The long-expected recodification of Czech private law has now entered the second reading before the Chamber of Deputies, despite the resistance of the opposition MPs. Although the new Civil Code, with other accompanying laws, should not enter into force until 2013, it is reasonable to monitor, and prepare for, the impacts of the ensuing changes, which are likely to affect all the areas of Czech private law, including commercial law. Changes will probably also be introduced with respect to the liability of corporate management which has thus far been regulated under the Commercial Code.

The bill on corporations does not depart from the existing fundamental requirement of reasonable and appropriate care as applied to the performance of the office in a corporate body; instead, the bill expressly provides that the company body constituted pursuant to law should perform its functions with "the necessary degree of loyalty and with the required knowledge and diligence". Indeed, legal practice has arrived at this conclusion by itself over a period of more than ten years.

The requirement of "all reasonable and appropriate care" should remain an objective requirement; thus, account should at all times be taken of the degree of care used in a similar situation by another reasonably careful person. The authors of the draft of the bill on corporations openly employ some elements of the international concept of the business judgment rule, which does not, within the duty of care, require the management to be liable for all the unfavorable economic results of the corporation resulting from the management's decisions. Conversely, the business risk remains with the company, and the directors have not breached their duty of care if they can reasonably assume in good faith that they were acting in a well informed manner and in the company's defendable interest. In addition, the bill would expect members of the company's bodies to take appropriate action should they realize that they were incapable of acting with due care. Thus, the principle remains that the person performing the functions of a company body constituted pursuant to law does not necessarily have to be an expert in each specific area of the company's business, but is instead required to responsibly (an objective criterion) arrange for professional assistance and support in these areas. Performing an office with the knowledge of insufficient capacity (by objective standards) should expressly constitute a refutable assumption of a breach of the duty of reasonable care by negligence.

Under the proposed bill, the burden of proof regarding the existence or nonexistence of a breach of the duty of care should still rest on the company body member concerned who is accused of the breach. Nonetheless, the court could, in justified cases, decide that the member of the company body cannot be reasonably required to bear the burden of proof. Another rule alleviating the requirements placed on managers is that a member of a company body should no longer be liable to the company for a loss or damage resulting from his/her fulfillment of an instruction of the company's supreme body to wrongful act if he/she informs the supreme body that the fulfillment of such an instruction might result in the company's incurring loss or damage.

The draft of the bill departs from the current, relatively broad prohibition of conflicts of interest, under which the prior consent of the general meeting is required for the execution of various contracts between the company and members of its bodies or an expert appraisal must be obtained for the purpose of valuation of the assets to be transferred between the company and the persons controlling it. Instead, a member of the company's body would be obligated to inform the company in the event that the performance of his/her functions might result in a conflict between the company's interests and his/her own interests or the interests of persons that are related to him/her in a certain way, without discharging him/herself from the duty of loyalty towards the company. Apart from the fact that the relevant body of the company could prohibit the execution of such an agreement, the company body member who fails to comply with this notification duty will be liable to the company for any resulting loss or damage. The question is whether and to what extent this liberal approach (which is common abroad) will be successfully applied in the Czech environment, where the ties between owners and members of company bodies are stronger than in other countries, and whether or not it will prove detrimental to the creditors of business companies.

The draft bill should preserve the current legislative provisions stipulating that members of a company's body are primarily liable to the company and cannot be released from their liability in advance by contract. Nevertheless, the bill envisages that any loss caused to the company might be subsequently settled on the basis of an agreement, which will be subject to approval by a two-thirds majority of the company's supreme body. The settlement can have various forms: compensation in full, reduced bonuses, or set-off against other claims. Since the contents of the agreement will be at the full discretion of the company and the members of the company's body, a full discharge from liability is also a conceivable option.

In addition to their liability vis-à-vis the company, members of the company's body could also be held liable to third parties in specific cases that are already described in existing legislation. For example, if the company became insolvent and a member of its body failed to take "all the necessary and reasonably foreseeable" steps to avert the insolvency, the court may decide, at the motion of the liquidator or creditor of the company, that a member of the company's body is liable for the company's obligations. Liability would also exist, directly by the operation of law, on the part of "persons of influence", who would guarantee to the company's creditors for obligations that he or she caused by his/her influence on the company and which the company, as the influenced entity, is unable to honor. This person of influence may be, for example, a member of any of the company's bodies, a shareholder, or the parent company. The decisive criterion would be that this person influenced the corporation's conduct to a "material extent".

Last but not least, there should be changes in the penalties to be imposed for a breach of the duty of care while the law should no longer impose obstacles to the performance of the function of the member of the company body, but the court should decide on them. Under the new legislation, it should be possible for a court (even without the relevant petition) to "expel" a member of the company's body constituted pursuant to law from his/her office if he/she caused the company to become insolvent, or contributed to a reduction in the value of the company's assets and to the harm of the company's creditors, or breached the duty of care repeatedly and to a material extent. The same decision could also be made with respect to other persons who are supposed to be liable for the company's obligations but are unable to comply with this duty. The prohibition of the performance of the office should apply for three years, with an extension for an additional ten-year period in the case of a violation.

The proposed changes to the legislative provisions on the liability of corporate management (including members of elected bodies or other persons capable of influencing the company's operations) should contribute to the liberalization of private law. However, opponents object that the bill projects certain foreign patterns onto Czech national law, which may not properly "take root" in the Czech business environment. Thus, only practice will show (as usual, with the contribution of appellate courts) whether the expectations associated with the recodification are justified. However, this will take a long time.

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