Upcoming changes in the Commercial Code
Upcoming changes in the Commercial Code
With the anticipated effectiveness from 1 October 2017, several significant changes should be introduced in the Commercial Code (Act No. 513/1991 Coll., the Commercial Code as amended) and other related legislation.
An upcoming amendment of the Commercial Code (“Amendment”) will be focused mainly on the following:
- (a) Extension of liability of statutory representatives and shareholders of companies;
- (b) The fight against forged mergers of companies; and
- (c) Introduction of rules concerning the creation and distribution of company's capital funds.
Extension of the liability of statutory representatives, liquidators and shareholders
The proposed changes substantially expand the liability of statutory representatives, members of statutory bodies, liquidators or other statutory representatives (“Representative”) of the companies, mainly:
- (i) In the event of a failure to timely file a petition for a bankruptcy:
- upon the court resolution, the company's Representative may be discharged from its office of a member of the body of a company or cooperative society (on the basis of proposal of public authority or other creditor respectively) and may be disqualified from holding such office for a 5 year period. The proposal is not filed timely if a company that could be a company in crisis was dissolved without a legal successor or if the execution or insolvency proceeding against this company was terminated due to a lack of property without the creditor's satisfaction;
- if the court decides to discharge the Representative from its office, the Representative is obliged to satisfy in the full extent the claims of the claimant and intervents which have not been satisfied at the date of the court resolution.
- (ii) In the event of a failure to cooperate in connection with assets and liabilities of the company / cooperation during bankruptcy, execution on the assets of the company or cooperative society or in the course of administration of taxes:
- the Representative may be discharged by the court resolution from its office of a member of the body of a company or a cooperation (for example, on the proposal of the person who can request such cooperation or the parties involved in these proceedings), and may be disqualified from holding of such office for a period of 5 years;
- if the court decides to discharge the Representative from its office based on such reasons, the Representative’s obligation to satisfy in the full extent the claimant's claims and the claims of the intervents which have not been satisfied at the date of the court resolution shall apply accordingly.
The burden of proof in these proceedings is borne by the Representative (the person who is subject to the discharge proceeding) who is required to prove that the requirements for his / her discharging has not occurred, or that he / she has proceeded with due care.
- (iii) In the event of termination of function of the Representative, if (a) there are no new Representatives appointed; or (b) the newly appointed Representatives are absent or do not provide the necessary co-operation:
- the former Representative must provide the cooperation requested by court, tax administrator, bankruptcy trustee, or executor (until such time as such cooperation may be fairly demanded from the former Representative).
The Amendment further introduces some additional requirements for intra-group business transactions by establishment of a statutory liability of the controlling person (i.e. a person directly or indirectly holding a controlling ownership interest with the most voting rights attached to it) in connection with the liabilities of the company in crisis, especially if the controlled company (a) has assumed liabilities for the benefit of the controlling person, (b) has acceded to its commitment or has provided for it a different security, or (c) has entered into a contract in its favor which resulted in impairment of the claim of the controlled entity's creditor. Such liability arises to the extent that the recoverability of the claim has been deteriorated.
Restrictions on mergers (mergers or split) of companies
With regard to mergers of companies, the Amendment introduces several new obligations and constraints, in particular:
- Prohibition of a merger, if, at the effective date of the merger:
- (a) the amount of successor's company own equity is negative,
- (b) the merging companies are in liquidation, or bankruptcy is effective against them, or
- (c) the court proceeding on dissolution of the merging companies has been initiated;
- The obligation to prepare an audit report certifying that the value of the successor's equity will not be negative at the effective date of the merger;
- For mandatorily non-audited companies, the obligation of the dissolving companies to draw up an auditor's report certifying that the receivables and liabilities of the dissolving company correspond to the economic reality on the day preceding the effective date of the merger; this obligation should be also met by dissolving Slovak companies in cross-border mergers;
- Obligation to file a petition for registration of the merger in the commercial register not later than 30 days as of the date of approval of the merger agreement or demerger project; otherwise it is assumed that the participating companies withdrew from the merger agreement / demerger project;
- The obligation of the Slovak company participating in the cross-border merger to submit a draft contract to the tax administrator not later than 60 days before voting on its approval.
The Amendment also introduces a ban on the transfer of a business share in a limited liability company which:
- (a) has not registered its bodies with the respective commercial register,
- (b) has not complied with the obligation to keep the financial statements in the collection of deeds pursuant to the Commercial Code,
- (c) in respect of which the proceeding for its dissolution has been initiate, is dissolved or the effects of bankruptcy is effective against it.
The Amendment finally introduces the concept of a capital fund of a company, which consists of:
- (a) share premium;
- (b) the amount of the allowance accrued by the shareholders for an advantage in distribution of profits;
- (c) the sum of other shareholders' contributions not related to the advantage at distribution of profits;
- (d) the amount of increase of equity of the successor company (in case of a merger), provided that it is not a registered capital and reserve fund.
The Commercial Code in the proposed wording expressly provides for the possibility not only to create but also to use capital funds under the following conditions:
- the contribution to the capital fund under letter (c) above may be the asset that may be the subject of a contribution; in the case of a non-monetary contribution, the value of such contribution must be determined by the expert's appraisals;
- the capital fund referred to in letter (c) above may be used to divide between shareholders until 60 days of the announcement of the amount of distribution of other own funds;
- the capital fund under (c) above may not, among other legitimate reasons, be distributed among the shareholders if the company is in crisis, or, as a result of such distribution would fall into crisis;
- within two years the capital fund under letters (a), (b) and (d) above may be used only to cover the company's losses.
This alert does not contain an exhaustive overview of all proposed changes. Its aim is to provide an approximate summary of the nature and extent of legislative changes that can be expected in the nearest future.
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