In addition to the risk of public law sanctions, an incorrect or missing entry in the register of real owners entails the risk of private law sanctions. These are the unenforceability of so-called cover-up contracts, the prohibition of the payment of a share of profits and the prohibition of the exercise of voting rights. The first consequence stands slightly aside, as it aims at preventing the use of "implanted" persons as so-called fictitious real owners. However, the other two consequences of a beneficial owner registration discrepancy have significant corporate ramifications. In this article, we will focus on how these two sanctions manifest themselves in a business corporation and what the consequences are.

Records of beneficial owners

It entered into force on 1 June 6 Act No. 37/2021 Coll., on the registration of beneficial owners (hereinafter referred to as: "Act on Registration of Beneficial Owners"). Generally it is for the purpose of registering the real owners legal entities (and trust funds) to ensure transparency the legal organization of legal entities, which is intended to mainly serve to reduce the risk of criminal activity. It can therefore be said that every entity that is subject to the obligation to register according to the Act on the Registration of Beneficial Owners should state in the register of beneficial owners a natural person or natural persons who are the final recipients of a share in its profit or are persons with ultimate influence, both directly and indirectly through other entities. The records of real owners should thus break through the opaque organization of legal entities and display their real personnel and organizational structure. However, this only applies on the condition that the data in the records of the real owners are up-to-date and correspond to the actual situation.

Thus, the central point of the Act on the Registration of Beneficial Owners is the registration of all natural persons who are required by law to be entered as beneficial owners in the register of beneficial owners, which is maintained by the relevant courts. The key here is to every entity subject to the registration obligation had some information about the real owner registered. However, if it is only a minor discrepancy or inaccuracy in the data listed in the register of beneficial owners (and the register already contains some information about the beneficial owner), then under the conditions of § 44, paragraph 1 of the Act on the Register of Beneficial Owners (and if it is appropriate to protect the rights of third parties) leaves it to the discretion of the court whether to initiate proceedings. However, for the avoidance of doubt, it is necessary to add that whether the entry in the register is completely missing or is only slightly incorrect, in accordance with § 2 letter (l) of the Act on the Registration of Beneficial Owners is always the so-called discrepancy. We will focus on this concept further.

Irregularity in the registration of the real owner

The Act on the Registration of Beneficial Owners understands the term irregularity a situation where any information about the real owners of the entity is missing or the information is incorrect, either from the beginning or if it has become out of date in the process. The moment of the actual occurrence of the discrepancy is precisely the decisive moment from which the effect of individual private law sanctions depends. We believe, however, that in practice it is difficult to ensure that these sanctions will actually take effect at the moment of the irregularity. Motivating entities to comply with these sanctions without the irregularity being declaratively decided by the court on the basis of the irregularity procedure according to § 42 et seq. Act on the Registration of Beneficial Owners, may be minimal. The purpose judicial proceedings is above all correction of inaccuracies in records, not the punishment of the relevant subject, although at least the retroactive certification of an irregularity in some past period can be a consolation. So the whole process can be described as follows:

If the public authority reasonably believes that it has detected an irregularity, he reports his suspicions to the court competent for registration in the register of real owners of the given entity.

Court first calls on the recording entity to eliminate the discrepancy or to refute it and sets him a reasonable deadline for this. An appeal against such a call is not admissible. If the irregularity is removed or refuted by the registering entity, the court will no longer initiate proceedings on the irregularity.

If the incomparability is not eliminated, the court will issue resolution on the initiation of irregularity proceedings. This resolution is delivered to the registering entity and, where applicable, to entities that did not provide sufficient cooperation. An appeal is not admissible here either.

Simultaneously with the initiation of the proceedings writes a note about the discrepancy in the records. She only has so far informative and warning character.

After taking the evidence (usually without ordering a hearing, if it is not necessary), the court issues a decision that either refutes the discrepancy or, on the contrary, confirms it. If it is refuted, the court will enter in the note the way in which it was decided and delete the note from the records. However, if they confirm it, then on this basis a public sanction may be imposed by the administrative body. As already mentioned above, so the court's decision is declaratory, and therefore only certifies which data do not correspond or did not correspond to the actual state.

Therefore, if the discrepancy is confirmed, the court, after acquiring legal force, will write down the decision to the discrepancy note:

i. as decided;

ii. the date from which there was an irregularity in the records of the registering entity; and at the same time

iii. deletes incorrect data, or directly writes data corresponding to the actual state.

Prohibition of payment of profit share and prohibition of the exercise of voting rights

If the real owner of the business corporation is not registered in the register of real owners of the registering entity, the following applies:

a.            prohibition of payment of profit share (for the purposes of this article, we deliberately use the term "benefit", which includes not only a share of profits and other own resources, but also other benefits provided to partners/shareholders of a business corporation, as the law interprets the prohibition more broadly); and

b.            prohibition of the exercise of voting rights.

These prohibitions are understood very broadly in the provisions of § 53 and 54 of the Act on the Registration of Beneficial Owners.

Prohibition of payment of profit share

Prohibition of payment of profit share applies to a natural person who was not registered as the real owner in the register (although he should have been). It also affects and legal entities or arrangements of which he is also the beneficial owner (with the exception of situations where the beneficial owner is, by virtue of his position in top management, pursuant to § 5 para. 1 and 3 of the Act on the Registration of Beneficial Owners). It also affects entities that do not have any real owner registered in the register.

Another important aspect (or rather a logical consequence) of this ban is that it also results in the termination of the right to a share of profit that has not been paid by the end of the accounting period, in which his payment was decided.

Prohibition of voting rights

In the event of a ban on the exercise of voting rights the beneficial owner may not exercise voting rights or make decisions as its sole partner in the decision-making of the highest body of this business corporation, neither he, nor the legal entities or arrangements of which he is also the beneficial owner, or the person acting on behalf of the arrangement of which he is also the beneficial owner (again with the exception of the situation where he is the beneficial owner based on his position in top management according to Section 5, paragraphs 1 and 3 of the Act on the Registration of Beneficial Owners). That's right if he decided as the sole partner contrary to the above prohibitions, it is possible to invalidity appeal this decision only according to the rules on the invalidity of the decision of the sole decision-making partner in the jurisdiction of the highest authority according to the Act on Business Corporations. In other cases, his voice is not considered.

Selected Corporate Consequences of Beneficial Owner Registration Irregularities

The sanctions we are dealing with are, in the narrower sense of the word, only a ban on the payment of a share of the benefit and a ban on the exercise of voting rights, but the consequences of their action in the broader sense of the word are more. We will therefore focus further on selected main and most frequent impacts of these sanctions.

Return of the paid share of the profit or other benefits in favor of the given person

If the given person was paid a share of the profit or other performance without authorization (or a benefit, as we defined this term above, while the term benefit is very broad and includes, among other things, the return of a monetary supplement), then in the case of a business corporation one of two situations will occur :

• unjust enrichment on the part of the recipient, which he will be obliged to return in accordance with the rules according to § 2991 et seq. of the Civil Code; or
• the recipient's obligation to return the paid share of the profit according to the rules of § 348 paragraph 4 of the Act on Business Corporations.

The decisive factor here is whether the situation occurred in a joint stock company or other business corporation (or arrangement):

Joint-stock company

Only a joint-stock company has the right to return an illegally paid share of profit according to Section 348, paragraph 4 of the Act on Business Corporations. In the terms and conditions of the joint-stock company, it is true that the beneficiary in good faith is not obliged to return the benefit to the company. However, in the case of the illegality of the payment due to the violation of the ban on the payment of benefits, it is hardly possible to consider the good faith of its recipient, who, as a rule, could at least always have been aware of the discrepancy in the registration of the real owner.

Other business corporations

In the conditions of other business corporations will apply the standard rules for issuing unjust enrichment according to the Civil Code. Which further means that the protection for bona fide payees outside the joint-stock company does not apply (the protection of bona fide shareholders results from the purely capital nature of joint-stock companies). The extent of the unjust enrichment, which the recipient will be obliged to return, may, however, modify his honesty in the sense of § 3000 of the Civil Code.

In the case of a claim for the return of an illegally paid profit share according to § 348, paragraph 4 of the Business Corporations Act, this is a relatively recent change. Before the so-called major amendment of 2021, the Act on Business Corporations worked with a general exception from unjust enrichment in general for all capital companies in the then provision § 35. However, at present this only applies to joint-stock companies and to other business corporations the normal rules for issue of unjust enrichment.

The conclusion that follows from the above is that the company may be entitled to the return of the benefit paid, and the recipient, on the other hand, may have an obligation to return it to the company, as we will show below.

Violation of the duty of care of a proper householder when paying profit or other performance in favor of the person in question and the obligation to request the return of unauthorisedly paid profit

The counterpart to the obligation to return an unjustified benefit on the part of its recipient is the opposite duty of a business corporation, and thus its statutory body, in the event of a claim for the return of the benefit paid (either according to § 2991 et seq. of the Civil Code or according to § 348, paragraph 4 of the Act on Business Corporations in the case of a joint-stock company) apply it to its recipient. This is in accordance with the principle of care of a proper householder according to § 159 of the Civil Code. At the same time, the members of the statutory body exposed themselves to the risk of violating the care of a proper householder by the previous unauthorized payment of benefits. If the ban on the payment of benefit is activated, then the member of the statutory body does not act in accordance with the care of a proper householder, if it is paid to the recipient. In such a case, he violated the rules for the payment of a share of the profit (respectively the benefit) sensu largo and the payoff was illegal.

However, the member of the statutory body can be released if he proves that he acted in good faith and in accordance with the so-called business judgment rules.

Visibility of the underlying resolution for the payment of profit

Banning the exercise of voting rights will then ensure that at all the underlying resolution itself for the payment of the profit share, or about its division, can be directly apparent in accordance with the principle of equity preservation (the ban on payment in the sense of the Act on the Registration of Beneficial Owners aims not only at the payment, but also at the distribution of the profit share).

We lean toward this conclusion, as the legal doctrine stipulates a conclusion on the validity of the resolution of the general meeting in the event of a conflict with the rules for the payment of a share of profit in the sense of Sections 34 and 35 of the Act on Business Corporations. It is in accordance with the principle of equity preservation (and creditor protection) that the equity remained protected against its unlawful decrease. In other words, in the case of its illegal decrease, the underlying resolution of the general meeting on the distribution of the profit share is so illegal that it should never have been accepted. Therefore, if the resolution could not be adopted without the votes of the person in question, it is looked upon as if it had never been adopted. However, the consequence is ultimately the same as in the case of an illegal payment of a profit share, as mentioned above.

However, for the avoidance of doubt, we state that in the case violation of the ban on the exercise of voting rights when voting on other issues its violation leads on the invalidity of the resolution, and not to its appearance. At the same time, if when a decision is made by a single partner or shareholder within the scope of the general meeting in violation of the prohibition, the law in such cases always expressly implies only invalidity of the given resolution.

záver

We definitely recommend not to underestimate the risks arising from incorrect and, in particular, missing entries in the records of real owners. Some corporate consequences can be very serious for a business corporation, as we have tried to illustrate in this article. In addition to the risks mentioned above, the discrepancy in the records of the real owner is significant consequences also within the AML legislation. Although, of course, we perceive the administrative burden, as well as other obvious negative connections associated with the mandatory registration of real owners, the potential adverse consequences clearly outweigh them in our opinion.

Source: epravo.cz

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