With new legislation effective from 1 January 2014, especially Act No. 89/2012 Coll., the Civil Code (hereinafter “NCC”) and Act No. 90/2012 Coll., on business corporations (hereinafter “ABC”), there have been many changes in the Czech legal environment and it will undoubtedly take some time for the addressees of these standards to adapt to these changes. This article should help provide some orientation in the new regulations governing the liability of the members of the statutory bodies of business corporations, i.e. former business companies.

1.      Due and reasonable care and business judgement 

The duty to act with due and reasonable care is defined in Section 159 of the NCC. Newly, however this duty does not fall solely to the members of a business corporation’s statutory bodies, but to the members of any elected body, including, for example, those of a non-profit organisation. The duty of due and reasonable care is defined as the performance of office with the necessary loyalty, knowledge and care.

According to Section 51 of the ABC, which introduces the so-called rule of business judgement, known abroad under the term “business judgement rule”, a person acting “carefully and with the necessary knowledge” takes all circumstances into account and acts in good faith:

• loyally;
• in the tenable interests of the business corporation, and
• on an informed basis.

Thus, if a member of a statutory body complies with the above conditions, he/she will not be subject to sanction for a breach of his/her duty of due and reasonable care, even if his/her actions do not lead to the corporation’s benefit. Therefore, this is not liability for results.

2.      Reversal of the burden of proof

Each member of a statutory body must prove (demonstrate) that he/she has fulfilled his/her obligation to act with due and reasonable care, for according to Section 52 (2) of the ABC, if there is any doubt that a member of the statutory body has acted in such a manner, the burden of proof falls to that member of the statutory body.

It is therefore essential that each member of the statutory body carefully keeps all material on which he/she based his/her decision (especially expert opinions) and can therefore prove that he/she acted on a sufficiently informed basis, loyally and in the interests of the corporation, if required.

3.  Liability for a corporation’s obligations in case of a breach of the duty of due and reasonable care

The provisions of Section 159 of the NCC do not only govern the duty to act with due and reasonable care for all members of elected bodies, but also establish the direct liability of these members in relation to third parties. This liability is given if the member of an elected body (i) was obliged to compensate the corporation for damages incurred in relation to the performance of his/her office, (ii) did not compensate the corporation for damages, and (iii) the third party (creditor) cannot satisfy its claim against the business corporation. In such a case, the relevant member of the elected body (e.g. the corporation’s executive manager) will be liable to the company’s creditors for the satisfaction of their claim to the full extent of his/her own assets.

4.      Duty to surrender benefits

Save for the obligation to compensate the corporation for any damages caused in relation to the performance of his/her office, the member of a statutory body is also obliged to surrender any benefit acquired from such activity to the corporation pursuant to Section 53 of the ABC. If it is not possible to surrender such benefit, the member of the statutory body must financially compensate the corporation for this benefit. This can occur, for example, on the conclusion of an unfavourable contract with a business corporation in which the member of the statutory body has a personal interest.

5.      Insolvency and liability of the statutory body for the bankruptcy of the corporation 

Perhaps the most consequential changes have occurred in the statutory body’s liability for the bankruptcy of the corporation. Because it is possible to establish, for example, a limited liability company with a contribution of just CZK 1 by the founding member(s) under the ABC, the liability of the members of statutory bodies must be tightened in cases where their actions lead to the bankruptcy of the company. Each member of the statutory body is therefore personally liable for the financial health of the business corporation he/she manages. If he/she leads the company to bankruptcy through the unqualified performance of his/her office, he/she will be personally liable to the extent of his/her own assets. 

5.1.Surrender of benefits

If the member of a statutory body, aware of the critical situation at the corporation, does not take all necessary and reasonably expected measures to avert insolvency proceedings, he/she will be obliged to surrender all benefits obtained in the performance of his/her office over the last two years from the effective date of the decision on the bankruptcy of the corporation at the request of the insolvency administrator, in accordance with Section 62 of the ABC. This also applies to former members of the statutory body, whose performance of office led to the bankruptcy of the corporation.

Surrendered benefits will not only include all emoluments received under their management contract, but also other benefits received from the corporation which can include, for example, the provision of services. If the surrender of benefits is not possible in this case, it will be necessary to provide financial compensation pursuant to Section 62 (2) of the ABC.

5.2.Liability for the corporation’s debts in case of bankruptcy

Aside from the release of all benefits received over the last two years, a fundamental aspect of liability under Section 68 of the ABC is the liability of members of the business corporation’s statutory body, including former members, for the corporation’s debts if the following conditions are met:

(i)                 it was decided that the business corporation is in bankruptcy (insolvency);

(ii)               the member, or former member of the statutory body knew, or could and should have known that the business corporation was in danger of bankruptcy, and in contravention to the duty of due and reasonable care, did not do everything necessary and reasonably expected to avert this outcome; and

(iii)             the court decides on the legal liability of the members on the application of a creditor or insolvency administrator.

This provision does not apply in the case of crisis management, i.e., persons who were demonstrably appointed to the office of the statutory body in order to avert bankruptcy or other adverse economic situation of the business corporation and who performed their office with due and reasonable care.

5.3.Disqualification from the performance of office

If the activity of a member of the statutory body leads to the corporation’s bankruptcy, or he/she does not take the necessary measures to avert the corporation’s bankruptcy through his/her inaction or the unqualified performance of his/her office, the court can disqualify the relevant member of the statutory body from the performance of his/her office on a motion in insolvency proceedings, but even without such a motion. The disqualification of a member of a statutory body means his/her forced exclusion from the performance of office in all business corporations for a period of up to ten years.

6. Conclusion

In view of the above, it can therefore be summarised that the new legislation brings a more detailed treatment of due and reasonable care and introduces the business judgement rule. 

The liability of the members of the statutory bodies of business corporations for the due performance of their office is stricter. The most severe penalties threaten if the statutory body leads the corporation to bankruptcy. In such a case, members are liable for the corporation’s debts with their own assets, and may even face criminal prosecution, which goes beyond the scope of this article.   

This new legislation and stricter liability will increase the need for professional and qualified analyses, which the member of a statutory body will be able to use to prove the due performance of his/her office. In case of doubt, it will be up to the member to prove that he/she acted with due and reasonable care. If he/she is unable to prove the due performance of his/her office, he/she runs the risk of strict penalties. It will thus always be advisable to consult any important decision from the position of the statutory body with a qualified expert.

For more information, please contact K&A partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz; tel.: +420604242241.