Division of Spouses' Property: Shares in LLC. Worthy and under the Law.

Current rules

Humanity has accumulated considerable experience in attempts to resolve the issue of separation of business when dividing the common property of spouses. And yet, the solution to this problem is still in the ambiguous category.

Any property acquired by spouses in marriage is considered as an item of a common property, namely, both possess it in equal shares. Upon divorce, such property is divided in equal parts, unless the couple decides otherwise.

Spouses can fix the property regime in the marriage contract, which can be concluded at the beginning of their life together or any time before the divorce. This contract subject to notarization.

In case of absence of a marriage contract during cohabitation or after divorce, the couple can agree on how to divide the common property and conclude an appropriate contract.

Good sense dictates that it is better to divide business through agreement and with bona fide intentions. A contract on division of common property is a good tool for settling disputes, especially when, as a result of agreements, the title owner of the property will change.

Determination of shares

Separation of business interests is one of the most emotionally charged challenge. A commonly grown up business is often a source of prosperity and sole family income.

When the parties do not find understanding and enter into a conflict, the court is called upon to solve this goal. The practice of legislation apply in controversial cases of separation is regularly updated.

Sometimes the value of a family business is higher than all movable and immovable property acquired by partners during their life together.

Thus how to define the scope of the rights of one of the spouses upon divorce to a share in the capital of a limited liability company (LLC) owned by the spouses? It is important here to determine the nature of what is property.

Thus the property of spouses includes:

share of a participant in the capital of an LLC,

share of a participant in the property of an LLC, allocated at the request of creditors or upon liquidation of an LLC,

income received by the participant from the activities of an LLC: dividends accumulated or paid.

The spouse's property is not:

the participant's contribution to the charter capital of the LLC,

LLC property,

charter capital of LLC,

LLC profit.

Thus, the share in the charter capital and the corporate rights of the LLC participant are different objects. A person can own a share, but cannot be a member of an LLC and have no corporate rights (1).

The charter capital and property of a private enterprise are objects of joint ownership of the spouses (2).

The Chamber of Civil Cases of the High Specialized Court of Ukraine ruled that the funds that were contributed by one of the spouses who are a member of the company to the charter capital of the company by contributing the common funds of the spouses become the property of the company, and the right of the other spouse to common funds is transformed into another object - the right to claim a part of the cost of such a contribution (3).

At the same time, these funds were acquired by the spouses during their cohabitation. Consequently, should one of the spouses becomes a participant of a business entity and contributes to its charter capital property acquired in marriage, then this property becomes the property of the company, and the other spouse's right of ownership of property (property right) turns into a right of claim, the essence of which consists in the right to claim payment of half of the value of the contributed property in the event of division of the spouses' property or in the right to claim ½ of the income received from the activities of the company.

A contribution to the charter capital of a business entity is not an object of the right to joint ownership of spouses (parts 2, 3 of article 61 of the Family Code of Ukraine). If a contribution to the charter capital of a company was made by the funds of the joint property of the spouses, in the interests of the family, the spouse who is not a member of the company has the right to share the income received.

If one of the spouses uses common funds, contrary to the provisions of Article 65 of the Family Code of Ukraine, the other spouse has the right of compensation of the value of his share.

This judgment, at the time of its adoption, ruled out the controversial issues that arose in the determination of the common property of the spouses.

Value definition

The value of the property to be divided is determined by agreement between the spouses, and if agreement is not reached, on the basis of its value due on the date of the consideration of the case (4).

Since the moment the funds are deposited into the charter capital of the joint property of the spouses, such funds are the property of the company, therefore, one of the spouses only has the right to a monetary claim to obtain half of the funds contributed to the charter capital (5).

The indemnity amount of one of the spouses is ½ of the value of his share in the LLC, in most cases, is determined by an expert (6).

In accordance with the current regulatory framework, in case the spouses' property is divided, the value of the spouse's part in the charter capital of the company is determined on the basis of the market value of the share in the charter capital of the company due on the date of the division of property.

The value of the share of a member of the company is determined on the basis of the market value of the shares of all members of the company in proportion to the size of the share of this member. The value of such a share is determined on the date of issue of the receipt the of shares division.

The value of the participant's share in the charter capital of the company is compiled by the value of the company's assets minus value of its obligations (namely, the value of net assets), in proportion to the share of such a participant in the charter capital of the company (7).

To determine the value of the share of a company participant, the value of all the company's assets must be calculated, unless a separate thing or a separate object without taking into account other property of the company (fixed assets and current assets, as well as other values, the value of which is declared in the company's balance sheet).

Should one of the spouses, as a member of the company, contributed to the charter capital instead of monetary funds, property that is the common property of the spouses, the other spouse has the right to claim compensation ½ of the value of the second spouse's share in the charter capital (8).

There are two ways  of shares declaration In the charter documents of enterprises: in hryvnia and in percent. This declaration is often causes  confusion in separation. When an LLC participant exercises his powers and corporate rights provided for by law, it is the size of the share in percent that matters (9).

Unresolved aspects

Despite the widespread practice the number of disputes and disagreements in the professional environment on the issue of the division of spouses' property is not decreasing.

The topic remains tough because in practice each case deems unusual and requires careful approach.

In any case, no matter what situation life leads to, the most important thing is to be human as possible. Sometimes it is not easy to make a decision on further actions and successfully go through the process to its successful completion. The combined professional experience of lawyer, valuator, accountant create the optimal space for resolving the situation with its acceptable outcome.

References in the text to normative sources:

(1) Resolution of the Supreme Court of Ukraine dated March 3, 2020 in case No. 909/52/19 (https://reyestr.court.gov.ua/Review/88149755).

(2) Decision of the Constitutional Court of Ukraine dated September 19, 2012 in case No. 1-8 / 2012 on the interpretation of the provisions of part 1 of Article 61 of the Family Code of Ukraine,

(3) Case No. 756/10797/15-c of December 14, 2016 (https://reyestr.court.gov.ua/Review/63583511)

(4) Resolution of the Supreme Court of Ukraine dated September 11, 2019 in case No. 756/12009/15 (https://reyestr.court.gov.ua/Review/84305203) with reference to the legal opinion of the resolution of the United Chamber of the Supreme Court of Ukraine dated October 3, 2018 on case No. 127/7029/15-c (https://reyestr.court.gov.ua/Review/77009144).

(5) Resolution of the Supreme Court of Ukraine dated March 13, 2019 in case No. 756/10797/15 (https://reyestr.court.gov.ua/Review/80918766)

(6) In such cases, the courts are guided by the provisions of Part 1 of Article 61 of the Family Code of Ukraine, paragraphs 22, 26 of the Resolution of the Plenum of the Supreme Court of Ukraine "On the Practice of the Application of Legislation by Courts in Considering Cases on the Right to Marriage, Dissolution of Marriage, Recognition of It as Invalid and Division of the Common Property of Spouses" No. 11 of December 21, 2007, as well as the decision of the Constitutional Court of Ukraine No. 17-rp / 2012 of September 19, 2012. Resolution of the Supreme Court of Ukraine dated May 8, 2019 in case No. 683/886/16-c (https://reyestr.court.gov.ua/Review/81753024),

(7) Provisions of Part 1 of Article 190 of the Civil Code of Ukraine, Part 1 of Article 66 and Article 139 of the Economic Code of Ukraine. This position is supported by the Grand Chamber of the Supreme Court of Ukraine in the decision of April 24, 2018 in case No. 925/1165/14 (https://reyestr.court.gov.ua/Review/73896751).

(8) Resolutions of the Supreme Court of Ukraine dated December 11, 2019 in case No. 638/19826/15-c (https://reyestr.court.gov.ua/Review/86468310), dated June 3, 2015 in case No. 6- 38tss15, dated July 3, 2013 in case No. 6-61tss13, dated October 2, 2013 in case No. 6-79tss13.

(9) Resolution of the Supreme Court of Ukraine dated February 3, 2021 in case No. 911/459/20 (https://reyestr.court.gov.ua/Review/94764278).