Liability of a Member of the Statutory Body

9. január 2023

Radka Sláviková Geržová

Article published in Conference Proceedings - Weyr ’s Day of Legal Theory 2015, Masarykova univerzita, Brno, Právnická fakulta, ISBN 978-80-210-8001-0

Abstract

Doing business carries a necessary risk which goes hand in hand with the possibility of the incurrence of damage. From that perspective, statutory bodies must deal with various duties imposed on them by law. The actions of the statutory body are in fact the actions of the company and for that reason the role of the statutory body is significant, not only in terms of management of the company but also in terms of binding the company in legal relationships with other legal entities. It must be remembered that the first and foremost purpose of conducting business is to achieve a profit, so it is strictly necessary to find a balance between the liability of a member of the statutory body for his decisions and the degree of business risk that must be reasonably assumed when conducting business.   

KEYWORDS: statutory body, responsibility, professional diligence, bankruptcy, business judgment rule

In our law practice we often encounter questions relating to the liability of statutory bodies, and it is interesting to see that the legal awareness of statutory bodies regarding liability for their actions is on the rise. In fact, it has become quite common that statutory bodies consult their actions with lawyers and/or other advisors, particularly in the case of unusual business transactions. Being aware of the breadth of this issue, we have focused this article on the private-law liability of statutory bodies strictly in limited liability companies and only in general terms. A key notion in liability for damage is professional diligence, which we will also cover. 

The second part of the article deals with the liability of members of statutory bodies for late filing of a bankruptcy application; in the Slovak Republic substantial changes were incorporated in this respect into Act 7/2005 on bankruptcy and restructuring and on amending certain acts, as amended, incorporated as of 1 January 2013 (“Act on Bankruptcy and Restructuring”). The aim of those changes is to raise the standards of ensuring that the share capital of a company is preserved and to introduce the duty of the statutory body to pay the amount equal to the share capital into the bankruptcy estate when the bankruptcy application is filed late or not at all. In this paper, we will be comparing the Slovak regulation on the liability of statutory bodies for late filing of a bankruptcy application with the regulation in the Czech Republic, where effective 1 January 2014 the amendment to Act 90/2012 on business corporations and cooperatives (act on business corporations) (“Corporations Act”) substantially reworked the liability of statutory bodies for the insolvency of a company while also introducing the business judgment rule, which the legislature expects will strengthen the position of the statutory body. 

Liability of a Member of the Statutory Body

From a jurisprudence perspective, we can separate private law liability into objective and subjective, depending on whether culpability is present.  A typical characteristic of private law liability is that only the party whose rights were jeopardized or breached has the right to make a liability claim. Furthermore, unlike other types of liability, in private law liability the restitution function is far more predominant than the penalty or disciplinary function. Sec 261(6)a) of the Commercial Code is of significant importance for the relationship of the statutory body to the company, as it states that the legal relationship between members of the statutory body and the company are subject to Chapter Three of the Commercial Code, and thus the liability of a member of the statutory body for properly discharging his office is subject to a mandatory statute from which no divergence is permitted. Because the legal relationship is of that nature, the system of the liability of the statutory body will be based on objective liability, regardless of culpability. The liability relationship between the statutory body and the company will be subject to specific provisions of the Commercial Code (§ 135a(2) through (5) for a director of a limited liability company, and § 194(5) through (9) of the Commercial Code), as well as the general provisions of the Commercial Code on compensation for damage (§ 373 et seq. of the Commercial Code). 

Legal Framework of the Liability of a Member of the Statutory Body for Damage

The liability of a member of the statutory body for damage requires the fulfillment of the conditions laid down in § 373 et seq. of the Commercial Code, namely (i) incurrence of damage, (ii) breach of legal duties, and (iii) causal connection between incurrence of damage and breach of legal duties. The Commercial Code sets out only an indicative list of the legal duties of members of statutory bodies, a breach of which would lead to the liability of a member of the statutory bodies for damage. We have focused on § 135a(1) of the Commercial Code and § 194(5) of the Commercial Code, which lay down the most general level of the duty of directors of limited liability companies and members of the management board of joint stock companies to conduct their activities with professional diligence and consistent with the interests of the company and all its members (shareholders).

The liability of members of the statutory body for damage toward the company or toward third parties (creditors) is based on the manner in which members of statutory body discharge their office. This manner is expressed in the positive, as a requirement to act with due care, which “comprises of two fundamental (and closely related) elements, namely professional diligence (the required level of competence and vigilance when discharging office), and loyalty to the company and all its shareholders (a part of fiduciary duty).” Professional diligence is not defined in the Commercial Code, but it is essentially a concept that has substantial meaning for business corporations in terms of the professional management of a company and it encompasses the creation of a flow of information through which the members of the statutory body are able to make decisions for the company - the management of another’s assets based on available information and specialized knowledge. This means that based on information they obtain, members of the statutory body will be able to responsibly assess a given situation or “recognize their own inability”.

Professional Diligence 

As mentioned above, one of the most fundamental duties of the statutory bodies is the duty to discharge their duties with professional diligence, which is essentially comprised of three fundamental elements that define the term: (i) discharging office in the interests of all members and of the company, and not giving preference to personal interests, the interests of certain members or of third parties (loyalty principle), (ii) obtaining all available information about a matter before making a decision, (iii) holding in strict confidence all confidential information and facts which, if disclosed, could harm the company or jeopardize the interests of the company or its members. The aforementioned is not an exhaustive overview of all the duties of the statutory body in the discharge of their duties, considering the fact that not even the Commercial Code contains a comprehensive list. In our opinion, the situations not directly specified in the Commercial Code are anticipated as can be seen in the elements of professional diligence; these can only be assessed on the basis of the specific circumstances of any particular case. Although there are numerous opinions that the liability of the statutory body arises simply by the existence of the duty to act in compliance with law or the legal obligation laid down in the Commercial Code, from a practical standpoint our opinion leans more toward that of Viktor Knapp. It is his opinion that liability is the threat of a penalty, while the penalty itself is only the consequence of that liability. And it is from this perspective that we consider the term professional diligence as not only a paradigm of the fundamental rule of conduct for statutory bodies in their management of a company, but from the law practice perspective it is also the most frequent way manner of absolution from liability for damage.  It is important to realize that in terms of objective liability (in the absence of culpability), the statutory body must demonstrate, i.e. must prove in a dispute over compensation for damages that they acted with professional diligence and in good faith that they were acting in the interest of the company.  Aside from the fact that in our opinion the term professional diligence, as mentioned above, is built on the principle of loyalty, confidentiality and obtaining available information and non-competition, it is also a way for statutory bodies to absolve themselves of liability for damage. 

In Slovak and Czech case law, characteristic of the term professional diligence (péče řádného hospodáře) is that the essence of discharging the office of statutory body consists in the management of another’s assets, and therefore this office requires experience and/or knowledge (unless specific experience is required by law for the office of statutory body) of at least the minimum required for the member of the statutory body to recognize the need for expert assistance. Slovak case law construes professional diligence similar to jurisprudence in the sense that professional diligence or due care must be assessed objectively within the meaning of the general diligence required for the given type of action/conduct. The professional expertise of a member of the statutory body must be understood to mean general knowledge and experience in discharging office, taking account of the scope of business.  We believe that currently there is an abundance of judicial decisions based on which we can see how the term professional diligence is assessed and which breaches of duties can be deemed examples of conduct by the statutory body lacking in professional diligence. It is appropriate that this term is not defined in detail in regulations, but rather the definition is left to the courts. A frequent example of a statutory body’s breach of professional diligence is withdrawal of money without due cause for the benefit of a linked party or the sale of shares below market price. 

One more essential fact must be emphasized in respect of absolving the statutory body. According to § 135a(3) and § 194(7) of the Commercial Code, members of the statutory body are not liable for damage incurred by the company through actions they carried out in accordance with a resolution of the general meeting. This is more or less logical, as the general meeting is the supreme body of the company having the most substantial influence over the decision-making of the statutory body. It is therefore appropriate for members of the statutory body to scrutinize unusual transactions for their own protection. However, for the sake of entirety we must add that the consent of the general meeting to a transaction is irrelevant if the resolution of the general meeting is in conflict with law, the articles of association or the statutes.  In our law practice we encountered a case where the general meeting resolved that the company would guarantee the loan of a member of the management board, but the same was not approved by the supervisory board.  Because the consent of the supervisory board is required for this type of legal act, the members of the statutory body are not absolved of liability for damage, even though they were carrying out the resolution of the general meeting. In respect of the liability of a member of the statutory body and the supervisory board, it should be noted that if a company has established a supervisory board, members of the statutory body are not absolved of liability if their actions were approved by the supervisory board. However, the court would have to deal with the possibility of the co-liability of members of the supervisory board. 

Professional Diligence and Business Judgment Rule in the new Corporations Act

In the Czech Republic, the term professional diligence (‘péče řádného hospodáře’) underwent a historic evolution far more substantial than it did in Slovakia.  In the past there were extensive debates over the quality of this term, and these debates were renewed during the drafting of the new Corporations Act. The original debate dealt with determining which term carried more power, or which term imposed greater obligations; here we specifically are presenting due care or professional diligence. J. Dědič is of the opinion that these are two different terms. He states that the professional diligence requirement is a “less strict formulation of the fulfillment of duties with due care. The difference is that the duty of professional diligence does not take into account the knowledge, qualifications and experience of the specific person, while the requirement of due care does”. On the other hand, there have been opinions in the past that there is no practical point in differentiating between due care and professional diligence. We refer to the opinion of I. Štenglová, who pointed out that even if a member of the statutory body is not an expert in the relevant field, he must consult with such experts and has thus de facto fulfilled the requirement of due care.  In the introduction we mentioned that this article would not be differentiating between professional diligence and due care, and we have referred to the opinion of I. Štenglová as a clear example that in terms of practicality, and especially in the practice of law, these terms are identical. According to the judgment of the Czech Supreme Court of 16 August 2006, case no. 8 Tdo 940/2006 (while this was a criminal case, in terms of defining professional diligence it is applicable to the civil liability of the statutory body), professional diligence means “to conduct oneself responsibly and conscientiously in the same manner as one would care for one’s own property, i.e. not to intentionally diminish or otherwise jeopardize it”. We can surmise that in both the Czech Republic and Slovakia, the courts have considered that professional diligence and péče řádného hospodáře both emphasize the due and responsible discharge of the office of member of the statutory body. In the management of another’s property, the care taken must be the same that would be taken in the management of one’s own property. That is the essence of “professional diligence”. Considering the historic nature of péče řádného hospodáře it is no wonder that the new Corporations Act substantially changed the liability of the statutory bodies and laid down a definition of the term. Pursuant to § 51(1) of the Corporations Act, “One who in making a business decision believes in good faith that he is acting on an informed basis and in the legitimate interests of the business corporation is deemed to be acting with care and with the required knowledge; however, that does not apply where such decision was not made with the necessary loyalty.” The recodification of the duty to act with “péče řádného hospodáře” has taken this term as the fundamental standard for discharging the duties of members of the statutory body. The recodification also attempted to define the term. The difference is that the definition includes the duty to act with “necessary loyalty”, which consists of acting in the interests of all the members and of the company, but also the confidentiality duty. Therefore, professional diligence is divided into the duty to act with (i) the necessary skill and care, and (ii) with the needed loyalty.  Both of these terms are connected by good faith, which is linked to assessment of the legal and actual actions of a subject of law. It is presumed that anyone who acts does so in good faith. The business judgment rule is based on the basic concept that while it is necessary for the proper operation of a company for the members of the statutory body to be liable for a breach of their duties, it is not possible for them to bear the risk of failure in business. Logically, doing business carries the risk of failure and therefore it is essential that the liability of members of the statutory bodies be excluded in cases where they act duly, responsibly, conscientiously and on an informed basis, in good faith and with reasonable conviction that their actions and decisions are in the best interest of the company. The business judgment rule is derived from Delaware corporate law and is based on the concept of a ‘triad’ test of the professional diligence of the statutory bodies: (i) it can be reasonably presumed that the statutory body is acting on an informed basis from available information, (ii) acting in good faith, and (iii) the interests of the company are rationally justified. This three-step test of the business judgment rule sets out the conditions for assessing the liability of a member of the statutory body for his actions and for any damage incurred, and a positive answer to all three of the steps constitutes absolution. The concept is based on the fact that the court does not examine the factual circumstances of the given transaction because it is not a businessman and is unable to assess the facts ex post. 

The business judgment rule is not explicitly entrenched in the Slovak Commercial Code, but we believe that the courts would consider it in a relevant dispute, because in our opinion it is a generally known concept already entrenched in European case law and recognized by jurisprudence.

Liability of a Member of the Statutory Body for Timely Filing of Bankruptcy Application in the Slovak Republic

Act 348/2011 (“Amendment”) incorporated some important changes into the Act on Bankruptcy and Restructuring concerning the duties of members of statutory bodies in respect of declaring bankruptcy; these came into force on 1 January 2013.  It is the duty of the statutory body to file an application for bankruptcy on behalf of the company within 30 days of when they learned or, in exercising professional diligence could have learned of the company’s over-indebtedness. 

Two important premises arise from the foregoing: A member of the statutory body must file an application for bankruptcy when the company is over-indebted and not when it is insolvent.  Therefore, a company or debtor is bankrupt if it is insolvent or over-indebted.  Over-indebted applies to a person who is required to keep accounting books, has more than one creditor and the value of his obligations exceeds his assets. For the sake of entirety in the definition of over-indebtedness we must add that the value of a company’s obligations and assets is determined on the basis of the accounting books or on the value determined by expert valuation, which prevails over the accounting books, and also taken into account are the expectable results of continuing management of assets or expectable results of continuing operation of the enterprise, if having regard for all circumstances it is reasonable to presume that continued management of the assets or operation of the enterprise is possible. 

It is the duty of the member of the statutory body to file an application for bankruptcy on behalf of the company within 30 days of when the member of the statutory body learned, or in exercising professional diligence could have learned of the company’s over-indebtedness. Once again professional diligence comes to the forefront, encompassing not only the duty of the member of the statutory body to act with diligence, conscientiously and duly, but especially in bankruptcy law the absolution function of professional diligence comes to the forefront. 

For that reason the legal definition of professional diligence in the Act on Bankruptcy and Restructuring is well founded, where § 7 sets out that acting with professional diligence means acting with the care commensurate with the office or position of the acting person after taking into account all available information which concerns or which could affect that person’s actions. This is so that the settlement of the debtor’s estate in bankruptcy or restructuring is conducted with the utmost proficiency and at the same time ensuring that the creditors are satisfied to the greatest extent possible. The definition of professional diligence applies not only to the member of the statutory body, but also to other persons involved in the bankruptcy (e.g. trustee, creditor). 

In respect of a debtor’s over-indebtedness it is important to note that effective 1 January 2012, § 2 of Slovak Justice Ministry Decree 643/2005 laying down details on the method of determining insolvency and over-indebtedness, which had laid down what was deemed the assets of a company and that the value of assets was based on its accounting books value when determining over-indebtedness, was repealed.  At this time, therefore, the value of a company’s obligations and assets is determined on the basis of the accounting books or on the value determined by expert valuation, which prevails over the accounting books, and also taken into account are the expectable results of continuing management of assets or expectable results of continuing operation of the enterprise, if having regard for all circumstances it is reasonable to presume that continued management of the assets or operation of the enterprise is possible. We should add, for the sake of entirety, that the total of liabilities does not include subordinated liabilities or any liabilities which would be satisfied in bankruptcy as subordinated liabilities. Therefore, a prudent member of the statutory body must always go by the value of assets recorded in the accounting books. Nevertheless, it is always wise to obtain an expert valuation which takes into account possible future revenues. In our law practice, we have heard of cases where even though a company appears over-indebted based on the value of its assets on the books, an expert valuation takes into account future revenues and existing contracts and awarded tenders and may just prove otherwise. That is why it is important for members of statutory bodies, in the interest of their own protection, to always act with professional diligence in monitoring financial indicators and if there are any doubts they should obtain an expert valuation. The expected results included in the assets determined by expert valuation will likely be higher than the value of the assets on the books.  Moreover, if there is ambiguity in the value of assets based on the books, an expert valuation will provide a truer picture of the condition of a company’s assets. 

As mentioned above, although the Amendment relaxed things in the sense that a debtor (and therefore a member of the statutory body) is not obligated to file a bankruptcy application in the event of insolvency, it also substantially changed the way members of the statutory body are held liable for a breach of their duty to file a bankruptcy application in the event of over-indebtedness. According to the new wording of § 11(4) of the Act on Bankruptcy and Restructuring, a person who was a statutory body, liquidator or legal representative of the debtor during the four years prior to commencement of bankruptcy proceedings and who breached the duty to timely file a bankruptcy application shall be obligated to pay into the bankruptcy estate the amount of the debtor’s share capital recorded in the relevant registry at the time when the duty to timely file the bankruptcy application was breached, up to an amount equal to twice the minimum amount of the share capital of a business corporation as laid down by law. If the trustee has reason to believe that a member of the statutory body breached the duty to timely file a bankruptcy application, the trustee shall invite the member of the statutory body to prove, within a certain period of time, whether he duly and timely fulfilled that duty.   If the member of the statutory body does not prove within that time period that he did not breach the duty to file the bankruptcy application, or that he acted with professional diligence or that another reason exists for his absolution from liability, the trustee must file an application with the court seeking the court to order the member of the statutory body to pay into the bankruptcy estate the amount of the debtor’s share capital recorded at the time when the duty to timely file the bankruptcy application was breached, up to an amount equal to twice the minimum amount of the share capital of a business corporation as laid down by the Commercial Code. 

According to the Act on Bankruptcy and Restructuring, a statutory body can be absolved of liability in one of three ways: (i) By proving he filed the bankruptcy application on a timely basis. (ii) By proving that he did not file the bankruptcy application on a timely basis but that he acted with professional diligence, for instance if he proves that he reasonably expected revenues from the continued operation of the company; in this situation it is advisable for members of the statutory body to be astute enough to have obtained an expert valuation if there were any doubts. (iii) A member of a collegiate body proves that due to lack of cooperation from the others with whom he acts jointly he could not fulfill the duty to timely file the bankruptcy application, and immediately upon learning of or when he could have learned of the breach of this duty, he filed a notice in the collection of documents indicating that the debtor was over-indebted.

Another important provision in the Act on Bankruptcy and Restructuring is the transitional provision contained in § 206a(3), according to which if the debtor met the conditions of over-indebtedness pursuant to the Act on Bankruptcy and Restructuring prior to 1 January 2013 and the over-indebtedness continued after 1 January 2013, the persons who held the office of statutory body prior to 1 January 2013 are liable for the obligation to pay to the bankruptcy estate the amount equal to the debtor’s recorded share capital unless they file a bankruptcy application by 31 March 2013 (if the over-indebtedness continues after 1 January 2013). Those persons are liable for the obligation to pay into the bankruptcy estate the amount equal to debtor’s recorded share capital if they fail to file a bankruptcy application by 31 March 2013. What that means is that the members of the statutory body had until 31 March 2013 to avert their liability under the previous regulations by filing a bankruptcy application, because under the old general provisions on liability for damage they would have been held liable. 

Liability of a Member of the Statutory Body in the Czech Republic

For liability of a member of the statutory body for not filing a timely bankruptcy application in the Czech Republic, we will focus on two regulations which are both interconnected and which together form an overall picture of the liability of statutory bodies. In this section, we will use the comparison method and we will concentrate on comparing the liability of members of the statutory bodies in the Slovak Republic and in the Czech Republic. The legislation dealing with this liability is the Corporations Act, which introduced the new concept of liability of members of the statutory bodies at the bankruptcy of a business corporation.  This liability for the company’s obligations does not arise automatically, but only after a final judgment by the court at the application of the trustee or a creditor. The court may decide that the member of the statutory body is liable for performing the company’s obligations if it was decided the company was bankrupt (insolvency and over-indebtedness) and at the same time the member of the statutory body (including a former member) knew or could have known the company was in danger of bankruptcy and contrary to “péče řádného hospodáře”, failed to take all necessary and reasonable steps in order to prevent the bankruptcy. For the sake of entirety we must add that § 68(1) of the Corporations Act is not applied to crisis managers who were demonstrably appointed as members of the statutory body for the purpose of preventing bankruptcy or some other adverse economic situation, and provided that they discharged their office with “péčí řádného hospodáře”. It is important to note that there is no such legislation in Slovakia. The closest we have to this concept (which does not, however, include liability) is the right of third parties (creditors) to use the company’s claims for compensation against its own directors against the members of the statutory bodies if the creditors are unable to satisfy their claims from the company’s assets. However, if bankruptcy is declared over the company’s assets, the creditors’ claims against the directors are enforced by the bankruptcy trustee. However this is a concept that enables creditors, when they are unable to satisfy their claim from the company’s assets (e.g. debtor company suspended payments), to go to the members of the statutory bodies and in order to satisfy their claims against the company, they can enforce all the claims the debtor company has against its statutory body, in its own name and on its own account.  In order for the creditor to be able to enforce the claims for compensation the company has against members of the statutory body, the creditor must have a claim against the company in which the person in question is a member of the statutory body. In judicial proceedings, the creditor will have to prove that the company is entitled to compensation from the members of the statutory body as well as the existence of its claim against the company and the fact that it cannot be satisfied from the company’s assets. In comparison with Czech law, this is a completely different legal concept and creditors face the difficult task of proving all the above-mentioned facts in judicial proceedings.  By contrast, in the Czech Republic liability is given by a court ruling that the company is in bankruptcy (insolvency and over-indebtedness) and the fact that the member of the statutory body (including a former member) knew or could have known that the company was at risk of bankruptcy. In order to be absolved of liability, the member of the statutory body must prove that he acted with “péče řádného hospodáře”, i.e. that he took all necessary and reasonable steps with professional diligence in order to prevent the bankruptcy, while the business judgment rule is also taken into account. 

Another novelty is that in bankruptcy or insolvency proceedings, the court can rule that a member of the statutory body of the bankrupt company, who held that office at the time the bankruptcy ruling was issued or after it was issued, cannot act as member of the statutory body in any other company or cooperative for a period of three years from the effective day of the judgment. The court will rule de jure to disqualify the member of the statutory body from discharging this office in another corporation in the future. The disqualification is due to the fact that the discharge of the office of member of the statutory body, taking into account all the circumstances of the case, led to the bankruptcy of the company. 

Once again, cause for absolution is acting with professional diligence, although in this case according to the law a person is not liable “if he demonstrates that he acted with the care of a reasonable person in a like situation in a like position.” We believe that in this case the legislature meant péčí řádného hospodáře, although this term is not mentioned explicitly even in the explanatory memorandum and perhaps future case law will provide confirmation of his fact. For the sake of entirety, the disqualification (ban) from acting as member of the statutory body also applies to similar positions (such as authorized officer) as well as to member of the supervisory board if such member of the supervisory board is obligated to provide compensation as the result of a breach of the duty to act with the péče řádného hospodáře. The ban may be issued repeatedly, for a period of ten years.  In practice, a problem area is § 66 of the Corporations Act, according to which “When the decision for disqualification comes into effect, the person to whom the decision applies is no longer a member of the statutory body in any business corporation.” In rare cases, the court can decide that the disqualified person may, under the conditions laid down in the judgment, continue to act as member of the statutory body of another corporation provided that it is manifest from the circumstances of the case that there is no cause for expelling the member of the statutory body in that corporation. We believe that this ban on acting as member of the statutory body should not be automatic, but that it should only apply to a company in bankruptcy. This type of un block sanction is impractical and administratively burdensome. We trust that the courts will be reasonable and will assess each case on an individual basis so that this particular provision of the law will not result in a “witch hunt”. For the sake of entirety we mention another novelty, under § 62 of the Corporations Act. According to § 62, “if in insolvency proceedings commenced at the application of a person other than the debtor pursuant to another regulation the court rules that the business corporation is bankrupt, the members of its bodies, if prompted by the bankruptcy trustee, shall pay back all consideration obtained under their statutory body member contract as well as any other consideration obtained from the business corporation for the 2-year period prior to the effective date of the decision on bankruptcy, provided the members knew or should have and could have known that the business corporation was at risk of bankruptcy pursuant to another regulation and, in conflict with the duty of professional diligence they failed to do everything necessary and reasonable to prevent it.”  It does not seem logical that a member of the statutory body should pay back consideration obtained from the company only if bankruptcy is declared at the application of a person other than the debtor, i.e. the creditors. Clearly, if the member of the statutory body acted with professional diligence and filed the bankruptcy application himself, then this obligation would not affect him. It will therefore be interesting to see how members of the statutory body react when bankruptcy is looming and they are supposed to attempt to revitalize the company with the proverbial sword of Damocles hanging over their heads.

The second regulation that deals with the liability of members of the statutory body for the timely filing of a bankruptcy application is Act 182/2006 on bankruptcy and insolvency solutions (“Insolvency Act”). According to the first sentence of § 98(1) of the Insolvency Act, a debtor shall file a bankruptcy application without undue delay upon learning of its bankruptcy or when, exercising due care, should have learned of its insolvency. According to the first sentence of § 98(2), the statutory body shall also be subject to the duty laid down in paragraph 1.  

Two important premises arise from the foregoing: 

Members of the statutory body are obligated to file a bankruptcy application when the company is over-indebted as well as when it is insolvent.  This means a company (debtor) is bankrupt if it is insolvent or over-indebted. Both definitions are similar under both the Act on Bankruptcy and Restructuring and the Insolvency Act, and we will therefore not analyze them in this paper. But what is different is that in the Czech Republic, a member of the statutory body is also obligated to file a bankruptcy application for the company when the company is insolvent. 

A member of the statutory body must file a bankruptcy application without undue delay upon learning of its bankruptcy or when, exercising due care, should have learned of the company’s insolvency. Let’s remember that in Slovakia this duty must be carried out within 30 days of when the member of the statutory body learned or, while exercising professional diligence could have learned of the company’s over-indebtedness. Once again, professional diligence comes to the forefront, even though the act actually stipulates due care. We believe that in order to be absolved of liability, the member of the statutory body would have to demonstrate professional diligence within the meaning of péče řádného hospodáře, so that the term is compatible with the Corporations Act. 

The consequences of breaching the duty to file a bankruptcy application are completely different in the Czech Republic. According to § 99 of the Insolvency Act, “a person who fails to timely file a bankruptcy application shall be liable to the creditors for damage or other harm caused by a breach of that obligation. Damage or other harm means the difference between the amount of the claim registered by the creditor in insolvency proceedings and the amount the creditor is awarded in insolvency proceedings to satisfy the claim”. In terms of sanctions on members of the statutory body, this is standard compensation for damages where the harmful event, causal connection and damage incurred must be demonstrated.  Cause for absolution is given in § 99(3) of the Insolvency Act: “..that breach of the duty to file a bankruptcy application did not affect the amounts intended to satisfy the claims registered by creditors in the bankruptcy proceedings, or that he did not fulfill this duty due to events out of his control which he could not avert, even using the best efforts which may reasonably be required of him.” There are two causes for absolution in the aforementioned provision – that breach of the duty to file a bankruptcy application did not affect satisfaction of the creditor, and that the member of the statutory body did not fulfill the duty because of events out of his control which he could not prevent, even using the best efforts that may reasonably be required of him. Surprisingly, professional diligence is not a cause for absolution, and in this case we do not believe the legislature even intended it. It really is limited to events that occurred out of the control of the statutory body member. However, notwithstanding the above, considering the consistency of the provisions in the Corporations Act, we think the courts will take it into account when deciding on disputes.

After comparing both regulations concerning the liability members of statutory bodies, we believe that our legislation is more consistent and more logical. In the Czech Republic there are too many sanctions for a breach of a statutory body member’s duty to file a bankruptcy application, which are surprisingly inconsistent as far as péče řádného hospodáře is concerned, a phrase which the Insolvency Act does not apply for this case. The Czech regulation is a strict regulation which in our opinion in the near future is certain to disconcert not only statutory bodies, but also trustees and judges.

Conclusion

The legislation concerning the liability of statutory bodies for damage caused in the discharge of their duties is the outcome of the search for answers to the question of how to govern the relationship between members of the statutory bodies and the company so as to preserve an optimal degree of business risk in the management of a company. The liability of a statutory body for damage requires the fulfillment of the conditions laid down in § 373 et seq. of the Commercial Code, namely (i) incurrence of damage, (ii) breach of legal duties, and (iii) causal connection between incurrence of damage and breach of legal duties. The fundamental concept in liability of members of statutory bodies is professional diligence, or péče řádného hospodáře, which is the fundamental rule of conduct for statutory bodies in management of the company and from a law practice perspective, it is the most frequent method of absolution from liability for damage.  It is important to realize that in terms of objective liability, the statutory body must demonstrate, i.e. it must prove in a dispute over compensation that they acted with professional diligence and in good faith that they were acting in the interest of the company.  Effective 1 January 2014 in the Czech Republic the business judgment rule has become part of the péče řádného hospodáře; the business judgment rule is a doctrine where although it is necessary for the proper operation of a company for members of the statutory body to be liable for a breach of their duties, it is not possible for those members to be held liable for the risk of failure in business. Logically, doing business carries the risk of failure and therefore it is essential that the liability of members of the statutory bodies be excluded in cases where they act duly, responsibly, conscientiously and on an informed basis, in good faith and with reasonable conviction that their actions and decisions are in the best interest of the company.

Our article focused on analyzing the liability of members of statutory bodies for failure to duly and timely file an application for the bankruptcy of the company in which they hold that office, as that liability is applicable in Slovakia and in the Czech Republic. We have pointed out some shortcomings in the legislation of both, and in our opinion the Czech regulation on liability of a member of the statutory body is particularly problematic and contains numerous sanctions for a breach of the duty of a statutory body member to file a bankruptcy application, which we analyzed in this paper. Moreover, the Czech legislation is inconsistent in its use of diligence of a professional manager, which the Insolvency Act does not use as a cause for a member of the statutory body to be absolved of liability for damage caused by failure to timely file a bankruptcy application. 

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