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The International Journal
of Not-for-Profit Law

Volume 12, Issue 1, November 2009

A publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor

NGOs in the Political Realm

Special Section

Political Activities of NGOs: International Law and Best Practices
International Center for Not-for-Profit Law

NGOs: An Antibiotic Against Bureaucracy, Democracy's Degenerative Illness
Eduardo Szazi


Citizen Participation in Mexico Through Advisory Councils
Consuelo Castro

State Supervision of NGOs in Peru
Maria Beatriz Parodi Luna

Endowment Funds: New Develpments in the World of Philanthropy in France
Philippe-Henri Dutheil

Legal Framework for External Supervision of NGOs in Current Czech Law
Katerina Ronovska

British Charities and Insolvency
Pesh Framjee

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Editorial Board

Legal Framework for External Supervision of NGOs in Current Czech Law

Katerina Ronovska1

Supervision of NGOs is a very sensitive issue that has become the focus of frequent debates. The term “supervision” can have different kinds of meaning. Supervision can be internal or external, private or public, governmental or nongovernmental, prior (and also preventive) with regards to establishment, or subsequent, judicial, etc.

The reason for the necessity of some form of supervision is, above all, the effort to achieve public accountability, legal security, certainty, and protection of third-party rights, assets, and the will of the founders, as well as to enforce compliance with the law and to correct any wrongdoings. If supervision functions properly, it contributes to the maintenance of legal certainty and can act as a motivating factor. However, if it is inadequate, it may have quite the contrary effect.

This article provides a summary overview and constructive critique of the concept and practice of external supervision of NGOs in the Czech Republic, as provided for by current Czech law.

I. External supervision with regard to the establishment and operation of non-profit organizations

1. Governmental supervision (general)
It is a political decision whether the creation of an association as a legal person depends on its recognition by the state, a signature of a notary public, its incorporation in the relevant registry, or merely the agreement of its members.  

The current legal regulation of association law2 gives the registering authority to the Ministry of the Interior, i.e., a body of state administration.3

It is clear that a greater freedom is assured when the government does not interfere with the formation of associations as legal persons. On the other hand, it is in the interests of members and third parties that the content of the fundamental document is in harmony with the law. The assessment of the acceptability of the purpose of an association is carried out at the very moment of its creation, which depends on its registration (i.e., the acknowledgment by the public authority). However, such a prevention-oriented check is not very effective since it may happen that the founders do not reveal their actual purpose. There is the danger of unjustified refusal to register an association.

In spite of these arguments, I do not believe it is the most suitable solution if the competence related to the exercise of the right to the freedom of association is, in a democratic state, given over to a state administration body, namely the Ministry of the Interior, which cannot be even formally considered as independent or apolitical. In comparison with the legal regulations in other countries, and especially the more developed West European democracies, it may be concluded that the current conception does not correspond to European best practice.

The new Civil Code aims to change the existing legal regulation of the creation of associations. Under the proposed regulation,4 the registration principle had to be abandoned and replaced by a form more conforming to the constitution—i.e., the principle of freedom of creation and the subsequent record of the association with the relevant authority, made on the basis of a notification.

However, the Ministry of the Interior strongly objected to this conception during the comments stage. Despite the argumentation of the drafters of the new Civil Code, the registration principle found its way back into the final version of the draft. At the same time, it was definitely decided that associations should be removed from the scope of powers of the Ministry of the Interior. Instead, they should be subject to a registering body common for all kinds of legal persons. This might be a registry court or a registering body established by the Ministry of Justice.

The NGO sector keeps on trying to change this political decision, mainly through the Government Council for NGOs. A suitable compromise could be found in the application of the “evidentiary” principle, under which associations would be formed not upon registration but already upon the delivery of the motion to register an association to the registry of the relevant authority. This principle would conform better to constitutional and international law. Moreover, it would not be new to the current Czech legal situation: it is already applied in the process of the formation of trade union organizations and employer organizations.

There are many reasons for associations being registered in a public registry. However, the Czech Registry of Civic Associations is not a public list, which is unsatisfactory mainly due to the protection of third-party rights. This drawback should be addressed in the new Civil Code by the establishment of a public registry of associations.
Society has an interest in preserving the property of foundations and endowment funds for the performance of the foundation purpose due to the protection of third-party rights (founders, donors, beneficiaries, creditors, etc.), whereby foundation freedom is being lawfully limited.
One of the reasons for the existence of external supervision over foundation subjects is the fact that they are defined as existing without any body (similar to the general assembly of members of corporations) that might give rise to a foundation’s will, balance out the position of the executive body, and have a certain supervision over it. It is true that individual foundation subjects are typically established with internal supervision bodies (supervisory boards); however, these cannot replace the role of the supreme body.

If the external supervision functions properly, it contributes to the maintenance of legal certainty and motivates potential founders of foundations. However, if it is inadequate, it may have quite the contrary effect.
There are no special external supervisory bodies for foundations in the Czech Republic, although they were originally included in the governmental draft of the Act on Foundations and Endowment Funds. However, during the discussions of the draft in the Parliament, this section was found to be redundant and too expensive and, as a result, removed. Despite this fact, the current law5 provides for a number of preventive measures reducing the possibility of misusing the institute of the foundation.
External supervision over foundation subjects is performed by courts administering the foundations registry and the relevant tax administrators (internal revenue offices). There is, of course, the possibility of not only civil but also criminal court proceedings.
Since emphasis is placed mainly on the prevention of possible mistakes, Chapter VI of the Act on Foundations and Endowment Funds provides relatively strict rules for bookkeeping and the preparation and publication of annual reports, as well as the possibility of compulsory audits. The preventive character is further evidenced by the duty to draft the deed of establishment (foundation charter) in the form of a notarial deed. Public access to annual reports is compulsory, whereby the “transparency” of the economic situation of foundation subjects is assured.
What was stated above concerning foundation subjects applies correspondingly to public benefit institutions.6 There is likewise an absence of a special supervisory body, while emphasis is placed on prevention combined with control by courts and tax administrators.
However, the founder of a public benefit institution has a highly specific position. This is manifested in the actual establishment of the institution because the founder may specify that the deed of establishment determine that a certain number of members of the governing board or the supervisory board shall be elected or appointed upon the motion of a specific circle of citizens, a specific legal entity, local self-government body, or a body of the national government (e.g., the local community may influence the management staffing of a school, retirement home or cultural institution of which it is a founder). In this way, a certain influence is exerted over the “internal life” of a given subject.
2. Court supervision
Under the valid law, an association may be forcibly cancelled only on the basis of a final and conclusive administrative decision by the Ministry of the Interior, with reference to an explicit list of reasons delimited by law. Such a decision, however, has to be preceded by a compulsory notice and a request asking the association to refrain from such activities. A remedy against the cancellation of a petition may be filed with the court.

I believe that only the court, as an independent body, and not Ministry of the Interior, should have the power to terminate any association undertaking unlawful activities or acting in conflict with its articles of association. In fact, it is a status-related issue the decision of which should be exclusively taken by court. However, this is currently not possible under the valid Czech law, which I consider to be highly inappropriate.
The current law does not provide for any direct public law supervision over foundations and endowment funds. The supervision by the state is performed indirectly mainly by the relevant courts which always act on the basis of a motion submitted to them (by the founder, the executor of a testament, the governing board, or some other person evidencing a legal interest). In exceptional cases, it may decide even without being submitted a motion.
A decisive role in the creation (registration) of a foundation entity is played by the decision of the registry court. A proposal to register the foundation/endowment fund in the registry is submitted by the founder or the executor of the testament or a person authorized by these in writing; the proposal must be accompanied by its foundation charter and other documents.7
A foundation/endowment fund can be wound up by the court decision on winding up or by the declaration of bankruptcy or the rejection of a bankruptcy motion due to insufficient assets. The court will wind up a foundation whose foundation equity (endowment) yields no revenues on a permanent basis and the foundation has no other assets and thus cannot fulfill the purpose for which it was set up or whose foundation equity falls under CZK 500,000 and the foundation fails to rectify the situation within a specified period of time. The court can wind up an endowment fund whose assets have been irrevocably used up (disbursed) and the endowment fund can no longer fulfill the purpose for which it was set up.
The court can also wind up a foundation/endowment fund if the foundation subject in its activities gravely or repeatedly violates the Act on Foundations, its foundation charter or statute; if in the last year, not a single session of the governing board was held or no members of the bodies were elected, nor a controller, to replace those members whose membership or office ceased to exist more than one year ago; or if the foundation endowment fund did not fulfill, in the period of at least two years, its purpose for which it was set, and the foundation subject fund did not make efforts to rectify the matter by the deadline extended by the court.
The winding-up is also possible when the governing board fails to appoint the liquidating officer. In such a case, an officer shall be appointed without unreasonable delay by the competent court.
If the foundation/endowment fund lacks a statutory body or just the board of directors is left with a single member due to the cessation of membership in the governing board of directors, new members of the board of directors will be appointed by the court upon the nomination by the Founder, the executor of the testament, the supervisory board, or even without any such nomination.
The court likewise decides on the possible change of the foundation purpose since this right is not vested in any internal body. In general, it is required that this purpose be changed as little as possible (this is the doctrine of cy-prés).8 The Czech legal situation does not deal with the issue of a change of purpose. No body or subject is named to decide on such a change, which is unsatisfactory. As a result, it is adduced that, although the law fails to provide this explicitly, such a change is to be decided upon by a court.
The cessation of a foundation’s existence is also conditioned by a constitutive decision by the registry court—i.e., the deletion from the registry of foundations.
What was stated above concerning the creation and termination of foundations and endowment funds applies correspondingly to public benefit institutions.
The court can, acting upon the motion of a governmental agency, the founder, or a person evidencing some lawful interest, decide on the winding up of the public benefit institution and on its liquidation if:

  1. no meeting of the governing board took place in the last year;
  2. no bodies (organs) were appointed and the term of office of the lastly appointed bodies of the organization had expired over a year ago;
  3. the organization has failed to render the publicly beneficial services specified in its deed of establishment for over six months;
  4. the quality, scope and availability of the publicly beneficial services for the rendering of which the public benefit institution was founded has been repeatedly endangered over the last six months;
  5. the organization uses the income from its operations and the assets it manages or acts otherwise in conflict with the law.

The court may set a period of time for remedying the cause for which the motion for winding up the public benefit institution was filed.
When the governing board fails to appoint the liquidating officer, such an officer shall be appointed without unreasonable delay by the competent court.
3. Supervision by tax authorities
Associations, foundations, endowment funds and public benefit institutions are obliged to make available their financial records and other administration to the tax authorities. The tax authorities do not supervise the organizations as such; they only check that they pay the right amount of tax, are legitimately exempt from certain taxes, or enjoy some special treatment.
Public benefit institutions also enjoy a special legal regulation. If the organization defaults in its duties under the law (Sections 2, 17, and 20), it shall be stripped of the tax benefits set forth by the Act on Public Benefit Institutions, by the Income Tax Act,9 and by the Inheritance, Gift and Property Transfer Taxes Act10 for the year in which such violation occurs, and also of the tax benefits set forth under the Property Tax Act11 for the next tax period following that in which the violation occurs.

II. Supervision with regard to other matters (e.g., enforcement of fiduciary duties and solicitation law)

Other persons participate in the supervision, e.g., the founder, the executor of a testament, and other persons evidencing a lawful interest. They may, in situations specified by the law, file a motion for the winding up of a given legal person by court. This, however, is not possible in the case of associations: these may be cancelled only by the Ministry of the Interior.
The enforcement of fiduciary duties in associations is merely a matter for the general meeting of members, which can dismiss the members of the governing board when they do not fulfill their fiduciary duties.
The enforcement of fiduciary duties of the members of the governing board of a foundation (endowment fund) may be the task of the supervisory board. However, as noted above, certain powers are also held by the relevant court.
The Act on Public Benefit Institutions contains a special regulation as regards subsidies from public budgets (state, regional, or municipal budgets) and state funds. The subsidies—from the budget of the central government, the communal budget, the district administration office budget, or the budget of some other territorial body of public administration—may only be granted to the public benefit institution for one and the same project or one and the same activity from a single source. The organization can apply for a subsidy from the governmental budget to the competent governmental body according to its prevailing activity. The body through which the subsidy is being granted shall decree the terms and conditions for granting the subsidy and it shall inspect and evaluate the utilization of the subsidy provided.
There are no similar provisions for associations and foundations (endowment funds). Certain rules, however, are provided by public law regulations—the most important being the Act on Municipalities, the Act on Regional Units, the Act on Budgetary Rules, the Act on Budgetary Rules of Regional Budgets, and the Act on the Property of the Czech Republic and its Representation in Legal Relations.
It is also possible for contracting parties to agree on other rights and obligations in their agreements on the provision of financial means, regardless of whether this concerns money from public or private sources. Any violation of such rules may be sanctioned by, e.g., the duty to return the contribution made.

III. Conclusions

State intervention in the internal matters of associations should generally be precluded by the constitutional right to the freedom of association. However, there is usually a legitimate attempt to establish certain norms limiting such a freedom, mainly due to the necessity to protect public order and third-party rights. A certain balance between the necessary control and the actual freedom of association should be observed. The law currently valid in the Czech Republic is not satisfactory from this point of view. It is wrong, in my opinion, to delegate the administration of associations to the Ministry of the Interior. Although law on civic associations quite unambiguously regulates the process of establishing an association as well as the objective conditions which may lead to the registration’s refusal, the approach exercised by the Ministry causes a number of problems.

In several cases,12 the Supreme Administrative Court ruled that any attempts taken by the Ministry to judge the registration or statutes proposal subjectively are unacceptable, similar to laying any obstacles or conditions other than those prescribed by law. Based on the aforementioned decision-making practice, one may observe a clearly marked tendency to remove any doubts concerning the lawfulness of the approach taken by the Ministry within the registration proceedings. In fact the Ministry’s practice has evolved in such a way that the proceedings of the registration authority have, in fact, become approval proceedings,13 which is in sharp contradiction not only to the Czech constitutional laws but also to the right to freedom of association stipulated by international documents. In addition, the legal regulation of the internal relations of associations, mainly for the protection of members’ rights and third party rights, is likewise insufficient.
As regards the supervision over foundations, endowment funds, and public benefit institutions, I believe that a policy emphasizing prevention combined with judicial control is desirable. This appears to be more suitable than the establishment of special authorities to oversee the activities of such subjects. In comparison with administrative (public) control, the judicial control has many advantages.
A significant role is also played by public supervision, i.e., not state supervision. This is carried out through the participation of other persons, e.g., the founder, the executor of a testament, and other persons evidencing a lawful interest. Last but not least, the obligation to publish annual reports and closing accounts contributes to the transparency of these subjects.
To conclude, the external supervision should be a supplement to internal supervision, and should be always exercised only in an objective way and limited to check lawfulness of the purpose and activities of NGOs.      
The combination of well-functioning internal supervision, private external supervision, and the supervision by the court are, due to the rigorous and extensive character of the legal provisions concerning the foundation law, in my opinion, sufficient. There is no need for some special supervisory organ to be established by the state.
On the other hand, there are some countries, e.g., Switzerland, which do have such a state supervisory body for foundations and find it very useful. The same holds for the Charity Commission in Great Britain. Those bodies not only control but often give advice and consultation to the NGOs.
A highly topical issue is the necessity of supervision over NGOs by the state in order to prevent the misuse of NGOs for the support of worldwide terrorism. This issue, however, is beyond the scope of the present article.


1 Katerina Ronovska works as an assistant professor of civil law at Faculty of Law, the Masaryk University of Brno, the Czech Republic, email: katerina.ronovska@law.muni.cz.

2 Act no. 83/1990 Coll., on association of Citizen (Civic Associations), as subsequently amended.

3 If state administration is active in the process of the creation of associations, it should play the role of a protector of the law only. It should not, for instance, evaluate the aims of associations from the political perspective. It is obviously necessary to act when a legal person acts in conflict with the public order but legal personality should not depend on the subjective view of some body of the state administration.

4 Section 151a of the proposed draft of the general part of the Civil Code, Eliáš, K, available at www.justice.cz, cited on 15. 10. 2006.

5 Act no. 227/1997 Coll., on Foundations and Endowment funds, as subsequently amended.

6 Regulated under Act no. 248/1995 Coll., on Pubic benefit institutions, as subsequently amended.

7 Section 5 subsection 3 of the Act on Foundations and Endowment funds.

8 The term originates in the French phrase “aussi prés”, meaning “as close as possible”, see also Riemer, H. M.: Berner Kommentar, Personenrecht, Die juristische Personen, 3. Teilband, Die Stiftungen, Systematischer Teil und Kommentar zu Art. 80 – 89bis ZGB [Commentar to Swiss CC], Verlag Staempfli, Bern, 1975, p. 238 a f.

9 The Act No. 586/1992 Coll., on Income Tax, as subsequently amended.

10 The Act of the Czech National Council No. 357/1992 Coll., on Inheritance, Gift and Property Transfer Taxes, as subsequently amended.

11 The Act No. 338/1992 Coll., on Property Tax.

12 Decisions of Czech Highest Administrative Court sp. zn. 7 A 13/2002-46, sp. zn.1 Ans 8/2005-165 and 1 Ans 3/2007- 235.

13  blíže k tématu registrace občanských sdružení např. www.net.aid.cz, citováno 14. 10. 2008.


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