GENERALIZATION OF TRIAL CHAMBER ON ECONOMIC CASES OF THE SUPREME COURT OF UKRAINE

of January 1, 2004

Generalization of court practice of resolution of disputes, connected using the Law of Ukraine "About economic societies" regarding regulation of activities of joint-stock companies

(Statement)

1. Disputes on recognition invalid constituent documents and cancellation of state registration

Problematic issues of application of Articles 4, 37 Laws concerning data which shall contain in constituent documents

Joint-stock company society which has the authorized fund divided into certain number of shares of equal nominal value and bears responsibility according to obligations only property of society (Art. 24 of the Law of Ukraine "About economic societies" (further - the Law) is recognized. According to Art. 3 of this Law the companies, organizations, the organizations, and also citizens, except cases, stipulated by the legislation Ukraine can be founders and members of economic society (1).

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(1) According to p.1 Art. 153 of the Civil code of Ukraine (became effective since January 1, 2004) the joint-stock company can be created by legal and (or) physical persons. Restriction concerning participation in economic societies can be established by the law (p.1 Art. 114 of the Code).

Foreign citizens, stateless persons, foreign legal entities, and also the international organizations can be founders and members of economic society (including joint-stock company) on an equal basis with citizens and legal entities of Ukraine, except the cases established by legal acts of Ukraine.

The state companies (except for the construction organizations, the companies of the construction industry and construction materials which are founders of economic societies which will perform designing and perspective construction abroad) are deprived of the right to act as founders economic (including joint-stock) societies according to item 1 of the Decree of KMU "About Ordering of Activities of the Subjects of Business Activity Created with the assistance of the State Companies".

Founders of joint-stock company sign among themselves the agreement which determines procedure them joint activities concerning creation of joint-stock company, responsibility to persons who were signed on the share, and the third parties.

For creation of joint-stock company founders shall make the message on intention to create joint-stock company, to perform stock subscription, to hold the constituent assembly and state registration of joint-stock company.

According to Art. 4 of the Law constituent documents based on which the joint-stock company is created and is effective are the foundation agreement and the charter (2).

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(2) According to the Civil code of Ukraine the single constituent document of joint-stock company is the charter (p.1 the Art. 154), and the constitutive treaty of society which determines procedure founders of joint activities concerning creation of society is not its constituent document (the p. 2 of the Art. 153).

Constituent documents of joint-stock company shall contain the data specified in Art. 4 of the Law: type of society, subject and the purposes of its activities, the list of founders and participants, the name and the location, the size and procedure for formation of authorized fund, procedure for distribution of profits and losses, structure and competence of bodies of society and procedure for adoption of decisions by them, including the list of questions concerning which the qualified majority of votes, procedure for modification of constituent documents and procedure for liquidation and reorganization of society is necessary.

The charter of joint-stock company also shall contain the data provided by Art. 37 of the Law: types of shares which are issued their nominal cost, ratio of shares of different types, the number of shares which are taken by founders, default on obligations effects about share repurchase, the term and payment procedure of part of profit (dividends) once a year following the results of calendar year.

Constituent documents can include other conditions which do not contradict the current legislation of Ukraine.

Lack of data which according to the Law shall contain in constituent documents of joint-stock company is the basis for refusal in state registration. It can also be the basis for recognition judicially invalid constituent documents and cancellation of state registration of society.

Courts should mean that claims about recognition invalid constituent documents and cancellation of state registration concern cancellation of state registration of joint-stock company as subject of business activity, but not state registration of constituent documents of society.

As a result of studying of court practice it is determined that economic courts in case of resolution of disputes generally correctly apply Articles 4, 37 Laws and recognize invalid constituent documents which do not meet the requirements established in the specified articles of the Law and also cancel state registration of society. It is possible to give the decision of economic court of the Lviv region of August 14, 2001 on case N 1/403-22/193 on satisfaction of the claim of the prosecutor of Drogobycha for the benefit of the state on behalf of executive committee of Drogobychsky city council to Economic Union Galichina Ltd about recognition as example invalid constituent documents and cancellation of state registration on the ground that constituent documents of the defendant do not meet the requirements of the legislation as in the charter of the defendant there are no obligatory data. The resolution of the Trial Court and the resolution of the Lviv Economic Court of Appeal of February 27, 2002 are upheld by the resolution of the Supreme Economic Court of Ukraine of June 5, 2002. The Supreme Court of Ukraine refused opening of cassation proceeedings.

In some cases economic courts consider that absence in constituent documents of certain obligatory data is not the basis for recognition of constituent documents invalid. The resolution of the Supreme Economic Court of Ukraine of November 6, 2002 on case N 4901/4-11 on the claim of Astoria Hotel LLC to Astoria-Holding Ltd in which it is specified that can be example as obligations of founders concerning share repurchase are fulfilled properly, absence in the charter of data on effects failure to carry out of the specified obligation cannot be the basis for recognition of the charter invalid.

Absence in constituent documents of joint-stock company of the data provided by Articles 4, 37 Laws is the basis for refusal in state registration of society, and also also cancellations of state registration can be the basis for recognition of constituent documents of society invalid.

Problematic issues of resolution of disputes of recognition invalid constituent documents of joint-stock companies

According to item 2 of Art. 34 of the Law of Ukraine "About the companies in Ukraine" the company is liquidated if constituent documents and the decision on creation of the company will be recognized as the judgment invalid. The violations of the current legislation allowed in case of execution of these documents which deprive of them legal force can be the bases for recognition of the specified documents invalid; discrepancy to the actual circumstances of the data specified in constituent documents concerning type of the company and pattern of ownership on which it is based, and so forth.

The corresponding claim can be submitted by state body which according to the current legislation exercises control of activities of society, the prosecutor, body which performs state registration of joint-stock company, and also any company or the organization which considers broken the rights or interests protected by the law in connection with creation (state registration) of joint-stock company.

Studying of court practice shows that economic courts generally correctly solve disputes on recognition invalid constituent documents and cancellation of state registration of subjects of business activity. Economic courts consider disputes on recognition invalid constituent documents (foundation agreements and charters) of joint-stock companies in which the joint-stock company and its founders who are the parties of the foundation agreement act as defendants.

The solution of case on recognition invalid constituent documents (the foundation agreement and the charter) of joint-stock company and cancellation of state registration without attraction as defendants of persons which are founders of joint-stock company is regarded as violation of the procedural legislation as founders of joint-stock company are those persons who shall answer in the claim regarding requirements about recognition invalid the foundation agreement of society. For example it is possible to lead case N 10/100-2818 on the claim of Forvard LLC to Agro Ltd about recognition invalid constituent documents and cancellation of state registration of Agro Ltd.

The Supreme Economic Court of Ukraine, canceling the previous decisions on case, noted that person who is defendant in this claim cannot answer according to the declared requirements. Trial Court, solving this dispute over being, shall recruit in case as defendants according to the procedure of Art. 24 of HPK of founders of Agro Ltd - LLC "Podvolochissky Creamery Agro LTD and OAOT Firm as specified persons can answer according to the declared requirements regarding recognition invalid constituent documents of society. Person who can answer in the declared claim regarding cancellation of state registration is person who performed registration of society, - Podvolochissky district public administration. However the Trial Court considered dispute over being and made the decision on recognition invalid constituent documents and cancellation of state registration of Agro Ltd without involvement of persons who are founders of society, and person who performed registration of society. Apparently from case papers, the Podvolochissky district public administration, OAOT "Pidvolochisky Creamery", Agro LTD Firm LLC were actually allowed to participation in case as the third parties though the court in defiance of requirements of Art. 27 of HPK did not take out determination about the admission or involvement of specified persons. I.e. the court passed the decision concerning the rights, obligations and competence of persons who are not recruited in case as defendants. The resolution of the Lviv Economic Court of Appeal of June 14, 2002 and the decision of economic court of the Ternopil region of December 20, 2001 on case N 10/100-2818 is abolished by the resolution of the Supreme Economic Court of Ukraine of September 20, 2002, the case is submitted on new trial to economic court of the Ternopil region. The resolution of the Supreme Economic Court of Ukraine was not appealed by the parties.

In the course of studying of court practice it is revealed that courts had complications in case of differentiation of jurisdiction of general and economic courts concerning the solution of cases on recognition invalid constituent documents (foundation agreements) of economic societies among which participants (founders) there are physical persons (3).

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(3) Since January 1, 2004 this question lost relevance in connection with the introduction in action of the new Civil code and Economic code which provide that the foundation agreement of joint-stock company is the charter, and the agreement on creation of joint-stock company is not its constituent document (Art. 153 of the Civil code, Art. 82 of the Economic code of Ukraine).

Analyzing the brought-up question, it should be noted that jurisdiction of civil cases and economic disputes is determined by general rules by legal acts of Ukraine. If in legal acts jurisdiction of disputes is determined indistinctly, the principle of differentiation of jurisdiction of disputes over subject structure is applied that N 01-8/518 are displayed in the letter of the Supreme Court of Ukraine and the Supreme Arbitration Court of Ukraine "Concerning determination of jurisdiction of civil cases and economic disputes" of July 20, 1995. Namely - if party litigants are legal entities, the dispute is subject to the decision economic court, except as specified, stipulated by the legislation.

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