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The supreme court interpreted vague terms in relation to adverse profit and loss

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The High Court in Prague, as the Court of Appeal, in proceedings under Case No. 6 Cmo 333/2021 dealt with the fact that the defendant company refused to provide severance pay to a dismissed member of the Board of Directors in accordance with his contract of office, based on the provisions of article 61(2) of the Business Corporations Act (hereinafter referred to as the “BCA”), which allows the following: “Performance under a contract of office ... shall not be provided if the performance of the office appears to have contributed to adverse profit and loss result of the corporation, ...”.

It is interesting to note, however, that the High Court, in its consideration of the present case, dealt in more detail with the vague terms in article 61(2) of the BCA. According to this Court, the term “appears to” is to be interpreted as not insignificantly (in relation to the adverse profit and loss of the corporation) and the term “adverse profit and loss " is to be understood as results clearly worse than those achieved in the previous period.

When applying the provisions of article 61(2) of the BCA, in most cases we cannot do without a comparison of the achieved profit and loss with the previous profit and loss, with a focus on basic variables such as the amount of sales, the amount of profits and possible losses. The Supreme Court also notes that an important guide in evaluating the performance of a manager who is to be (dis)compensated under a performance contract is the length of time the manager has been with the corporation and the profit and loss of the corporation in the period following the termination of the manager’s operation (i.e., under different management).

In the present case, the High Court came to the partial conclusion that the profit and loss of the operations of the defendant company did not deviate significantly from the results before and after the operation of the dismissed board member. Profit and loss that is not worse than the results of the previous period cannot be considered unfavourable. In this situation, it cannot be concluded that the dismissed member of the board of directors appears to have contributed to the unfavourable profit and loss and cannot be denied the right to severance pay.            

The benefit of the judgment can thus be seen in the clarification of the interpretation of the provisions of article 61(2) BCA and the unclear terms mentioned therein at first sight, which can continue to serve as a practical guide in similar situations.

Author: Veronika Odrobinová, Martina Šumavská