Does the registered scope of business of your company qualify as a so-called unqualified trade (as per the stock phrase “production, trade, and services…”)? The Supreme Court has provided guidance as to what makes the definition of a company’s scope of business invalid, and what a proper entry of its activities in the Commercial Register looks like.
The Supreme Court has supplemented its landmark decision of 12 May 2021 (case Ref. 27 Cdo 3549/2020), in which it ruled that the provision in a memorandum of association or in articles of association whereby the relevant company’s scope of business is simply subscribed by the stock phrase “Production, trade and services other than those listed in Annexes 1 to 3 to the Trade Licensing Act”, is invalid due to lack of specificity.
This vagueness stems from the fact that the activities within the scope of so-called unqualified (unlicensed) trade include, in sub-section No. 82, a “bits and bobs” item known as “production, trade and services not listed elsewhere”. Thus, a memorandum of association which relies on a reference to unqualified trade refers also to the field of activity no. 82, which is completely undefined and says nothing about the actual business operations of the company. An arrangement to such effect in the memorandum of association is therefore insufficiently specific.
The consequence of such an indeterminate clause is that the court may order the dissolution and winding-up of the company (albeit only if the company fails to remedy the situation by amending the memorandum/articles of association in an appropriate manner within a time limit set by the court). Our experience shows that the registry courts have begun to require companies to remedy defective circumstances of this kind.
In its decision of 27 November (27 Cdo 3391/2023), the Supreme Court further elaborated on its above-described earlier conclusions.
In particular, the Supreme Court added that it is perfectly fine for a company to define its corporate purpose in the articles of association as unqualified trade in the fields of activity No. 1-81, thus excluding the “problematic” catch-all activity pursuant to No. 82.
The Supreme Court also stated that the entry of the company’s scope of business in the Commercial Register should correspond to the definition given in the company’s founding deed. However, the entry in the Commercial Register must not contain any cross-references (to the Trade Licensing Act, the entry in the trade register, or other documents). This means that whenever the scope of business of a company is defined by means of various unqualified trades (which is probably the most common case in practice), the individual trades must be listed in the Commercial Register. The primary purpose of entering the scope of business of companies in the Commercial Register is to create transparency for third parties, who thus can gain an idea of the line of industry in which the respective company operates by looking it up in the Commercial Register. Therefore, even if the memorandum/articles of association only list the individual fields of activity within the unqualified trade by numbers, these fields of activity must be spelled out in plain text in the Commercial Register entry. This means that the wording in the Commercial Register will differ from that of the memorandum of association.
For the sake of completeness, we should point out that, common practice notwithstanding, there is no need to define the scope of business strictly on the basis of trade names (for unlicensed and other trades) in the foundation deed. Rather, the scope of business should above all clearly specify which activity the company actually pursues, taking into account the specification provided by the founders (partners, shareholders), without unnecessarily narrowing or reducing it to the wording of the (unqualified or other) trades that carry the requisite license to pursue the company’s business. If, for instance, a given company’s business is limited to the sale of sporting goods and nothing else, it may indeed be defined as such in the memorandum of association or articles of association (instead of using, say, the designation of the unqualified trade of “wholesale and retail”), and such definition will be in accordance with the law and judicial practice.
By properly defining your company’s scope of business early on in its founding deed and ensuring that it is entered correctly in the Commercial Register (i.e., in line with the above-mentioned conclusions of the Supreme Court), you avoid being served a court request for remedial action and thus prevent possible complications (because, for example, the general meeting would have to convene within the period set by the court in order to fulfill this obligation to provide remedies).
Please do not hesitate to ask us for assistance if you are unsure whether the corporate purpose (scope of business) of your company has been correctly captured in the memorandum of association or the Commercial Register.
Source:
Supreme Court decision 27 Cdo 3549/2020
Supreme Court decision 27 Cdo 3391/2023