Quiet revolution in dividend payment?
With the effective date of the Corporations Act four years ago, a new chapter of corporate law started to be written. While some old concepts have explicitly been abandoned by the new law, some changes are only appearing gradually, as the interpretation of individual provisions of the act becomes clear. Over the last year, the interpretation of the act that companies are no longer bound by the six-month time limit to decide on dividend payment has been intensively discussed.
For nearly ten years, Czech companies have accepted the time limit for using financial statements as a basis for decision on dividend payments as a reality. If the general meeting of a company wants to pay a dividend, this may be done based on an ordinary, extraordinary or interim financial statements, while the financial statements must not be older than six months. Notably, the rule was never stipulated directly by law – in 2009, it was deduced by the Supreme Court in a judgement rejecting a decision on dividend payment that a general meeting adopted ten months after the date of the last financial statements and based on these financial statements (that had been previously duly approved by the general meeting within the statutory six-month time limit). The reason for this judicial law-making was the Supreme Court panel’s idea that more than half a year after their preparation, financial statements cannot give a true view of the company’s financial position and therefore cannot serve as basis for such an important decision as dividend payments.
At the time, the decision was viewed as rather controversial: both academic and practicing experts criticised it as they felt that its main argument did not stand the test of logic: in some companies, things may change extremely quickly, making even week-old financials obsolete, while in others, the development is slower, meaning that year-old financials may still give a fair view. Setting a flat six-month limit thus does not make much sense.
The authors of the Corporations Act that in 2014 replaced the Commercial Code, instilled in it, among other things, a philosophy of not binding companies’ statutory bodies with rigid one-size-fits-all rules. On the other hand, this loosening of rules is compensated by more responsibility on the part of statutory bodies, with the possibility of the executives’ disqualification or punitive liability. A crucial element is the insolvency test: a statutory body’s duty to make a qualified judgement whether a decision they are to make would expose the company to the risk of insolvency. This rule is to protect the shareholders/members and, in particular, creditors. Over the last year, the opinion that this duty sufficiently serves the purpose of the six-month time limit applied to dividend payment under the old legislation (which, in fact did not work very well anyway) has been frequently voiced in professional training sessions and in literature. Under the new legislation, even if the general meeting decides to pay dividends, the statutory body simply cannot pay it if it would mean breaching this duty.
This opinion is now cautiously being presented by experts from around the Supreme Court, the institution that coined the original rule in the first place. It seems that companies have finally freed themselves of these needless chains and may happily decide on dividend payment based on older financial statements if their statutory bodies have carried out the insolvency test as appropriate. This opinion has already been voiced in many respected commentaries – it is therefore just a matter of time until it finds its place in the Supreme Court’s case law.