On 24 May 2012 Presidium of the Supreme Commercial Court issued Information Letter No. 151 with an overview of the court practice on expulsion of a participant from a limited liability company (LLC).

According to Article 10 of the LLC Law No. 14-FZ, the LLC participants may demand (through court proceedings) that a participant be expelled from the LLC if he fails to duly perform his obligations, including if he grossly breaks his duties or if his actions/ inactions make it impossible for the LLC to perform its activities. The Letter clarifies a number of issues in this regard.

A participant may be expelled from the LLC if he, in particular:

  • performs activities which are known to be detrimental to the company (even if a LLC participant performs such activities irrespective of exercising his rights) and thus offends trust among the company’s participants and impedes its normal activity;
  • knowingly distributes inadequate information about the company and thus grossly impedes its activity;
  • performed activities which were known to be detrimental to the company when functioning as a sole executive body or by power of attorney, if such activities caused huge damages to the company and (or) resulted in depriving the company of its activity or grossly impeded such activity; or
  • voted at the general meeting or, on the contrary, systematically deviated from participating in a general meeting without a reasonable excuse, and such actions (inaction) caused huge damages to the company (resulted in adverse consequences for the company), or resulted in depriving the company of its activity or grossly impeded such activity.

The Letter also addresses some specific situations, such as:

  • a participant owning more than 50 percent of the LLC’s charter capital may only be expelled if the participants may not withdraw from the company at any time according to the company’s charter (Article 26 of the LLC Law); and
  • if a participant hasn’t paid his participatory interest in full, he may not be expelled on this ground because the Law specifically provides as a consequence of a participant’s failure to pay his interest in due time that the unpaid participatory interest may be transferred to the company (Article 16 of the LLC Law).

Exclusion of a participant is an independent remedy and may be applied irrespective of other remedies envisaged by the law (e.g., early termination of the powers of the company’s sole executive body or liability prescribed by labour legislation).

The Information letter will serve as a guideline for lower commercial courts when considering similar issues.

For further information please contact Igor Ostapets or Irina Dmitrieva in the Moscow office of White & Case, tel + 7 495 787 3000 .