The amendment of the Business Corporations Act has brought a significant change with effect as of 1 January 2021 in the responsibility of statutory body members in case of bankruptcy of a business corporation, which we will present in greater detail in this article.

Before 1 January 2021

Liability of members of the statutory body

Prior to the effect of the amendment, the Business Corporations Act treated a sanction in the form of statutory liability for members (or former members) of statutory bodies of business corporations for failure to act with due managerial care and to take all necessary and reasonably foreseeable measures to avoid bankruptcy (although they knew or should have known that the corporation was in danger of bankruptcy) in article 68.

The premise for guarantor’s liability of the statutory body for fulfilling the obligations of a business corporation to incur was a final decision on bankruptcy.

The liability itself did not arise until the court's decision on the action for determination under article 68 became final, in which the court decided that a member (or a former member) of the statutory body of a business corporation was liable for fulfilling specific (particular) obligations of the business corporation. The creditors and the insolvency administrator have been given the standing to bring an action under article 68.

In practice, though, this stipulation was only rarely used. Insolvency administrators were not motivated to file a lawsuit under article 68, because a transaction from the guarantor is not part of the assets. Remuneration of the insolvency administrator is calculated from the assets, however. Filing a lawsuit thus meant a further cost for insolvency administrators, not gain, and insolvency administrators therefore usually did not file lawsuits under article 68.

The obligation to surrender the benefit acquired from performing office

Further obligations of members of the body (in this case all bodies, not only the statutory body) of a business corporation during bankruptcy were resolved by the stipulation of article 62 of the Business Corporations Act. It regulated the obligation to surrender the benefit acquired in relation to performing the office into the assets of the bankrupt business corporation, for the period of two years before the decision on bankruptcy became final, if they knew or should have known about impending bankruptcy of the business corporation, and failed to take all necessary and reasonably foreseeable steps to avert it, contrary to the exercise of due care.

Before 1 January 2021, the beginning of the two-year period, for which he was supposed to surrender his benefits, was connected to a final decision of the insolvency court on bankruptcy. In practice, this allowed the members of the body concerned to delay the legal validity of the insolvency decision by various means, thereby effectively shortening the period, for which they would have to return any benefits they may have received (they generally no longer receive any benefits after the insolvency proceedings have been opened).

After 1 January 2021

The amendment to the Business Corporations Act replaced the above-mentioned provisions with a new one (article 66) and thus merged the previously fragmented proceedings (under articles 62 and 68) into one. Following the example of French law, the amendment newly regulates the so-called action to supplement liabilities, which has replaced the previous liability under article 68, while also transferring and partly modifying the treatment of the obligation of a member of a statutory body to surrender the benefit from performing his office.

A prerequisite for these special obligations relating to bankruptcy of a business corporation to be imposed is:

• a decision on how to resolve the bankruptcy of a business corporation;
• demonstrable contribution of a member of the statutory body to the bankruptcy of the corporation by breach of his/ her duties; and
• the filing of an action by the insolvency administrator, who is the only one entitled to file an action under article 68 (proceedings are initiated only on motion).

The insolvency administrator is obliged to also file a lawsuit under article 68 in cases, where the creditor’s committee decides about this. If there are no funds in the estate to cover the costs of filing the petition and conducting the proceedings, the insolvency administrator may make the filing of the petition or the continuation of the proceedings conditional on the creditors making a reasonable advance to cover those costs. If the insolvency administrator succeeds in the proceeding, the creditors who provided the advance may claim the advance as a claim against the estate.

It is worth noting that a breach of the duties of a member of the statutory body is not only a breach of the duty of due managerial care, but any of his duties (e.g. the duty of loyalty, the duty of non-competition, the duty to act with the necessary knowledge and care, etc.).

Unlike the former provision of article 62, which applied to members of all bodies of a corporation (including the supervisory board), article 66 applies only to members of the statutory body (current and former) and, similarly, to a person in a similar position as a member of the statutory body and to any other person who is in fact in such a position, although not a member of the body, and regardless of his relationship to the corporation.

Action to supplement liabilities

In cases where the insolvency of a business corporation is resolved by bankruptcy, the insolvency court may impose an obligation on the members of the statutory body to provide their own funds to the estate in an amount determined by a court decision, but not more than the difference between the total debts and the value of the assets in the estate. In determining the amount of the transaction, the insolvency court shall take into account in particular the extent to which the breach of the obligation contributed to the insufficient amount of the estate. In deciding whether the sanction is appropriate, the court should also take into account other circumstances, such as the defendant's past performance of his duties as a member of the statutory body (whether he otherwise acted with due case and whether the breach of duty was an exception), his financial circumstances, the seriousness of his misconduct, which subsequently became a contributing cause of the bankruptcy of the corporation, etc.[1]

The obligation to surrender the benefit from performing office

Compared to the previous regulation under article 62 (in the version before 1 January 2021), the beginning of the two-year period, for which a member of the statutory body may be obliged to surrender his benefits, is connected to the beginning of the insolvency proceeding. From this perspective, the special obligation may be more painful for members of the statutory body under the amended version. First, the possibility of deliberately delaying the decision on insolvency (which was previously decisive for the determination of the two-year period) is eliminated and second, the period from the commencement of insolvency proceedings to the decision on insolvency is not included in the aforementioned two years.

In conclusion

The regulation on guarantor’s liability of members of a statutory body of a business corporation in case of its bankruptcy, which was little used in practice, has been replaced by the regulation on the so-called action to supplement liabilities, which seems to be more efficient. Therefore, all statutory board members should be extremely cautious in a situation, where the business corporation may be facing bankruptcy, and take real care in fulfilling their duties.

[1] (ŠUK, Petr. § 66 [Zvláštní povinnosti při úpadku obchodní korporace (Special obligations in case of bankruptcy of a business corporation)]. In: ŠTENGLOVÁ, Ivana, HAVEL, Bohumil, CILEČEK, Filip, KUHN, Petr, ŠUK, Petr. Zákon o obchodních korporacích (Business Corporations Act). 3. vydání (3rd ed.). Praha: C. H. Beck, 2020, s. 224.)