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Supreme Court of the Czech Republic: Resignation of board members of corporations at an inopportune time

Towards the end of 2019, the Czech Supreme Court took position on an issue which has become very topical in the context of the current Covid-19 pandemic. What are the consequences of the resignation of a board member at an inopportunity moment in time?

As we’re penning this article, the Covid-19 pandemic has reached a peak, causing the operations of businesses in the Czech Republic and around the world to ground to a halt. This will doubtlessly have dire consequences for many of them. It seems a good moment to remind readers of a resolution by the Czech Supreme Court of 20 November 2019 which takes position on what the consequences are if the member of a corporate body steps down from his or her office at an inopportune time.

On 17 September 2017 a register court had declined to accommodate the request of the managing director of a company for deletion from the Commercial Register, citing Sec. 59 (5) of the Czech Corporations Act (Act No. 90/2012 Coll.), according to which "the member of the body of a business corporation may step down from his or her office. However, he or she may not do so at a time at which this is inopportune for the corporation". The company in the given case was in distress in that it had been dissolved and liquidated by virtue of a decision by the single shareholder and the role of the liquidator had temporarily been taken on by the managing director who then filed the above-mentioned request for being deleted from the Commercial Register. For this reason, the register court found that the resignation of the managing director had been invalid, on grounds of having been carried out at a highly inopportune moment. The managing director however disagreed with the decision by the register court and filed an appeal. The court of appeals upheld the legal view of the register court and the matter thus escalated to the Supreme Court of the Czech Republic.

The Supreme Court held that Sec. 59 (5) of the Corporations Act does not stipulate the consequences of a breach of the above-described prohibition and thus leaves some discretionary leeway as to whether to apply such legal concepts as the nullity of such resignation or a liability for damages on grounds of a resignation effected at an inopportune time. The Supreme Court also referenced Sec. 574 and Sec. 584 of the Czech Civil Code (Act No. 89/2019 Coll.), according to which a legal transaction is invalid if it runs counter to established good morals, whereas the preferred assumption should be that a transaction is valid, rather than invalid.

In discharging themselves of their official duties, managing directors must act with the due care of a proper businessperson (Sec. 159 of the Civil Code); in the view of the Supreme Court, the spirit and purpose of the cited part of Sec. 59 (5) of the Corporations Act is to apply the due-care principle also to the resignation from office. Consequently, a breach of the prohibition against resigning from one’s office as a member of a corporate body is tantamount to a breach of the duty of due care, and as such may trigger a liability to provide compensation for the damage thus incurred, but the resignation itself will still be valid.

In closing, we should add that as of 1 January 2021, an amendment to the Corporations Act will come into force which abolishes the cited part of Sec. 59 (5) and introduces a separate Sec. 58 to provide rules for the resignation from office. This new Sec. 58 of the Corporations Act no longer includes the said controversial arrangement, and this bears out that the Supreme Court’s legal view is essentially correct according to which the resignation of company officers at an inopportune time must be addressed by invoking the general institution of the due care of a proper businessperson.

Source:
Resolution 27 Cdo 3367/2018 by the Supreme Court of the Czech Republic of 20.11.2019