Definition of concern group for actions to set aside under insolvency act

On one hand, meeting the definition of a concern group provides several advantages to the parties involved: e.g., they can apply a more favourable regime regarding compensation for damage caused and can give instructions on business management to the managed person’s statutory body. On the other hand, there are also negative consequences associated with the existence of the concern group: for instance, under the Insolvency Act, vis-à-vis a person forming a concern group with the debtor, creditors may seek to set aside (declare ineffective) a legal act made without adequate consideration for the benefit of such person in the last three years before the insolvency proceedings were initiated.

In decision No. 29 Cdo 14/2020, the Supreme Court recently dealt with assessing the existence of a concern group in the context of a bankruptcy receiver’s action to set aside (the Paulian action). For these purposes, the court held that the concept of a concern group under Czech law cannot be confused with mere control, as the mere fact that two companies are in their mutual relations controlled and managed by one person shall not in itself lead to the conclusion that they together form a concern group. On the contrary, the court held that a necessary prerequisite for the existence of a concern group is single management pursuant to Section 79 of the Corporations Act, which is conditional upon the existence of the dominant person’s control, its influence on the dependant person’s activities, the long-term promotion of the group’s interests, the group’s single policy, and coordination and conceptual management of at least one of the important components of the group's business. The law does not define the specific form that establishes the existence of a concern group (e.g., its de facto origination, origination by a contractual arrangement or by a decision of a body of the managed person); however, the defining features of a concern group must always be met, and the facts of the case have to be assessed.

In addition, for a concern group to come to existence, the law also stipulates the obligation to publish a concern group declaration; without fulfilling this obligation, the benefits stipulated by the Corporations Act cannot be applied.

The Supreme Court thus confirmed a unified interpretation of the concern group concept in the law, meaning that to prove the existence of a concern group in the context of an action to set aside under the Insolvency Act, it is necessary to prove the fulfilment of the conditions under the Corporations Act, and these requirements cannot be disregarded or mitigated when interpreting the concept of a concern group in the context of other legal regulations.

Finally, the Supreme Court refused to apply the concept of a single economic unit used in competition law. A single economic unit doctrine is an exceptional situation where the parent company may be held liable for the unlawful conduct of its subsidiary. In this context, according to the Supreme Court, it is necessary to distinguish between the private-law regulation of a concern group on one hand, and the public-law regulation of competition on the other hand. Therefore, an exception cannot be applied to relationships that do not involve any infringement of public-law rules protecting competition, therefore also not to contractual relationships entered into voluntarily.

To conclude: distinction must be made between various forms of business groupings, as the law attaches different consequences to different degrees of their integration, such as the liability for damage caused, the duty to disclose entities in the report on relations, or the possibility to effectively subject the entity to single management within the concern group.