CHANGES IN PROFIT DISTRIBUTION IN BUSINESS CORPORATIONS UNDER CZECH LAW

  • Profit distribution in the light of the current case law of the Supreme Court of the Czech Republic

On 27th March 2019 the Czech Supreme Court issued an innovative decision concerning the distribution of profit in a joint stock company (case No. 27 Cdo 3885/2017).
In this decision, the Supreme Court has made it clear without any doubt that pursuant to the Czech Business Corporations Act (Act. No. 90/2012 Coll.), effective as of 1.1.2014, the corporation´s financial statements prepared for the previous accounting period, may serve as a basis for decision on profit distribution until the end of the consequent accounting term.

By this ruling, the Supreme Court reversed the existing case law based on the interpretation of the Czech Commercial Code (Act. No. 513/1991 Coll.), valid until 31.12.2013, implying the rule that after the elapse of the statutory period for the convocation of the mandatory annual General Meeting (i.e. 6 months from the end of the accounting term), the respective financial statements can not longer serve as a basis for profit distribution.

The case law applied so far considered the above mentioned 6 months statutory period counting from the last day of the accounting term, not only as the deadline by which the annual General Meeting must approve the results of the previous financial year, but also as the deadline in which the financial statements may be considered as a realistic picture of the economic standing of the company based on which the shareholders can make a qualified decision on the profit distribution.

In its ruling, the Supreme Court concluded that the Business Corporations Act, unlike the Commercial Code, explicitly regulates so-called insolvency test (Sec. 40 (1) BCA), which should be sufficient to achieve the pursued goal, i.e. to prevent companies from pay-out of the profit to the detriment of the company’s creditors. Moreover, a joint stock company under the regime of the Business Corporations Act may avoid the previously applied rule of “time limited applicability” of the annual financial statements by issuing shares, which have fixed interest in profit share. By law, such shareholders will be entitled to the fixed interest in the profit share (provided company generates profit) on the first day of the following accounting term and regardless of the tact whether or when the General Meeting will decide on the actual profit distribution.

  • Forthcoming novelization of the Czech Business Corporations Act

A relatively large novelization of the Business Corporations Act is currently being discussed in the Czech Parliament (Parliamentary Press No. 207), and it will, inter alia, also affect the provisions governing profit distribution (Sec. 34 et seq. BCA).

The proposed legislation maintains the existing principle that the distribution of profit (and newly also any share in other own resources) may be determined only on the basis of the ordinary or extraordinary financial statements approved by the supreme body of the business corporation. However, it also explicitly adds a new rule that on the basis of such financial statements it will be possible for the corporation to reach decision about distribution of the profit (and also other own resources) until the end of the consecutive accounting term.

In compliance with the abovementioned case law of the Supreme Court, the forthcoming legislation confirms that ordinary or the extraordinary financial statements may serve as a basis for the distribution of profits and other own resources throughout the whole accounting term. It is reasoned that the ordinary and extraordinary financial statements must present a true and fair view of the company’s accounting as of the balance sheet date; any significant events which may occur between the balance sheet date and the date of the preparation of the financial statements are then described in the annotation to the financial statements. However, any events that may occur later will no longer be reflected in the financial statements. This implies that neither ordinary, nor extraordinary financial statements can provide realistic picture of the company’s accounts as of the date of the profit distribution and it is absolutely irrelevant, whether the profit is distributed before or after the six months statutory balance sheet date period.

The expected effectiveness of the new law is set as of 1 January 2021.

By Michaela Fuchsová & Magda Stárková