Together with the amendment of the Act No. 90/2012 Coll., on Business Companies and Cooperatives (the Business Corporations Act), as amended (the “Business Corporations Act”), a relatively significant and fundamental amendment of the Act No. 304/2013 Coll., on public registers of legal and natural persons and the register of trust funds, as amended (the “Register Act”) was also made, which also entered into force on 1 January 2021.
The amendment to the Register Act brings a new stricter regulation for cases of non-publication of financial statements by business companies in the collection of documents, which now allows, as a sanction under certain conditions, the direct dissolution of the company without liquidation. If you do not regularly file financial statements in the collection of documents, then we recommend paying increased attention to the information below.
Reasons for amendment
The amendment to the Register Act aims to reveal the so-called inactive companies, which do not carry out any economic activity, exist only formally, but are registered in the Commercial Register. The legislator argues that the new measures introduced by the amendment to the Register Act should lead to a reduction in the number of financial and tax frauds, in which inactive companies operate as a so-called white horse.
According to the explanatory memorandum, another motive for introducing stricter regulations is to ensure the “cleaning” of the Commercial Register from inactive companies and to ensure that companies create or add documents to the collection of documents, as currently many companies do not file prescribed documents in the collection of documents, despite the impending sanctions so far.
New legislation – conditions, sanctions, dissolution of the company without liquidation
Based on the amendment to the Register Act, it is now possible to liquidate inactive companies without the need to carry out the liquidation. The amendment sets out two criteria, under the simultaneous fulfillment of which the company can be dissolved even without liquidation.
The first criterion is failure to file regular or extraordinary financial statements in a collection of documents for at least two (2) consecutive accounting periods, and the second criterion is the inability to contact the business corporation.
The above is based on the provisions of Section 105a of the Register Act, which explicitly stipulates that if a business corporation does not submit regular or extraordinary financial statement for at least two (2) consecutive accounting periods for inclusion in the collection of documents, the registration court shall invite it within one (1) month from the date of delivery of the invitation to submit all missing financial statements for inclusion in the collection of documents, otherwise, it will proceed under Section 104 of the Register Act (i.e. it may impose a disciplinary fine of up to CZK 100,000). However, if the invitation is not delivered to the business corporation according to the above, the registration court shall initiate proceedings for its dissolution; the data on the commencement of proceedings on the dissolution of a business corporation shall be entered in the public register by the registration court without proceedings.
In the light of the above, it will therefore be possible to affect an inactive company only if two cumulative conditions are met, which are:
- breach of the obligation to submit regular or extraordinary financial statement for at least two (2) consecutive financial years in the collection of documents, and
- inability to contact the company.
Obligation to submit regular or extraordinary financial statement
The obligation to file regular or extraordinary financial statement in the collection of documents follows from the provisions of Section 66 (c) of the Register Act and Section 21a of the Act No. 563/1991 Coll., on Accounting, as amended, and this obligation is fulfilled even if the annual report, of which the financial statement is a part of, is included in the collection of documents.
The amendment to Register Act stipulates for the event of a breach of the law, regular or extraordinary financial statement not to be included in the collection of documents for at least two (2) consecutive accounting periods, i.e. if, for example, the company did not file every other accounting period the financial statements in the collection of documents the above stipulated condition was not met and in such a case the court could only use existing law enforcement institutes, i.e. impose a disciplinary fine of up to CZK 100,000 under the provisions of Section 104 of the Register Act or exceptionally proceed to liquidate the company under Section 105 of the Register Act.
Inability to contact the company
The Register Act stipulates that the invitation to submit the missing financial statements is delivered to the business corporation to its own hands, while substitute delivery is excluded. In this case, the rules applicable to service in civil proceedings shall apply similarly. Therefore, the registration court will primarily deliver to the company via the data box. The fiction of delivery in the event of not logging of the company in the data box within ten (10) days will not apply in this case, as alternative delivery in this way is excluded. The registration court will therefore have to use other methods of service provided for in the Code of Civil Procedure to deliver the invitation to company´s own hands, the last method of the service being the postal service provider. If finally, it is not possible to deliver to the company even through the postal service provider, the second condition of inability to contact the company is also met.
In such a case, and if both above stated conditions are met cumulatively, the registration court will initiate, without a motion, legal proceedings to dissolve the business corporation without liquidation.
With this condition, the legislator promises that the companies that are inactive and exist only formally and cannot be contacted in any way will be identified. In this context, it should be mentioned that many companies do not comply with the legal obligations and do not include financial statements in the collection of documents, but this does not mean that they are not active and do not perform economic activities. Usually, these companies only do not fulfill their legal obligation to file financial statements in the collection of documents. In our opinion, it can be stated that in case these companies submit missing financial statements at the request of the court and include them in the collection of documents, in addition to imposing of a fine of up to CZK 100,000, which can be imposed repeatedly, liquidation of the company according to the Section 105a of the Register Act should not be applicable.
The decision to dissolve the company without liquidation
As already described and mentioned above, if both above-described conditions are met, the registration court will initiate proceedings without the motion to dissolve the business corporation. The information on the commencement of the dissolution proceeding of a business corporation shall be entered in the public register by the registration court without proceedings. The registration court may issue a decision on the dissolution of a business corporation without liquidation at the earliest after one (1) year from the date of entry of the data on the commencement of the dissolution proceeding of the business corporation in the public register. The registration court shall not decide on the dissolution of a business corporation if, at the time of its decision, insolvency proceedings are held, in which the bankruptcy or imminent bankruptcy of the business corporation is being resolved.
The above-mentioned period of one (1) year serves primarily to be able to eventually prove to the registration court that the company has property. If it appears during the proceeding that the company has assets sufficient to at least cover the costs of liquidation, the registration court shall decide, if this would not substantially affect the rights of third parties, to dissolve the business corporation without liquidation. Otherwise, i.e. if it appears that the company has assets that exceed the costs associated with the liquidation, the court will decide on the dissolution of the company with liquidation. The deletion of the company from the Commercial Register will be performed by the registration court based on the decision on the liquidation of the company.
Conclusion
In the view of the above-mentioned tightening of the legislation and the introduction of new requirements and especially new sanctions in the form of the possibility of the registration court (without proposal) to decide on dissolution of the company without liquidation, the long-term trend and intention of the legislator to ensure transparency and increasingly monitor compliance of the companies’ obligations to file regular and extraordinary financial statements to the collection of documents.
In the light of these legal changes, it can be recommended that companies pay attention to compliance with the obligation and file annual financial statements in the collection of documents, thus avoiding possible sanctions by the registration court, either in the form of disciplinary fines or, in the worst case, the decision to dissolve the company. Business corporations, which do not currently have more than two (2) consecutive annual accounts in the collection of documents, should also be sharpened, and it may be advisable to remedy this situation, and to file the documentation in the collection of documents.
Also, in connection with transactions, it can be recommended that in particular from the position of the buyer emphasis was placed and the inclusion of all statutory documentation in the collection of documents was required, so that subsequently the buyer does not have to face the sanctions above according to the amendment to the Register Act.
In conclusion, it can be recommended that companies always respond to any call (invitation) from the registration court, especially regarding the new wording and requirements of the Register Act, where the impossibility of delivery to the company (non-contacting the company) may, if the condition of non-establishment of financial statements for at least two (2) consecutive accounting periods in the collection of documents is met at the same time, lead to the deletion of the company without liquidation.
In case of any questions concerning the issues of corporate and business corporation law, the above and current legislation, we are at your disposal. Do not hesitate to contact us.
Mgr. Bc. Štěpánka Vajdová, attorney vajdova@plegal.cz
Mgr. Jakub Málek, partner – malek@plegal.cz
10. 05. 2021