Changes to the Czech restructuring law and their impact on insolvencies

On 1 January 2021, the first major amendments to the Czech Act on Business Corporations come into force. These amendments will introduce a number of material changes to areas including corporate governance, profit distribution and the rules governing conflicts of interests. Given how soon they are to become effective, the amendments may also have an impact on ongoing restructurings as well as transactions begun in 2020.

Special duties in the event of a corporation’s bankruptcy

If a member of a statutory body of a business contributes to the bankruptcy of that business by breaching his/her obligations, the insolvency court may decide that the benefit gained from the service agreement and any other benefits obtained from the corporation must be handed over to the bankruptcy estate, up to two years before the bankruptcy proceedings commenced. If bankruptcy is declared involving the corporation’s assets, the court may decide that the member is also obliged to provide property to the bankruptcy estate up to the amount of the difference between the sum of debts and value of the assets.

Under the previous regulation, the court could have ordered that such breaching member of the statutory body was obliged to guarantee that the company’s obligations were fulfilled. However, this was viewed as too harsh a punishment that did not reflect the requirement of pari passu satisfaction of the creditors.

Changes to the rules for disqualifying a board member

A newly amended general rule will be that the court may decide that a member of a statutory body of a business who in the previous three years repeatedly or materially breached his/her duties will be disqualified from the position for up to three years from the effective date of the disqualification decision. Such breach of duty does not need to cause nor contribute to the corporation’s bankruptcy. As of the effective date of the decision, the disqualified person’s offices will be terminated in all corporations, except for the offices specified in the decision as unaffected. For the period of disqualification, the disqualified person will not be able to be a member of a corporate body.

The amendment enables the court to distinguish the gravity and specifics of each individual breach. Under the previous wording, the disqualification period was unified and there was no room to shorten it. Further, it is no longer necessary to prove that a breach of duties was both material and repeated. In cases where a board member materially breaches his/her duties, it should be possible to sanction the breach before it is repeated.

Conflict of interest rules extended to shadow directors

Shadow or de facto directors, e.g. majority directors and former board members effectively acting as directors or influencing the directors, are also required to act with due care. If they breach this obligation, they might be liable for any resulting damages. Conflict of interest rules will also further apply, with certain exceptions, to shadow directors.

Profit distribution and “extended” usability of financial statements

The amendments maintain the existing principle that the distribution of profits may be determined only based on the ordinary or extraordinary financial statements approved by the general meeting. However, it further explicitly states that the profit (and corporation’s other own resources) determined on the basis of the financial statements can be paid out until the end of the consecutive accounting term, as opposed to the six-month period under the former Commercial Code. This is of course provided that the financial statements still present a true and fair view of the company’s accounts as of the balance sheet date.

The amendments further extend the balance sheet test limitations (determining the maximum amount to be distributed) to a corporation’s other own resources; in practice, this will mean that a negative result of the balance sheet test will also affect the corporation’s other resources.