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05.11.2019

COMPLIANCE OF POTENTIAL COUNTERPARTY

STANISLAV KLIMOV, PARTNER, THE DIRECTOR OF “KODEX” FOR LIGA: ZAKON

In the modern world not only outsiders, but also counterparties could encroach on safety of business and thus impede its development. Because of that, the effectiveness of activities aimed at checking of reliability of potential counterparties, is one of the most important factors of stable functioning and development of any kind of business. Despite there are a lot of criteria for checking counterparties, in daily work it would be enough to check main of them for achieving the appropriate result.

The first step is to check the counterpart`s legal status in the Uniform State Register.  There are different services, which can serve as additional validation tools for checking legal status, e.g. CONTR AGENT. Regarding legal entity, it is important to find out, whether such legal entity is in the process of reorganization, liquidation or bankruptcy, or not. Because if it is in the process of reorganization, it will cease to exist very soon and it`s rights and obligations will pass to another person(s), whose reliability is hard to predict. In case of liquidation of the legal entity, in the end all of its obligations will be terminated. Because of that, it is very risky to choose such legal entities. If such counterparty is very important for the business, then it is better to work with it by taking full prepayment.

Regarding individual, it is needed to make sure whether potential counterparty has a status of individual entrepreneur, because the taxation of individuals and entrepreneurs is different. So, if you figure out that the counterparty does not have the status of an individual entrepreneur, you will have to withhold taxes on the income that you pay them. Such provision should be specified in the contract.

In case your potential counterparty has been recently registered, it can also be risky. If it is so, it is worth checking whether another legal entity with a very similar name, founders, legal address, activities and even a Director has not been terminated. In any case, the legal entity leaves its mark in different registers and other sources, even after liquidation, changing of all possible requisites and owners. There are certain situations where unscrupulous owners of legal entity, after they have spoiled their reputation and have accumulated debts and unfulfilled obligations, simply dispose the legal entity in any way, and at the same time, register a new legal entity (almost a “clone”), what does not usually raise any objection during standard review.

However, it is worth noting how often the owners of the company, its managers, location and authorized capital have been changing since registration. Frequent changes can be a “red flag” of low level of responsibility of a company or a sign that company does not conduct any activity and has no assets and its authorized capital increases only to cover operating expenses and payment of wages.

Second step of checking potential counterparty is to examine its taxpayer registration, and whether the potential counterparty has a tax debt and a pledge. This can be verified through the official registers of the State Tax Service of Ukraine (until recently – the State Fiscal Service of Ukraine) posted on its website. You can also check the counterparty’s registration on the specified site as a VAT payer and a single taxpayer. The presence of a tax debt makes it difficult for a counterparty to fulfill its contractual obligations. First of all, the tax debt should be repaid since the counterparty is unable to dispose its property without letting know the State Tax Service.

If the activities of the counterparty require permissions and licenses, it is important to check their availability and relevance.

In order to check the legal status of the counterparty, you can additionally ask for a package of documents. Sometimes such documents may be outdated or irrelevant, so for maximization of the authenticity, the best option will be to search in all registers by yourself (perhaps even save screenshots).

When you are sure, that legal status of potential counterparty is appropriate, it is advisable to check the authority of the signatory of the contract. Usually it is the Director of the company. Director’s authorities are defined in the constituent documents (charters) of the legal entity and the decisions of its supreme body.

It is necessary to pay attention whether the constituent documents contain any restrictions on the authority of the Director to sign contracts. For example, the charter may include a clause stating that transactions on amount which exceeds 30 thousand UAH need to be approved by the supreme body of the company. In this case, in order to avoid the risk of invalidation of the contract, you must additionally require a document, confirming the approval of the transaction by supreme body.

Sometimes the limitation of Director’s authorities can be specified in the decision of the supreme body on his appointment. Therefore, it would be useful to ask a potential counterparty to give a copy of the decision.

In addition to the Director, any other person by proxy, issued by him, also could be a signatory of a contract. It should be remembered, that another person can’t have more authority than the Director has. The signature on the proxy must be certified by a seal, because legal entities of private law have the right to work without a seal only if it is expressly stated in their charter.

It is also advisable to check other details of proxy, for example, the date of issuance and its validity. If the contract is signed by an individual or an individual entrepreneur, it is necessary to pay attention to the form of proxy, because it must correspond to the form of the transaction. This means, if the contract is subject to notarization, then the proxy must be notarized.

After checking the legal status of the potential counterparty and the powers of the signatory to the contract, attention should be paid to judicial practice. Existing lawsuits and initiated criminal cases can tell a lot about the potential counterparty and its reputation.A legal entity can be involved in a large number of lawsuits as the plaintiff or the defendant. The ongoing lawsuits, in which a potential counterparty collects debt depletes business, which affects the ability to fulfill its contractual obligations. When the lawsuits are brought against your counterparty, it becomes immediately obvious, what you can expect in case of entering into agreement with such counterparty.

The presence of criminal cases should be very alarming (for example, money laundering or tax evasion), because if the company is already under oversight of law enforcement bodies, any subsequent transactions, including that have been concluded with you, can and will be considered as something aimed at commitment or concealment of a crime. Therefore, the law enforcement bodies, may become interested in your business, and would at least be able to interfere with its normal functioning and development. Mentions of your company can also be in the court register, which, of course, will result in loss of reputation, as contractors will check your company in all possible ways.

In addition, it is worth checking the register of enforcement proceedings and the register of debtors about the presence of open enforcement proceedings in which the potential counterparty is the debtor. This is necessary due to the fact that at the time of the initiation of enforcement proceedings for the recovery of funds, the contractor usually places all of the assets under arrest. Under such circumstances, it is generally impossible to perform the concluded contracts.

When the counterparties are already checked by all above mentioned criteria in the open registers, you also can use other open sources, e.g. information posted on various sites, forums and articles. However, you should think critically, when consider such information, because there is a huge possibility, that such information can be false, or written by order of jealous competitors.

Accordingly, if potential counterparty has been tested successfully and no significant risks have been revealed, then you can be sure of its reliability and integrity.