In this article, we analyze a particular case of exclusion from a Romanian LLC/ SRL – the exclusion of an associate who is also the administrator.
If you are an associate in a Romanian LLC/ SRL and have discovered that another associate, who also holds the position of administrator, has abused your trust or the company's resources, you may face one of the most unpleasant situations – the need to exclude them from the company.
In such circumstances the other associates may first revoke the administrator. However, as often happens in practice, when the administrator-associate is also the majority shareholder, or when there are only two associates with equal holdings, this may not be an available option. Nonetheless, before filing for exclusion, it is possible to attempt negotiation towards alternative solutions – either the voluntary withdrawal of the responsible associate from the company, or the transfer of their shares to the other associate or a third party agreed upon by both associates.
In this article, we will explore how you can legally act to protect the business from fraudulent behavior by detecting it early, and how you can recover damages by explaining the cases and procedure for excluding an associate-administrator who has violated the rules, including key references from the Romanian High Court of Cassation and Justice. (ICCJ)
"The content of the act thus sanctioned involves the violation by administrator associates, with guilt, of legal or statutory prohibitions requiring them to act in the interest of the company, respecting the rights of other associates or administrators and showing diligence, independence, and probity in the exercise of their duties, as provided mainly in Articles 70-82 of the (Romanian) Companies Law."
Appeal Decision of the Court of Appeal Alba-Iulia – upheld by Romanian High Court of Cassation and Justice, Decision 1351/2015
Associates who are not administrators cannot interfere in the actual management aspects, but this does not mean they do not have the right to know how management is conducted and its results.
If the company has designated auditors or censors, the information and verification of the associates are carried out based on the reports prepared by them.
If no auditors or censors are designated, each non-administrator associate has an express personal right under the law to information and control. [Article 199, paragraph 5, Romanian Companies Law]
Any associate has the right to participate in associate meetings, request additions to the agenda, and even call the meetings, according to the law and the constitutive act. They also have the right to vote on financial statements and the annual reports the administrator is required to provide.
In addition to these general rights, the right to information and control of each associate (in the absence of designated censors or auditors) offers any non-administrator associate the possibility to inspect the company’s registers and financial statements, to take note of its operations, and to consult any document of the company, UNDER THE CONDITION this does not disrupt the company's operations or infringe on the rights of other associates. [Article 1918, paragraph 2, Romanian Companies Law]
Moreover, it is advisable that the constitutive act and the contract with the administrator stipulate "intermediate" reporting obligations, for instance, through quarterly reports, and the obligation to respond to questions and clarification requests regarding these reports from the associates, to ensure a real possibility of verification during the financial year.
Since the law does not differentiate, it follows that fraud does not need to be confirmed by a final criminal conviction of the associate-administrator. We believe that the notion of fraud should be viewed broadly, but for exclusion to be ordered, a concrete loss of the company must exist.
The administrator-associate "can be excluded not only for fraud that they are capable of committing as an administrator but for any intentional wrongdoing against the company."
Romanian High Court of Cassation and Justice Decision 28/2021 - legal interpretation
"The law does not distinguish either the scale of the fraud, the number of fraudulent acts, or the administrator’s conduct after the fraud,"
Romanian High Court of Cassation and Justice Decision 3883/2013 – in appeal
That is, defenses claiming that the fraud was isolated, minor, or that there was an intention to remedy it are irrelevant. The important factor is that the element of trust on which Romanian LLCs/SRLs are based has already been breached, as SRLs combine elements of both partnerships and capital-oriented companies.
“As the administrator's mandate in onerous, their liability is assessed in abstract terms, meaning regardless of the form and degree of their fault. In this context, the administrator cannot invoke their managerial incompetence or the lack of personal benefit from the misappropriation of funds to be exonerated from liability.”
Companies Law No. 31/1990: bibliographic references, judicial practice, Constitutional Court rulings, annotations / Cristina Cucu, Marilena-Veronica Gavriş, Cătălin-Gabriel Bădoiu, Cristian Haraga. – Bucharest: Hamangiu Publishing, 2007 – referring to Decision No. 1852/2003 of the Supreme Court of Justice, Commercial Section
Simple negligence or business incompetence cannot serve as grounds for exclusion but may justify the revocation of the administrator's mandate. (Romanian High Court of Cassation and Justice, Decision 320/2008 – in appeal)
If there are no fraudulent acts as described above but serious disputes exist between associates that prevent the company from functioning, exclusion cannot be obtained in such cases, and the company will be dissolved. [Article 229, paragraphs 1 and 2 of the Companies Law]
However, if both exclusion and dissolution are requested as alternatives and fraudulent acts are found, exclusion takes precedence. The associate-administrator cannot avoid the consequences of their actions, which often affect not only the company and the harmed associates but also involve the violation of other mandatory legal obligations that can lead not just to civil liability, but also to administrative, or even criminal liability. [Romanian High Court of Cassation and Justice, Decision 1351/2015 – in appeal]
The company, through the decision of the associates, without needing the vote of the person for whom exclusion is sought, or any associate, individually or together with other associates. [Article 223, paragraph 1 of the Companies Law]
To justify the exclusion of an associate-administrator and the claimed damages, solid evidence is required:
This evidence must be presented and managed efficiently, clearly, and comprehensively so that the court can determine the associate’s guilt and order the exclusion.
After exclusion, the structure of the remaining associates' shareholding in the company will change, as they will take over the shares of the excluded associate. The court is required to rule on this aspect in the exclusion decision even if it is not expressly requested. [Article 223, paragraph 3 of the Romanian Companies Law]
If there were two associates in the SRL, and the administrator-associate is excluded, the company may continue with a sole associate if such a provision already exists in the constitutive act, or if the remaining associate opts for this after the exclusion. Otherwise, the company will be dissolved. [Article 229, paragraphs 1 and 2 of the Romanian Companies Law]
Obviously, a new administrator must also be appointed.
The new administrator or the board of directors is responsible for submitting the exclusion decision to the trade register within 15 days of it becoming final (after the expiration of the appeal period, or after the appeal decision is resolved, as the case may be). [Article 223, paragraph 4 of the Romanian Companies Law]
In this case, the corresponding entries in the Trade Register will be made ex officio, based on the final exclusion decision. [Article 204, paragraph 4 of the Romanian Companies Law]
Exclusion is imposed as a sanction, and naturally, there will be several negative consequences for the excluded associate. However, this does not mean they permanently lose all rights related to their shares.
Until the day of exclusion, they have the right to benefits BUT are also responsible for losses. They cannot request the liquidation of benefits until they are distributed according to the provisions of the constitutive act—meaning they cannot claim their right to dividends at the time of exclusion but must wait for distribution according to the constitutive act.
They cannot claim physical assets from the company’s patrimony BUT have the right to receive payment for their value. In some rulings, courts have stated that this is owed based on the company’s net assets.
Until the exclusion decision becomes final, they remain liable to third parties for the company’s operations, and if there are ongoing operations at the time of exclusion, they are obliged to bear the consequences and cannot withdraw their entitled portion until those operations are completed. [Articles 224 and 225 of the Romanian Companies Law]
The patrimonial rights owed to the excluded associate are debt rights, not real rights, that would confer the prerogative to exercise control over a specific asset directly.
Romanian Companies Law No. 31/1990: bibliographic references, judicial practice, Constitutional Court rulings, annotations / Cristina Cucu, Marilena-Veronica Gavriş, Cătălin-Gabriel Bădoiu, Cristian Haraga. – Bucharest: Hamangiu Publishing, 2007 – referring to Supreme Court of Justice, Commercial Section, Decision No. 2822/2001
