June 30: A day to prepare for

June 30 is generally known to be the last date for filing your tax return (and paying income tax) for the prior year if you use a tax adviser or lawyer. Nevertheless, this date has quite a few important implications for corporate law.

To a lesser degree it is general knowledge that the ordinary shareholders meeting of Czech companies that approves the accounts must be held within the first six months after the end of the year to which the accounts relate, usually the end of June. These provisions (§ 128 Commercial Code for an limited liability company or s.r.o., and § 184 para 3 for a joint stock company or a.s.) have existed for a long time but never had any serious implications, nor were later approvals sanctioned.

Recently, however, this date has gained in importance in the legal community due to a decision by Supreme Court of the Czech Republic leading to the interpretation that decisions on paying out dividends to the shareholders must also be made by this date. In the recent weeks, various interpretations have been published in the Czech press setting this as a general rule. Auditors are already becoming nervous about late decisions on the voting of dividends, as these might indeed lead to certain accounting problems if the settlement of dividends is decided upon later.

This is the wrong forum to discuss the Supreme Court decision in detail (for those interested it is 29 CDO 4284/2007). It concerned an insolvent company in the list of insolvencies that have acquired the name Berka-insolvencies and was probably not meant to be taken as the general rule for normal financially sound companies. The decision to vote on dividends was taken by the shareholders’ meeting after an insolvency application had been delivered to the company more than one year prior.

Arthur Braun

One could also very well argue that the decision, if you decide to look into it in detail, is exactly one of those formalistic decisions which can be explained within the history of Czech commercial law being close to public law and judges keeping commercial common sense out of their decisions.

The reasoning of the decision was that only when the annual accounts are new (meaning not older that six months) will creditors of companies be protected against shareholders taking out dividends in case of insolvency. Should a decision to pay dividends in your company been made in July instead of June, the Supreme Court would in this interpretation require interim accounts to be made to give the shareholders the information about the actual financial state of the company.

Creditors of companies are, however, protected by many other rules, in particular the Insolvency Act. The management board may not pay dividends (even if approved by the shareholders meeting) if this leads to the insolvency of a company. They cannot pay dividends if the equity of company goes below the value of basic capital and its reserve funds.

In the normal case when a company is not close to insolvency, why should there be such limitations on the timing of the decision — there is simply no need to protect creditors by an overly formalistic interpretation of the law. In particular, international groups sometimes actually require more time to complete group audits and are not able to approve the accounts for the Czech subsidiary within the first six months of the business year, nor does this have any practical relevance to them. The Czech Republic is, of course, the country of pragmatic solutions.

It would be less of a problem if one could simply then decide in October to pay out the equity capital from the account “profits of prior years”. Nevertheless, the interpretation of the Supreme Court decision also does not approve of such a solution and would also require (quite cost-intensive) interim accounts.

The Czech Republic is, of course, the country of pragmatic solutions. the first solution that will probably be used mostly in practice is, for private companies, that the date of minutes of shareholders’ decisions on payment of dividends shall never be given to be later than June 30. Payment of dividends can be effected later; this was not prohibited in the court decision.

Moreover, at least for joint stock companies, a shareholder does not have to return dividends received in good faith. It is disputable, however, whether this provision of the Commercial Code also applies to limited liability companies that are the common business vehicle used in the Czech Republic. And of course, if you (in particular as the managing director) want to be completely on the safe side: prepare an interim account that will serve as the basis for your decision in the second half of the year.

The easiest way to avoid potential problems would, however, be to have not only the tax declaration but also the approval of the annual accounts done not later than before June 30. There are still a few weeks left.

Arthur Braun is a partner at bpv Braun Partners