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.
ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.