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The relationship between the managing director and the company: the new article 66 d of the Czech Commercial Code in force as of the 1st January 2012

According to the articles 134 and 135 of the Czech Commercial Code, the duties of the administrative body of a company consists in managing the company, keeping regularly the accounting, informing the members about every circumstance which is relevant for the company.

Moreover, the Courts have clarified that the managing director’s typical duties include, in particular, the organization and the business management of the company, and that cover also the decision making about the business purpose of the company itself (Supreme Court, 29 Odo 479/2003).

With reference to the relationship between the managing director and the company, the article 66 of the Commercial Code, paragraph 2, provides that for acting as the managing director and, consequently, for carrying out the duties above mentioned, an executive service agreement has to be concluded and, should not such kind of agreement have been drawn up, a mandate contract shall be applied.

The problem which occurred in the practice was that people who held the office of the managing director on the basis of an employment contract and, therefore, who held the office of the administrative body of a company, carried out duties which had similar contents to those typical of the managing director as provided for by the articles 134 and 135 of the Commercial Code, above mentioned. However, the office of the managing director is a particular legal relationship which is regulated by the Commercial Code and not, instead, by the provisions of the Labour Code; therefore, until the novelty in force as of the 01.01.2012 (about which we will specify later on), the contracts that were possible to utilize in order to regulate the relationship between the managing director and the company were just the mandate contract and the executive service agreement.

As stated by the Supreme Court by the decision issued on the 17.08.2004 (n. 21 Cdo 737/2004) the office of the administrative body is not included in those kinds of jobs which are regulated by the Labour Code and, therefore, the employment contracts concluded between the managing director and the company in order to carry out duties similar to those typical of the administrative body had to be considered invalid. Notwithstanding that, the Courts’ case law held that the characteristics and the discipline of the limited liability company did not prevent the conclusion of employment contracts between the managing director and the company, provided that the duties arising from those contracts were totally different from those (duties) about the commercial management of the company. For instance, the managing director could be employed by the means of an employment contract, so to function as informatics engineer or as a designer, but not to function as an accounting manager, since this kind of duty (accounting manager) is included into the typical duties of the company’s administrative body.

By the means of the amendment of the Commercial Code performed by the law 351/2011, the provision named “authorization to the commercial management” (article 66 d) was introduced in the Commercial Code. This article has expressly provided that:

  • the administrative body can partially or totally entrust other individuals the duties concerning the company’s commercial management, also by the means of an employment contract; in particular, the company’s managing director himself can properly be the party of the employment contract, holding both the roles;
  • the liability of the administrative body of the company, in case of breach of the duty of performing its own office with respect of the due diligence, is not compromised by carrying out the duties provided for by an employment contract;
  • should the duties that are included in the commercial management of the company be carried out on the basis of an employment contract, the remuneration of the company’s employee - who is also the administrative body – shall be determined by that body of the company which is entitled to fix the remuneration of the administrative body or of its members;
  • the duties which the law reserves to the exclusive competence of the administrative body (i.e. attending the body’s meetings or taking decisions about the commercial purpose of the company) cannot be the subject of an employment contract.

Therefore, the legislator has introduced the possibility to utilize another kind of contract in order to regulate the relationship between the managing director and the company, giving then validity to the conclusion of employment contracts regulated by the Labour Code, instead that by the Commercial Code, also for the managing directors. Consequently, those contracts shall be lawful and they shall not be considered totally invalid (as it was before the introduction of the new Commercial Code’s provision).

05.10.2012

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