Legal News [December 2022]: Conditions for removal of a member of the statutory body

What are the conditions and prerequisites for the removal of a member of the statutory body? And what does the breach of due diligence that precedes such a removal look like? The analysis of this topic is part of the corporate judgment in Case No. 27 Cdo 1370/2021. In addition to this, we have also selected other news from the current case law. You can read about them in our article.

Among the older judgments of the Supreme Court, the conditions and prerequisites for the removal of a member of the statutory body (under the legislation in force until 31 December 2020) are dealt with in Case No. 27 Cdo 1370/2021. The Supreme Court stated that neither a single violation nor repeated less serious violations are sufficient. At least two serious violations of due diligence within a period of three years are required. It is irrelevant whether these violations cause harm to the corporation. The Supreme Court also emphasised the principle of proportionality between the violation and the penalty for that violation. In the present case, there was a violation of the duty of necessary loyalty, where the member of the statutory body acted not in the interests of the corporation, but in the interests of herself and persons close to her. Specifically, she purchased a car, rented a flat and enjoyed other services using the company’s funds. These were exclusively (or mainly) for the benefit of her daughters and herself, without this being defensible from the point of view of the company and its interests.

The Supreme Court deals with the so-called public “mock” auctions and the protection of the auction winner, for whom the malicious intent of the persons participating in the auction (the auction initiator, the auctioneer) may not be discernible, in its Case No. 21 Cdo 822/2022. The established case law defines the situations in which the almost unquestionable right of the auction winner may be breached. However, it is precisely in this situation where the Supreme Court considers that the principle of favouring the good faith of the auction winner (the purchaser), as regulated by Section 1109(a) of the Civil Code, should be applied. Good faith must be linked to the authorisation of the person who is (in the regime of the Public Auctions Act) closest in substance to the person “transferor”, and such a person can only be the auction initiator. Thus, the Supreme Court concluded that a third party may assert its claimed ownership right against a person who has acquired its ownership right by the auctioneer’s bidding in a public auction under the Public Auctions Act only if it proves that the institution of public auction was abused (and thus the Public Auctions Act was abused) and the auction was not actually held under the Public Auctions Act, and, at the same time, the purchaser was not in good faith in the auctioneer’s authority to propose the public auction. With reference to the established case law, the Supreme Court further addressed the issue of abuse of law in the execution of a pledge by means of a public auction in a situation where the auction initiator already knew at the time of concluding the pledge agreement that the subject of the pledge was not owned by the pledgee. The Supreme Court stated that in further proceedings it is necessary to examine in more detail whether such a legal act deserves legal protection.

The scope of the authority of a manager to act for the employer is addressed by the Supreme Court in its judgment in Case No. 21 Cdo 1774/2022. It concluded that actions of a manager cannot be distinguished between acting “outside” the company, e.g. in relation to the employer’s business partners, and “inside” the company, e.g. in relation to subordinates. The employee always acts on behalf of the employer, which is one of the characteristics of dependent work. Therefore, if the employee was ordered by an interim measure to refrain from any action on behalf of the company, i.e. on behalf of their employer, they were not able to do their work even internally as a general manager, as even in that case it would represent acting on behalf of the employer.

It is also worth noting the judgment in Case No. 23 Cdo 1191/2021, in which the Supreme Court deals with the limitations regime in a situation where the limitation period began to run when the Commercial Code was in force. The Supreme Court stated that the statute of limitations and its individual aspects (e.g. the beginning of the period, its interruption, etc.) are subject to the existing legislation as a whole, and therefore the Civil Code cannot be applied even in partial issues of the statute of limitation. The limitation period must be assessed under the existing rules from its beginning to its end. A contrary conclusion would be in conflict with the principle of legal certainty and predictability.

Contractual law

  • The Supreme Court has addressed the regulation of the so-called pre-contractual liability in its recent judgment in Case No. 25 Cdo 2535/2021. The Supreme Court, referring to its previous case law, deals with the possibility of the creation of an obligation to compensate for damages between contractors, noting that it is necessary to distinguish between the situations regulated by the provisions of Sections 1728 and 1729 of the Civil Code. Section 1728 of the Civil Code applies to cases where a party initiates and continues negotiations without having any intention of concluding a contract. On the other hand, the provisions of Section 1729 of the Civil Code are based on the general rule that, while respecting the principle of freedom of contract, the conduct of one of the potential contracting parties may be considered unlawful provided that the negotiations for the conclusion of the contract have reached a stage where one of the parties, as a result of the conduct of the other party, had a good faith belief that the contract would be concluded, i.e. the conclusion of the contract appeared highly probable to it. The other condition is that, in such a situation, the party terminated the contract negotiations without having a fair reason to do so. It is thus necessary to distinguish whether or not the parties are negotiating in good faith and to select the appropriate provision accordingly. According to the Supreme Court, what constitutes just cause under the provisions of section 1729 of the Civil Code cannot be stated in general terms. It will always depend on the circumstances of the particular conduct. As the Supreme Court has stated earlier, the assessment of just cause is not to be too strict and any rational consideration of the acting party based on objective fact as well as a defensible subjective belief supported by the particular circumstances at a given place and time should be assessed as just cause.
  • The question whether the violation of the prohibition of an encumbrance of the property, which was established as a right in rem, causes the invalidity of the pledge agreement, by the conclusion of which this prohibition is violated, or what other legal consequences it has, was addressed by the Supreme Court in its judgment in Case No. 21 Cdo 1813/2021. It concluded that the prohibition of an encumbrance of the immovable property in question, which was established as a right in rem, did not prevent the debtor from concluding a valid agreement by which it assumed the obligation to establish a pledge. However, the relevant question is whether the debtor could have fulfilled such an obligation. This could be the case if the land registry authority erred in entering a right contrary to the prohibition of alienation/encumbrance registered in the land registry as a right in rem. The Supreme Court summarised that the only possible defence against such an error is a declaratory action.
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