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2014 Recodification: Start Reading from the End

2014 Recodification: Start Reading from the End

30.5.2013 17:47
Autor: Alica Stegmannová, KSB

Reading all of it at once is virtually impossible; however, it could be worthwhile to start at the end with the transitory provisions and work your way backwards, as you will find some important information fairly quickly, such as when the new legislation will affect you.

Most people already know the most important detail – 1 January 2014 – which is when the New Civil Code and the Corporations Act will take effect. However, the first day of next year will not be the decisive date after which all legal relationships will be subject to the new legislation. On the contrary, for many, the current laws will remain valid. There will still be time to amend certain documents and businesses will also have time (although limited) to make certain important decisions.

The new rules will apply to the rights and obligations established as of the effective date of the new legislation. In other words, establishing a limited liability company, purchasing a car or entering into a delivery agreement after 1 January 2014 will be governed by the new laws. Things will be little more complicated, however, for legal relationships which currently exist and which will continue to exist until at least next year.

Agreements: mostly unchanged

The new Civil Code and the other recodification acts will certainly not terminate agreements that have already been concluded, but since some changes are crucial, parties to an agreement should check whether their particular agreement will continue to be subject to the current laws or whether it will be subject to the New Civil Code. For example, under the New Civil Code a contract can be terminated after ten years if it was concluded for such a long term without any good reason for such a long term. On the other hand, breaches which are now subject to the statutory penalty of absolute invalidity will only be penalised by relative invalidity under the New Civil, i.e. invalidity must be claimed before a court; otherwise, the agreement will remain valid.

Agreements in effect today will largely be subject to today’s laws even after 2014. However, this does not apply across the board. Leaseholds, for example, are a typical exception that will be subject to the New Civil Code even if they were established before 2014 (although some exceptions will apply). Nevertheless, an agreement concluded today can be governed by the New Civil Code as of 2014 if the contracting parties so choose.

People, family and things: immediate changes

All personal and family rights and property rights will be governed by the new legislation as of 1 January 2014. Nevertheless, certain issues will be regulated separately by the New Civil Code, such as buildings, which will newly be considered part of the land on which they stand. However, currently there are many buildings which stand on land plots owned by another party. In other words, the land and the building each has a different owner. The legal “marriage” of the land and building will be postponed in these cases until the titles to the building and the land unite in the hands of a single owner. To ensure this happens as soon as possible, the New Civil Code provides both the owner of the land and the owner of the building a right of first refusal for the purchase the building or the land plot. However, it is expected that in certain cases this may take several years. In addition, all rights and obligations are subject to the fundamental principles imposed in the first part of Chapter I of the New Civil Code (no exemptions available), such as the rule for identifying which statutory provisions can be contracted out of and which cannot.

Companies held captive by deadlines

The Corporations Act (due to take effect on 1 January 2014) is fairly demanding for existing companies and their managers, namely because it requires a timely response. Both joint-stock and limited liability companies are required to take a certain number of steps to ensure their operations are in line with the new rules.

For example, joint-stock companies are (unless they already have one) required to launch a website as of 1 January 2014 on which they must post certain information. This does not apply to limited liability companies; however, if such companies decide to launch a website, they will also be required to post the required information.

Another even more challenging task for companies is that they will have to adjust their articles of association to meet the compulsory provisions of the Corporations Act (i.e. the provisions which the parties cannot contract out of), something they must do by 30 June 2014. The same deadline applies to executive appointment contracts (smlouvy o výkonu funkce). In addition, it cannot at this time be ruled out that information which is in direct breach of the provisions of the Corporations Act will have to be omitted from the articles of association as of the Act’s effective date, i.e. 1 January 2014.

Moreover, companies are required to decide within two years following the effective date of the Corporations Act whether they want to be governed entirely by the Act (the compulsory provisions will be mandatory for everybody, including companies which wish to continue to be subject to the current Commercial Code in most regards after 2014). Generally speaking, companies may be better off diving in at the deep end at the beginning of next year, mainly because complications could arise if they want to be subject partly to the Corporations Act and partly to the current Commercial Code. This is because it is not absolutely certain which provisions of the Corporations Act are compulsory and cannot, therefore, be contracted out of.

As you can see, it is better to be ready and to meet all of the deadlines. Breaching the recodification requirements may not result only in “normal” penalties such as unlawful provisions in the articles of association being deemed invalid. Sometimes the punishment may be more palpable for particular parties. For example, if compensation is not set out in an executive appointment contract, the office holder will be forced to perform his duties for free. Or, if a company fails to choose to be governed entirely by the Corporations Act it may not get a second chance to choose this later.

What to do, what to avoid

Idle hands are definitely not recommended. Parties to contracts should decide which act will govern their contracts as of 2014 and be aware that they are free to choose the more liberal approach available under the New Commercial Code, provided they amend their contracts accordingly. Companies should review their corporate documents and make the fundamental decisions outlined above.

In addition to the new requirements, the New Civil Code and the other recodification legislation will bring new opportunities, such as the chance to tailor many legal relationships to the parties’ own specific needs. It would certainly be a shame to let this chance go to waste. 

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