Responsibility of members of the statutory body
Responsibility of members of the statutory body
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Responsibility of members of the statutory body of a joint-stock company
Becoming a board member of a joint-stock company in the Czech Republic entails many benefits but also obligations. The failure to comply with these responsibilities may potentially result in dire consequences for the board member. This article aims to inform the reader about the most flagrant rules that must be observed by the board members of a joint-stock company founded according to Czech law.
Briefly on the position of board of directors within company
Joint stock company (abbrevation Inc.) is a type of business corporation. The basic structure stipulated by law prescribes three obligatory bodies. These are general assembly as the highest body, board of directors as statutory body and control board as supervisory organ.
Joint-stock company has a limited liability which is a way of legal protection for the private assets of shareholders. The obligation of the members for the company’s debts is limited by the value of their fully paid-up shares; while the company is liable for the rest.
There are three members of the board of directors, unless the Articles of Association (the founding document) stipulates a different number. The members of the board of directors are usually elected and dismissed by the general assembly, which also approves the executive service contracts.
Board of directors is a collective body, which means that decisions are made by voting. As a statutory body it is in charge of business management of the company. According to the law, the board of directors shall conclude and sign contracts on behalf of the company and shall keep records as the law requires and are also is responsible for the company’s book keeping; they are preparing annual financial statements and a profit distribution drafts.
Board member’s responsibility
The person who agrees to exercise the role of a member of board of directors initiates their service as their executive service contract is approved by the general assembly. A member of the board, has the right to act – together with the rest of the members – on behalf of the company, and this right is connected with the obligation to act with due diligence. This term refers to a certain measure of prudence, responsibility, and diligence that is expected from, and ordinarily exercised by, a reasonable and prudent person under the same circumstances.
It is particularly necessary to observe the duty to act with business judgement rule. That means, a person who participates in decision-making process must act with necessary expertise and experience. This behavior is mostly associated with loyality, aiming at a defensible benefit of the company, making decisions and taking actions based on informed judgement.
It is expected that members of board act with due diligence as explained above. In that case, they can not be held personally liable for any obligations of the company. However, if they happen to breach their duties, severe consequences may arise – they may become personally liable for the obligations of the company up to the amount affected by their actions (details in the next article). However, it is important to say that the board members are not responsible for the outcome of their decisions and actions taken on behalf of the company per se; if the board member acted with all due diligence as law prescribes, they shall not be liable in spite of the fact that these actions did not lead to the company’s benefit. In other words, the board members are not responsible for the outcome itself.
If there are any doubts about observing the due diligence rule by a board member, it shall be the board member who presents contrary evidence. This rule is to make board members prudent and prompt them to keep records of all documents that supported their decisions, voting or actions. It is highly recommended that they save documents that may later serve as evidence.
Naturally, a board member may not always be capable of creating a fully informed and valid opinion themselves; it is anticipated by law that they may use the services of an expert, outsourcing or any means of securing the best possible outcome for the company.
Assuming liability of the company’s obligations
As written above, in the case of failing to observe their duty to act with due diligence, members of board may be held personally liable for the company’s obligations – for the debts incurred by their actions and decisions. According to the law, the board members automatically assume these liabilities towards third parties, if the board member is obliged to compensate the loss incurred by the company and has not done so and the due claims of the third party (creditor) have not been satisfied. In this case, the responsible board member assumes full personal liability for the claims of the creditor that the company incurred as a consequence of the member’s deeds.
Obligation to return benefits
There is another issue to keep in mind as a member of board. If the company becomes insolvent (unable to pay due debts) and insolvency proceedings are initiated at the request of a third party (creditor), the board members may have to return all benefits obtained in relation to their executive function within the company as long as two years in arrear. This obligation shall arise in case they have not taken proper actions (as required by the rule of due diligence) despite being aware of the threat of the company’s insolvency.
These obligations do not only concern current board members, but also those who have left their positions within the company’s board. Also, the benefit that may have to be returned involves not only the pay or remuneration obtained under the executive service contract but also other monetary and non-monetary benefits accrued by the current or ex-member of board.
Disqualification from positions in business corporations
Another consequence of the failure to act with due diligence for a board member may be the disqualification from similar positions in future. If board member shall cause the company’s insolvency or by failing to take appropriate actions does not avert its insolvency (as written above), the board member may also be disqualified from assuming positions in statutory bodies of business corporations in future. Such injunction would last three years. However, it would only concern corporations in the Czech Republic.
Conclusion
The member of a statutory body in a joint-stock company is required to act with due diligence. They shall take actions and make decisions based on the of the company’s best interest. Although in general, statutory body members or other memebrs of a joint-stock company are not personally liable for the debts and other obligations incurred by the company, the failure to execute their functions with due diligence observing business judgemnt rule may eventually result in their personal liability for the company’s obligations. It is therefore highly recommended to any member of board that they act prudently, make informed decisions and keep record of documents thet may later serve as evidence proving their best intentions.
Katerina Hajkova, February 17, 2017
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