The International Journal
of Not-for-Profit Law

Volume 2, Issue 4, June 2000

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

Table of Contents

Letter from the Editor

Articles

Scottish Charity Law: Proposals for Reform
By Dr. Christine R. Barker

Volunteering-- The Long Arm of the Law
By Debra Morris

Do Czechs Need a New Law on Associations?
By Dr. Petr Pajas

The Freedom to Join an Association: A Principle in Question
By Barbara Rigaud

Structural and Systematic Issues Surrounding the Establishment and Management of Endowments in the Czech and Slovak Republics
By Robert N. Thomas

Report on the Violations Committed in the Course of Registration and Re-Registration of Public Associations in the Russian Federation in 1999
Prepared by the Information Center of the Human Rights Movement and the Center for the Development of Democracy and Human Rights

Reviews

An Introduction to the Not-for-Profit Sector in China
By Nick Young and Anthony Woo
Reviewed by Georgina McCaughan

Las Organizaciones de la Sociedad Civil en el Ordenamiento Legal Argentino
By GADIS and Foro del Sector Social
Reviewed by Fernando Latorre

Hacia un Desarrollo con Ciudadania
By La Sociedad Internacional de Investigación del Tercer Sector
Reviewed by Antonio Itriago

Entidades Sin Ánimo De Lucro - Regimen Tributario Especial
By Juan Carlos Jaramillio Diaz, Vargas Ballen, Jenny & Fabio Andres Duran Acosta
Reviewed by Antonio Itriago

Case Notes

North America:
the United States

South Asia:
India

Country Reports

Asia Pacific:
Australia

Central and Eastern Europe:
Regional
| Bulgaria | Croatia | Czech Republic | Estonia | Kosovo | Macedonia | Montenegro | Romania | Slovak Republic | Yugoslavia

Latin America:
Belize
| Chile | Colombia | Nicaragua | Venezuela

Middle East and North Africa:
Egypt

Newly Independent States:
Armenia
| Moldova | Russia

North America:
Canada | Mexico | the United States

South Asia:
India

Sub-Saharan Africa:
Ghana
| South Africa | Tanzania | Uganda

Western Europe:
France
| Germany | the United Kingdom

International:
CIVICUS Diamond Project | G4+1 Accounting Standards

International Grantmaking

Determining Whether to Make an Equivalency Determination or to Excercise Expenditure Responsibility
By Derek J. Aitken

Supporting Microfinance Abroad: Introductory Legal Issues for U.S. Grantmakers
By Timothy R. Lyman

United States International Grantmaking (USIG) Project Unveils New Web Site
By Derek J. Aitken

Community and Corporate Philanthropy

The Enabling Environment for Community Philanthropy

Changemakers.net

German Publication

Partnerships

Survey of the Current Legislative Framework for NPOs to Perform Social Services in Bulgaria

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Editorial Board

Subscription Information

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Do the Czechs need a new law on Associations?

By Petr Pajas
ICNL Consultant, First Consulting p.b.c., Prague, June 2000

I. Introduction

In mid-May, the Czech Parliament’s Chamber of Deputies rejected the Bill on Associations, as proposed by the minority Government of Social Democrats. The M.P.’s move was not at all expected. In fact, everybody, even the politicians who were involved in the issue, considered this Bill to be of a highly apolitical nature.

However, the debate in the lower chamber of the Czech Parliament shows how deeply rooted Czech politician’s prejudices concerning the role of civil society and how far many of them still are from understanding the need to improve the Czech legal system

As originally planned, this article was meant as a description of the new features brought about by the new Bill of Associations. Now, when the efforts of the Governmental drafters have been nullified by a simple vote in the Parliament, the question is raised whether there is really a need for a new legal regulation of the right to associate or whether the existing regulation, as provided by the Civil Code and the special Act No. 33/1990, on Associations of Citizens, is of such a quality, that what is needed is only a slight amendment, if anything at all.

II.The Arguments for a Change in the Present Regulations of Associations

The present regulation of associations needs several adjustments to the practical needs.

A. The change of the philosophy

The present law covers two important features: the right to associate and the legal requirements required for an existence of a legal entity that is incorporated in order to serve the associated persons.

According to the opinion of some jurists and NGO experts, there is a need to distinguish the legal provision by which the basic right to associate is being implemented from those which regulate the existence of legal entities chosen as a form of the association.

From one side of the problem, the Constitution of the Czech Republic guarantees the right to associate, to form transient or permanent associations of individual citizens among themselves and with legal entities. Such associations may be freely established and the state has no legitimate power to prevent their formation. There are also no specific requirements related to the purpose for which the association is being formed, unless we take into account the broader legal framework, which defines several types of legal entities that the association may take.

Looking to the other side of the same coin, it should be taken into account that an association may voluntarily decide to be registered as a legal entity. This might be of importance for several reasons: to be able to summon money and open an account in the bank in the name of the legal entity, to receive the benefit of formal relations between legal entities as defined by the Civil Code, to enter the economic sphere by contracting or providing services, buying or selling goods, publishing the books or journals, organizing meetings, conferences, etc. But that means to become a partner in relations to third persons. And it is in the interest of all persons- be it individuals, citizens or foreigners or legal entities, including the communities, municipalities, as well as the states and their institutions. Whenever a legal entity enters into some business or legal relations, its partners have the right to know whom they are dealing with, who is entitled to act on behalf of the partner entity, where to send correspondence or invoices, for what purpose the entity has been established and according to which law it has been registered. This is a natural requirement for commercially active legal entities, because it protects their interests, property rights and minimizes a risk of a loss from a transaction with a non-existent or non-transparent entity.

The philosophy behind the existing Act on Association of citizens, adopted shortly after the Velvet Revolution, in the spring of 1990, was based on an assumption, that associations are non-important in business relations and for existence as a legal body need only to have certain rules for internal decision-making, keep the accounting books and be limited only so far, as not to be mixed with political parties and political movements, churches and religious congregations and commercial companies. The Act also required from associations to absent from any paramilitary activity and any violation of the basic rights and freedoms of other citizens.

Insofar, these requirements are generally acceptable and fulfilled by the Act from 1990.

However, the practical life has shown the limitations to the above liberal approach. The Act did not provide any specific regulations concerning the economic activities and nobody could be blamed for dissolving the association, whenever it became bankrupt. How easy it is for such a loosely defined legal body as an association to enter into some beneficiary legal or commercial relations and after making use of them to disappear. Unfortunately, such thing happened, and there is not much use of the civil code in fighting against such a criminal approach to the responsibility of a legal entity. Were it a commercial entity, everybody would know, how much to trust to it, where are the liability limits of it, whom to suit for the damage caused. With a dissolved association you do not have anybody to prosecute, unless you prove to some individual his or her direct responsibility.

Also in the inner life of associations, as existing under the present law, there are several aspects causing serious worries: the possibility of having two or more bodies claiming the right to decide and act on behalf of the association, the possibility to prevent some of the members to participate in decision-making of the association bodies, no clear regulation of establishment of branches and subunits, who also may acquire a status of a legal entity, a possibility to enter into real entrepreneurial activities without any liability requirements and thus distorting the fair competition rules, etc.

Last, but not least, the Act was dealing exclusively with citizens of the Czech Republic. The foreigners did not have equal rights in establishing the associations and international associations or associations established according to other then Czech laws are still regulated by the Act No. 116/1985, on the Activities of Organizations with a Foreign Element in the Czechoslovak Socialist Republic (sic!).

The new philosophy requires the following:

  1. To provide clear legal provisions for the right to freely associate without any interference of any state authority.
  2. To define the conditions, under which an association may acquire a status of a legal entity.
  3. To provide the rules for the collective and individual responsibilities of associated persons, their rights to openly express their common views or do common actions, with the exception of some unconstitutional activities and entering any legal acts that require existence of a specific form of a legal entity.
  4. To define explicitly, that whenever the associated persons wish to enter into legal relations with third persons, open a bank account, etc. as an association, then the association must apply for registering as a legal entity.
  5. To make the registration of associations as easy as possible
  6. To provide for basic legal requirement to make the internal decision making processes and decisions made by it transparent to its members and to those third persons, which enter into legal relations with the association.
  7. To maintain a register of associations as a public document, in which the basic data, lake the name, headquarter office address, statutory organ and persons dealing on behalf of it, as well as on the purpose and basic internal regulations of the association should be made available to general public.

The new philosophy may also include more precise unification of basic rules for distinguishing between the associations as free membership based organizations of individual natural persons and legal entities in one side, and interest associations of legal bodies, trade unions, political parties and political movements, religious congregations and churches, professional chambers and other specific kinds of associations on the other side.

B. The Treatment of Citizenship and the Right for Association

According to the present law, there must be at least three Czech citizens to form the Preparatory Committee that may submit the proposal for registering the association as a legal entity at the Ministry of Interior.

In many cases, the incorporated associations remained limited to the membership of the three or a very small number of founding members, while using all provisions of the law, which were constructed for a benefit of an open set of persons.

The amended or any new law should therefore enable any person (be it a citizen or a foreigner) to form the Preparatory Committee of an association and to become its members of full membership rights.

C. The Governance Regulations

More precise conditions for exercising the powers of a statutory organ should be defined, including the rules for changing the composition or membership of executive bodies of an association.

The law should also provide a clear definition of responsibility transfer from one statutory internal body to another one in case of a change of the by-laws or other internal regulations of the associations, which define the way of establishment and changes of such an internal body.

D. The Economic Rights

Associations are not supposed to be economically active, but many do so, because the present law is not specific with this regard. It is rather essential to allow the NGOs of all kinds to be engaged to some extend in an economic, income generating activities.

However, when the law allows for economic activities to be undertaken, it should limit them to certain extent by requirement of the use of the income generated by such an activity solely for the needs of the association as such and not for the profit of its members. Without such an arrangement, the association would easily mimic the share holding companies without any initial capital investment and property risks to its members.

There is also a possibility to adopt a position, according to which an association – even when registered as a legal entity – may not be allowed to enter into certain commercial unless it decides to establish for that purpose a specific legal entity of the appropriate kind, as allowed by the Code of Commerce.

E. The Reporting Obligations

In general, the incorporated association may be requested to produce a publicly available annual report. But this should be limited only to those cases, when the association uses in a substantial way a state or municipal property or when it obtained some subsidy from a public budget. Such an obligatory reporting might be also limited to those activities of the associations, which were related to the use of such a public property, subsidy or donation.

Under ideal circumstances, public reporting may be replaced by reporting to the contracting party – to the donor or sponsor. However, the question is, whether we live in such an ideal environment, in which we may fully trust the officials of a governmental agency or similar persons, without requiring access to the information about the use of public resources?

The same applies whenever the association may benefit from any tax or other fiscal exempts or reductions, which are based on the assumption that the association is engaged in some activity in the public interest.

D. The Governmental Bill on Associations

Essentially, the governmental Bill on Associations was a fairly well done piece of law attempting to incorporate most of the above requirements and provisions.

The Bill deals explicitly with the associations that decided to establish themselves as legal entities – clubs, societies, chambers, for a etc and it defines these as “registered associations”, under certain registering process provisions.

The Bill retains many of the features of the existing Act, such as the way of distinguishing the registered associations from commercial legal entities, political parties, churches, professional chambers and other specific forms of membership organizations.

The Bill redefines the rights of individual persons with respect to the establishment of the association and the relation to it, be it from the side of membership in it or non-membership in it. Unchanged were also the provisions of negative determination of the purpose of an association – the list of properties not allowed to an association to have fixed in its by-laws or other internal regulations. What is essential – the Bill gives equal rights to the foreigners with the citizens of the Czech Republic in all aspects of the life of registered associations.

The Bill defines more explicitly, what kind of documents and data must be submitted to the Ministry of Interior for being registered, as well as conditions, under which the ministry may decline the registration and how this may happen. The right of appeal to the court is provided as a precaution against the misuse of administrative power given to the ministry of Interior. There are time limits to the registration process and a default situation defined, enabling the association to be registered, even if the ministry does not act in the given time limit.

The novelty of the Bill is mainly in the introduction of the Register of Association, in the requirement of providing the data about persons forming or representing the statutory body of the registered association, and the rules defining the way of transfer of the statutory rights from one body to another in the case of irregular change of the composition of such a body.

The completely new feature brought about by the Bill is the regulation of dissolution of an association according to the rules similar to those valid for commercial companies: in the case of dissolution, there must be a liquidation process and in the case of bankruptcy, the same procedures are to be followed, as for any other legal entity: the proposal and the decision of the court on settlement, on bankruptcy proclamation or on denial to proclaim the bankruptcy for insufficient property.

The Bill also allows and more explicitly regulates the way in which the associations may form unions or branches with their own legal entity, as well as condition for merging, splitting or uniting the associations.

What is also important top mention is the way of treatment of economic activities of associations: they are allowed to enter these under the conditions of public reporting on the activities and the use of income from these for the main purpose of the association and not for profit making of its members as individuals. The Bill also defines the sources of income of a registered association, allowing for the income from membership fees and donations on one hand and from the economic activities, on the other hand.

Finally, the law explicitly requires annual reporting from those associations, which obtained some subsidy, grant or contract based on the use of resources from any public budget.

There is one feature of the Bill that might raise certain concerns: the right given to the Ministry of Interior to post

II. The Arguments Used Against the Bill In the Parliament     

It is interesting to read the stenographic records of the debate about the Bill on Associations, as it took place during the first reading in March and during the second reading in May 2000.  

Already during the first reading, one of the youngest deputies stood up with a speech sharply criticizing the Government for proposing a new Bill to replace “the well proved and practical” Act on Associating the Citizens. That young gentleman not only criticized the Bill for having more articles (45) than the Act, which had only 21 Articles. He even said, it is a typical “socialistic law” produced in the workshop of “this” socialist government. Thus, from an apolitical norm became immediately highly political issue. A technical problem, the change from 10 to 60 days of a time limit for the Ministry to check the documents for registration was interpreted as a way of limiting the right of citizens to associate. No mentioning of the fact, that an association may exist and be active even without being registered. And, typically, another member of the parliament came up with a serious worry of for the enthusiasm of citizens, eager to associate and do something nice and useful, but after being forced to waiting for 60 days to be permitted to do so, they shall rather lose their enthusiasm and dissolve the association. Well, why to register under such a circumstance? His main argument was: “let us listen each to the other and let us not make the life of associations more difficult”.

Nevertheless, the first reading was relatively successful: both proposals - to decline the Bill, as well as to return it to the Government – have been refused and the Bill was given to the two committees – to the Petition Committee and to the Science, Research, Education and Sports Committee – for further discussions.

The second reading passed very quickly. The Petition Committee recommended to approve the Bill with some small technical amendments, while the second committee recommended to decline the Bill. The discussion was mostly influenced by a statement of one of the parliamentarians: he argued, that it would be sufficient to amend the existing law by introducing the liquidation procedure in the case of dissolution of the association, while the new law, which even requires the existence of a central Register of Associations would cause loss of money from the state budget.

The efforts of the Mr. Gross, the new and very young Minister of Interior and similar efforts of the reporting officer were useless. The vote resulted in declining the proposal by 111 against 67.

Is this the end of the new consolidating phase of the Czech legal system dealing with the NGOs? Or is it a signal for more efforts and a call for a real battle? Is it only an internal case of the Czechs or is it a phenomenon of a broader regional importance?

It is hard to forecast the outcome. Nevertheless, the Czechs may only gain from opening a discussion about the new situation within their own community, as well as with Poles, Slovaks, Hungarians, Germans and other regional neighbors, which may help to everybody to assess, what actually took place in the Czech Parliament and what might be the consequences and the ways out.

 

Copyright 2008 The International Center for Not-for-Profit Law (ICNL)
ISSN: 1556-5157