Especially in German-speaking countries, a joint representation of businesses by a member of the management together with an authorized clerk is standard. Does Czech law allow for a similar manner of representation?
For management purposes, the four-eyes principle is a popular instrument to ensure mutual supervision and control. Usually, it takes the form of a requirement whereby the company may only be bound by several – i.e., as a rule, two – members of the executive (“statutory”) body acting jointly. It is both common and legal for several members of the statutory body thus acting jointly to represent the company. But what about a joint representation by a member of the executive body and an authorized clerk with proxy powers?
From time to time, we are approached by clients with the request to implement the four-eyes principle in their corporate governance in the form of joint action by the managing director and the authorized clerk. These clients are usually foreign companies with German or Austrian management, where such an arrangement is popular.
The arrangement was clearly inadmissible under the Commercial Code (Act No. 513/1991 Coll.) which was in force until 31 December 2013 (see e.g. the ruling in 7 Cmo 55/99 by the Prague Upper Court). The main arguments rejecting the possibility of such a manner of representation included the different degree to which these company officers are liable (for the managing director had to act with the due care of a proper businessperson, unlike the authorized clerk), and the fact that the managing director acts on behalf – “in the name” – of the company, whereas the authorized clerk merely represents the company based on (what is essentially) a power of attorney.
The debate on the admissibility of joint action by the “statutory body” and the authorized clerk was rekindled with the passage of the new Civil Code (Act No. 89/2012 Coll.) and the Corporations Act (Act No. 90/2012 Coll.), which both came into force on 1 January 2014. According to the new rules, the authorized clerk, too, is now required to act with due care, whereas members of the executive body are now (also) ‘representing’ the company. It may thus appear as if the main obstacles to a joint manner of representation have been cleared.
But this is not so, as can be seen in more recent decisions by the Upper Court (4 Cmo 184/2014 or 14 Cmo 576/2014) in which it confirmed that a business cannot be legally represented by an authorized clerk with proxy powers acting jointly with a member of the executive body, and that this manner of representation is thus unfit for entry in the Commercial Code.
The final word was spoken (towards the end of last year) by the Czech Supreme Court which in its ruling 29 Cdo 387/2016 of 31 October 2017 upheld the above-mentioned opinion of law expressed by the Upper Court. According to the Supreme Court, the powers of representation by members of the executive body must not be tied to joint action with other persons who are not a member of this body. Such an arrangement would go against the rules governing statutory bodies and the manner in which their members represent legal entities. In addition, the Supreme Court stressed that one must not overlook the restriction of the authorized clerk’s powers of representation, who may only bind the company with respect to the legal transactions listed in Sec. 450 (1) of the Civil Code (a restriction which does not apply to executives). Further, the Supreme Court explained that any clause stipulating the joint acting of the managing director and the authorized clerk as the prescribed manner of representation of the company by members of the executive board would be in conflict with Sec. 1 (2), Sec. 164 (2) of the Civil Code and a manifest violation of the law regarding the legal capacity of persons, i.e., as such, an ordre public offense. The Supreme Court concluded that any such arrangement in the memorandum of association is null and void, and should be considered null and void by the courts even in the absence of a motion by any part for a declaratory judgment to such effect.
In closing, we may only summarize that the joint acting of a member of the executive board together with an authorized clerk remains inadmissible. We recommend all clients who still have such a rule on their books to amend their memorandum of association as quickly as possible to remedy the defective state of affairs.
Act No. 89/2012 Coll.
Act No. 90/2012 Coll.
Act No. 304/2013 Coll.
Supreme Court resolution 29 Cdo 387/2016
decision 7 Cmo 55/99 of the Prague Upper Court
decision 4 Cmo 184/2014 of the Prague Upper Court
decision 14 Cmo 576/2014 of the Prague Upper Court