The fast-paced, sometimes hectic flow of everyday businesses may lead us to overlook statutory data registry or reporting obligations. While these omissions, such as the failure to report an address change, a new delivery agent, or to publish the annual account balance, may seem as minor flaws bearing little or no consequence, they can actually result in severe court sanctions.
This article pinpoints how to prevent a situation that would escalate to a perhaps entirely unexpected court sanction. To ensure that a firm can continue its businesses without disruption, vigilance over the lawfulness of its operations shall be sustained. In 2020 we also need to keep in mind that the corporate compliance reviews, initiated by company registry courts, have increased in number.
The case flow in 2019 and now: less registration, more reviews
The economic setbacks of Covid-19 and a fear of the second wave already show in the corporate register indicators, negatively affecting the earlier dynamic of corporate establishments, and compared to last year’s data, the number of amendment notification proceedings initiated due to the companies’ changing business operations and corporate finances. The uneven flow of businesses accordingly altered the case flow of the company courts: the focus shifted from the reduced number of company establishments and modifications to the increasing number of corporate compliance reviews. In light of the more frequent compliance checks, corporations that so far complied with the statutory requirements, will continue to be able to prevent an unwanted proceeding by means of sustained self-vigilance. This internal procedure involves a complex set of self-checks in which the corporate team of bpv Jadi-Nemeth Attorneys can provide their professional assistance and practical insights. In the following sections we outline criteria for the lawful operations of a company—and for those companies that are already subject to the courts’ compliance proceedings, we also outline some possibilities to restore lawful operations.
Check-in-the-box: Suprise reviews for unlawful firms
Our attorneys recently observed an increasing number of cases where clients were not even aware that their company operated unlawfully, the court deed just came suddenly and apparently without preliminary signs. One may wonder, if the company does not know, (including the management, accounting, or other responsible persons) then how can the courts of registry receive information of the omission? The answer is: by means of a continuous review of the corporate data and information submitted to the company- and tax registers. Companies often become subject to corporate compliance review proceedings because they simply failed to report, on due time, a change in their corporate data, or missed to send an annual accounting balance report to the tax authority. The company registry courts are obliged, by statutory provisions, to initiate a corporate compliance review ex-officio if they observe any significant omissions or signs of unlawful operations during their proceedings. The courts can also be informed of expired data, or, for that matter, deeds of foundation that do not comply with statutory provisions prescribed for a specific company form, during an amendment notification proceeding. But even the courts’ IT system may send automated notifications on expired corporate data, or for that matter, the death of natural persons earlier registered for corporate functions. The courts will proceed ex-officio also if they receive information on corporate law infringements from informants that are otherwise not entitled to initiate a compliance proceeding due to legal interests, conflicts of interests, or for other reasons. Reasons for initiating a proceeding ex-officio are specified under Section 76 of the Companies’ Act (Act V of 2006).
To-do list to prevent a corporate compliance review proceeding
The criteria to initiate a corporate compliance review proceeding are described under Section 74 para (1) of the Companies’ Act, however, to ensure that a company operates in compliance with the law, other provisions, relevant to the specific company form, shall be taken into consideration—including provisions of the Civil Code, the Act on Accounting (Act C of 2000), and the Act on Corporate Taxation (Act LXXXI. of 1996). At the same time, the scope of corporate compliance review does not extend to the surveillance of a company’s profitability, only and exclusively to the fulfilment of statutory requirements such as the posting of annual balance reports and mandatory data disclosure to the tax authority. As set in Section 74 para (1) of the Companies Act, the court of registry can initiate a corporate compliance proceeding against a company if
- the deed of foundation, its amendment, or any data recorded in the companies register is unlawful for reasons that incurred before registration;
- the data entered in the companies register become unlawful for reasons incurred after registration;
- the deed of foundation, its amendment, or the companies register do not contain the provisions required by the legal regulations that apply to the specific company form;
- the company fails to operate in compliance with legal regulations or with the provisions of the deed of foundation pertaining to the specific company form's structure and operations;
- judicial oversight proceedings are prescribed mandatory by law.
Possibilities for non-compliant firms: how to restore lawful operations
If the court initiated a corporate compliance review proceeding for the above reasons, the involved company still has the possibility to complete the requested data submissions, reports, or fulfil other statutory obligations on due time, as it is set in the court or tax authority’s call for submission.
Our attorneys observed a generally positive outcome for those companies that fulfilled the statutory requirements upon the call for submission; these companies succeed in restoring their lawful operations and the compliance review proceeding is eventually terminated. In such cases, companies are permitted to continue their businesses without any impediments, and they can even save expenses as they pay only 10% of the court duties.
Nevertheless, those non-compliant companies that fail to complete their missing submissions on due time upon the court’s call, will face severe sanctions. The court may order the company’ s deregistration, and the tax authority may delete the company’s tax identification number. A company undergoing deregistration can no longer pursue its business activities. Any company contesting the court decision issued after the corporate compliance review proceeding is entitled to file an appeal.
The end of grace period: suspended deregistration proceedings continue in November
The company courts continue to suspend any ongoing deregistration proceedings until 31 October, according to a government decree issued in May to alleviate economic setbacks of the COVID pandemic. During this half-year grace period, which soon comes to an end, the courts are not permitted to decide on the mandatory deregistration of a non-compliant company. The involved companies have had some extra time, until the end of October, to restore their lawful operations and complete their missing statutory obligations upon the call of the court or tax authority, in order to settle the situation that would have otherwise led to the mandatory termination of their operations.