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Transfers between group companies – the end of the rigid interpretation of section 196A (3) of the commercial code

Transfers between group companies – the end of the rigid interpretation of section 196A (3) of the commercial code

The Supreme Court of the Czech Republic issued an important ruling by which it changes the existing judicial practice in the interpretation of Section 196a (3) of the Commercial Code (the “196a (3)”).

196a (3) was originally incorporated into the Commercial Code by its novelization effective as of 1st July 1996, with its current wording effective as of 1st January 2002. The provision is the result of the implementation of Article 11 (1) of the second directive of the Council 77/91/EEC.

The purpose of this provision is to provide protection to companies when acquiring or transferring assets for a counter-performance (consideration) at the minimum value of 1/10 of the company’s registered capital, when the other contracting party falls into the special relation group of entities specified in 196a (3).

These entities include the founder, shareholder or an entity acting in concert with such entity and/or any other entity listed in 196a (1) of the Commercial Code (particularly the members of the bodies of the company) or the controlled entity and/or the entity belonging to the same concern.

In such case the value of the transferred assets must be specified on the basis of a court appointed expert evaluation (while this rule does not apply to transfers within ordinary course of business).

Former Jurisprudence of the Supreme Court

Throughout the whole term of the application of 196a (3), the Supreme Court had many opportunities to address the issue of breach of the provisions of 196a (3). The court had always persisted that any contract that falls under the regime of 196a (3) and had been entered into in breach with this provision (i.e. in the absence of the court appointed expert evaluation determining the transfer price) is considered as invalid ab initio. The expert must have been appointed by the court and the expert opinion must have been executed prior to the execution of the relevant contract.

The above said opinion of the Supreme Court was applied to all cases of breach of 196a (3), this means also to cases when the transfer price corresponded to the actual market price and only the prescribed procedure for the determination of the transfer price by the court appointed expert evaluation under 196a (3) had not been complied with. In other words, these contracts were considered as absolutely invalid, even though the actual purpose of the 196a (3) (including the purposes of the Article 11 (1) of the EEC Directive) had been fully complied with.

New Decision of the Supreme Court

In the recent ruling of the Great Senate of the Civil and Commercial Collegium of the Supreme Court, reg. no. 31 Cdo 3986/2009, the Supreme Court moved away from its existing jurisprudence when it came to a conclusion that a contract which falls under the regime of 196a (3) and is executed for a transfer price which is not determined by the court appointed expert evaluation, but such price corresponds to the market price at the given time and place, cannot be declared invalid for being in breach with 196a (3).

The invalidity of any legal act relating to transfer/acquiring of assets in breach with 196a (3), shall be now declared only to those legal acts where the agreed transfer price does not correspond to the market price.

This ruling was welcomed by the general public with great relief after a long period of overall application of invalidity to any (formal) cases of breach of 196a (3).

The new interpretation of 196a (3) far better reflects the original purpose of the provision, which is to protect the companies from the undervalued transfers of their assets or, on the other hand, the overpriced acquiring of assets. However, we must regret that the move from the restrictive interpretation of 196a (3) comes at the end of the life of the existing Commercial Code.

On 1st January 2014 the totally new recodification of civil law becomes effective; accordingly any contracts that fall under the regime of 196a (3) executed with the absence of the expert evaluation, will not be declared invalid. According to the terms and conditions of the new Act on Business Corporations, a company will have a right to demand from the other party the settlement of the difference (i.e. the additional sum that would be paid if the transfer price would be determined according to the expert evaluation).

Jiri Spousta

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