Komron Tursunmurodov

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Exclusion from a limited liability company

S. Tazhidinnov (plaintiff), a participant of a limited liability company, applied to the (appellate) court with a demand to exclude S. Azamova (defendant) from the company’s membership on the grounds that S. Azamova, having forged the minutes of the general meeting, had purchased two cars and thereby caused damage to the company in the amount of 1,087,987,990. Azamova (defendant) from the membership of the company on the grounds that S. Azamova, having forged the minutes of the general meeting, purchased two cars and thereby caused damage to the company in the amount of 1,087,971,825 soums. S. Azamova was prosecuted for what she had done, but was released from punishment because she compensated for the damage caused to the company by transferring her share. The money spent by the company on technical inspection of cars, state license plates and the road fund in the amount of 28,277,655 soums was not reimbursed to her. In addition, S. Azamova was reimbursed only after her criminal actions were revealed.

The article analyzes current corporate disputes, decisions of judicial boards, and identifies gaps in the current legislation of Uzbekistan. It also cites foreign legislation and scientific doctrines to eliminate gaps and improve the legislation of Uzbekistan regulating corporate relations.

Decision of the Judicial Board

The judicial board refused to satisfy the plaintiff’s claims. In doing so, it referred to Article 8 of the Law “On Limited and Additional Liability Companies”, according to which the participants of the company, whose shares in the aggregate amount to at least 10% of the authorized capital of the company, have the right to demand in court to exclude from the company a participant who grossly violates its obligations or by its actions (inaction) makes it impossible to operate the company or significantly hinder it.

For full and correct application of this norm it is necessary to specify two conditions:

a) when a participant grossly violates its obligations;

b) when a participant by his actions (inaction) makes it impossible for the company to operate or substantially hampers its activities.

Unfortunately, Resolution No. 262 of the Plenum of the Supreme Court does not clarify these two conditions, but, on the contrary, mentions them superficially. In particular, part 2, paragraph 19 states that the courts must establish the facts of gross violation by the defendant of its duties or commission of actions (inaction) that make the company’s activities impossible or significantly impede them. However, this ruling does not explain what the facts of gross violation of their duties are, for example.

In order to give a full explanation of these conditions, it is necessary to refer to foreign practice and scientific doctrine. Article 10 of the Law of the Russian Federation “On LLC” is similar to Article 8 of the Law of the Republic of Uzbekistan “On LLC”. Paragraphs “b” and “c” of paragraph 17 of the Resolution of the Plenums of the Supreme Court and the Supreme Arbitration Court of the Russian Federation No. 90/14 provide an explanation of the norms established by the above article. According to these rulings, actions (inaction) of a participant that make the company’s activities impracticable or significantly impede them should be considered as systematic evasion from participation in the general meeting of the company without valid reasons. In addition, when determining whether the violation of a participant is serious, it is necessary to take into account such factors as the degree of guilt and possible negative consequences for the company. As foreign scientist I.S. Shitkina notes, such interpretation itself needs additional clarification, leaving room for different approaches in judicial practice.

International experience

Foreign researchers A.N. Artyukhin and U.A. Artemenko shrewdly note that the term “gross violation of duties” covers cases when a company’s participant forges the minutes of the general meeting of shareholders. An essential ground for excluding a participant from the company is the commission of unlawful actions, especially those related to document forgery. It is important to note that the court decision confirming these actions must be in force. In our case, Azamova was held criminally liable.

Practicing lawyer Michal Puk, relying on court decisions and Polish law, emphasizes that the grounds for excluding a member from the corporation should also be disloyalty and actions contrary to the interests of the company. Thus, in Poland, the behavior demonstrated by S. Azamova would be grounds for her exclusion from the company.

In the German case “Fair play vs K.O.”, the court ruled to exclude a participant from the company on the basis of his inappropriate behavior and personal qualities. In Germany, a good reason for excluding a participant from a company can be his behavior or personal qualities that disrupt the normal functioning of the company with other participants. This provision is crucial to the effectiveness of the company, as it requires participants to act in good faith in the best interests of the company.

Based on the experience of foreign countries, it can be argued that S. Azamova’s actions provide a specific and justified reason for her exclusion from the company.

Analyzing the court’s decision

In the forthcoming discussion, we will look directly at the final decision of the court panel. In the opinion of the judicial board, the exclusion of a participant from a company is an extreme measure associated with deprivation of the right to a share in the authorized fund of the company, which can be applied only when the consequences of the actions of a participant cannot be eliminated without depriving the offender of the opportunity to participate in the management of the company. That is, the consequences of the actions of the excluded person are irreversible. Therefore, the board decided not to satisfy the claim of S.Tazhidinov.

But the judicial board, in making its decision, missed several important points of the case.

Firstly, S.Azamova reimbursed damages in the amount of 1,087,971,825 soums, i.e. for the purchase of two cars. However, the company’s expenses for technical inspection of the cars, state license plates and road fund totaling 28,277,655 soums were not reimbursed. This amount also constituted a significant loss to the corporation. Only by reimbursing this damage, S.Azamova will be able to avoid exclusion from the company. Unfortunately, the judicial board did not pay due attention to this crucial aspect.

Secondly, the judicial board did not take into account the fact that S. Azamova reimbursed the damage only after a criminal case was initiated against her. In other words, she compensated the damage in order to avoid criminal punishment. Such behavior could be grounds for calling her untrustworthy and having a destructive influence on the company’s activities.

Thirdly, the judicial panel should have taken into account the future consequences for the company, taking into account the opinion and attitude of other stakeholders towards S. Azamova. Given her criminal actions and disregard for the company’s interests, it is likely that it would be difficult for other stakeholders to cooperate with her or fully trust her. Consequently, her presence in the company could interfere with its operations and potentially lead to an inability to function effectively.

Fourth, the judicial panel considered it necessary to establish the existence of a substantial and irreversible hindrance to the company’s operations as a result of the participant’s bad faith actions in order to satisfy the claim. However, the panel did not take into account the defendant’s gross violation of the duties provided for in paragraph 19 of the Plenum Resolution. Thus, S.Azamova, as the founder, had an obligation not to cause harm to the company, which she failed to fulfill, which is a gross violation.

Finally, the court panel did not pay due attention to the charter of the company, which may prescribe the duties of all participants. According to Articles 9 and 13 of the Law “On Limited and Additional Liability Companies”, the duties of the participants may be set forth in the charter of the company. It follows from this that violation of the duties established not only by law, but also by the charter of the company, may serve as grounds for excluding S.Azamova from the company. The interpretation of Article 276 of the Economic Procedural Code allows the court to take into account new evidence and establish new facts when considering the case on appeal. Thus, the obligations of the participants set forth in the charter of the company may serve as new evidence confirming the gross violation of duties by S.Azamova.

Conclusion

The Judicial Board, while considering the corporate dispute between S.Tajidinnov and S.Azamova about the exclusion of the latter from the company’s membership, did not consider all aspects of the case. As a result of insufficient study of the case, they came to an erroneous conclusion by refusing to satisfy the plaintiff’s claims. Both scientific doctrine and foreign experience of consideration of similar disputes revealed existing gaps in the legislation of the Republic of Uzbekistan, indicating the need for its further improvement.

In addition, S.Tazhidinov, in order to protect the rights of the company, can appeal this decision of the judicial board. In my opinion, by citing the arguments set forth in this article, there is a high probability of convincing the court to satisfy the claim to exclude S.Azamova from the membership of the LLC.

Cite as:  Komron Tursunmurodov, “Tadzhidinov v. Azamova: grounds for exclusion from LLC membership”, Uzbekistan Law Blog, 12.07.2024.