How not to lose money and corporate rights when selling a share in the authorised capital

What happens if the buyer fails to fulfil their obligation to pay under a sale and purchase agreement?

The Supreme Court has clarified that deferral payment means setting a later payment date than the general rule provides, whereas instalment payment means payment made in several parts. Thus, if a share purchase agreement provides for payment after the transfer of corporate rights, it is considered to be concluded with a deferral of payment. If the buyer fails to make payment within the specified period, this is considered a delay in the performance of a monetary obligation.

Failure to pay on time entails legal consequences provided for by law. Firstly, interest is charged on the outstanding amount for the use of another person’s funds, which constitutes liability for late payment (under Part 5 of Article 694 of the Civil Code). Secondly, the seller has the right (under Part 4 of Article 694 of the Civil Code of Ukraine) to demand the return of unpaid goods (the share).

How can the seller return the share?

At this stage, it is important to note that exercising the right to recover a share is subject to certain legal limitations and risks.

The Supreme Court confirms that a sale on credit allows the seller to demand the return of a share, but emphasises that the return of a share is a consequence of the termination of the parties` obligations under the relevant contract (for example, through its termination in court or by unilateral refusal, if the right to such refusal is provided in the contract). If the contract remains valid, the claim for return of the share will be considered as an inappropriate legal remedy and will not succeed.

Therefore, if the buyer fails to make payment, the seller’s first step should be to terminate the agreement, and only then initiate the process of recovering the share. This right is exercised, for example, by applying to the court. If, during the proceedings, the court finds that the buyer has committed a material breach of the contract (such as failing to pay the agreed amount), the agreement may be terminated by judicial decision.

Once the court decision comes into legal force, the parties` obligations cease, and the seller may demand the return of the share on the basis of Article 694 of the Civil Code. In practice, it is advisable to file a claim for the recovery of property. The Supreme Court has clarified that the return of a share (treated as goods) may be carried out by filing a claim for the recovery of the share from the buyer. Thus, after the contract is terminated, the seller applies to the court seeking to have the buyer’s ownership of the share declared terminated and to oblige the buyer to transfer the share back to the seller. A mandatory condition is that the contract must be terminated – only then are the obligations deemed impossible to perform, and the property can be restored to its original state.

Accordingly, the seller’s course of action to recover the share should follow this sequence:

• file a claim to terminate the contract (or withdraw from it unilaterally, if the contract allows); 
• file a claim to recover the share from the buyer.

What should be taken into account?

Terminating a sale-on-credit agreement and recovering the share come with several important features that should not be overlooked.

One of the potential risks highlighted by court practice is the possibility of unjust enrichment of the seller. The Supreme Court emphasises that the seller cannot use the termination of the contract as a means of obtaining additional benefits. If, after the sale, the market price of the property has increased or the buyer has significantly improved the property, the return of the share may lead to a situation where the seller receives more than they had before the conclusion of the contract. The courts have explicitly stated that such behaviour is not intended to restore the seller’s right to funds, but rather to achieve unjust enrichment.

Another risk in this category of disputes is excessive delay on the part of the seller. The courts have noted note that attempts to recover a share too long after the sale violate the principles of good faith and reasonableness. For example, if the return is sought several years later (especially after the expiry of the limitation period), such a claim may be rejected as contrary to the principles of justice.

The third point is the appropriateness of the chosen method of protection. Court practice recommends choosing the method of protection that best suits the nature of the violation If the problem lies solely in the buyer’s failure to pay, it is more appropriate for the seller to claim the unpaid money rather than demand the return of the share. The Supreme Court specifically noted that a plaintiff who has already delivered the goods and is only claiming the money not received should demand the collection of the amount, not the return of the share. In other words, the choice of remedy must correspond to the nature of the breach. On the other hand, termination of the contract and a claim for return of the property are justified only if the buyer`s breach makes further performance of the contract impossible. The Court has made clear that a demand to terminate the contract and return the property is not an appropriate remedy when the only breach concerns non-payment.

In summary, the seller should avoid formally requesting the return of the share solely for the purpose of inducing the buyer to pay. In such cases, it is more reasonable and legitimate to file a lawsuit to recover the debt. For their part, buyers should be aware that failure to fulfil their payment obligations may result in the actual loss of the purchased share. That is why it is important to act in a timely manner and in good faith, as delays in the dispute resolution process on the part of the seller or passive behaviour on the part of the buyer only complicate the protection of their rights and legitimate interests.

Conclusions

Court practice in disputes related to deferred payment under contracts for the sale of shares shows that an effective contract is not only a legal form of agreement, but also a tool for effectively securing the parties’ interests. The application of Article 694 of the Civil Code should serve to restore a fair balance between the seller and the buyer, rather than creating advantages for one of the parties.

The appropriate choice of protection depends on the nature of the violation: in the case of delayed payment, it is more effective to collect funds, while a claim for the return of a share is justified only in the event of a material breach or impossibility of performance of the contract.

For the seller, it is crucial to provide for mechanisms of liability for delay, the procedure for termination and methods of ensuring the performance of obligations in the contract. The buyer, in turn, must be aware that failure to fulfil payment obligations may result in the loss of a share and affect their business reputation.

Balanced contractual arrangements and good faith behaviour by the parties ensure stability in corporate relations and minimise the risk of situations where one of the parties finds itself without funds and without corporate rights.