Czech Republic: Company Law - Stricter liability and sanctions for managing directors and board members
The cornerstone of corporate law in the Czech Republic – the Business Corporation Act - has been recently amended with effect from 1st January 2021. A focal point of these changes are the general rules regarding statutory bodies of business corporation, especially their liability in case of the company´s insolvency.
The previous regulation differentiated among a number of different cases of potential liability in relation to a company´s insolvency and the proper or improper performance of its managing directors or board members. And all these different cases were supposed to be handled differently also from the procedural point of view. Since this proved impractical in practises, the the current amendment of the Business Corporation Act aimed at the unification and clarification of the duties and liability of statutory body members in general, what is definitely a welcomed move. From now on, the act only stipulates 2 kinds of proceedings that can be taken against the malperforming director or board member - for declaration of temporary inability to assume office in a business corporation and for replenishment of the business corporation´s assets.
Temporary inability to assume office
Under the new law, a person can be barred by a court decision from assuming office in the statutory body of any company for time period of up to 3 years, in case that such person previously violated his obligations in connection with his position in the statutory body of a business corporation repeatedly or gravely.
The new regulation opens space for a judicial assessment of the specific circumstances of the case, since in contrast to the previous law, the court may decide to impose a ban from office that is shorter than 3 years. On the other hand, the new wording implicates that henceforth either repeated small violations or alternatively one grave violation will both be sufficient for being temporarily being barred from office. From a practical point of view this makes sense, as companies only rarely suffer damage caused by actions of their statutory bodies which could simultaneously be proven to have been both grave and repeated.
The amendment also specifies the period for which the proper performance of office (not imited to one specific company, if the person under scrutiny has held office in more than one) is subject to the court´s review. This period is 3 years before the date of beginning of the respective court proceedings. Such proceedings may be initiated by the courts of their own motion (ex officio), but also by anybody who has an important interest in the matter, which in practise will most probably play a greater role. For example, minor shareholders of a company might be well advised to initiate such proceedings as soon as possible after they receive information about violations, which the statutory body member committed in their own or in another company. It is verys likely that courts will start such proceedings ex officio only in cases, when the person in question is found to have contributed to a company´s insolvency.
When a decision barring a person from being member of a statutory body becomes legally effective, the person in question by law ceases to be a member of the statutory body in any Czech company where he was appointed, unless the count decided otherwise in his individual case.
Action for replenishment of a business corporation´s assets
The amendment also introduces a new type of incidental proceedings within insolvency proceedings regarding the liability of directors or board members. The purpose of these proceedings is to pass a preliminary ruling about the liability of a person in relation to the bankruptcy of a specific company. The only person entitled to initiate such proceedings is the insolvency administrator, on the grounds that the director or board member violated his duties towards the company and thus in some way contributed to the insolvency of that company. Normally, such a broad definition would raise doubts over its interpretation. In this specific case, we so far see no indication that the current case law, that developed under the law in its previous regulations, should not be applicable any more, as it was the explicit intention of the legislators to unify the formerly fragmented regulations into this new general clause.
In case a person is found to have culpably violated his duties and subsequently contributed to a company´s bankruptcy, he may be sentenced to return his salary or other financial benefit he obtained from the company for the performance of office or that was otherwise provided to him by the company within the last 2 years or to otherwise replenish the assets of the company. While the duty to return benefits is already well established in the Czech insolvency and corporate law for a long time, the duty to replenish the company assets is a new legal instrument.
The action for replenishment of assets is intended to replace the previous concept of personal surety of directors for certain liabilities of bankrupt companies, which has not proven very effective in practise. This was mainly due to the fact, that the respective proceedings could not be held as incidental proceedings within the insolvency, and thus could begin only after the end of the insolvency proceedings. Also, any creditor was entitled to rise such claim in his own name, which led to multiple proceedings and an uneven satisfaction of claims. Tin order to avoid the shortcomings of the old law, the new action on replenishment of assets is now solely in the hands of the insolvency administrator (on behalf of all creditors) and does not constitute a statutory surety, but instead an obligation to compensate the balance between the assets and the liabilities of insolvent company.
It will be definitely interesting to watch how the jurisprudence will handle cases when multiple members of statutory bodies violated their duties to a different degree of violation (acting vs. omitting etc.) and contributed to a different degree to the insolvency. Such disputes might become very complex and intricate. A possible solution may lay in imposing the obligation to compensate missing assets to all members of the statutory body jointly and severally, but such application of the general rules of liability for damage will naturally have its limits. Overall, we believe these new legal instruments will contribute to a higher certainty and possibly to a greater satisfaction of creditors.
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