With this article, we would like to start a very current topic of the transformation of insolvency, which occurred after 1 January 2021 in connection with the amendment to the Business Corporations Act. The article deals with the topic of direct liability of members of the statutory body of business corporations for the insolvency. The amendment to the Business Corporations Act opened the way to insolvency administrators to the property of (not only) members of the statutory body of business corporations.
To liability and duties of the members of the statutory body before 1 January 2021
Until 1 January 2021, the members of the statutory body were obliged to manage the entrusted property with due managerial care. This obligation also continues after the amendment to the Business Corporations Act. The consequence of a breach of such care was then regulated in Section 68 of the Business Corporations Act, where according to this provision members (or former members) of the statutory body of a business corporation were (or could be) a legally liable for the fulfilment of the obligations of the business corporation.
The preconditions for the occurrence of such liability on the part of the members of the statutory body included the decision of the insolvency court on the insolvency of the business corporation pursuant to Section 136 of the Insolvency Act. The second assumption was the fact that the business corporation was pursuant to Section 3 (4) of the Insolvency Act in imminent insolvency, while the concerned members of the statutory body knew, should have known or could have known about it and did not avert the imminent insolvency contrary to due managerial care. Creditors thus had the opportunity to recover damages from members of the bodies of a business corporation for intentionally unfavourable actions or for neglect due managerial care, which led to the insolvency of the business corporation.
However, the disadvantage of this step from the creditor’s point of view was that the creditor had to bear the burden of proving that the negligence of due managerial care on the part of bodies of business corporation had been neglected. Therefore, the case that any of the creditors have taken this step was rare, mainly because they did not have sufficient information to prove what preceded the company’s insolvency. However, after the opening of the insolvency proceedings, this information was (and is) available to the insolvency administrators. Although the law also gave insolvency administrators standing to bring an action, the issue of standing of insolvency administrators caused considerable disputes among experts.
Moreover, the insolvency administrators themselves had no incentive to recover the damage caused to the creditors, since the proceeds did not go to insolvency estate and thus the insolvency administrator was not entitled to remuneration from such proceeds. With a bit of exaggeration, it could be said that insolvency administrators were motivated to deny creditors’ claims rather than enforce them in court as described above. As matter of fact, insolvency administrators did not file lawsuits pursuant to Section 68 of the Business Corporations Act, as amended until 1 January 2021.
The situation now – i.e. after 1 January 2021
The amendment to the Business Corporations Act introduced the institute of the so-called action to supplement liabilities from the French legal system to the Czech legal system. This means that if the insolvency of a business corporation is resolved by bankruptcy, the insolvency court may impose on members of the statutory body of the business corporation the obligation to provide own funds in the amount determined by the court decision, but not more than the amount of the difference between the summary of debts and the value of property located in the insolvency estate.
The summary of debts of a business corporation then means the summary of debts corresponding to registered and established claims, including claims of secured creditors, claims against the estate and claims equal to them. The performance, the provision of which may be imposed on a member of the statutory body, may be both monetary and non-monetary. If we use the words of the explanatory memorandum to the amendment, then the purpose of the action to supplement liabilities is: “provide creditors of a business corporation with additional funds to satisfy their claims, which they do not receive as a result of breach of duties by members of the statutory body”. The obligation to supplement the insolvency estate is a specific obligation to compensate for the damage (incurred by creditors of a business corporation) consisting in the insufficient amount of assets of a business corporation.
In practice, the amendment to the Business Corporations Act extends the direct liability of members of the bodies of a business corporation.
Compared to the previous regulation, the amendment does not refer to a conflict with the due managerial care, but it refers to a breach of any obligation of the members of the statutory body. In other words, the direct liability of the members of the statutory body will affect a wider range of errors than the legislation valid until 1 January 2021.
Thus, from 1 January 2021, the members of the statutory body must consider that in the event of the company’s bankruptcy, all their procedures and decisions within the insolvency proceedings may be examined in detail. A breach of the duty that a member of a statutory body may contribute to the bankruptcy of a business corporation can be seen, for example, the breach of non-competition obligation, breach of due diligence, i.e. duty of knowledge and diligence, breach of necessary loyalty, non-compliance with internal restrictions regulated in the founding legal proceedings, non-compliance with the method of representation determined by the founding legal action in accordance with Section 164 (2) of the Civil Code or even in complete resignation from the performance of the function etc. At the same time, the members of the statutory body will have to prove that they always acted with the due managerial care and in every decision.
The action may be directed not only to intentional dishonesty but also to negligent conduct. The statutory body of an over-indebted company fighting for the survival of a business corporation, or a statutory body that will not negotiate with creditors on deferral of payments, may find itself on thin ice. In practice, most reasonable creditors tend to negotiate a deferral of debt with a business corporation, or in some rare cases forgive part of their claim, so that the business corporation avoids impending bankruptcy and consequently bankruptcy. To illustrate – the performance rate of the claims of secured creditors in the bankruptcy is on average 24%, and the claims of unsecured creditors only 6%. Moreover, the members of the statutory body cannot get rid of this responsibility by resigning from their position, as the amendment specifies the period for which the court retrospectively examines the violation to a period of 3 years before the initiation of insolvency proceedings.
In addition to the above, an action to supplement liabilities may be directed against several members of the statutory body (i.e. against several persons with capacity to be sued) who contributed to the bankruptcy of a business corporation and also company representatives who have decisive powers, although they are not directly in the statutory body.
In this article, we collectively call all these persons members of the statutory body. These are persons who, although not formally members of the elected body, actually intervene in the management of the business corporation as if they were members of the elected body.
The provision of Section 69 of the Business Corporations Act thus extends the personal scope of Section 66 of the Business Corporations Act to representatives of legal entities (i.e. to a natural person who actually performs the function of a statutory body if another legal entity is a member of the statutory body of a legal entity), former members of the statutory body (sanctions for breach of duty committed at the time they performed the function), persons in a similar position (liquidators, guardians) and so-called factual and shadow leaders. The factual leader is a person who actually acts as a member of the statutory body, regardless of his relationship with the business corporation and the reasons why he does so (e.g. a former member of the statutory body). A shadow leader is then understood to be a person who actually decides on matters falling within the competence of the statutory body, although he is not a member of it, and whose instructions the members of the statutory body actually follow (e.g. the majority shareholder). The relationship of these persons to the business corporation does not result from their membership in the elected bodies of the corporation, but from a certain relationship with the business corporation or from certain situations that allow them to interfere in the company’s activities.
On the other hand, senior employees are not included in the list of persons responsible for contributing to the bankruptcy of a business corporation, even if they have been entrusted with business management or part of it, since they are always at least subordinate to the statutory body of the business corporation. For the same reason, the head of the branch is not included here either. Although Theodore Roosevelt stated that: “[t]he best executive is one who has sense enough to pick good people to do what he wants done, and self-restraint enough to keep from meddling with them while they do it”, thus, this confidence on the part of the members of the statutory body needs to be moderated in the sense of the above by recalling the fact that the members of the statutory body are responsible for selecting managers, creating the necessary conditions for their work and carrying out its proper control. In this case, the saying “trust, but verify” applies. Direct liability also does not apply to members of supervisory boards and proxies.
In cases where it is found that for the bankruptcy of a business corporation is responsible a larger number of persons, then the court in accordance with Section 2915 et seq. of the Civil Code obliges the defendants to supplement the liabilities jointly and severally. If the degree and seriousness of the breach of obligations of the defendants, which contributed to the inadequacy of the property, differs from one defendant to another, the court will impose obligation in a different amount on each of the defendants, which will be reflected in the extent of solidarity.
The amount up to which the member of the statutory body will be obliged to pay will be at the discretion of the court, which will take into account in particular the extent to which the breach of duty has contributed to the insufficient insolvency estate. The law thus leaves the court a discretion with regard to the circumstances of the case and does not specify how this difference should be determined, at what moment or on what basis the court should base its determination. It will therefore not be possible to decide on this obligation of a member of the statutory body until at the very end of the insolvency proceedings, when the final state of satisfaction of creditors will be known. The court will be able to impose this sanction only if the debtor’s bankruptcy is resolved by bankruptcy. In the case of a reorganization permit, the obligation to replenish liabilities cannot be imposed on the members of the statutory body. The question is whether the threat of imposing this sanction will motivate the debtors to resolve the impending or already existing bankruptcy earlier, while there is still a chance for a remedial solution to the bankruptcy.
As regards standing to bring an action to supplement liabilities, insolvency administrators have standing to bring an action. They may bring the action described above against the misconduct of members of the statutory body in the administration of the assets of a business corporation. The funds thus recovered become part of the debtor’s insolvency estate, which are distributed among the insolvency creditors in accordance with the rules of the Insolvency Act and on the amount of which the remuneration of the insolvency administrator also depends. This has the desired motivation for insolvency administrators to use the institute of an action to supplement liabilities, because in the event of success in the case, there is a “WIN WIN” solution to the situation for both creditors and insolvency administrators.
Reorganization as a possible protection of the company’s statutory bodies
The members of the statutory body of each company should have a clear financial plan that reveals problems even before they occur. In the event that the members of the statutory body reveal the impending bankruptcy of the company, then they should immediately start negotiations with creditors. In connection with this, it is also possible to recommend an attempt to reorganize the company during the negotiations themselves. In the event of bankruptcy, the business establishment of a business corporation in bankruptcy is always terminated (and thus the liquidation value of the establishment is reduced). This has a negative financial impact on the value of the insolvency estate of the company in bankruptcy, and thus in direct proportion to the satisfaction of creditors as a whole. As creditors’ satisfaction decreases, the motivation of creditors (and insolvency administrators) to satisfy their claims against members of the statutory body of a business corporation increases. However, in the event of a reorganization, this path will not be possible through the action to supplement liabilities, as the reorganization preserves the company’s operations.
Reorganization is thus a possible procedural variant of the company’s restructuring. The reorganization of the company must have the support of creditors, expressed by their vote at the creditors’ meeting, from the beginning and during the reorganization. At the same time, the so-called test of legality of reorganization must be met, where the condition for its implementation is the approval of the reorganization plan by the court.
The reward for the members of the statutory body for their efforts and cooperation in the preparation and implementation of the reorganization of the business corporation, as a more advantageous solution for creditors in bankruptcy, is the impossibility of imposing a “penalty” on them in the form of an action to supplement liabilities.
As far as the application of the amendment is concerned, the existing legal regulation will be applied in insolvency proceedings initiated by the end of 2020. The new legislation will be applied in insolvency proceedings initiated from 1 January 2021.
The memento that members of the statutory body of business corporations should always keep in mind is the word “control” and its constant implementation and adherence to all set internal compliance programs.
It can thus be recommended to take significant steps or decisions in consultation with the relevant consultants (whether economic, legal or otherwise) well in advance.
Mgr. Nikol Čišecká, junior lawyer – firstname.lastname@example.org
Mgr. Martin Heinzel, attorney-at-law – email@example.com
Mgr. Jakub Málek, partner – firstname.lastname@example.org
30. 03. 2021
 Štenglová, I., Havel, B., Cileček, F., Kuhn, P., Šuk, P.: Zákon o obchodních korporacích. Komentář. 2. vydání. Praha: C. H. Beck, 2017, 194 – 197 p.
 SIGMUND, Mgr. Adam. Reorganizace firem v České republice – probouzení Šípkové Růženky. Bulletin advokacie. Praha: Česká advokátní komora v Praze, 2020, 2020(10), 43 – 47. ISSN 1210-6348.
 Štenglová, I., Havel, B., Cileček, F., Kuhn, P., Šuk, P. Zákon o obchodních korporacích. Komentář. 3. vydání. Praha: C. H. Beck, 2020, s. 232 – 237.
 Štenglová, I., Havel, B., Cileček, F., Kuhn, P., Šuk, P. Zákon o obchodních korporacích. Komentář. 3. vydání. Praha: C. H. Beck, 2020, s. 209 – 212.