Should directors be loyal to their companies 24/7? Czech law and the Supreme Court say yes

Czech Republic

Imagine a company being party to a lease contract with its director and the director (as a lessor) not being paid rent by the company as a lessee. Then imagine this director withdrawing from the contract by delivering notice to himself as a company director and as a result of the withdrawal, the company no longer fulfils conditions for state aid entitlement and must return millions. This actually occurred in the Czech Republic, and the incident raised following legal question:

Is the director to blame for giving preference to his personal interests (of being paid rent) over the company's interests concerning a valid contract entitling it to state aid?

This question reached the Czech Supreme Court, which ultimately ruled that the director is obliged to fulfil his duties and be loyal to the company 24/7.

This judgement, however, does not mean that the director is not entitled to have personal interests that – from time to time – conflict with the interest of the company. Czech law, however, deals with this conflict by establishing rules on director conflict of interest.

In general, these rules prohibit a director from acting on behalf of the company where there is a conflict between his interests and that of his company. The director in this case did not adhere to these rules. By representing the company in a scenario where there was a conflict of interest and ignoring the relevant rules, this director breached his duties and was obliged to compensate the company for the damage caused.

The takeaway is that when there is a conflict of interest between the director and the company (including a potential conflict), the director should follow the specific rules on conflict of interest and at no time neglect his directors' duties, including his duty to be loyal to the company.

Should a director neglect these duties and the company subsequently become insolvent, learned creditors will seek that the director compensates the company for damage caused as a result of not adhering to the rules on the conflict of interest. This will increase the insolvency estate and lead to greater satisfaction of the creditors during the insolvency proceedings.