On 12 May 2021, the Czech Supreme Court issued a ground-breaking resolution under file no. 27 Cdo 3549/2020 which brought a significant change to the existing practice in relation to the determination of a company’s subject of enterprise.
In the Articles of Association, it will not be possible to state only “manufacture, trade and services not specified in Annexes 1 to 3 of the Trade Licensing Act” as the subject of enterprise, as such a definition is not sufficiently specific according to the Supreme Court, and it will be necessary to provide a precise definition of at least one of 81 specific fields of free trade.
According to statistics, this change will affect up to 89% of all limited liability companies and up to 81% of all joint-stock companies and has caused considerable chaos.
This article will take a closer look at this critical resolution and highlight the noteworthy points.
Supreme Court Resolution File No. 27 Cdo 3549/2020
[1] The provision of the Articles of Association which states that a company’s subject of enterprise is manufacture, trade and services not specified in Annexes 1 to 3 of the Trade Licensing Act is not sufficiently specific since it is not apparent what the company’s subject of enterprise is, and the corresponding result cannot be obtained by interpretation. Such a provision is therefore vague in its content (Section 553 of CC) and does not apply (Section 554 of CC). This means it is not possible to register the subject of enterprise in the Commercial Register.
[2] No reasonable person in the position of a shareholder or a member of a commercial company could infer from such a provision that the shareholders/members intend to engage in all of the expressly listed fields in the given Annex, and thus it is deemed that the subject of enterprise is an undefined range of activities.
[3] If the subject of enterprise is defined as manufacture, trade and services not specified in Annexes 1 to 3 in the Articles of Association and, if applicable, entered in the Commercial Register, this entry contravenes Section 25(1b) of the Act on Public Registers, and it must be remedied in accordance with Section 9(1) of the Act on Public Registers.
Rationale
Until now, the definition of a specific subject of enterprise has been left to the discretion of the company’s managing director. Therefore, a significant number of companies only state “manufacture, trade and services not specified in Annexes 1 to 3” as their subject of enterprise in their Articles of Association. The Supreme Court has now described such legal action as vague under Section 553 of Act No. 89/2012 because of its incomprehensibility and indefiniteness. The subject of enterprise thus defined should, therefore, not be entered in the Commercial Register at all.
The Supreme Court has now placed the definition of the subject of enterprise in the competence of the company’s general meeting.
There are currently 81 trades under free trade which encompass an extensive range of activities, and it is not possible to determine with certainty what the company actually does. It will, therefore, be necessary to define the field of activity under free trade and to have this information correctly stated in the Articles of Association as well as the Commercial Register.
The Supreme Court intended this change to make it clear and immediately apparent what a company does. However, the resolution does not apply to the definition of trades in the Trade Register.
What do you need to do?
It will be necessary to comply with the new Supreme Court resolution without undue delay. If your Articles of Association or Memorandum of Association define your subject of enterprise as “manufacture, trade and services not specified in Annexes 1 to 3 of the Trade Licensing Act”, you must change such provisions in accordance with the Supreme Court resolution and specify the exact activities of the company. In particular, this change must be made by companies that have this definition stated as their only subject of enterprise. It is, therefore, appropriate to convene a general meeting and to ensure the change in the Articles of Association or Memorandum of Association and also in the Commercial Register.
Penalties
Why is it necessary to react to this change immediately? The registration court may call on your company to remedy this situation (i.e. to change the subject of its enterprise). If the remedy is not introduced within the set time, the court may, of its own motion, decide to dissolve the company with liquidation. In addition, the court may impose a penalty of up to CZK 100,000.
At the same time, such an act of the governing body may be considered a breach of due care, and such governing body may be held liable for any damages.
How can we help?
For many years, the Corporate Services Department has been helping its clients with timely and appropriate reaction to the dynamic changes constantly occurring in the field of corporate law. We will be happy to handle the entire process for you: from organizing the general meeting to entering the change of the subject of enterprise in the Commercial Register.
Our assistance will save you time and ensure that your company is in compliance with the new Supreme Court resolution.
