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Business in Ukraine: the ins and outs of top managers dismissal in Ukraine

July 2019 - Employment. Legal Developments by DLF attorneys-at-law.

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Top managers belong to the category of employees on whom the company efficiency depends, as top managers implement business and corporate policies â€“ strategies, business plans, and projects â€“ and make decisions that will determine the future of company business. Although it is indisputable that business is based on complete trust, effective control mechanisms could hardly be dispensed with. These truisms are well known to everyone. However, as practice shows, sometimes business owners overlook important issues that later lead to financial and reputational risks.

It would be advisable to consider the main issues regarding top managers dismissal.

Planning everything in advance

"One should not underestimate the contract importance" is the most common statement of a lawyer. The labor contract is one of the key elements in avoiding labor disputes. The following are the main key points to be defined in detail in every labor contract with top managers:

• hazards of intellectual property issues in employment contracts;

• confidentiality;

• restrictions on signing or approving certain transactions in a certain value;

• the golden parachute;

• procedures for documents and assets transfer;

• additional reasons for the labor contract termination; and

• top manager’s liability.

The above detailed benchmarks of the labor contract could play a crucial role in minimizing the risks that can arise when dismissing top managers.

Required steps to terminate top managers

Every company owner must have and follow a clear plan when dismissing top managers. Otherwise, the consequences of overlooking a small matter can be unpredictable and lead to the dismissed top manager reinstatement.

Under Article 99 (3) of the Civil Code of Ukraine, the top manager may be revoked or suspended at any time on the employer's will. In the case of a suspension, the top manager will continue to receive the salary until termination.

Procedure for top manager’s change:

1) resolution on dismissal by the responsible corporate body

It is important to ensure that the resolution on the current top manager dismissal and the new top manager appointment is made by the corporate body empowered to make such resolutions in accordance with the Articles of Association.

Resolutions on the management change may be passed by the shareholders’ general meeting or by the supervisory board. Therefore, such a resolution should strictly adhere to the Articles of Association provisions. Otherwise, such a resolution may be challenged in court and the managing director may be reinstated.

The resolution must include: the reason and date of the current manager termination, information about the person authorized to sign a contract to terminate the employment relationship with the current top manager, the date of the new manager appointment, information on the person authorized to conclude a labor contract with the new manager, information on the person authorized to register the new manager in the Unified State Register of Legal Entities, Individual Entrepreneurs and NGOs (hereinafter "the Unified State Register").

2) Order on dismissal, employment contract

Once the shareholders' meeting has decided to dismiss the managing director, irrespective of the reasons for such a dismissal, the managing director has to issue a notice of dismissal. It is essential to state the reason for dismissal in the order - the minutes of the shareholders' meeting, the top manager's notice of dismissal or, if applicable, the contract clause or a reference to the relevant article of the Labor Code. These documents must be signed by the manager or a person authorized by the company owner. It should not be forgotten that the manager is an employee like everyone else. Therefore, on the termination day he must be provided with the duly completed workbook indicating the reason for his termination and the salary paid in full. Otherwise, if the workbook handover is delayed or the employer fails to pay the outstanding amounts in due time, the employer must pay the average salary for the entire duration of the forced redundancy.

Agreement on employment relationship termination may be used if the employer and the employee have jointly decided to terminate the employment relationship by mutual agreement between the parties.

Following provisions should be outlined in the agreement: all compensation payments, provision with respect to the employer’s confidential information, non-compete clause (taking into account peculiarities of the issue regulation in Ukraine), the procedure for transfer of the tasks, assets and customer base (e.g. keys, passports, fuel cards, supermarket cards, flash drives, passwords, official documents (both copies and originals)), penalties for non- or poor performance of the agreement and other essential conditions.

3) Block bank accounts (if required)

If the company assets are exposed to a risk, it is recommended to inform the bank immediately after the resolution on dismissal was issued and block the accounts until the management change would be registered in the Unified State Register. In practice, it is one of the most important measures, as it saves the company assets.

4) Transfer of documents and assets to the newly appointed top manager

The procedure of the documents and assets transfer in case of the management change could be defined in the founding documents and in the company internal regulations and/or in the labor contract, as well as in the agreement on employment relationship termination.

The actual handover of documents and assets must be documented in a handover and acceptance act, in which the former and newly appointed top managers indicate the list of documents and assets to be transferred and the handover date. This document may be used as evidence if some documents or assets have not been transferred to the newly appointed top manager.

It is necessary to request from the former top manager all information on the pending court disputes and on any complaints from business partners. It would also be advisable, after the management change to check the main state registers such as the register of judicial decisions, enforcement proceedings, etc., since litigation may affect the company business.

5)The management change registration in the Unified State Register and the bank notification

Thus, a management change requires not only the the shareholders’ decision but also the obligatory state registration of changes made in the Unified State Register.

The following documents must be submitted to the Unified State Register: a completed application form for the registration of changes, shareholders’ resolution or minutes of the shareholders' meeting, a bank receipt and a power of attorney (if the change of the top manager is carried out by an authorized person).

The next important step is to submit documents to the banks where the company has accounts. It is recommended that the list of documents to be submitted should be clarified in advance. As a rule, the following documents must be submitted to the bank: confirmation of the newly appointed top manager registration, an order of the top manager appointment, the original and a copy of the passport.

6) Notification of business partners about the management change

An important aspect, which is often forgotten in practice, is the notification of business partners about the management change and blocking the former manager's access to the customer base and correspondence.

It is advisable to notify the business partners not only in cases where such an obligation is contractually agreed, but also in other cases, for the company to be protected from misuse by the former top manager and for the customer base not to be lost.

7) Revocation of powers granted by the former managing director

Each company has a register of powers of attorney. It is recommended that the newly appointed director should issue an order to revoke previously issued powers of attorney (if required). The company employees are to be familiar with such an order against signature. A copy of the order must be sent to the business partners and contractors. The newly appointed top manager must also make an appointment with the notary to check whether the former top manager has a notarized proxy.

8) Recommendations to the newly appointed top manager

It is advisable to take the following steps after an appointment:

• to arrange for an audit;

• to carry out an inventory. It should be noted that the inventory should also be carried out by the previous top manager;

• to check the number of unused vacation days for each employee;

Not all issues that may arise in practice have been mentioned above. However, taking into account the abovementioned issues regarding the top managers’ appointment and dismissal will help prevent future risks.