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Supreme Court Rules on Validity of Debtor’s Share Transfer - International Law Office

International Law Office

Litigation - Czech Republic

Supreme Court Rules on Validity of Debtor’s Share Transfer

January 22 2008

The Supreme Court recently ruled that a creditor may have standing to sue for a declaration that a transfer of its debtor’s shares to a new sole shareholder is invalid. The judgment aims to provide a new remedy for dishonest debtors. However, at the same time the Supreme Court ruling may have the unwanted side effect of encouraging vexatious actions challenging legitimate transactions.

In the present case the debtor was a limited liability company with a sole shareholder. The shareholder transferred its shareholding in the debtor to a third party, allegedly an untrustworthy individual with no reputation to lose in the case of the debtor’s bankruptcy. The lower courts rejected the creditor’s petition to declare such a transfer invalid due to lack of standing. The Supreme Court reversed and remanded the case for further consideration, stating that the creditor’s standing to bring such an action depended on whether the former shareholder had intentionally transferred the shares to a person who was unable duly to manage the debtor. In its reasoning, the Supreme Court referred to the principle of corporate loyalty and the importance of the shareholder’s identity for the management of the debtor.

As a rule, Czech law does not give standing to third parties to enable them to challenge the validity of a contract to which they are not party. Such standing may be exceptionally available only if the judgment sought could improve the applicant’s legal position. However, in the present case the court did not elaborate on either this issue or any further conditions for granting standing.

This judgment attempts to create a new remedy for combating dishonest debtors and purely speculative transactions. However, it is unclear what practical effect such a remedy may have. Rather, the new case law seems to open the door to vexatious actions with illegitimate aims.

For further information on this topic please contact Juraj Alexander at Salans by telephone (+420 236 082 111) or by fax (+420 236 082 999) or by email (jalexander@salans.com).

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