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New risks of executives pursuant to the act on business corporations

New risks of executives pursuant to the act on business corporations – when can you guarantee by your personal property and how can you defend it?

On 1 January 2021, an extensive amendment to the Act No. 90/2012 Coll., on Business Corporations, as published in the Collection of Laws under No. 33/2020, will become effective. It is a very extensive amendment changing significantly the current legal regulations including the obligation of statutory body members to provide resources for the insolvent estate if they contribute to the company bankruptcy. This article is aimed to inform the general public of this specific amendment to the Business Corporations Act.

Current mode of possible sanctions

Currently, the courts can decide, in case of the company bankruptcy, upon disqualification of a person who was a statutory body member of the company being bankrupt from performance of the statutory body office with effects towards any business corporation. Furthermore, a court can decide, based on the petition of an insolvency administrator or creditor of a business corporation, upon the fact that a member or former member of the corporation´s statutory body guarantees for meeting of their obligations if the member of former member of the corporation´s statutory body knew or was supposed to know or might have known that there is a danger of the business corporation´s bankruptcy and he/she did not take all the necessary and reasonably assumable steps to avert the bankruptcy, in conflict with the due diligence.

This is disqualification from the office performance for a definite period of time and threat of guarantee by his/her own property for the company´s debts.

Risks for managers after the amendment to the Business Corporations Act

The amendment makes these obligations more restrictive and adds even more obligations. If a statutory body member contributed to the business corporation bankruptcy by breaching of his/her obligations after the amendment, and if it was decided in the insolvency proceedings upon a manner of solving this bankruptcy, an insolvency court will decide, based on the petition of an insolvency administrator, upon the obligation of this member to provide to the insolvent estate the benefit gained from a contract for office performance as well as any other benefit received from the company (for a period of up to 2 years retroactively from opening of the insolvency proceedings, unless it is a so-called debtor´s petition). Notice! If the benefit may not be provided, a statutory body member will compensate it in money. By the way, a comparable obligation does exist nowadays but the amendment makes it more restrictive.

A new fact is that if liquidation was declared, a court can decide based on a French model that the statutory body member is obliged to provide the benefit to the insolvent estate up to the amount of a difference between a sum of debts and value of the company´s assets. This is a new feature which seems to be draconian. When determining the amount of benefit, a court considers also the fact how the breach of an obligation contributed to the insufficient amount of insolvent estate. The principal of this action for the so-called replenishment of liabilities is the fact that if it was decided to solve bankruptcy in the form of liquidation, the members of a statutory body (current, former as well as factual members) are obliged, based on a court ruling, to provide their own resources to replenish the insufficient company´s assets, in the form of pecuniary as well as non-pecuniary benefit.

In addition to that, a creditors´ committee may decide upon the future of the statutory body member as well. An insolvency administrator files a petition to a court even in case a creditors´ committee decides upon this fact. Nevertheless, the amendment deals also with the participation of creditors because if the insolvent estate does not contain resources necessary to cover the costs to file a petition and conduct subsequent proceedings, an administrator may condition the petition filing or proceedings continuation by the fact the creditors provide a reasonable advance payment to the administrator to cover such costs (the advance payment will be eventually compensated as a claim against insolvent estate).

Naturally, the possibility of disqualification of a member from the statutory body office continues to apply. If an insolvency court comes within the proceedings to the conclusion that a statutory body member breached any of his/her obligations and such circumstance was a cause (or one of the causes) of the subsequent bankruptcy, and if a court imposes some of the sanctions described above (provide a benefit or difference) on a statutory body member, the competent court will open the proceedings concerning the disqualification of the affected statutory body member from his/her office.

It is necessary to add that these amended provisions will be applied mutatis mutandis to a former member of a statutory body, to a person at a similar position and to any other person being factually in such a position in spite of the fact he/she is not a statutory body member. This includes factual and shadow Executives - persons not being currently at a managing position but acting factually in this way.

Summary

The amendment to the Business Corporations Act makes the current sanctions more restrictive for the statutory body members, for instance, disqualification from the office or provision of the economic benefit. In addition to that, the amendment introduces the obligation to provide to the insolvent estate the benefit up to the amount of a difference between a sum of debts and value of the company´s assets. Defence against such interference with the assets of an Executive or Member of the Board of Directors consists especially in the proper office performance in accordance with due diligence, which can be demonstrated in higher investments in “compliance” and counselling - to displeasure of managers. On the other hand, it is necessary to realize that prevention will significantly save personal resources of managers in the future.

ARROWS advisory group

Jakub Pártl, LL.M.
managing associate

T: +420 724 960 987
E: partl@arws.cz

www.arws.cz