This article is a part of our law firm’s series which introduces changes brought by an extensive amendment of Act No. 90/2012 Sb., on Commercial Companies and Cooperatives (the Business Corporations Act), as amended (hereinafter the “BCA“), effective in majority on 1 January 2021. In this article, we discuss specifically the new regulation of the so-called special obligations of members of statutory bodies in the event of insolvency of a business corporation in connection with the new wording of the provision of Sec. 66 of the BCA. The relevant amendment of the BCA was made by Act No. 33/2020 Sb. and will become effective on 1 January 2021.
According to the explanatory memorandum to Act No. 33/2020 Sb., the new regulation in Sec. 66 of the BCA aims, among other things, to eliminate unreasonable differences between the so-called insolvency offenses and ambiguities in interpretation, which is supposed to prevent disputes and to simplify the application of the given legislation.
The new wording of Sec. 66 of the BCA replaces the previous wording of the current Secs. 62 and 68 of the BCA, i.e. the obligation of members of business corporation bodies (except members of the highest bodies of capital companies and cooperatives) to hand in, at the request of the insolvency administrator, performance from the executive service agreements for the period of two years before the legal force of the decision on insolvency and the statutory liability of members of statutory bodies for debts of insolvent business corporation, both in the case of fulfilment of relatively differently defined factual elements of breach of their obligations related to (subsequent) insolvency of the business corporation.
Joint proceedings on insolvency offenses
The purpose of the new provision of Sec. 66 of the BCA is to unify substantive preconditions and procedural regimes for determining the obligations of members of statutory bodies of the business corporations to hand in performance under the executive service agreements and settle the difference between the business corporations’ assets and its sum of debts, according to the degree of their contribution to the corporations’ insolvency. These two situations will now be possible to resolve in a single joint proceeding by the insolvency court, which will be an incidental dispute pursuant to Sec. 159 et seq. Act No. 182/2006 Sb., the Insolvency Act. The question of whether the members of the statutory body contributed to the insolvency of a business corporation by violating their duties will be addressed directly within it.
Only the insolvency administrator of the insolvent corporation will be authorized to file a lawsuit, either at his discretion or compulsorily according to a binding decision of the creditors’ committee. The emergence of both discussed obligations of the member of the statutory body (i.e. to hand in any performance from the executive service agreement, or to hand in a performance representing the difference between the corporation’s assets and debts) will be linked to a binding decision of the insolvency court.
The insolvency court will also be obliged to notify its decision to the court, which will be entitled to decide on the exclusion of the defendant from the performance of the function of the member of statutory body of any business corporation according to the newly defined rules in Secs. 63 to 65 of the BCA.
Legal preconditions for the emergence of duties of the member of statutory body
As indicated above, the new legislation unifies regime of various factual elements of the so-called insolvency offenses, where the member of statutory body did not do everything necessary and reasonably foreseeable to avert insolvency, performed the function in a way that led to the insolvency and/or his actions appear to have contributed to the insolvency, either via active contribution or unjustified passivity.
According to the explanatory memorandum to Act No. 33/2020 Sb., it is important to understand the breach of duties of a member of statutory body primarily as a breach of the duty to conduct business management properly and/or a non-compliance with the standard of performance of the function imposed on members of elected bodies with due diligence and care. In this connection, it is impossible not to mention the provision of Sec. 52(2) of the BCA on the inversion of the burden of proof to the detriment of the concerned member of statutory body.
Furthermore, there will be a change of the decisive moment for the beginning of the two years period, for which the members of the statutory body are obliged to hand in any performance obtained from executive service agreements (or other benefit received from the business corporation). Until now, this period is calculated from the legal force of the insolvency decision, which, however, gives members of the statutory body chance to obstruct the final insolvency decision until they are not obliged anymore to issue payments for the period before the business corporation’s insolvency. The beginning of this period will therefore be newly linked already to the moment of the commencement of insolvency proceedings.
Compared to the current legislation, the change of the relatively problematic statutory liability of the member of statutory body for debts of the business corporation towards the obligation to settle the difference between assets and debts of the business corporation by paying the corresponding performance to the corporation’s assets, is quite a large shift.
Under the current legal regulation, any reluctance of the member of statutory body due to the statutory liability for the debts of the business corporation must be resolved by conventional litigation, the costs and risks of which are borne directly by the creditor as the plaintiff. Newly, these risks will be transferred to the insolvency administrator and there will be no risk that the insolvency proceedings will end before the legal dispute with the member of the statutory body.
The pari passu principle
Legislators state that the current legal regulation of statutory liability of the member of statutory body for debts of the insolvent business corporation, contained in Sec. 68 of the BCA, is inconsistent with the purpose of insolvency proceedings and even too harsh on members of statutory bodies, which the new legislation is supposed to solve.
The solution should be the new wording of the provision of Sec. 66(1b) of the BCA, which represents the (undisguised) takeover of the institute of the so-called lawsuit for supplementation of liabilities from French commercial law. The essence of this institute is that the members of the statutory body may be required to supplement the assets of the business corporation with their own resources if they do not properly fulfil their obligations arising from their position. This will actually introduce the principle of pari passu also in relation to the eventual performance of the members of statutory bodies due to their liability for debts of the insolvent business corporation as the company’s assets will then be distributed to creditors under insolvency rules.
On the contrary, in our opinion, the new legislation of Sec. 66 of the BCA is unlikely to lead to the announced removal of the excessive harshness of the existing legislation in relation to the liability of members of statutory bodies for debts of insolvent business corporations.
It is true that, unlike the current legislation, the member of statutory body (when meeting the legal preconditions) will not be liable for the corporation’s entire debts, but will be obliged in the worst case “only” to balance the difference between the corporation’s assets and liabilities, but in practice, the new legislation could be generally far more unpleasant for members of the statutory bodies of insolvent business corporations than the current one for a simple reason – the statutory possibility of action against members of statutory bodies could be used much more often.
However, a challenge for practice will be to determine the (maximum) amount of performance of the member of the statutory body, which he should provide to the corporation’s assets. The new legislation does not specify in any way how that amount is to be determined, at what point in time or on what basis. This can easily lead to very complex partial disputes and unfortunately, further considerable delays in insolvency proceedings can therefore be expected.
The forthcoming change in the special duties of the member of statutory body in the event of the insolvency of business corporation is unlikely to lead in practice to a lesser sanction of members of statutory bodies who have failed somehow in their business activities on behalf of the business corporation. The fulfilment of duties arising from membership in statutory bodies will need to be approached with even greater care.
In case of any questions on the subject-matter or amendment of BCA in general, we are at your full disposal.
PhDr. Mgr. Jan Ptáčník, attorney – firstname.lastname@example.org
25. 05. 2020