This article follows up on a series of articles by our office dealing with the first extensive amendment to Act No. 90/2012 Sb., on Commercial Companies and Cooperatives (the Business Corporations Act), as amended (hereinafter „BCA”), most of which will be effective from 1 January 2021.
Although it may not seem so at first sight, the amendment quite significantly changes the rules for the director’s disqualification.[1] Disqualification can have far-reaching consequences not only for an expelled director.
The aim of this article is to provide a basic overview of changes in the legislation concerning disqualification contained in Sec. 63 to Sec. 65 of the BCA.
Current legislation
According to the current legislation Secs. 63 to 67 of the BCA, the court may decide on disqualification if a director or another person in a similar position: (i) has led the business corporation to bankruptcy (current Sec. 64 (1) of the BCA), (ii) contributed through his actions to reduce the property and to damage the creditors of the business corporation (current Sec. 64 (2) of the BCA), or (iii) repeatedly and seriously violated the care of a proper manager (current Sec. 65 (1) of the BCA). According to the current legislation, the period of expulsion from office is always 3 years from the date of the legal decision on disqualification.
The current regulation of disqualification does not only affect directors, but also former directors or persons in a similar position. A liquidator and a (substantive) guardian of a legal entity are also considered to be persons in a similar position to a director. In addition, according to the current Sec. 65 (2) of the BCA, it is also possible to disqualify other persons who are obliged to observe the care of a proper manager. According to the current legislation, disqualification could also affect a procurator or a member of the Supervisory Board.
Upon disqualification, or the moment the decision on disqualification takes legal effect, the expelled person automatically ceases to be a member of the statutory body of all business corporations. The court that decided on the disqualification is obliged to notify this fact to the registration court so that the expelled person is removed from the Commercial Register.
The law also stipulates the consequences in the case that the disqualified person continues to perform the role of a director. The infringing person is liable to fulfil all of the obligations of the business corporation, which arose at the time when he performed the activity of a director despite the court decision. Due to the violation of the dismissal, the court may also decide on re-disqualification for up to 10 years.
New legislation
According to the explanatory memorandum, the aim of the amendment is to eliminate the shortcomings of the current legal regulation consisting of unjustified differences between the individual facts of the so-called insolvency delicts, ambiguities of interpretation, duplications and complexity of some institutes.[2]
General clause
The amendment primarily introduces a general clause, and through its fulfilment the court may decide to disqualify a director. According to the new legislation, a director may be disqualified if, in the last 3 years before the commencement of the (exclusion) proceedings: (i) he / she has repeatedly or (ii) seriously violated his / her duties in the performance of his / her duties.
The general clause therefore has no connection with the insolvency proceedings conducted in respect of the business corporation in which the director concerned performs a function.
A fundamental change compared to the draft in the current Sec. 65 (1) BCA is that the current legislation requires cumulative fulfillment of repeated and serious violations, while according to the new regulation one of the mentioned quantifiers of violations will be sufficient to fulfill the facts, ie after the amendment takes effect, also a member of the statutory body who violated his duties (once) seriously can be disqualified.
Special facts of the case
The special clause for disqualification is contained in the new Sec. 63 (2) of the BCA. A necessary precondition for the application of the special clause is the opening of insolvency proceedings regarding a business corporation of which the disqualified person is a director. Pursuant to this provision, the court shall decide on disqualification, if this member has been required to supplement the insolvency estate of a business corporation pursuant to Sec. 66 (1) of the BCA. Unlike the general clause contained in Sec. 63 (1) of the BCA the law does not give the court the discretionary power to approve the disqualification.
The circle of persons concerned
Thanks to the new Sec. 69 (2) of the BCA, the possibility of disqualification also affects (i) former directors, (ii) persons in a similar position (i.e. liquidators, guardians) and (iii) the so-called factual leaders, i.e. persons who are in fact in the position of director, although they are not members of the body, regardless of their relationship with the business corporation.
Consequences of disqualification
The amendment changes the current consequences of disqualification, i.e. even after the amendment takes effect, the disqualified person ceases to be a director of all business corporations by the legal force of the decision on disqualification.
The amendment also changes the existing regulation concerning the possibility for a court to decide that disqualification will not lead to termination of membership in the body of another business corporation if the circumstances of the case prove that the current performance of duties in this business corporation does not justify the disqualification and if the disqualification could harm the legitimate interests of that business corporation or its creditors.
Duration of the prohibition
The amendment also changes the duration of the prohibition on performing the function of a director. Newly, the court deciding on disqualification will be able to consider the length of the disqualification depending on the specific situation, the degree of fault, the seriousness of the breach of duty or other relevant circumstances.
Locus standi
The amendment still envisages that the disqualification proceedings may be initiated without a motion. However, the law grants locus standi to initiate these types of proceedings to anyone who has an important interest in them. Important interests include economic, moral, or social interests.[3] Taking into account aspects of „important interest“, it can be assumed, according to the cited order, that locus standi belongs to the business corporation itself, and to directors, or members of the supervisory body and its associates.[4]
Transitional provisions
The amendment contains a special transitional provision under which the new Secs. 62 to 68 of the BCA will apply if the insolvency proceedings were initiated after the effective date of the amendment, i.e. after 1 January 2021. In my opinion, this transitional provision affects only the special clause referred to in the new Sec. 63 (2) of the BCA and not the general clause, which is in no way dependent on whether insolvency proceedings are ongoing. For this reason, I believe that the general clause will apply as of the first day the amendment takes effect.
Conclusion
Although the new legislation was adopted mainly to eliminate the shortcomings of the current legislation, the amendment also brings substantive changes, especially by introducing the new general clause, which significantly changes the conditions for the decision on disqualification of a director.
If you have any questions regarding the topic of this article or corporate law in general, we are at your disposal – do not hesitate to contact us.
Mgr. Martin Heinzel, attorney – heinzel@plegal.cz
28.08. 2020
[1] For the sake of clarity of the text, the abbreviation „disqualification“ is used instead of the exact designation „disqualification of director“.
[2] Explanatory Memorandum to the Business Corporations Act. Available at: https://www.psp.cz/sqw/text/orig2.sqw?idd=135881.
[3] Order of the Supreme Court of 21. February 2018, file no. 29 Cdo 2227/2016.
[4] Op. cit. sub 3.