On the liability of the shareholder and director of an LLC

One of the many issues that foreign investors are concerned – is the liability of the founder and director of an LLC during the company’s business activities.

In this regard, the lawyers of our Law Firm prepared the following legal opinion.

Regarding the Shareholder’s liability

As a general rule, the shareholder (the founder) is not liable for the obligations or debts of the company.

Since, pursuant to Article 96 of the Civil Code of Ukraine, the shareholder of a legal entity is not liable for the obligations of the legal entity, and the legal entity is not liable for the obligations of its shareholder, except in cases established by the charter and the law.

In addition, pursuant to Article 3 of the Law of Ukraine On Limited Liability Companies and Additional Liability Companies, a company is liable for its obligations with all of its property. The company is also not liable for the obligations of its members.

BUT there are some cases where the shareholder is liable:

if the founder has not made a full contribution to the charter capital (civil liability arises)

– in particular, pursuant to Article 2 of the Law of Ukraine “On Limited Liability and Additional Liability Companies”, the company’s shareholders who have not made full contributions to the charter capital may be jointly and severally liable with the company for the company’s obligations to the extent of the value of the unpaid part of each shareholder’s contribution;

if the shareholder intentionally brought the company to bankruptcy and during the bankruptcy procedure the company does not have sufficient property/cash to cover its debts to creditors (civil liability arises) – in accordance with Article 61 of the Bankruptcy Code of Ukraine;
if the shareholder commits criminal offences together with the director of the company (criminal liability arises), for example, if the company is engaged in money laundering, terrorist financing, fraud, human or arms trafficking, tax evasion in large amounts (approximately USD 20 thousand or more), or other crimes, but in this case there must be evidence that the founder acts jointly with the director in committing the

Regarding the Director’s responsibility

As a general rule, a director is not liable for the company’s obligations or debts.

As already mentioned, in accordance with Article 3 of the Law of Ukraine “On Limited Liability Companies and Additional Liability Companies”, a company is liable for its obligations with all its property.

BUT there are certain cases when a director is liable:

if the company’s director has caused property damage to the company as a result of relevant culpable actions, such as entering into contracts without the founder’s consent, entering into contracts in violation of the law, etc. (civil liability).

In this case, the director is released from liability if he proves that the damage was not caused by his fault.

if the director violates the requirements of the charter (disciplinary liability in the form of early dismissal of the director), for example, in case of failure to submit financial statements to the founder, entering knowingly false data into the financial statements, entering into agreements in excess of the authority without obtaining the consent of the founders, etc;
if the director intentionally brought the company to bankruptcy and during the bankruptcy procedure the company does not have sufficient property/cash to cover debts to creditors (civil liability arises) – in accordance with Article 61 of the Bankruptcy Code of Ukraine;
if the company’s director fails to ensure timely submission of tax and other mandatory financial statements to the tax authorities (administrative liability), the director may be subject to fines under the Code of Ukraine on Administrative Offences;
if the director of the company fails to organise timely and full payment of taxes in the amount of up to USD 20 thousand (administrative liability), the director may be subject to fines under the Code of Ukraine on Administrative Offences;
if the director violates the requirements of labour legislation (administrative or criminal liability, depending on the nature of the offence), such as non-payment of wages to employees, hiring employees without official employment, illegal dismissal of employees, etc;
if the director commits criminal offences (criminal liability arises), for example, if the company is engaged in money laundering, terrorist financing, fraud, human or arms trafficking, large-scale tax evasion (approximately USD 20,000 or more), or other crimes.

Structuring the business relationship between the shareholder and the director

“Lotysh & Partners” Law Firm provides legal assistance to founders / shareholders in setting up a business in Ukraine, including structuring the business relationship between the shareholder and the company director.

Legal advice is available at the our firm’s office in Kyiv (Ukraine) by appointment.

Author:

Lotysh Andriy - lawyer, managing partner