Judgment of of 9 March 2022, Case No 27 Cdo 3330/2020 – Competence to decide on granting an advance on profit share

Judgment of the Supreme Court of 9 March 2022, Case No 27 Cdo 3330/2020

(Competence to decide on granting an advance on profit share)

The Supreme Court addressed a case in which the defendant, at that time the sole shareholder of the joint-stock company, entered into an agreement with the company for the assignment of a claim for consideration in the amount of CZK 40 063 923 (approximately EUR 1 669 330). Subsequently, acting as the sole shareholder exercising the powers of the general meeting, the defendant resolved to pay him/herself an advance on profit share in the amount of CZK 40 163 923 (approximately EUR 1 673 496). On the following day, the defendant and the company concluded an agreement on mutual set-off of claims and obligations, whereby the claim for payment of the advance on profit share was set off against the claim for payment of the consideration for the assignment of the claim. In connection with this, the company transferred CZK 100 000 (approximately EUR 4 166) to the defendant’s bank account (as the difference between the two offset claims). 

In the dispute at issue, the company, as the claimant, sought payment of CZK 40 063 923 (approximately EUR 1 669 330) and related civil fruits on unpaid consideration for the assignment of a claim, and CZK 100 000 (approximately EUR 4 166) and related civil fruits based on unjust enrichment (arising from the fact that the company transferred this amount to the defendant’s account without legal grounds). According to the claimant, no valid set-off of claims could have occurred, as the claim for payment of an advance on profit share never arose, since the creation of such a claim does not follow from the law in this case. The claimant further pointed out that the decision to pay the advance was made by the sole shareholder acting within the powers of the general meeting.  

Since the claimant was unsuccessful with its arguments before both the court of first instance and the appellate court, it decided to file an appeal on a point of law. The Supreme Court first addressed the nature of an advance on profit share. In the case of such an advance, if the conditions prescribed by law (or by the articles of association) are met, shareholders acquire the right to receive an advance on profit share, which constitutes a claim of the shareholder against the company and a corresponding obligation of the company to pay the advance. Among these conditions is the decision of the competent body of the company to grant the advance on profit share, which, as a legal act of the company, represents the legal basis on which the obligation arises, the content of which is the shareholder’s right (as creditor) to receive the advance (the claim) and the company’s obligation (as debtor) to provide the advance (the debt). This is not altered by the fact that the advance constitutes a performance that must subsequently be ‘settled’ within the distribution of profit for the accounting period for which the advance was granted.

The decision to grant (pay) an advance on profit share is not expressly assigned by law to any of the company’s bodies; it therefore falls within the (residual) competence of the statutory body (board of directors). However, there is no mandatory rule preventing the articles of association from assigning this competence to the general meeting. If the general meeting decides to grant an advance on profit share despite not being vested with this competence under the articles of association, two scenarios may arise. It may constitute a mere instruction by the general meeting for the board of directors (or administrative board) to decide on granting (paying) the advance. Since the decision that the company will grant (pay) an advance on profit share does not fall within the company’s business management, the prohibition on issuing instructions concerning business management does not apply to it. The second possibility is that such a decision represents a so-called one-off derogation from the articles of association (the decision would thus embody the shareholders’ will to amend the articles of association so that, for this individual case, the general meeting is vested with competence to make such a decision). For this to qualify as a one-off derogation from the articles of association, the required majority of votes must be met (the same as would be required for an amendment of the articles of association), and, as of 1 January 2021 at the latest, such a decision must be certified by a notarial deed. 

According to the Supreme Court, in the case at hand, the decision to grant the advance was also adopted by the board of directors, even though the relevant minutes were not submitted. Even if that were not the case, it would constitute a one-off derogation from the articles of association (as described above), and there is therefore no doubt that the competent body of the joint-stock company adopted a decision that represents the legal basis for the creation of the claim for payment of the advance on profit share.

The Supreme Court therefore rejected the appeal on points of law, as it considered the decision of the appellate court to be correct.