Company Legal Audit, Counterparty Due Diligence and Protection During Searches: Legal Business Security

Business Legal Audit: Reviewing Your Own Company

A business legal audit is a lawyer’s review of your own company: who owns it and who has the right to act on its behalf, whether contracts, assets and the trademark are protected, and whether any disputes or demands from authorities remain open. It is also called a legal review of the business. The goal is to find weak spots before an investor, a bank, a regulatory authority or a former partner comes across them.

A legal audit does not check financial figures. Accounting data and financial statements are checked by an auditor (Article 1 of the Law of Ukraine “On the Audit of Financial Statements and Auditing Activities”), while a tax and accounting audit covers bookkeeping and tax payments. A legal audit establishes what rights and obligations the company has and which of them could turn into a loss. An audit of your own company concerns the security of your own business. Checking another company before buying a share or a business is a separate service, due diligence of a company before acquisition.

When a Company Needs a Legal Audit

An audit is worth conducting before an event when someone else will examine the company’s documents, or after a change that may have affected them:

• before an investor comes in, before taking out a loan or selling a share;

• after a change of director or participants;

• before an inspection by a regulatory authority;

• when a conflict is brewing between participants or a reorganization is being prepared;

• when the owner runs the business from a distance;

• when no one has reviewed the documents for years.

It is worth repeating the audit when the owners, the executive, key contracts or the type of activity change. What to check every month between audits is covered in our article on the legal risks of doing business.

What We Review During a Company Legal Audit

We agree on the areas at the start: the whole company can be reviewed, or only what matters before a specific event. The lawyer checks the documents against state registers, primarily the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations (USR).

Besides the USR, we check documents against the State Register of Real Property Rights, the State Register of Encumbrances over Movable Property, the State Register of Trademark Certificates of Ukraine, licensing registers, the Unified State Register of Court Decisions and the Automated Enforcement Proceedings System.

A discrepancy with the USR is not a formality. A company cannot rely on information that is not in the register in a dispute with a counterparty. And a counterparty may rely on an erroneous entry if it did not know and could not have known of the error (Article 10 of the Law of Ukraine “On State Registration of Legal Entities, Individual Entrepreneurs and Public Organizations”).

Can You Review Only One Area of the Company?

Yes. We agree on the audit areas at the start: for example, you can review only contracts with key counterparties or only the authority to act and powers of attorney. The scope of work is then determined by the areas you choose.

How the Audit Works and What You Get

1. A meeting with the owner or director: the goal, the event we are preparing for, the areas.

2. You provide the documents according to the list of documents on this page. We refine the list at the start: which documents are really needed depends on the chosen areas, and we will note in the report anything that is missing.

3. The lawyer reviews the documents, checks them against registers and asks questions of the responsible employees.

4. You receive a written report, and at a meeting we explain it and agree on what to fix first.

The audit can be conducted entirely remotely, with meetings online.

The report contains a list of the documents and registers reviewed, with the date, findings for each area, a risk assessment for each finding (a risk map) and an action plan: what to fix, in what order and who does it. A missing document is also a finding: we note what is missing and how to restore it.

We can take on the corrections as separate work: participants’ resolutions, new powers of attorney, contracts, registration of changes in the USR, a trademark application. The length of the audit depends on the number of areas and contracts, the size of the company and how quickly the documents arrive.

Suppose an owner is preparing the company for an investor. The audit shows that a manager who left six months ago still holds a power of attorney without an expiration date to sign contracts, and that the trademark is registered to one of the founders. Dismissal is not among the grounds for terminating a power of attorney: it must be revoked, and the representative and the counterparties they dealt with must be notified (Articles 247–249 of the Civil Code of Ukraine). The power of attorney is revoked, the trademark is transferred to the company, and by the time of the negotiations the owner knows what has already been fixed and what will have to be disclosed to the investor.

Counterparty Verification by a Lawyer: Checking a Legal Entity Before a Transaction

Counterparty verification is the second part of legal business security. Here the lawyer looks not inside your company but at the party you are signing a contract with: this may be a check of a supplier, a buyer or a business partner. Counterparty due diligence services come in two formats: an express check and comprehensive due diligence before a major transaction. The scope of both is set out in the service packages.

The lawyer works with primary sources:

• the USR;

• the “Case Status” service on the “Judiciary of Ukraine” web portal and the Unified State Register of Court Decisions;

• the Automated Enforcement Proceedings System and the Unified Register of Debtors;

• bankruptcy notices on the same web portal;

• the State Sanctions Register;

• licensing registers;

• for comprehensive due diligence, also the State Register of Real Property Rights and the State Register of Encumbrances over Movable Property.

Besides state registers, we also use paid verification services. A service compiles register data into a dossier. The lawyer checks this data against primary sources, separates ordinary business disputes from cases that threaten your particular transaction, and writes how to proceed: whether to sign the contract, on what terms, or to walk away from it.

In comprehensive due diligence, the lawyer also establishes whether the person who will sign the contract has the right to sign it: what is recorded in the USR, what restrictions the charter contains, what the power of attorney says.

The result is a legal opinion on the counterparty. An express check ends with a brief written opinion: status and registration data, owners and executive, court cases, enforcement proceedings, signs of bankruptcy, tax, licensing or sanctions signals, plus a risk level with a recommendation on how to proceed. Comprehensive due diligence ends with a detailed opinion or a risk map: it adds related companies, business reputation, ties to the aggressor state, assets and encumbrances, an analysis of the draft contract and a plan to protect the transaction.

You can also check a counterparty yourself: our separate article explains how to check a counterparty on your own. There are also separate articles on a counterparty’s assets and encumbrances and on beneficial owners and sanctions risks.

The length of the check depends on the number of counterparties, the depth of the review, the number of assets to be checked and whether documents have to be requested from the counterparty itself. An express check usually takes 3–5 working days.

The Counterparty Is Reliable: We Review the Contract with It

Even if the check shows a reliable counterparty, the contract with it still has to be performed, and its terms will decide what you get if the transaction falls through. That is why we turn the results of the check into contract terms: the risk level determines whether to agree to an advance payment, split payment into stages, or require a pledge, a surety or a bank guarantee.

An analysis of the draft contract is included in the “Comprehensive Due Diligence Before a Major Transaction” package. If you need a counterparty check together with a review of a ready-made contract, the “Analysis” package on the “Contract Law” page will suit you. What exactly a lawyer checks in a contract is explained in our article “Professional Legal Due Diligence of the Contract.”

Legal Protection of Business During Inspections and Searches

Legal business security also means legal protection for when authorities visit, in particular when a business is put under pressure through inspections, searches or attempts to seize the company. What was seized, recorded in the report and said in the first hours then has to be corrected through an investigating judge and the court.

Inspections by Regulatory Authorities

Before an on-site inspection, officials must present an inspection referral or certificate and their service IDs, and the tax authority must also present a copy of the order. Without them, the company has the right not to admit the inspectors (paragraph 81.1 of Article 81 of the Tax Code of Ukraine, Articles 7 and 10 of the Law of Ukraine “On the Basic Principles of State Supervision (Control) in the Field of Economic Activity”).

A state supervision report the company disagrees with is signed with comments. Objections to a tax audit report are filed, as a rule, within 10 working days from the day after it was received (paragraph 86.7 of Article 86 of the Tax Code of Ukraine).

We prepare the company for the inspection, attend it, and write comments and objections. In particular, we support tax audits, prepare companies for military record inspections by the Territorial Recruitment and Social Support Center (TCC) and explain how to act during an inspection by the State Service on Medicines and Drugs Control.

The “Our Experience” section describes how we prepared a company that kept records only in an internal spreadsheet for a TCC inspection.

For details, see our pages “Support of Tax Audits in Ukraine,” “Legal Assistance During Inspections of Controlling Authorities” and “License Inspection,” as well as our pages on responses to requests from regulatory and law enforcement authorities and appeals against actions and decisions of authorities.

Who Comes and with What Document

A search, an inspection of premises and temporary access to items and documents take place in criminal proceedings. They are conducted by investigators of the police, the Security Service of Ukraine, the State Bureau of Investigation, detectives of the Bureau of Economic Security and the National Anti-Corruption Bureau of Ukraine (NABU), or a prosecutor (Article 38 of the Criminal Procedure Code of Ukraine, hereinafter the CPC). A search and an inspection of premises are investigative (search) actions, while temporary access is a measure to secure the proceedings. The rights in them differ:

The table simplifies: each procedure has exceptions, so a defense lawyer checks the document on site.

Search at a Company: How to Prepare in Advance

Preparation means several decisions made in advance, so that in the first minutes people act according to plan:

• who calls the defense lawyer and who represents the company: the director or an employee with a power of attorney;

• where the charter, powers of attorney and lease agreements are kept: they show who owns the premises and who possesses them, and this is checked against the ruling;

• who is responsible for servers and email and will be available: if the company restricts access to a computer, or if a password or other protection must be overcome to gain access, the law allows the equipment itself to be temporarily seized (part two of Article 168 of the CPC), so whether to provide access is decided together with the defense lawyer;

• what security, the secretary and accounting do: ask to see the ruling, notify the responsible person and the defense lawyer, do not argue;

• which defense lawyer you have agreed with on coming on site and how to reach them.

You must not obstruct a search or remove or destroy documents and equipment: failure to comply with an investigator’s demands entails liability (part three of Article 236 of the CPC).

A Defense Lawyer at a Search: What to Do During a Search

The law does not require an investigator to wait for a defense lawyer before starting a search of premises: three hours for the lawyer to arrive are given only for a search of a person, if that person demands the lawyer’s presence. However, the investigator must admit the defense lawyer at any stage of the search (Article 236 of the CPC). Before the lawyer arrives, ask to see the ruling and to be given a copy, write down who is conducting the search, and do not give explanations.

The defense lawyer checks the search against the ruling and records every deviation, because this determines what can later be recovered and appealed:

• ruling: valid for no more than one month, the premises and their owner, the list of items and documents. It allows entry only once (Article 235 of the CPC);

• attesting witnesses: at least two disinterested persons. Under martial law, if involving them is objectively impossible or dangerous, the search is conducted without attesting witnesses, but with continuous video recording (Articles 223 and 615 of the CPC);

• limits: anything seized beyond the list in the ruling (except items withdrawn from circulation) is considered temporarily seized property;

• equipment: outside the cases defined by law, computers are not seized; the information is copied with the participation of a specialist. If equipment is seized anyway, copies of the data are left with the owner at the owner’s request, when technically possible (part two of Article 168 of the CPC);

• recording: a search under a ruling must be recorded on audio and video, and actions not on the recording may not be entered in the report;

• report: comments are entered before the signatures, and a second copy with the inventory of seized items is handed to the company’s executive or representative.

Whether to sign the report is decided by the defense lawyer on site. A refusal to sign is noted in the report, and the person has the right to give a written explanation of the reasons, which is also entered in the report (Article 104 of the CPC).

After a Search: Return of Property and Lifting of Attachment

After a search, deadlines matter:

• a motion to attach property temporarily seized during a search under a ruling must be filed within 48 hours, otherwise the property is returned immediately. The investigating judge must issue a ruling on the attachment of such property no later than 72 hours from the day the motion is received (part five of Article 171, part six of Article 173 of the CPC);

• funds in accounts may also be attached (frozen), but the method of attachment must be the least burdensome and must not stop lawful activity (part ten of Article 170, part four of Article 173 of the CPC);

• the investigating judge considers a motion to lift an attachment within three days, and a ruling on attachment may be appealed within five days from the day it was announced or, if the owner was not summoned, from the day a copy was received (Articles 174, 309 and 395 of the CPC);

• failure to return temporarily seized property is appealed to the investigating judge (Article 303 of the CPC);

• a witness being questioned has the right to legal assistance from an attorney and may refuse to testify about themselves, close relatives and family members if this could become grounds for suspicion (Article 66 of the CPC).

So that work does not stop, demand during the search that copies of information be left from the equipment being seized: at the owner’s request they are made on the company’s media with the participation of a specialist, if copying is technically possible (paragraphs five and six of part two of Article 168 of the CPC). Records are restored on other equipment from these copies and from backups made in advance, and the return of seized items is pursued through the attachment deadlines or a complaint to the investigating judge.

What to Do If Equipment Was Seized or an Account Was Frozen?

Watch the deadlines. Equipment not named in the ruling is considered temporarily seized property: if it was seized during a search under a ruling, a motion to attach it must be filed within 48 hours, otherwise it is returned. A ruling on the attachment of property or funds may be appealed within five days, or you can ask the investigating judge to lift the attachment, so it is worth involving a defense lawyer right after the search.

Search Support and Other Business Protection Services

• A defense lawyer coming to a search: checks the ruling, supports the search until the report is signed, enters comments, monitors the inventory of seized items. A defense lawyer comes to searches in Kyiv and the Kyiv region; in other cities of Ukraine we work with partner defense lawyers. Visits are during working hours; outside them, by prior arrangement.

• Preparing staff for a search: roles, an action memo, a briefing for security, the secretary, accounting and executives.

• Support during questioning of employees and the executive.

• Return of seized items and lifting of attachment orders: motions and complaints to the investigating judge, appeals against rulings on the attachment of property and funds.

• Defense of the executive in a criminal case during the pre-trial investigation and in court.

• Protecting a business from raiding: we track changes in the USR concerning your company and challenge unlawful registration actions before the Ministry of Justice of Ukraine or in court. A complaint to the Ministry of Justice is filed within two months from the day you learned or could have learned of the violation, but no later than one year (Article 34 of the Law of Ukraine “On State Registration of Legal Entities, Individual Entrepreneurs and Public Organizations”).

The “Our Experience” section describes how a defense lawyer preserved a company’s server and equipment during a search.

How Is the Scope of the Review Determined for Your Business?

The scope of the review depends on the client’s specific needs:

• For a one-time counterparty check before entering into a transaction, the counterparty’s identification details (EDRPOU or RNOKPP code, full name or legal name) and documents related to the specific transaction are sufficient.

• For comprehensive legal security of the business, the counterparty review is supplemented by an analysis of internal procedures for working with counterparties, standard agreements, critical payments and the individuals or companies that require monitoring.

• For a legal audit of your own company, the scope is determined by the chosen areas, the number of contracts and the event you are preparing for. We agree on the list of documents at the start.

If some documents needed for the counterparty review are unavailable, our lawyer first determines which information can be checked in public registers and which information must be obtained from the client or directly from the counterparty.

Our Experience

Records only in a spreadsheet. A small installation company was preparing for a scheduled military record inspection by the TCC. Having reviewed the HR documents, we saw that records of persons liable for military service were kept only in an internal spreadsheet: there were no personal cards or lists in the prescribed form, and no notifications had been sent to the TCC. The lawyer prepared orders, notifications for each employee, personal military record lists, an annual military records work plan and instructions on how to complete and sign everything. The inspection passed without significant comments.

The server stayed with the company. A search was conducted at the office of a software development company in criminal proceedings concerning its counterparty. The investigators were looking for contracts, transaction records and correspondence on specific transactions, but also intended to take work laptops and a server that stored data of the company’s other clients. The defense lawyer on site checked the investigators’ actions against the court ruling, proposed copying the necessary files without seizing the equipment and, when one laptop was taken anyway, recorded objections. The server and the rest of the equipment stayed with the company: the investigators received copies of the files and seized documents on the specified transactions. After the search, the lawyer filed a motion for the return of the laptop, it was returned, and the team continued its work.

Cost of Counterparty Due Diligence and Legal Audit: What It Depends On

The cost of counterparty due diligence and a lawyer’s business audit services depends on the format of the service: a one-time check before a transaction, a legal audit of current risks, or ongoing support with monitoring of changes. The price depends on:

• the number of counterparties to be checked;

• the complexity of the counterparty’s business structure;

• the transaction amount and subject matter;

• the need to analyze assets and encumbrances;

• the number of registers to be monitored;

• the need to update contracts and internal procedures.

The cost may include preparing a legal opinion, risk profile, recommendations, contractual safeguards, and advice on further actions.