On 1 January 2021, an Amendment to the Czech Act on Business Corporations came into effect, which introduced changes in the area of corporate governance. These include changes to the liability of statutory body members in case of corporate insolvency, and changes to the conditions for disqualification of statutory body members from the performance of their office or from serving as shadow directors.
Liability of statutory body members in the event of corporate insolvency
Before the Amendment came into effect, if a statutory body member breached his duty of due managerial care by not acting to avoid a company’s impending insolvency, this could result in the court holding the director inpidually liable and requesting that a director (i) provide a personal guarantee for fulfilment of the company’s obligations; or (ii) return benefits received from the corporation up to two years prior to the decision on insolvency.
The recent Amendment, however, fundamentally changes the framework of a director’s liability for insolvency in a company under bankruptcy.
As of 1 January 2021, insolvency administrators can file an action against a statutory body member, requesting that such a statutory body member provide funds for the bankruptcy estate of a distressed company. The court may oblige the statutory body member to cover the difference between the company’s debts and the value of its assets. The insolvency administrator can file such an action if the statutory body member has breached his obligations, and the breach contributed to the company’s insolvency. The breach may consist of an act (e.g. adopting decisions that are not compliant with the duty to act with due managerial care) or failure to act (e.g. not taking necessary precautions to avoid the impending insolvency of the company).
Disqualification of a statutory body member
The Amendment also extends the reasons for a court to decide, without a motion, on the disqualification of a person from performance of his office as a statutory body member. As of 1 January 2021, a statutory body member may be disqualified from performing his office for up to three years if this inpidual seriously or repeatedly breaches his statutory obligations. Before the Amendment came into effect, disqualification was only possible if the breach was both serious and performed repeatedly. The new law provides courts with greater discretion and makes it possible to penalise statutory body members after committing a single serious breach or minor repeated breaches.
Following a court’s decision on the disqualification of a statutory board member from their office at a company, that statutory board member will be disqualified from holding office as a statutory board member of any other company.
The new rules concern shadow directors and those in similar positions
Under the Amendment, the liabilities and disqualification rules outlined above also apply to persons acting as de facto statutory body members (i.e. shadow directors). This includes former board members, persons in a position similar to a statutory body member (e.g. head of branch, custodian of the company), or any other person deemed to be acting as de facto statutory body members, irrespective of their relationship to the corporation. In extreme cases even a shareholder giving instructions to the statutory board members and therefore acting as a de facto manager of the company may be held liable for breach of the duty to act with due managerial care.
The new specific rules discussed in this article add to the general provisions regulating liability of controlling entities and piercing the corporate veil that have already been introduced into Czech law.
For more information on this Amendment and the Czech Act on Business Corporations, contact your CMS partner or local CMS experts.