When is the legal entity reorganized by way of separation responsible for the obligation, and not its legal successor?

When is the legal entity reorganized by way of separation responsible for the obligation, and not its legal successor?

On February 20, the Supreme Court of the Russian Federation issued Ruling No. 304-ES19-19176 on a dispute over the collection of debt by a supplier from two legal entities - the buyer who underwent reorganization in the form of a spin-off, and its legal successor.

In 2016, Edem LLC supplied goods to Retail Center LLC for a total amount of 77 million rubles. In June 2022, as a result of the reorganization of the Retail Center company, RC Arenda LLC was created in the form of a spin-off, to which, on the basis of a transfer deed, the rights and obligations of the reorganized organization were transferred. Due to partial payment of the cost of the goods by the buyer, the supplier sent the latter a claim for payment of debt in the amount of 2.7 million rubles. and a contractual penalty in the amount of 40 thousand rubles. Since the recipient of the claim did not fulfill its demand by the appointed deadline, the company filed a lawsuit for debt collection against Retail.

The courts of three instances upheld the claim, establishing the fact of delivery of goods to the Retail Center company and partial payment by the latter. Having analyzed the transfer act and recognizing the fact of violation of the principle of fair distribution of assets and liabilities of the reorganized company, the courts found it possible to hold both companies jointly and severally liable.

With reference to violations of the norms of substantive and procedural law, the RC Arenda company filed a cassation appeal to the Supreme Court of the Russian Federation, whose Judicial Collegium for Economic Disputes, having studied the materials of case No. A45-38056/2018, considered it justified.

As the highest court explained, if the deed of transfer does not allow the determination of a successor to the obligation of a legal entity, or during the reorganization the assets and liabilities of the reorganized legal entities are distributed in bad faith, which led to a significant violation of the interests of creditors, the reorganized organization and its legal successors bear joint liability for such an obligation (clause. 5, Article 60 of the Civil Code of the Russian Federation).

In the case under consideration, the Supreme Court of the Russian Federation emphasized, the fact of the defendant’s reorganization was confirmed by an extract from the Unified State Register of Legal Entities, according to which the RC Arenda company is the legal successor of the Retail Center company. At the same time, the presented annex to the transfer act contained a breakdown of accounts payable and receivable, property and obligations under agreements transferred to the RC Rent company from the Retail Center company, among which information about the transfer of rights and obligations to the plaintiff was not included.

The Supreme Court did not agree with the conclusions of the lower courts about the joint liability of the defendants, noting that the indication that the transfer act does not contain information about the property, rights and obligations that remain with the reorganized company in the form of a spin-off is not based on the rules of law.

“At the same time, the courts did not assess the circumstance indicated on page 3 of the transfer act that the book value of the assets transferred to the RC Arenda company is 725 thousand rubles, while the book value of the assets of the Retail Center company as of January 1, 2022 (date of the latest financial statements) – RUB 7,506,108,000. Moreover, the company “RC Arenda” was transferred the rights and obligations under the specific lease agreements for real estate specified in the annex to the transfer deed and agreements for reimbursement of expenses for the maintenance of leased real estate, and not under obligations for the supply of goods. In addition, from the case materials it follows that part of the supply of goods was carried out after the reorganization of the Retail Center company in the form of a spin-off. The courts also did not give a proper assessment of this circumstance,” the Supreme Court noted. In this regard, he overturned the decisions of the lower courts and sent the dispute for a new trial at first instance.

Partner at the law firm Five Stones Consulting, Alexander Karpukhin, expressed confidence that the definition of the Supreme Court is important for practice concerning the reorganization of legal entities. “Indeed, clause 5 of Art. 60 of the Civil Code of the Russian Federation establishes the principle of fair distribution of assets and liabilities of reorganized legal entities, the violation of which entails joint liability of the reorganized legal entities for the corresponding obligations,” he explained.

According to the expert, the concept of fair distribution of assets, in principle, is not very detailed in judicial practice and is reduced to an abstract requirement for the fairness of their distribution. “As a rule, when assessing the good faith of the transfer of assets during reorganization, the courts evaluate the liquidity of the transferred assets (in particular, case No. A56-7086/2018), their real existence (for example, case No. A68-4774/2019) and the overall balance between the transferred assets and debts. In principle, the main purpose of establishing this principle is to prevent such reorganizations that violate the rights of creditors and create an imbalance by allocating a person only with debts without providing the assets necessary to repay them,” the lawyer noted.

Alexander Karpukhin believes that in the case under consideration, the decision of the court of first instance, in principle, does not assess whether the reorganization was bona fide or not - the court simply applied joint and several liability of the reorganized persons by default, which violates the requirements of the Civil Code and the Arbitration Procedure Code. “The appellate court cited the well-known provisions of the Civil Code and judicial practice, without assessing the specific circumstances on which it came to the conclusion that the reorganization was unconscionable, indicating only that “the fate of the property that remains with the reorganized company is not indicated, the property is not listed in the act " The district’s AC acted similarly, pointing out that the principle of fair distribution of assets was violated, without going into details and assessing specific facts,” the expert said.

According to him, Art. 59 of the Civil Code of the Russian Federation establishes that the transfer act must contain provisions on the succession of all obligations of the reorganized legal entity in relation to all its creditors and debtors: “It is not indicated whether the list of obligations should be detailed. Thus, it is quite acceptable to have a position where, according to the transfer deed, a number of specific obligations are transferred to the reorganized entity, while all other obligations (without explanation) remain with the reorganized legal entity. This approach is rational and often used in practice.”

Alexander Karpukhin added that in the case under consideration, the Supreme Court rightly pointed out the need for a comprehensive assessment of the circumstances of the case and supported its decision by comparing the total amount of assets transferred under the transfer deed and the total book value of the assets of the reorganized entity. “Moreover, as follows from the decision, in court the reorganized entity did not raise the issue that it should not be held liable as a legal successor for the disputed obligation due to the fact that it transferred these obligations as part of the reorganization,” he noted.

“Thus, the decision of the Supreme Court of the Russian Federation gives, first of all, an understanding that when assessing the good faith and fairness of the reorganization, all circumstances and documentation of the case should be assessed, and not limited to formal references to the fact that the deed of transfer does not indicate the disputed obligation, so in practice this is not always possible. In addition, the case itself draws attention to the problems of formulating transfer acts, and in order to avoid such situations, it is recommended to very clearly formulate reorganization documents in order to avoid accusations of bad faith,” summed up Alexander Karpukhin.

KPMG lawyer Alexander Belyaev called the plaintiff’s position in the case under consideration reasonable, since the latter tried to hold both organizations jointly and severally liable, since at the time of filing the claim he did not know and could not know about the unfair distribution of assets during the reorganization.

According to the expert, in this case the approach of the RF Armed Forces to the interpretation of paragraph 5 of Art. 60 of the Civil Code of the Russian Federation: “In essence, the Court indicated that if the transfer act does not contain the amount of the obligation, it means that the obligation remained with the organization from which the new one was separated. In turn, the above rule of law could be applicable during division (when one organization ceases to exist and several new organizations are created in its place), because if the obligation is not specified in the act, then it is not clear which organization will receive the creditor’s obligation.”

Alexander Belyaev believes that the judicial act in question is an example of a substantive (not formal) approach to resolving a dispute, since the Supreme Court absolutely correctly indicated that in order to apply the provisions on joint and several liability as a result of reorganization, it is necessary to determine:

• is it possible to identify a successor (if we are talking about reorganization in the form of a spin-off, then the mere absence of an indication of the obligation in the transfer act means that the obligation has not been transferred to the spun-off organization);
• to what period the resulting obligation relates in whole or in part (before or after the reorganization).

“As for the unfair distribution of assets, in this matter it is necessary to evaluate not the amount of the organization’s assets and liabilities, but their category and content, since in accounting, in any case, the amount of transferred assets must be equated to liabilities, otherwise the assets and liabilities of the balance sheet will not converge. For example, there may be such a situation: a company allocated assets (real estate) to a new organization and “equalized” them with liabilities in the form of debts on corporate loans from the founders. And in the old organization she left debts to independent creditors and receivables that are unlikely to be repaid. In my opinion, this is precisely the unfair distribution of assets,” summed up Alexander Belyaev.

Issue of shares during reorganization in the form of merger

The placement of securities upon the merger of legal entities is carried out by converting shares of the company being merged into them or exchanging for them the shares of participants in the authorized capital of the merged limited liability company, the shares of participants in the share capital of the merged business partnership, shares of members of the merged production cooperative.

Conversion of shares or exchange of shares in the authorized capital of the merged joint-stock company can be carried out into shares acquired and/or redeemed by the joint-stock company to which the merger is being carried out, and/or received at the disposal of this joint-stock company, and/or into its additional shares.

If the conversion is carried out into additional shares of the joint-stock company to which the merger is being carried out, state registration of the issue of shares (additional issue of shares) of such joint-stock company is carried out before an entry is made in the Unified State Register of Legal Entities about the termination of the activities of the joint-stock company being acquired.

The accession agreement is approved by a decision of the supreme governing body of each legal entity participating in the accession.

After the state registration of the report on the results of the issue of shares (additional issue of shares), changes are made to the charter of the joint-stock company to which the merger was carried out, related to an increase in its authorized capital by the par value of the additional shares placed, an increase in the number of issued shares and a decrease in the number of authorized shares of the corresponding categories (types).

Upon merger of a joint stock company, the following are repaid (cancelled):

• own shares owned by the acquired joint stock company;
• shares of the acquired joint stock company belonging to the joint stock company to which the merger is being carried out;
• shares of the joint stock company to which the merger is being carried out belonging to the acquired joint stock company, if this is provided for in the merger agreement.

For state registration of a report on the results of the issue of shares (additional issue of shares), a document confirming the entry into the Unified State Register of Legal Entities of an entry on the termination of the activities of the acquired legal entity is additionally submitted to the registering authority.