Shareholders should be last in line when it comes to accessing the company’s resources. These are the words of the Czech Supreme Court in its fairly recent decision No. 27 Cdo 1306/2023. What do they mean?
The Czech Supreme Court emphasizes that profit distribution should not negatively affect creditors. This principle is ensured primarily by two limitations:
- The up-to-date nature of the financial statements
- Balance sheet tests
In this case, the Czech Supreme Court dealt with a situation where the general meeting of a limited liability company decided to distribute profit in 2021 based on the financial statements from 2019. However, in 2021, profit distribution could only be made based on the financial statements for 2020. According to the Czech Supreme Court, such a decision by the general meeting has no legal effect, similar to how the law invalidates profit distribution in violation of balance sheet tests.
This is a significant ruling that imposes stricter requirements on company management and general meetings when preparing for and carrying out profit distribution. According to the court’s strict interpretation, financial statements must be both current and duly approved by the general meeting. If these rules are not met, the management may breach its duty of due care if it proceeds with the profit distribution. Likewise, for shareholders, receiving profit under these conditions may constitute unjust enrichment.
At our law firm, we ensure that our clients’ profit distributions or distributions of other company resources comply with the law and current court rulings. If you are interested in consulting on your case, please do not hesitate to contact us.
