CEO’s “Mortmain” Case

Representing a Company in the CEO’s “Mortmain” Case.

INTELLECT-S successfully represented a limited liability company in a suit filed by its dead CEO's personal creditor for the enforcement of an unauthorised guarantee given by the CEO on behalf of the company and equally unauthorised mortgage on the company's all real estate.

The majority shareholder who owned 50% of the company, OOO SuperTorg, and was its CEO at the same time, borrowed personal loans on the security of all of the company's real property and a guarantee he issued on behalf of SuperTorg without the knowledge of the other two members, who owned the other 50% of the company between themselves, in breach of the bylaws and his own fiduciary duties as both CEO and member. Neither the guarantee nor the mortgage had due statutory corporate approvals.

After the majority member/CEO's sudden death, his lender sued the unsuspecting company for the enforcement of the guarantee and mortgage to a total of RUB17 million.

The death of the CEO as the majority shareholder left the two minority holders in a legal trap, technically inquorate to do anything; they could neither appoint a new CEO, nor take any other lawful corporate action, nor even admit the dead shareholder's successors as new members.

Our comment:

Represented by Roman Rechkin, INTELLECT-S, the surviving company members sued for the invalidation of the mortgage as an unauthorised transaction entered into with an interested party in the personal interest of the late CEO in abuse of his office which the plaintiffs demonstrated in court. The court accepted their argument and granted the relief, voiding the mortgage. The judgment stood later on appeal.

Represented by INTELLECT-S, SuperTorg's members contested in a separate action the guarantee which the late CEO issued on behalf on the company for his own personal borrowing obligation. The plaintiff's compellingly demonstrated in court that the CEO could not be possibly unaware of the conflict of interest when issuing the guarantee for himself. Once accepted, this argument helped the plaintiffs to successfully counter-estop the lender from raising the defence of missed prescription (statute of limitation) that the defence asserted: neither minority shareholder knew or could possibly have known of the issued guarantee the late CEO had knowingly concealed. Convinced, the court judged for the plaintiffs.

Still represented by INTELLECT-S, the two minority shareholders in SuperTorg negotiated and made a compact with the late majority holder's successors to his share in the company to appoint and have duly registered a friendly new CEO who reaffirmed in writing the company's obligation to repay the minority holders over RUB30 million that the company borrowed earlier under duly authorised shareholder (member) loan agreements.

INTELLECT-S thus released SuperTorg co-owners from the legal trap in which the majority shareholder's death had left them, helped them to regain corporate control, freed the clients from the grip of the dead CEO's 'mortmain' which had indebted them to an unknown lender, cleared the company's asset of a hidden encumbrance, and reassured the company's obligations to its members as debtor.

The company's real property was cleared of a RUB11 million's mortgage and a RUB6 million's guarantee. The company reassured its obligations under shareholder loans to RUB30 million.

Corporate Disputes, Corporate Law

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