Forfeiture of the Mandate of an Executive Director and the Board of Directors

A Ticking Time Bomb in Your Company: Why an Expired Mandate Is More Serious Than You Think?

Although Act No. 90/2012 Coll., on Business Corporations (hereinafter the "BCA") typically assumes an indefinite term of office, many companies limit the term without implementing a system to track it.

Of course, a term of office can also end in other ways, such as resignation, removal, or the death of a board member. In each of these cases, however, the law requires a swift response. Under the provisions of Section 198 of the BCA, the General Meeting must elect a new executive director within one month of the previous one's term ending.

If this does not happen, the company finds itself without a validly appointed representative. It cannot legally enter into contracts, conduct banking transactions, or make binding decisions. This situation directly threatens its operations and often points to deeper deficiencies in internal corporate governance.

Discovering an expired mandate should therefore be a signal for a broader audit of your corporate governance. It is likely not an isolated mistake. The lawyers at ARROWS specialize in this area and can prepare a comprehensive review of your company's internal processes and documentation. For an immediate solution to your situation, write to us at consultation@arws.cz

Legal Consequences in Practice: Invalid Contracts, Blocked Accounts, and Protection of Third Parties

The consequences of acting without a valid mandate quickly become apparent in the company's daily operations. Any legal act performed by an executive director after their term of office has ended is potentially void from the very beginning (i.e., ex tunc). This is not a minor technical defect, but a fundamental problem that can challenge the validity of lease, supply, and employment contracts.

A key fact that surprises many entrepreneurs is that the entry in the Commercial Register is merely declaratory (confirmatory), not constitutive (founding) in nature. The executive director's office therefore legally terminates on the day the term expires or the day the resignation is discussed, regardless of what is stated in the public register.

However, this is where a paradox arises. Act No. 89/2012 Coll., the Civil Code, protects the good faith of third parties (banks, business partners, authorities) who rely on the data in the Commercial Register. If a third party is unaware that the executive director's mandate has expired, the company is bound by their actions. The company can thus find itself in a situation where it is legally bound by a contract signed by a person with no authority to represent it.

This discrepancy between the actual and registered status is extremely risky for the company. Maintaining up-to-date data in the register is therefore not just a bureaucratic duty, but a fundamental element of risk management and company protection. At ARROWS, we provide our clients with comprehensive corporate governance, including monitoring key deadlines and timely updating of register data. Connect with us at consultation@arws.cz and get a tailor-made legal solution.

Who Bears the Responsibility? The Former Executive at Risk

Responsibility for the chaos caused by an expired mandate does not fall solely on the company. The executive director whose term has ended is also exposed to direct and very tangible risk. Their duty to act with the due care of a prudent manager, enshrined in Section 159 of the Civil Code and Section 51 of the BCA, does not automatically end on the day their office terminates.

If a person who is no longer an executive director continues to act on behalf of the company, they are fully liable for any resulting damage. The case law of the Supreme Court (e.g., decision file no. 29 Cdo 4095/2016) is uncompromising in this regard: an executive is liable for their actions taken after removal (or other termination of office) as if they were still in office. It is irrelevant whether they were aware of the termination of their office.

This liability is personal and unlimited. The executive is liable for the damage caused with all their assets. Therefore, if the company suffers a loss due to a contract by which it is bound because of the protection of a third party's good faith, it can subsequently claim this damage directly from its former executive. Every member of a statutory body therefore has not only the right but also the duty to know the status of their mandate and to take an active interest in its duration.

Step-by-Step Guide to Remediation: How to Get Your Company Back in the Game

Resolving a situation with an expired mandate requires a swift and formally flawless procedure. Any mistake in the remediation process can lead to further legal complications. The following steps represent a proven path to restoring legal certainty.

Step 1: Convening a General Meeting

The first and most important step is to convene a General Meeting, which is the only body authorized to elect a new executive director. It must be convened by an authorized person – typically another executive director (if one exists), the supervisory board, or, under certain circumstances, a shareholder with a sufficiently large stake. The invitation must contain all legal requirements to prevent the General Meeting's resolutions from being challenged later.

The ARROWS team will handle the complete preparation and organization of the General Meeting for you, from drafting invitations to moderating the meeting itself, thereby guaranteeing the legal validity of all adopted resolutions. Need legal assistance? Contact us at consultation@arws.cz.

Step 2: Election of a New (or Re-elected) Statutory Body

At the General Meeting, a vote will be held to elect a new member of the statutory body. This can be a completely new person, or the same executive director whose mandate expired can be re-elected to the position. This step effectively "cures" the absence of a statutory body. It is necessary to adhere to the quorum and voting majority stipulated in the articles of association.

Step 3: Entry in the Commercial Register

After a valid election, the change must be registered in the Commercial Register without undue delay. There are two ways to do this:

1. Filing a motion with the court: The standard route using the so-called intelligent form on the justice.cz website. The court fee is CZK 2,000.

2. Direct registration by a notary: If the General Meeting's decision is certified by a notarial deed, the notary can register the entry directly in the register. This procedure is significantly faster and cheaper (fee of CZK 1,000).

The choice between these two options is not just administrative, but strategic. In a crisis situation, for example when company accounts are blocked, the speed of direct registration by a notary is invaluable. Our Prague-based lawyers at ARROWS will recommend the optimal procedure for your specific situation and handle the entire registration process.

The motion must be accompanied by the minutes of the General Meeting, a declaration of honor from the newly elected executive director, and their consent to the registration with an officially certified signature.

A Safety Net for Past Mistakes: Can Invalid Acts Be Cured Retroactively?

But what about the contracts and acts that the executive director made in the interim, when their mandate had already expired but a new one had not yet been elected? For these cases, Czech law provides for the institute of ratihabitio, or subsequent approval. This mechanism, regulated in Section 440 of the Civil Code, allows a company to retroactively approve actions taken on its behalf by an unauthorized person.

If the newly and validly elected statutory body approves this action (for example, by a formal resolution), it becomes binding on the company from the very beginning (ex tunc). However, ratihabitio is not a panacea and has strict rules. It must be carried out "without undue delay" after the company learned of the unauthorized action, and the form of approval must be appropriate to the nature of the act being approved.

The correct assessment and execution of ratihabitio is a complex legal act that requires expert knowledge. The lawyers at ARROWS have extensive experience with this institute and will prepare a legal opinion and all the necessary documentation for you to validly cure past actions. Do not hesitate to contact our firm – consultation@arws.cz.

Solutions with an International Scope: ARROWS International as Your Partner

Complications associated with a change in the statutory body multiply if the executive director is a foreign national or if your company is part of an international group. Obtaining a criminal record extract from abroad, having documents apostilled or superlegalized, and arranging official translations are processes that can significantly delay and complicate the remediation of the situation.

Thanks to our ARROWS International network, which we have been building for ten years, we handle corporate matters with an international element on a daily basis. We have established procedures for quickly obtaining the necessary documents from abroad and can effectively coordinate legal steps across jurisdictions.

Prevention is the Best Strategy. Secure Legal Certainty with ARROWS

An expired mandate is a serious risk that can and should be prevented. The best solution is not to fight fires, but to implement robust internal processes that prevent such situations. Our experience from the long-term administration of more than 150 joint-stock companies and 250 limited liability companies shows that a proactive approach is key.

At ARROWS, we not only solve acute problems for our clients, but above all, we build systems that prevent them. We provide services such as drafting internal corporate governance guidelines, professional training for management and employees including certification, or regular reviews of founding documents.

We pride ourselves on speed, high quality, and building long-term relationships. We also actively help our clients connect with business and investment opportunities.

Don't wait for a problem to arise. Secure legal certainty for your company today. Connect with our experts at consultation@arws.cz and arrange an initial consultation.