New Czech Civil Code (Part II)
The partial relaxation of some existing provisions of the Commercial Code is reflected in the strict and comprehensive regulation of corporate governance of companies and cooperatives. The authors of the new law claim to have followed the general European trend of freeing commercial enterprises from regulation as far as possible, without jeopardising sound governance. BY RADKA JERIE
The government of the Czech Republic has recently presented a new draft Civil Code, which forms the main component of the upcoming recodification of private law. The Chamber of Deputies is expected to complete its consideration of the draft before the end of the year. State institutions and the general and professional public will then have a period of one year to prepare for the changes before the new Civil Code takes effect. If all goes to plan, the new Civil Code should become effective as of 1 January 2013.
Another important element of the recodification is the proposed new Law of Commercial Companies and Cooperatives (law on business corporations). This is intended to replace the Second Part of the current Commercial Code, which currently regulates commercial companies and cooperatives.
The present Commercial Code was adopted in 1991, at the beginning of the transition from a planned economy to a market economy. After forty years of communist rule there was no recent practical experience of the market economy, and the 1991 Commercial Code was a hybrid of rules copied from pre-war Czechoslovakia, international commerce and some neighbouring countries. Many of its provisions soon proved to be outdated, inadequate and inappropriate. In response to this situation and in the context of the rapid development of the economy a number of piecemeal amendments were made, rendering the Code complex, casuistic and difficult to read.
The proposed new Law of Commercial Companies and Cooperatives deals only with the regulation of corporate bodies. It does not cover issues such as regulation of unfair competition or of business contracts. Legislation on these issues will be consolidated and moved to the Civil Code, which will contain a uniform contract law (the current Commercial Code includes specific regulation of contract law, and different conditions apply to the same types of contracts under the Civil Code and the Commercial Code respectively).
The authors of the new law claim to have followed the general European trend of freeing commercial enterprises from regulation as far as possible, without jeopardising sound governance. The goal is a system which does not inhibit entrepreneurship, but still safeguards the interests of those who do not have equivalent influence or information, such as minority shareholders and creditors.
The partial relaxation of some existing provisions of the Commercial Code is reflected in the strict and comprehensive regulation of corporate governance of companies and cooperatives. Compared with the current law, there is much more emphasis on the appointment of board members, the conditions of their employment and the performance of their duties.
The new draft law focuses in particular on issues of remuneration and liability and imposes an obligation on board members managing the company to act with due diligence (loyally, carefully and with due information) in the company's interests. This obligation will be discharged if they can demonstrate that they acted in good faith on the basis of relevant information, in what they perceived to be the company's long term interests.
The court may disqualify managers who failed in their duties or who brought the company to bankruptcy from acting as directors, and directors may be required to provide guarantees against losses in the event of their company becoming insolvent.
About the Author
Dr. Radka Jerie is the senior lawyer at Andreas Neocleous & Co., Prague, Czech Republic.