Czech Republic Update – Re-codification and Entrepreneurship
Three new laws re-codifying Czech private law are set to change the country’s current legal order entirely. The current order will be abolished entirely and replaced with new laws. As one of the largest legal overhauls of the Czech Republic’s laws in recent decades, this development is indeed an admirable achievement. The article below describes some of the key changes and difficulties.
Agreement of association – transitional provisions
Under the Act on Corporations, those provisions of the agreement of association of limited liability companies (s.r.o.) and provisions of the bylaws of joint-stock companies (a.s.) (further called “Articles”) that are not in compliance with the mandatory provisions of this statute shall as of 1 January 2014 be abolished or will cease to be binding. Theoretically the entrepreneur will act correctly if they add to the Articles the data required by the new legal regulation and if they delete the conflicting ones. Nevertheless, in practice this is not so easy; if we ignore the fact that mandatory provisions themselves are hard to define, there remains another problem to be solved: within what time limit must the entrepreneurs, under the sanction of the dissolution of the company, undertake these steps? The most reasonable interpretation would be to assume that provisions that are not in compliance with the New Civil Code may be adjusted within three years, whereas provisions not in compliance with the Act on Corporations may be adjusted within six months. Nevertheless, it is not always advisable to rely on the most “reasonable” interpretation and we therefore recommend that the Articles be adjusted within six months.
After the implementation of the above-mentioned revision, the Articles will still be governed by the Commercial Code; i.e. there is a risk that a conflict of interpretation between the new dispositive regulation and the old regulation will arise. The new regulation does provide a solution for entrepreneurs who want to avoid these unpleasant surprises. They may subordinate their Articles entirely to the Act on Corporations by amending them within a period of two years after the Act on Corporations has become effective. The entrepreneurs must enter the changes into the Commercial Register.
Agreements on performance of functions
Agreements on performance of function will also have to be adjusted to the requirements of the Corporations Act, namely with respect to the remuneration of Management and Supervisory board members. If companies fail to do so, they risk making the exercise of these functions by members uncompensated within six months after the effective date.
Control agreements and profit transfer agreements
The effectiveness of control agreements and profit transfer agreements entered into before the date of effectiveness of the Act on Corporations shall expire on the last day of the accounting period binding upon the controlling entity. The report on relations for the year 2013 will therefore still be prepared under the Commercial Code, whereas from 2015 this shall be done in accordance with the new legal regulation. Rights and obligations that have already been created are not affected.
The entrepreneur should be especially careful in situations in which they enter into new agreements pertaining to old agreements, as it is not entirely clear which regulation will govern agreements on the assignment of receivables entered into before 1 January 2014. The same applies in the case of an amendment to an older agreement, a new agreement executed under an existing framework agreement, or an agreement on a future agreement. These agreements can be perceived as new agreements, meaning that they should be governed by the new regulations. Whether legal practice will settle on a reasonable interpretation, i.e. division of such legal relations, shall be answered by the courts. Under such an interpretation, the legal relation under which the assigned receivable arose would be governed by the current regulations (i.e. “old Civil or Commercial Code”), yet the agreement on the assignment of receivables, or the new agreement under the old framework agreement would already be governed by the new regulations.
In matters of invalidity of legal acts (especially agreements), the new regulation meets the needs of legal practice. The New Civil Code makes a great effort to maintain the validity of concluded agreements. In the future, it will be possible to cure some now irreparable defects, such as lack of form.
Power of attorney
The new rules on legal representation also have certain interpretative difficulties. Briefly, it requires the same form for a power of attorney as the conduct for which it is authorized. Since some legal acts require a notarial deed, it is unclear whether it will continue to suffice that a power of attorney only needs verified signatures, or whether the power of attorney itself will have to be granted in the form of a notarial deed. The results of this interpretation lead us to other interpretative complications: will a German, Austrian, or English notarial deed satisfy the requirements of the New Civil Code? In the beginning, it will be safest to grant a general power of attorney, for example, in the form of a notarial deed drawn up by a Czech notary.
Less formality – greater caution
The new legislation significantly retreats from the requirement on written form. Compared to the current legislation, it will be possible for a wide range of agreements that at the present can only be concluded in writing to be concluded orally, by e-mail or even over the phone. This refers to the agreement on the assignment of receivables, debt assumption by accession to debt, remission of debts, agreement of contractual penalties, lease of commercial space, buying an enterprise, etc. Therefore, if the parties agree, for example, by means of a conference call or by e-mail on the essential aspects of the agreement, such as the assignment of a receivable, such conduct may be valid and enforceable. As the impact of this largely informal approach can be unpleasant for entrepreneurs, they should use only such communication procedures from which it can be clearly established that they insisted on the written form of such agreements when needed.
Fulfillment of debt
In brief, to avoid unnecessary misunderstandings of which debts are currently being performed or outstanding, the creditor should keep a detailed list of all reminded debts, including the date of the reminder; otherwise, it should remind its debtor of every single one of the debtor’s debts.
New legislation also contains many presumptions of due fulfillment, which could have adverse consequences for the entrepreneur. For a certificate of repayment of the principal, for example, it is deemed that the interests and other accessories of the obligation were also covered. Where there is repeated performance, it is deemed (by the lease agreement) that the person who submits the acquittance of the performance that is due later also performed what was due formerly. Waiver of the debt occurs when the creditor issues the debtor an acquittance or returns the debenture bond to the debtor. In the future, thought, the creditor is advised to thoroughly consider every such move.
The new legislation also revolutionizes the definition of real estate. Czech law returns to the traditional principle of superficies solo cedit and buildings, as well as other objects built on the property, lose their character as real estate. On the other hand, the new legislation grants the character of real estate to rights in rem applicable to the real estate.