Separation of a legal entity

General information

One of the most common cases in practice is the reorganization of a legal entity. Reorganization of a legal entity includes the merger of legal entities, the accession of one legal entity to another, the division of one legal entity into two or more legal entities, the separation of one or several legal entities from an existing legal entity, as well as the transformation of a legal entity when changing its organizational-legal form. This article discusses the separation a legal entity.

Actions to be taken during a separation

During a separation, the company does not cease its operations — one or more new companies are created from within it, and part of its existing rights and obligations is transferred to the newly established company or companies. From the moment the new company or companies are officially registered with the state, the original company is considered to have been reorganized.

When one or more companies are separated from the structure of a company, the rights and obligations of the reorganized company are transferred to each of them in accordance with the separation balance sheet. The transfer act and the separation balance sheet are approved by the founders (participants) of the company who made the decision on its reorganization, or by the authorized body in accordance with the company’s charter. These documents, along with the charters of the newly created legal entities, are submitted for state registration or for amendments to the charters of existing legal entities.

The transfer act and the separation balance sheet must include provisions on legal succession regarding all creditors and debtors of the reorganized company, including disputed obligations. Failure to submit the transfer act and separation balance sheet along with the charters, or the absence of provisions on legal succession for the obligations of the reorganized legal entity, results in the denial of state registration for the newly created legal entities.

Furthermore, during a separation, the founders (participants) of the legal entity who made the decision to carry out the separation, or the body of the legal entity authorized to do so by the charter, must send a written notice about the separation to the company's creditors. In this case, the creditor has the right to demand the termination or early fulfillment of the obligation for which the legal entity is the debtor, as well as compensation for any losses.

If, based on the separation balance sheet, it is impossible to determine the legal successor of the reorganized company, the newly formed companies shall bear joint liability for the obligations of the reorganized company to its creditors.

The provisions mentioned above apply to the reorganization of a company on a voluntary basis. However, in some cases, the reorganization of a company is carried out on a mandatory basis. According to civil legislation, in cases specified by law, the reorganization of a legal entity in the form of a separation of one or several legal entities from its structure is carried out by court decision. In this case, the court appoints an external administrator and entrusts him/her with the task of carrying out the reorganization of the legal entity. From the moment the external administrator is appointed, the authority to manage the company is transferred to him/her. The external administrator acts on behalf of the legal entity in court, prepares the separation balance sheet, and submits it to the court along with the charters of the newly formed legal entities resulting from the reorganization. The court decision that has entered into legal force, in compliance with the requirements of the legislation, serves as the basis for the state registration of the newly established legal entities.

Just like in the voluntary procedure, in the mandatory procedure, the external administrator must send a written notification to the creditors of the legal entity regarding its reorganization.

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Note: The information contained in this article should not be interpreted as legal advice or legal opinion.

Our company provides all professional legal services related to the reorganization of legal entities (merger, accession, division, separation, transformation). We are pleased to offer you support in this area.

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