Societal differences: The legal rules governing the exclusion of an associate from a company

I. Context

Companies are based on the product of the willful agreement of several persons who decide to work together within the company, an agreement reinforced by the essential affective element of the company contract - affectio societatis .

Contrary to the harmony found when a company is set up, it is often the case that, in the midst of an internal conflict, the divergent interests of the members can come into play and affect the existence of the company.

Thus, the separation of associates sometimes appears as the only mechanism by which the divergences between them can be extinguished.

The separation of associates can take place either amicably (as for example the assignment of the social parts), or through judicial separation mechanisms, by excluding an associate from the company[1].

While the first is the product of the agreement of the associates, the exclusion of the associate is a mechanism of judicial separation, considered even a sanction of the conduct of the excluded associate, so the domestic law must be clear about the reasons why this sanction can operate.

II. Exclusion of associates from the company. The High Court of Cassation and Justice`s decision regarding the legal rules applicable to the matter

As it was also noted on a doctrinal level[2], the exclusion of an associate from a company is the expression of corporate disagreement.

Given the major impact on corporate life, the exclusion of the associate producing the amendment of the articles of association, the restructuring of the social patrimony and the associative structure, it is imperative that the legislator expressly provides for the hypotheses for which an associate can be excluded from a company.

Although at first analysis the law seems to be clear and does not raise additional clarifications, The High Court of Cassation and Justice was referred by the Oradea Court of Appeal regarding the following legal issue: do the situations of exclusion of the partner provided by art. 222 of Law no. 31/1990 corroborates with the provisions of art. 1.928 Civil Code or can the partner be excluded from the company exclusively based on the provisions of Law no. 31/1990?

By Decision no. 28/2021, The High Court of Cassation and Justice admitted the referral of the Oradea Court of Appeal and decided that the provisions of the special law are not supplemented by the provisions of the Civil Code in this situation, for the reasons shown below.

2.1. Relevant legal norms

At the outset, it should be stated that art. 291 of the Companies Law regulates that the Provisions of this law are supplemented by the provisions of the Civil Code and the Civil Procedure Code.

This aspect must also be corroborated with the provisions of art. 1887 (1) Civil Code which proclaims the character of common law of chapter VII of Title IX of Book V of the Civil Code in the matter of companies.

With regard to the special incident rule regarding the exclusion of associates, we point out that Law no. 31/1990 ( from now on  " the Companies Law ", more precisely art. 222 paragraph (1), provides for four circumstances in which a person may be excluded from the company in collective name, in simple limited partnership or with limited liability:

a) the associate who, formally noticed, does not make the contribution he committed to;

b) the associate with unlimited liability in bankruptcy or who has become legally incapable;

c) the associate with unlimited liability who interferes without right in the administration or contravenes the provisions of art. 80 and 82;

d) the managing partner who commits fraud to the detriment of the company or uses the social signature or the social capital for his own benefit or that of others.

The cases of exclusion from the company referred to in lit. a and lit. c are determined by contractual causes, as the associates are penalized for non-performance of obligations under the memorandum of association or for breach of the duty of loyalty. [3].

On the other hand, lit. b and lit. d provide for hypothesis of exclusion due to extra-contractual causes.

Regarding the general norm, art. 1928 Civil Code provides that at the request of an associate, the court, for valid reasons, may decide to exclude any of the associates from the company.

That is, according to the general rule, once the condition of proving the "good reason" is met, any associate can be excluded from a company, without restricting the scope of the hypotheses to which the legal text is applicable.

2.2.Case law prior to Decision No 28/2021

As the analysis of the opinions submitted by the national courts on the issue of completing the cases from art. 222 Companies Law with the provisions of art. 1928 Civil Code, there were previously two orientations in the matter.

Some of the national courts have assessed that the situations of exclusion of the associate provided for in art. 222 Companies law is not supplemented by the provisions of art. 1928 of the Civil Code, since the rules provided in the Companies Law are of strict interpretation and application.

On the other hand, some courts have an opposite approach, considering that art. 1928 Civil Code grants the courts the right to verify any irregularity invoked by an associate, under the aspect of fulfilling the "substantial reason" condition, thus having the right to, in relation to the result of the verification, order the exclusion of the associate.

See in this regard the Sentence no. 1369/03.08.2020 of the Bucharest Court, according to which: It is true that art. 222 para. 1 of Law no. 31/1990 presents a ________ reasons for exclusion without leaving, as happens in other cases, a general norm of reference to other situations provided for in the normative acts in force. However, such a situation does not represent a sufficient reason to consider that the respective list is a closed one; this is because the law does not present an express wording in this regard (for example, a wording of the exclusion type can only take place in the following situations), and observing the broader framework in which art. 222 of Law no. 31/1990 leads to the conclusion of the exemplary character of the analyzed norm.

The latter interpretation would have had as its finality the possibility of excluding an associate as a result of a subjective examination, given the fact that these "substantial reasons" that had to be ascertained by the courts are not quantified or exemplified by the legislator.

As an example, we show that prior to the pronouncement of Decision no. 28/2021 were considered as valid reasons for the exclusion of an associate:

- The associate limited the access of other associates to the company`s headquarters and refused to provide them with documents regarding the company's operation and assets[4];

- The lack of interest shown by an associate, lack of interest resulting from the slow way in which the company's activity is carried out[5].

Although the conduct described above is reprehensible, there are other legal mechanisms by which the disputes between associates could be resolved, it is not necessary (nor possible) to use the mechanism of excluding the associate who is guilty of these facts.

2.3. The decision of The High Court of Cassation and Justice regarding the applicable rules regarding the exclusion of associates

Therefore, as we have shown above, we have on the one hand a special rule which expressly and restrictively provides for the hypotheses of exclusion of associates from a company, and on the other hand a general rule which, without providing for a case of exclusion, grants the court the possibility of verifying any irregularity invoked by an associate, subject to proof of "substantial reason.”

The law does not limit these "substantial reasons", so the courts had extensive prerogatives regarding their identification, being thus situations when the associates were excluded for refusing to sign some documents or even for defective cooperation with the other associates.

The legal issue subject to resolution has as its starting point, therefore, the conflict between the two normative acts, the relationship between the general and the special law, more precisely the extent to which Article 222 of the Companies Act provides, either restrictively or by way of example, for cases in which an associate may be excluded from the company.

The judicial practice in the matter is contradictory in terms of the possibility of excluding an associate for reasons other than those limited to art. 222 of the Companies Law, led to the need to resolve this legal issue for a better administration of justice.

According to Decision no. 28/2021 of The High Court of Cassation and Justice, the special norm, being derogatory from the general norm, applies with priority, even when it precedes the general norm, whenever a hypothesis falls under its provisions, and the special norm cannot be modified or abrogated by a subsequent general rule except expressly.

Also, the method of drafting the legal text from art. 222 of the Companies Law, leads to the conclusion that the enumeration contained therein is not exemplary, but exhaustive, which is why an associate cannot be excluded from a company for other hypotheses than the four previously presented.

III. Conclusions

In conclusion, the present regulation expressly and restrictively provides for the hypotheses of exclusion of associates by means of the special rule in Article 222 of the Companies Act, without being able to apply the general rule on the matter laid down in Article 1928 of the Civil Code, which would have allowed the courts to exclude associates for a wide range of "substantial reasons ".

This ruling by the High Court of Cassation and Justice is in line with the principle of the security of the life of the company and with respect for the rights of associates, as clear and complete rules must be taken into account regarding the sanctions that can be applied to an associate.

Too wide a discretion on the part of the courts would have led to an uneven judicial practice in this area, as well as to abuses of the rights of associates, which could have been excluded from the company if the associate who requested his exclusion had proven some "substantial reasons ”, regardless of their severity.

The request to exclude an associate usually consists of two aspects:

- The way of making decisions within a limited liability company, from the differences of the associates regarding the solution that each one would like to adopt in certain situations;

- The distribution method of the social capital which, in general, is distributed equally (in percentage shares of 50% for each associate) when there are two associates.

Thus, in the event of any misunderstandings or differences of vision regarding the company's economic or financial policy, the company would be practically unable to function, being unable to adopt the most important decisions.

Moreover, we must bear in mind that the nature of the sanction of excluding an associate is the most serious and drastic form of exclusion from one's own company, so it must be analyzed as such, including by the legislator, i.e. restrictively and transparently.

MAXIM/ Associates

Av. Călina Tejan

01.11.2022

[1] T. PRESCURE, I. SCHIAU, T. PRESCURE, I. SCHIAU, Legea societatilor comerciale din 01 noiembrie 2009, Hamangiu, București
[2] Idem
[3] Decizia nr. 28 din 10 mai 2021 a Înaltei Curți de Casație și Justiție
[4] Decizia nr. 143/27.05.2020 a Curții de Apel Craiova
[5] Sentința nr. 1369/03.08.2020 a Tribunalului București