Fraudulent change of an executive

A routine meeting with a client can change within a second into a heartbreaking drama. We have experienced that (to be specific our client has) recently. It all started with an innocent question. You changed the executive? No, answered the client in surprise. I should have known about that as I am a partner and sole executive [laughter].

Our client stopped being joyful when he consulted the companies register and found out that an intruder infiltrated into his company approximately a week ago.

The situation was as following, someone (the criminal is still unknown) falsified the report on general meeting agenda, which in fact had never happened, (together with accompanying documents, e.g. record of partners present), which is really easy, because the law does not require an officially certified signature of the chairman of the general meeting, recorder or convener (see Section 188(2) and (3) of the Act on Business Corporations), moreover it is a decision which is not certified ex lege with a notarial record (a contrario Section 172(1) Act on Business Corporations). According to this fictitious general meeting the current executive was withdrawn and the new fake executive was elected, naturally in the regime of the highest confidentiality, i.e. without informing our client.  It is not necessary to highlight that the “new” executive acted as a straw person in this case. The Court responsible for maintaining the companies register registered this “change of the executive” into the companies register pursuant to the falsified documents (for the responsibility of the state for the injury caused by an illegal decision, cp. the interpretation below).

In such situation we took basic steps, i.e. especially had the company´s bank accounts blocked, filed a criminal complaint, a suit on declaration of non-existence of the given decision, a suit for nullity against the decision of the Court responsible for maintaining the companies register on the registration, but mostly we made the notary make a direct record of the decision of the general meeting about the fact the withdraw of the function of the present executive did not happen and that he stays in his function without break. We did not want to legitimize (and thus basically legalise) such mafia-like practices (illegal hostile takeover) by withdrawing the dummy executive and re-electing the old executive.

Despite the above mentioned correction which took several hours by the way, our client has not won yet. During the period when the self-appointed executive was registered in the companies register, the principle of material publicity, formulated in the Section 8(1) of the Act No. 304/2013 Coll., on the Public Registers of Legal Entities and Natural Persons (hereinafter referred to as the “APR”) is applied towards the third persons dealing with the company, so that: “Against the person, who legally acts confiding in the data registered in the public register, the one who is related to the register does not have the right to raise an objection that the register does not correspond with the reality.” No matter the present illegality was caused by a criminal activity.

That means the company will not be able to successfully raise an objection against the third person, who neither knew about the fact nor could have known that the executive appointed by nobody was not authorised to legally deal with the third person acting in a good will on behalf of the company, e.g. to conclude a contract. Purely purpose transaction may be challenged for sure, with the reference to the absence of good will, which will not be easy to prove. Unilateral legal transaction or other similar acts will not definitely oblige the company as they were made by some who was not even entitled to do so (Section 440 of the Commercial Code), the provision on exceeding the representative authorisation may not be enforced in this case from the nature of issue (e.g. Section 431 and Section 446 of the Commercial Code). The company should not be obliged for bills signed by the false executive (Article I Section 8 of the Act No. 191/1950 Coll., Bill of Exchange and Cheque, as amended), etc.  

Other challenge is connected with the fact that the data on the register of the false executive into the companies register may not be deleted from the history. The Supreme Court came to the conclusion repeatedly under the effectivity of the Commercial Code (Resolution of 23 January 2008, File No. 29 Odo 625/2006, of 29 April 2008, File No. 29 Cdo 3025/2007 and of 08 December 2011, File No. 29 Cdo 3197/2010) and newly the Court corresponds with that when interpreting the Act on Public Registers of Legal Entities and Physical Persons: “The fact which was registered in the companies register may not be eventually deleted from the “history” of the companies register in the way it would not occur either in the “full extract” from the companies register.” (Resolution of 30 March 2016, File No. 29 Cdo 5569/2015). The Constitutional Court rejected the constitutional complaint pointing against such Resolution in the proceedings registered under File No. III. ÚS 1977/16.

In this context, we may suggest everyone who will become a victim of similar attack to have registered into the companies register from the procedural caution within the so-called “other facts” that the mentioned person has never been the executive [see Section 21(1)j) APR]. As we have already mentioned, from the point of view of legal certainty it is also suitable the company would file a suit for nullity of the decision of the general meeting on the withdrawal and election of an executive by the court under Section 80 of the Civil Procedure Code [the satisfactory decision of the court argument a minori ad maius under Section 66(q) APR] and claim for nullity against the decision of the Court responsible for maintaining the companies register [Section 229(1)c) of the Civil Procedure Code] thanks to them the removal of the illegal final order would happen and that would help the company to get the compensation for loss against the state [Section 8 of the Act No. 82/1998 Coll., Act on the Liability for Damage Caused in Exercising Public Authority by a Decision or Incorrect Official Procedure, as amended (hereinafter referred to as the “Act on the State´s Liability”)] and the company cannot be fairly required to use, within the statutory deadlines, all procedural means which are provided by the law in order to protect its rights, because it is logic the dummy executive will not appeal against the decision of the Court responsible for maintaining the companies registers. It is a typical case of a special regard within the meaning Section 8(3) of the Act on the State´s Liability.

On the other hand it is necessary to mention the projection of such facts into the companies register, respectively in the collection of deeds, may have a negative effect on the later sale of the company to a third person.

Since the object of such “raid” may be any company in the Czech Republic, when an absolute paralysis may happen from day to day, a question whether we may face the risk in advance arises. As the most secure (however not very cheap and totally effective, see above) is the change of the memorandum of the association so the decision of the general meeting on the withdrawal and election of an executive would be certified by a notarial record which should not be so easily falsified.

If the notarial record was eventually falsified (as we may see such cases in the practice, see e.g. the Order of the Supreme Court of 11 November 2015, File No. 5 Tdo 1176/2015) and the Court responsible for maintaining the companies registers would register the change of the executive into the companies register, it would be an incorrect official procedure (the Court responsible for maintaining the companies registers does not render a decision in such case, the Court makes changes by the so-called direct register and is obliged to trace whether the notarial record meets the requirements imposed by other act, i.e. whether it is a notarial record and not forgery, see Section 92(1) APR, and the company would seek compensation against the state under Section 13 of the Act on the State´s Liability. It is necessary to remind the state´s liability is objective without the possibility of release from liability, i.e. the state is totally liable for the loss, see: “From the point of view of the nature of the liability the quoted provisions make the objective state´s liability (i.e. regardless of fault), which may not be released (Section 2). The liability is thus absolute which cannot be excluded, limited or narrowed by law, even if it is proved that the loss originated by an intended illegal act of a concrete person. In the case of an objective liability, respectively absolute objective liability of the state, the possibility of release from liability does not come into question in any case.” (cp. Judgement of the Constitutional Court of 31 May 2016, File No. II.ÚS 2635/15 or Judgement of the Constitutional Court of 13 March 2012, File No. I. ÚS 529/09).

And what is the advice for the company´s owners? Just have a look at ejustice every day!

The article was published at EPRAVO.CZ on 14 February 2018.