Holding transaction nightmare finally over?

Tomas Nielsen, CFO World

Have you transferred a car worth CZK 30,000 to a limited liability company you are a member of? Or bought some property from the company for a similar price? If – for the purpose of this transaction –the value was not determined by a court-appointed expert, you (with the knowledge of law only several months ago) have performed an illegal act and the transaction is void.

This follows from Section 196a(3) of the Czech Commercial Code saying that if the company transfers its property in an amount equal to at least one-tenth of the company's registered capital, the value of such property must  be determined by a court-appointed expert. Both the commentaries on the law and the case law long concurred that transactions of this kind performed without an expert's opinion were (from their very beginning) absolutely null; and remained void even if the expert was subsequently called for or if the price applied was found to correspond with the price that would be recommended by the expert or even if it was more beneficial to the company. This - according to the Czech Supreme Court - is over.

This February, the Grand Panel of the Czech Supreme Court's Civil and Commercial Division came to a revolutionary conclusion that transactions between any person defined in Section 196a and a company performed without an expert's opinion but subsequently found to be beneficial to the company are not void. This is indeed a genuine revolution in corporate law; not illogical though. Quite reasonably, the Czech Supreme Court has stated that if the purpose of the law is to protect the company's minority shareholders or creditors and this purpose is fulfilled within the transaction, there is no reason to penalise such transfers by making them void (all the less if the transaction is beneficial to the company, that is, if it factually strengthens the position of creditors and minority shareholders). Quite interestingly, the Czech Commercial Code itself needed not to be amended for this revolutionary change to take place; the Czech Supreme Court has simply changed its previous view - it is its inalienable right (and a duty when it finds its previous view is unable to be upheld anymore).

In the past we have seen Section 196a(3) being breached quite widely. There are many reasons for this, ranging from its wide scope (involving, for instance, also the company founders even if these are not company shareholders or members any more) to its rather unfortunate position in the text of the Czech Commercial Code itself (being included in the part regulating the prohibition of competitive conduct in joint stock companies). At the same time, it was often not quite easy to remedy the situation. Especially in cases where the property acquired in this way was further transferred by the company or became a part of the company's business. In spite of the said Czech Supreme Court's decision one needs to be aware of one thing: where the transaction is performed by two companies the provision of 196a of the Czech Commercial Code is likely to apply to both of them. In such cases, one needs to keep in mind that a transaction beneficial to one company (for instance, because of the purchase price being lower compared to the value of the property acquired) is unfavourable to the other for the same reason (and as such is considered void). Last but not least, the Czech Supreme Court's judgement should in no way be interpreted as that the property price or value needs no more be determined by the court-appointed expert. Nonetheless, where a company acts contrary to the law but not to its detriment, then, from now on, the situation is much easier to get remedied.

(Published in CFO World magazine)