transactions and (or) application of consequences of invalidity of such transactions;

5) the appointment or election, termination, suspension of the powers and responsibilities of persons entering or were part of the legal entity's management bodies, as well as disputes arising from civil relations between such persons and a legal entity in connection with the implementation, termination or suspension of their powers;

6) issue of securities;

7) maintenance of register of holders of securities with rights to shares and other securities, as well as disputes relating to placement and (or) circulation of securities;

8) the invalidation of state registration of the share issue;

9) the convening and holding of general meeting of the legal entity and the decisions taken thereon;

10) challenging the decisions, actions (inactions) of the legal entity's management bodies.

According to the Law of Kazakhstan "On amendments and additions to some legislative acts of the Republic of Kazakhstan on settlement of corporate disputes", corporate disputes include disputes between legal entities (except for disputes between non-profit organizations), as well as disputes to which is a legal entity and ( or) its shareholders (participants, members):

1) associated with the reorganization or liquidation of the legal entity;

2) arising from the requirements of the shareholders (participants, members) of the legal entity contesting the decisions, actions (inactions) of a legal entity, affecting the interests of shareholders (participants, members), as well as related to violation of the order of transactions, established by the legislative acts of the Republic of Kazakhstan and ( or) constituent documents of the legal entity;

3) resulting from the activities of the professional securities market participants, taking into account the rights associated with the shares and other securities;

4) related to the invalidation of state registration of the shares, as well as the transactions made during the placement, purchase, redemption by the issuer of the shares".

Thus, corporate disputes are - disputes between legal entities (except of disputes between non-profit organizations), as well as disputes to which is a legal entity and (or) its shareholders (participants, members), such conflicts are located in different planes rights - criminal rights to theft and shortages as a result of acts and omissions of the Director (or other official LLP), in competition law cases, disclosure of confidential information, violation of business ethics, opening parallel LLP, thus corporate dispute may involve a range of different illegal actions.

We now turn to the legal aspects of the recovery of damages to the director of the LLP.

Thus, in accordance with the Law "On Limited and Additional Liability" (hereinafter - the Law), clearly defined competence of the general meeting and the executive body - the Director.

In addition, the charter of LLP can be a competence of the general meeting and the executive body charged and other issues related to the activities of the partnership. It should be noted that the Charter of the LLP can serve not just the nominal required legislation document, but also a sufficient tool-gear ratio balance regulation between the founders and the director, clearly fixing the amount of the liability of directors, beyond the work with cash, the limits of the decision, the introduction of another counterweight governing body, as the Board of Trustees, the Audit commission and so on, the individual mechanisms.

 But despite the clearly defined rights and responsibilities (competencies), the actions of the directors may cause losses to LLP.

In such cases, the interests of the Company may recover the following provisions of the legislation of RK, Director of LLP may be held liable by participants for the following reasons.

Firstly, a return to the original position -restitution.

By virtue of paragraph 2 of Article 52 of the Law, in the relations with third parties a limited liability partnership is not entitled to rely on them to set limitations on the powers of the executive body of the association. However, a limited liability company has the right to challenge the validity of the transaction made by his executive authority to a third party, in violation of the restrictions, if it proves that at the time of the transaction the third person knew about such restrictions.

Before turning to the courts on these grounds, the participants of LLP should clarify the question of how a third party in the transaction showed due diligence to establish the authority of the person to enter into transactions on behalf of the LLP, by reference to the founding documents, the general meeting on the election of the executive body etc.

If a participant of LLP can prove that at the time of the transaction the third person knew about such restrictions, it may apply to the courts to recognize the transaction invalid guided to paragraph 11 article 159 of the Civil Code of RK, which states that the transaction made by a legal entity in contradiction with the objectives of the activities, particularly limited by this Code, other legislative acts or constituent documents, or in violation of the statutory competence of its authority, it may be declared invalid at the suit of the owner of property of the legal entity or its founder (participant), if it is proved that the other party to the transaction knew or should have known of such violations.

Data argument can cite the example of an inured decision of the Specialized inter-district economic court of Pavlodar region taken in a civil case at the suit of LLP participant to the director of LLP and Bank for invalidation of transactions. The plaintiff's claims are motivated by the fact that the director of LLP made a big deal, although his right to enter into such transactions were limited, and that the director of Partnership entered into an agreement with representatives of the Bank and entered into a bank loan agreement. The court decision in satisfaction of a claim denied completely and refusal is motivated by the fact that the plaintiff has not presented evidence to the other side of awareness, that is, the Bank of the existence of any restrictions on the competence of the Director. In case of refusal to satisfy the claim on these grounds, the court is guided by paragraph 2 Article 52 of the Law.

 Thus, the decision of the court fully confirms our argument that the participant of LLP can apply to the courts for recognition of the transaction invalid if it has sufficient evidence that at the time of the transaction the third person knew about the limitations in the office of the Director in the fulfillment of such transactions.

Secondly, the subsidiary liability of directors with the LLP to third parties.

In accordance with Section 3 of Article 52 of the Law, the executive body members LLP can be prosecuted at the request of any of the participants of LLP for damages caused to their partnership. At the same time they are responsible jointly for the damages caused by the joint implementation of the improper management of the partnership.

Also, according to paragraph 4 of Article 52 of the Law, members of the executive body of the LLP can be jointly held subsidiary liability with partnership before third-party for losses which these people have suffered as a result of insolvency (bankruptcy) of the partnership caused by improper implementation of the members of the executive management of the partnership.

 The basis for the recovery of damages from the director of LLP according to the provisions of the law can be any actions of director, not consistent with the participants, and that instead of the expected benefits/profit caused to LLP a loss or caused unreasonable costs, and if the director improperly managed LLP, which led to bankruptcy.

Thirdly, on the grounds of breach of the employment contract.

If the director is an employee, employment contract must be concluded with Director of LLP, which may also perform an effective tool for solving problems of actions of the Director control and transparency of the processes in the future.

 If such a contract is concluded with the director, the recovery of damages to the Director of LLP possible on the following provisions of the Labour Code of the Republic of Kazakhstan (hereinafter - RK TK).

 According to the subparagraph 7 paragraph 1 of Article 23 of Customs Code, the employer has the right: to compensation for damage caused by an employee in the performance of job duties.

By virtue of Article 120 of Customs Code, the liability of the parties of the employment contract for damage (harm) caused by it to the other side of the employment contract comes for damage (harm) caused as a result of guilty of unlawful conduct (action or inaction) and the causal link between the unlawful guilty conduct and the damage (harm), unless otherwise provided by this Code and other laws of the Republic of Kazakhstan. A labor contract that has caused damage (harm) to the other party, reimburse it in accordance with this Code and other laws of the Republic of Kazakhstan.

In accordance with pp3, 4 and 8 of Article 123 of Customs Code, an employee is obliged to reimburse direct actual damage caused to the employer. Under the direct actual damages understood a real decrease in the cash assets of the employer or the deterioration of the said property (including property of third parties in the possession of the employer, if the employer is responsible for the safety of the property), and the need for the employer to make the costs or unnecessary payments for the purchase or the restoration of the property. Liability in the full extent of the damage caused to the employer, is assigned to the employee in the following cases:

1) failure to ensure the safety of property and other assets transferred to the employee on the basis of a written agreement on the acceptance of full liability;

2) failure to ensure the safety of property and other values received by the worker under the one-off report on the document;

3) damage in a state of alcoholic, narcotic or toxic intoxication (their analogues);

4) shortage, intentional destruction or vandalism materials, semi-finished products (products), including in their manufacture, as well as tools, measuring instruments, special clothing and other items issued by the employer to the employee for use;

5) violation of the terms of the non-competition clause, which caused damage to the employer;

6) in other cases stipulated in the employment, collective agreements.

However, in practice business owners very often belong to an employment contract, as a standard, formal procedure, such provisions of agreement are standard and do not bear specific mechanisms to ensure the interests of the Company, which leads to negative consequences, often the inability to recover damages from the Director by Labour Code of RK. Also ensure the interests of the Company may serve other corporate documents of the Company, as well as other ancillary agreements and documents, as a contract liability, privacy statement, memorandum of coherence of the work of various bodies of the Company, and so on depending on the size, activity and corporate standards of Company and of course legal capacity, the legal service as a whole.

In case if the conflict occurred and resolving it is available only in the courts, here it is necessary to give attention to the adequacy of the evidence base, written inventory acts in cases of shortage or embezzlement of entrusted property, recognition of signatures of such acts, acts of inspections and other procedural documents perpetuate unfair competition , theft or other facts running counter to the interests of the Company and the participants signed or otherwise accepted/recognized by the executive body.

This article was prepared by a senior lawyer of ZAN Company

Practice Litigation Zhumadilova Zhuldiz.