(Non)prescription of the right to fulfill capital contribution obligations in joint-stock companies

The Supreme Court, in its ruling dated June 27, 2024, under ref. no. 27 Cdo 1606/2022, addressed the issue of whether the right of a joint-stock company to demand the fulfillment of a shareholder's capital contribution obligation, specifically the payment of the subscription price for shares, is subject to prescription. It also considered the consequences of the prescription of this right in terms of the shareholder’s expulsion from the company.

Basic Facts of the Case

In this case, the applicant, a shareholder, sought a declaration of nullity of a resolution passed at the company’s general meeting. The reason was that the applicant was denied participation in the meeting as the company no longer considered her a shareholder due to her failure to pay the subscription price for the shares. The general meeting took place more than 20 years after the applicant had defaulted on fulfilling her capital contribution obligation. Subsequently, the company expelled the applicant for failure to meet this obligation.

Decisions of the Lower Courts

The court of first instance declared the resolution of the general meeting null and void, reasoning that the company’s right to collect the subscription price was time-barred after such a long period and that enforcing this right would be contrary to good morals. Consequently, the applicant should have continued to be recognized as a shareholder.

The High Court in Prague upheld the decision of the lower court, concluding that the prescription of the company’s right to demand the fulfillment of the capital contribution obligation extinguished the negative consequences of the shareholder’s default in fulfilling this obligation.

At the time the company was established, the issue of prescription was governed by the Commercial Code, which provided that rights arising from obligations are subject to prescription unless otherwise provided by law. The general prescription period was four years. The lower courts based their decision on the understanding that the capital contribution obligation constituted an obligation between the shareholder and the company and, therefore, was subject to prescription. Consequently, after the prescription period had expired, the company could neither demand payment of the subscription price nor expel the shareholder from the company.

Prescription of the Capital Contribution Obligation

The key legal issue the Supreme Court needed to address in this case was whether the right of a joint-stock company to demand the fulfillment of a capital contribution obligation is subject to prescription, and what the implications of such prescription would be for the shareholder.

Interpretation by the Supreme Court

The Supreme Court reached a different conclusion than the lower courts.

While acknowledging that the literal wording of the law might suggest that the right to demand the fulfillment of the capital contribution obligation could be subject to prescription, the Supreme Court reminded that a linguistic interpretation of the law is only a preliminary approach to understanding legal norms.

The Supreme Court agreed with some academic views suggesting that certain proprietary rights may be non-prescriptible if there are sufficiently serious reasons for this—even if the law does not explicitly provide for non-prescription, as long as the purpose and intent of such rights require them to be exempt from prescription.

The Supreme Court considered several factors, including:

• the purpose of establishing the registered capital, which serves a guarantee function for the company’s creditors, thus aiming to protect the rights of third parties;
• the legal prohibition against a joint-stock company waiving a shareholder’s capital contribution obligation (Section 344, paragraph 3 of the Business Corporations Act);
• the suspension of voting rights for shareholders who are in default on fulfilling their capital contribution obligations;
• the fact that allowing the circulation of unpaid shares without any consequences would essentially enable the existence of de facto anonymous shares, whose existence in physical form is excluded by law.

These reasons, collectively, led the Supreme Court to conclude that the right to fulfill a capital contribution obligation is not subject to prescription.

Application to Limited Liability Companies?

The Supreme Court’s decision focused exclusively on the prescription of the right to fulfill capital contribution obligations in joint-stock companies. A question arises as to whether these conclusions could also apply to limited liability companies.

In my personal opinion, the above conclusions cannot be applied to limited liability companies. Unlike joint-stock companies, limited liability companies are not purely capital-based entities and exhibit significant differences, as they also incorporate elements of partnerships.

However, the ultimate interpretation for limited liability companies remains to be determined by future court rulings.

Conclusion

The right of a joint-stock company to demand the fulfillment of a shareholder's capital contribution obligation is not subject to prescription. A shareholder who has not paid the subscription price for the shares thus risks expulsion from the company regardless of any prescription period.