When not to pay out profit
In our previous articles, we introduced you to the rules for profit distribution. In this article, we will continue the topic by looking at situations, in which profits already distributed may not be paid to the shareholders.
Who decides on the payment of profit?
While the distribution of profit is decided by the supreme body of the corporation, its payment is the responsibility of the statutory body. As a general rule, a share in profits and other own resources is payable within 3 months from the date, on which the decision of the supreme body of the company on its distribution was adopted, unless the law, the articles of association or the supreme body determine otherwise.
When can profit not be paid
Here it is necessary to distinguish two model situations.
1. The distribution of profits was decided in compliance with the law
The statutory body shall not pay out or advance a share of profits or other own resources, if doing so would cause bankruptcy of the corporation.
Thus, even if the supreme body has decided to distribute the profit in accordance with the law, the statutory body cannot pay the profit to the shareholders, if this would result in the company’s bankruptcy. If the profit shares cannot be paid out by the end of the accounting period due to failure to meet the insolvency test, the right to payment shall be extinguished and the profit or other own resources not paid out by the end of the accounting period due to failure to meet the insolvency test shall be transferred to the retained earnings account of previous years.
2. The distribution of profits was not decided in accordance with the law
If the distribution of profits is contrary to law (especially for failure to meet the statutory tests for distribution of profits), the statutory body must not pay out shares in profits or other own resources. At the same time, there is a rebuttable presumption that those members of the statutory body, who consented to the payment in violation of the law, did not act with due care and are therefore liable for the damage caused by the payment of the profit shares.
Furthermore, a decision of the supreme body on the distribution of profits that is contrary to the law and/or the articles of association shall have no legal effect.
If the payment of the profit share was made illegally, i.e. on the basis of an ineffective decision, the shareholder must return the paid profit share, regardless of whether he or she was in good faith.
This does not apply to a public limited company, where it is assumed that the control of shareholders over whether the decision to pay out profits is in accordance with the law is generally lower, and therefore they are allowed to invoke good faith to the detriment of the members of the statutory body, who in such a case will bear the consequences of the illegality of the decision to pay out profits.
Members of the statutory body should be cautious when paying out profits and carefully check that all legal conditions are met. In the event of misconduct, they are liable for the damage caused by such misconduct. As a result, the company could claim the illegally paid amount from the members of the statutory body.
If you are not sure whether all the legal requirements for payment of profits are met, do not hesitate to contact any of our colleagues at Grant Thornton Czech Republic.
Author: Veronika Odrobinová, Aneta Koubková