Insolvency 2024 Comparisons

Key Legislation

Czech insolvency law is governed by several key statutes and regulations, with the primary legislation being Act No 182/2006 Coll., on Insolvency and Methods for Its Resolution (the “Insolvency Act”). The Insolvency Act forms the foundation of Czech insolvency law, outlining the procedures and methods for resolving insolvency. In addition to the Insolvency Act, other important statutes regulate various aspects of insolvency law:

• The Civil Code (No 89/2012 Coll.) and the Business Corporations Act (No 90/2012 Coll.), govern issues related to consensual restructuring, the fiduciary duties of directors, the internal organisation of legal entities, and the process of liquidating solvent companies.
• The Act on Preventive Restructuring (No 284/2023 Coll.) introduces a new legal framework aimed at averting impending insolvency and rescuing viable businesses based on broad consensus between the corporation and its creditors.
• The Act on Insolvency Trustees (No 312/2006 Coll.) regulates the role and responsibilities of insolvency trustees. The remuneration of insolvency trustees is detailed in Regulation No 313/2007 Coll.
• Act on the Protection of Employees in Case of Employer Insolvency (No 118/2000 Coll.) applies specifically to cases where an employer becomes insolvent. It stipulates the conditions for employees’ compensation by the Labour Office of the Czech Republic.
• Regulation (EU) 2015/848 also known as the Recast Insolvency Regulation, governs cross-border insolvency proceedings within the EU. The regulation also supports the restructuring of viable businesses and promotes co-operation between courts and insolvency practitioners across the EU.
• Specific procedural rules for insolvency proceedings are governed by the Czech Regulation No 311/2007 Coll.

Terminology Notice

In this document, the term “debtor” refers to a Czech legal entity (business corporation) under the Business Corporation Act (as it is defined above) unless the context clearly indicates otherwise.

The most frequent types of legal proceedings aimed at solving a debtor’s bankruptcy or unfavourable economic situation are:

• the insolvency proceeding (insolvenční řízení);
• preventive restructuring (preventivní restrukturalizace);
• receivership (nucená správa); and
• liquidation (likvidace).

Insolvency Proceedings

The Insolvency Act regulates insolvency proceedings, which are designed as the only proceedings under Czech law to resolve a debtor’s general default leading to bankruptcy. Insolvency proceedings can be initiated voluntarily by the debtor or involuntarily by one or several creditors and are divided into two phases: (i) proceedings before the declaration of bankruptcy and (ii) proceedings after the declaration of bankruptcy. Each insolvency proceeding is fully disclosed in the insolvency register accessible online to any party.

As a protection against frivolous or unsubstantiated insolvency petitions, the law imposes stricter requirements for petitions submitted by creditors than those submitted by debtors. To further discourage frivolous insolvency petitions, the Insolvency Act constitutes a special civil liability for filling an abusive or frivolous insolvency petition for both the relevant legal person(s) and its (or their) executive bodies (ie, board of directors, etc).

Under Czech insolvency law, the debtor and its management are under a strict obligation to file an insolvency petition without undue delay once cash-flow insolvency or over-indebtedness occur. If the debtor fails to file for insolvency in a timely manner, it faces a number of civil law and criminal law consequences.

Insolvency proceedings – before the declaration of bankruptcy

Insolvency proceedings may only be initiated against a debtor that is insolvent or faces imminent insolvency. Imminent insolvency arises when, based on all relevant circumstances, it is reasonably expected that the debtor will be unable to meet a significant portion of its financial obligations on time and in full.

In the first stage, the court determines whether the liquidity constraints or financial distress of the debtor constitute bankruptcy. To assess the debtor’s insolvency, the insolvency court applies two insolvency tests established by Insolvency Act: a liquidity test and a balance sheet test.

Liquidity test

Under the liquidity test, also known as the cash flow test, the debtor will be deemed insolvent if:

• it has multiple creditors (at least two);
• it has outstanding monetary obligations that have been overdue for over 30 days; and
• it is unable to pay these obligations.

The Insolvency Act establishes several legal presumptions aimed at facilitating proof of the debtor’s insolvency. Under these presumptions the debtor will be considered insolvent, if:

• it has stopped payments on a material portion of its monetary obligations;
• it has failed to fulfil its monetary obligations for more than three months past the due date (it must have at least two creditors, each with an unpaid claim against the debtor for more than three months past the due date);
• it is impossible to satisfy a creditor’s claims through enforcement proceedings (individual execution or foreclosure); or
• it fails to comply with certain procedural demands of the courts during insolvency proceedings (such as a failure to submit the list of liabilities and assets).

Balance sheet test

Entrepreneurs and legal entities are also considered insolvent in cases of over-indebtedness, which occurs if:

• they have multiple creditors (at least two); and
• the sum of their liabilities exceeds the value of all their assets (considering the ongoing enterprise value).

Insolvency proceedings – after the declaration of bankruptcy

The second stage of the insolvency proceeding is solely aimed at the chosen method of resolving the debtor’s insolvency. When the insolvency court declares the debtor insolvent, there are three different methods available for resolving insolvency:

• Liquidation bankruptcy (konkurs) – This generally consists of the liquidation of the insolvency estate. It is the most common method of resolving insolvency of business corporations. Creditors’ claims are satisfied proportionally from the proceeds of the liquidation of the debtor’s assets. Liquidation bankruptcy generally leads to a lower rate of creditor satisfaction, as the liquidation of the insolvency estate is carried out through distress sales.
• Reorganisation (reorganizace) – This is a very flexible way of resolving a debtor’s insolvency similar to the Chapter 11 of the United States Bankruptcy Code. The measures to be taken in reorganisation are stipulated in the reorganisation plan approved by the creditors and the insolvency court. The reorganisation plan may include a variety of restructuring measures for the debtor’s business, such as the restructuring of creditors’ claims, payment extensions, waivers, new financing, the issue of shares or other securities, debt equity swaps or even transfers of the whole business or parts thereof (to mention only a few).
• Debt relief/debt discharge (oddlužení) – This is a way of resolving insolvency or impending insolvency and can be applied upon a debtor’s motion to the insolvency court. It may only be sought by private individuals (natural persons) or legal entities that are not classified as businesspersons under the law and do not have debts arising from business. The debtors may be discharged of all their debts if they make regular monthly payments over a period of three years as determined by the insolvency court based on the debtor’s abilities and financial circumstances.

Preventive Restructuring (Preventivní Restrukturalizace)

Preventive restructuring is designed to provide entrepreneurs with a flexible tool to address financial distress outside of traditional insolvency proceedings, with an emphasis on protecting reputation and business relationships. Preventive restructuring is therefore a largely non-public and private proceeding aimed at resolving the financial distress upon an agreement between the debtor and its creditors. There is no formal obligation to disclose all documents to the public within the insolvency register (eg, the notice of commencement, the saturation plan or the restructuring project documents).

Receivership (Nucená Správa)

A procedure where a court appoints a receiver to manage and control the debtor’s property and business, particularly in regulated sectors such as banking and insurance. The process is initiated by regulatory authorities and its main goal is to protect the public interest.

Liquidation (Likvidace)

Liquidation is a formal process for winding up and dissolving a company. The liquidation may be initiated voluntarily by a solvent company based on a decision of its shareholders to cease all operations. The process can be also initiated by court (compulsory liquidation). The liquidator is appointed to manage and conclude the dissolution process. If the liquidator finds that the liquidated company is insolvent, they are obliged to initiate standard insolvency proceedings.

The main statutory bodies of a Czech insolvency proceeding are (i) the creditor’s meeting, (ii) the creditors’ committee (or the creditors’ representative) and (iii) the insolvency trustee.

Creditors’ Meeting

The creditors’ meeting is the supreme and most important creditor body established in insolvency proceedings. It is basically a meeting of all registered creditors that is convened and organised by the insolvency court and held before the insolvency court, where all major issues regarding the insolvency proceedings are discussed and decided.

All registered creditors may generally vote at the creditors’ meeting, apart from creditors whose registered claims were rejected by the insolvency trustee and who have not been subsequently granted voting rights by the court. Representatives of the debtor should be present at creditors’ meetings and may face creditors’ questions, but otherwise the creditors’ meeting does not directly interact with the debtor or the insolvency trustee.

Resolutions adopted by the creditors’ meeting may only be cancelled by the insolvency court if the resolution is contrary to the best interests of all creditors.

Creditors’ Committee/Creditors’ Representative

The creditors’ committee is an executive body, to be mandatorily established if more than 50 registered creditors participate in the insolvency proceedings. Otherwise, a single creditors’ representative may be elected. The creditors’ committee has three to seven members comprised from secured and unsecured creditors, who are elected by the creditors’ meeting.

The creditors’ committee usually conducts regular meetings with the insolvency trustee and the representatives of the debtor to review the ongoing matters and approve dispositions outside of the ordinary course of business.

Insolvency Trustee

The insolvency trustee is an independent professional appointed by the court to manage the insolvency process. Their main responsibility is to oversee the debtor’s assets, resolve creditors’ claims, and ensure fair distribution to creditors.

The court appoints the trustee based on a randomised selection mechanism. The first creditors’ meeting may decide to remove the court-appointed trustee and appoint a new one (a majority vote of all registered creditors with voting rights is required). The debtor may nominate a specific trustee only in a pre-packaged reorganisation.

Some key powers of the insolvency trustee in liquidation bankruptcy include taking control of and liquidating the debtor’s assets and distributing the proceeds to creditors. In reorganisation, the trustee supervises the debtor’s management and directors, ensures the restructuring plan is implemented, monitors compliance, and challenges creditor claims to protect other creditors’ interests (see also 4.5 The Position of Office Holders in Restructuring, Rehabilitation and Reorganisation).

In the course of preventive restructuring, a restructuring trustee may be appointed, in particular if the majority of the parties concerned or the debtor proposes it. The court appoints the restructuring trustee based on a randomised selection mechanism from a list of restructuring trustees consisting of insolvency practitioners with special authorisation. The main roles of the restructuring trustee include:

• supervising the debtor’s business activity in accordance with the restructuring courts’ resolution;
• a preliminary review of creditors’ claims;
• co-operation with the restructuring court; and
• obtaining an expert valuation of a business enterprise if the need arises.

Creditors can be categorised based on the nature of their claims and whether their claims are secured over the debtor’s assets:

Secured Creditors

Secured creditors are entitled to the exclusive and preferential right to satisfy their claims from the actually obtained value of their collateral such as real estate, movable property, etc. The secured creditors within Czech insolvency proceeding are only those whose claims are secured by debtor’s assets through legal instruments specified by the Czech Insolvency Act (eg, pledge or lien, right of retention, restriction on the transfer of real estate, security transfer of rights, assignment of a receivable, and similar rights under foreign jurisdictions). Security in the form of personal or financial guarantees, which is common, does not qualify as security for the purpose of obtaining the status of a secured creditor.

Estate Claims and Priority Claims

Preferential creditors have special priority under certain circumstances over the other non-preferential unsecured creditors. Such claims may be satisfied in full at any time after the declaration of the debtor’s bankruptcy. However, no voting rights at the creditors’ meeting are associated with these claims.

These claims include employee claims for unpaid wages or severance payments, certain government claims (eg tax claims or social security and healthcare contributions), remuneration of the insolvency trustee, and costs associated with the management and maintenance of the debtor’s estate if they arose after the declaration of bankruptcy (see 2.2 Priority Claims in Restructuring and Insolvency Proceedings)

Unsecured Creditors

Unsecured creditors have no special rights over the debtor’s assets (common contractual creditors, lenders or trade creditors). Unsecured claims can generally be satisfied only after secured and estate and priority claims.

According to statistical data, the average satisfaction rate of secured creditors in the Czech Republic reaches 28.2% of the amount of their registered claims, while for unsecured creditors, it averages merely 3.2% of the amount of their registered claims (in cases of liquidation bankruptcy).

Subordinated Creditors

Subordinated creditors are those with contractually subordinated claims which can be satisfied only after full satisfaction of a standard unsecured creditors or respective superior creditors. Statutory subordinated creditors (typically debtor’s shareholders) may only receive any remaining surplus of the insolvency estate after the satisfaction of all other claims.

Certain claims are not to be satisfied within the insolvency proceedings. These include interest or contractual penalties that only arose after bankruptcy was declared, the costs of the parties to insolvency proceedings that arise in connection with the insolvency proceedings, or claims arising out of donation agreements.

Priority claims are referred to as “claims against the estate”. Such claims may be satisfied in full at any time after the declaration of the debtor’s bankruptcy. However, only assets and proceeds which are not subject to collateral rights of secured creditors can be used to satisfy priority claims. In other words, secured creditors have an absolute priority to the proceeds of the sale of assets serving as collateral (with limited exceptions such as remuneration and costs of the insolvency trustee).

No voting rights at the creditors’ meeting are associated with priority claims.

The most common priority claims can be summarised into the following categories:

• remuneration of the insolvency trustee;
• reimbursement of costs and remuneration of the members of the creditors’ committee.
• costs associated with the management and maintenance of the debtor’s estate arising after the declaration of bankruptcy.
• new money claims including those from interim or new financing provided during the preventive restructuring (eg, debtor in possession financing);
• taxes and other similar public charges arising after the declaration of bankruptcy; and
• employees’ claims.

Claims Excluded From Preventive Restructuring

Some claims are excluded from preventive restructuring. Such claims cannot be directly affected by the restructuring plan and the creditors involved cannot become an affected party in relation to these claims. Excluded claims are:

• employees claims (wages, employees’ pension insurance, severance, etc);
• claims for compensation for personal injury;
• contested or disputed claims (ie, where claim validity, amount or priority is challenged by other participants in the process); and
• claims that are subject to ongoing court proceedings.

There are still doubts as to whether tax claims are excluded from preventive restructuring as the Preventive Restructuring Act does not regulate this issue and it remains subject to judicial interpretation.

There are five main types of security under Czech law:

• pledges/mortgages – the creditor is entitled to satisfy its claims from the proceeds obtained by the sale of the pledged asset up to the stipulated amount if the debtor fails to discharge its debt when due;
• personal guarantees – the guarantor is obliged to satisfy the creditor if the creditor’s debtor fails to discharge its debt to the creditor;
• financial guarantees – the issuer of a financial guarantee declares in a guaranty instrument to the effect that it will satisfy the creditor in accordance with the guarantee instrument up to a certain pecuniary amount if the debtor fails to discharge a certain debt to the creditor or if other conditions specified in the guaranteed instrument are met;
• security transfer of a rights – a debtor or a third party secures a debt by temporarily transferring its right to a creditor, and the security transfer of the right becomes unconditional if the secured debt is not discharged; and
• floating charges – a floating charge is similar to a regular pledge but can be established over a pool of debtor’s assets such as inventory, equipment or business enterprise, thus allowing for a security interest in assets whose composition changes over time.

If the debtor fails to discharge the debt in a due and timely manner, the creditor becomes entitled to satisfy its claims from the security provided. The enforcement of the collateral usually takes place through a court sale of the asset serving as security, or in a public auction. A private sale of the collateral may take place instead if such is agreed between the secured creditor and the pledgee.

Unsecured creditors have several rights and remedies available to them outside a restructuring or insolvency context, which can be employed to protect their claims and improve recovery chances:

• Injunction/interim measures – Unsecured creditors can petition the court to issue an injunction or interim measures to secure their claims before a final judgment. The creditor must demonstrate that such measures are necessary to preserve the status quo or to prevent the debtor from undermining future enforcement (eg, by disposing of the assets). If granted, the court may freeze assets or impose restrictions on the debtor. These proceedings usually occur without the debtor’s knowledge, with the debtor being informed upon issuance or rejection.
• Right of retention – Right of retention allows a creditor to retain possession of a debtor’s movable property to secure their claims against the debtor. Through a timely exercise of the retention right, the creditor may even attain the position of a secured creditor for the purposes of the debtor’s insolvency proceeding. The creditor must have a valid, due claim against the debtor in order to invoke the right of retention.
• Set-off – All creditors can exercise the right of set-off, allowing mutual debts between the creditor and debtor to be offset unilaterally if the conditions are met and if not excluded under contractual provisions. An uncertain or unliquidated claim is not eligible for set-off.

Consensual restructuring may be carried out within the framework of (i) preventive restructuring or outside of the framework by concluding (ii) a standstill agreement.

Preventive Restructuring

The process is regulated by the Act on Preventive Restructuring and is initiated by the debtor’s formal written invitation to start negotiations, a rehabilitation project addressed to its creditors and notification to the restructuring court.

The rehabilitation project must generally include at least an outline of the restructuring measures aimed at maintaining or restoring the viability of the business corporation. All measures must be based on realistic assumptions, a business plan, and a description and evidence of the ability to ensure the proper functioning of the business corporation and its ability to meet its current and future obligations.

The rehabilitation project is then followed by a more detailed restructuring plan drawn up by the business corporation. The restructuring plan must, among other things, define the legal position of the parties concerned based on the proposed restructuring measures. Restructuring measures may include asset restructuring (eg, sale of assets), liability restructuring (eg, extension of debt maturity or full or partial waiver of debt), equity restructuring (eg, equity contribution from an existing shareholder) and/or operational changes (eg, changes in the product mix of a plant).

“Cram-down” procedures are available and the restructuring court may authorise the overruling of dissenting creditors, if the restructuring plan has been approved by the majority of creditor groups. The restructuring plan must adhere to all legal requirements and the business entity seeking preventive restructuring must act in good faith and avoid any dishonest conduct.

Standstill Agreement

Prior to the Act on Preventive Restructuring becoming effective, many out-of-court restructurings in the Czech Republic started with the conclusion of a standstill agreement between the debtor and its most important creditors. Standstill agreements are presumed to be used even after the implementation of the Act on Preventive Restructuring. Czech law does not stipulate any specific requirements for such agreements, and their contents are thus determined by the debtor’s particular situation and its relations with its creditors.

A standstill agreement generally confers two main advantages. Firstly, it is in fact a voluntary contract concluded between a group of private persons, and as such is not subject to any disclosure or announcement to other parties or authorities. This will usually help to avoid negative implications for the debtor’s good reputation regarding its ability to fulfil its obligations (unlike an official insolvency petition, which is immediately published in the insolvency register). The second advantage is that a standstill agreement usually allows the debtor to fulfil, in a timely manner, minor obligations that are not subject to the standstill agreement (eg, obligations towards state authorities or suppliers) and generally gives the debtor more time and the necessary leeway to restructure and improve its business operations.

The most common clauses in a standstill agreement include the following in particular:

• prohibition on filing an insolvency petition against the debtor in the specified time period;
• debtor’s obligation to prepare a draft restructuring plan by a certain date;
• debtor’s obligation to secure sufficient operational funding;
• postponement of the maturity of debtor’s debts;
• prohibition on creating new security or guarantees;
• prohibition on enforcing existing claims or securities; and
• prohibition on accelerating loans or terminating credits.

Intercreditor agreements, which compel dissenting creditors to take specific actions regarding their claims, have not yet gained popularity in the Czech Republic. Therefore, aside from the preventive restructuring process described above, the unanimous agreement of all creditors is usually required for an out-of-court restructuring.

The restructuring plan adopted under the Act on Preventive Restructuring is a legally binding document sanctioned by the court and can be invoked against all creditors taking part in the preventive restructuring process.

An out-of-court restructuring based on a standstill agreement lacks court oversight (there is no option to cram down the results upon third parties who do not participate in the standstill agreement). Therefore, dissenting creditors who do not rely on the continued operation of a debtor’s business may lack sufficient interest to be part of an out-of-court restructuring.

Entry Criteria

Reorganisation is only available to large entrepreneurial debtors who are insolvent under either the liquidity test (inability to pay debts as they become due) or the balance sheet test (liabilities exceeding assets considering on-going enterprise value) and who fulfil one of the following criteria:

• the debtor must demonstrate a minimum annual net turnover of CZK50 million (approximately EUR2 million) for the last accounting period prior to the insolvency petition (at the level of the company undergoing reorganisation); or
• the debtor must employ at least 50 employees as of the filing date.

These criteria may be waived if the debtor files a pre-packaged reorganisation plan. Such pre-packaged plan must be filed with the approval of a majority of both secured and unsecured creditors.

Corporate Group

Legal entities are treated separately in Czech insolvency proceedings, and the law does not provide for a reorganisation of a corporate group on a combined basis. Nevertheless, certain procedural rules are in place to save costs and facilitate knowledge of intra-group relations acquired during proceedings. Thus, unless circumstances prevent it, the same insolvency trustee shall be appointed to all members of the corporate group. Moreover, an insolvency petition against each individual group company may be filed either with the insolvency court closest to its registered seat, or with the insolvency court in charge of the insolvency proceedings of another member of the corporate group.

Petition to Initiate Reorganisation

The reorganisation can be initiated both by the debtor or by the creditors (although debtors’ petitions are more frequent). The insolvency court will assess whether the debtor is insolvent and if the debtor qualifies for reorganisation under the Insolvency Act, the court will declare bankruptcy (úpadek) and convene a creditors’ meeting to decide on the method of resolving the bankruptcy as the creditors hold the exclusive right to determine the approach to resolving the debtor’s bankruptcy (ie, reorganisation or liquidation bankruptcy).

If creditors approve reorganisation, the debtor has the exclusive right to draft the reorganisation plan. Creditors have the right to exclude the debtor from drafting the reorganisation plan by the majority of votes, but this is uncommon as the debtor’s co-operation (and that of its board of directors, employees, etc) is crucial for ensuring a smooth and efficient reorganisation process.

Duration

On average, reorganisation takes 13 months from the commencement of the proceedings to the confirmation of the reorganisation plan (excluding its implementation). The creditors’ vote on the approval or reorganisation usually takes place within two to three months from the declaration of the debtor’s bankruptcy. Reorganisation plan must be submitted within 120 (or up to 240) days after the court approves reorganisation.

Reorganisation under Czech law is similar to Chapter 11 of the United States Bankruptcy Code and involves court supervision, the insolvency trustee and the creditors’ committee. Czech law currently recognises reorganisation as the only form of statutory restructuring of an insolvent company. Other than that, debtors may apply for a moratorium of up to three months (which may be extended by an additional 30 days). The moratorium allows for out-of-court restructuring, as described in 3.1 Out-of-Court Restructuring Process.

Reorganisation is a very flexible way of resolving a debtor’s insolvency. The leading principle of court-managed reorganisation is that the recovery rate of all creditors should be higher than in the event of a liquidation bankruptcy. The measures to be taken in a reorganisation are stipulated in a reorganisation plan approved by the creditors and insolvency court. The reorganisation plan may comprise a variety of restructuring measures for the debtor’s business, such as the restructuring of creditors’ claims, payment extensions, waivers, new financing, the issue of shares or other securities, debt equity swaps or even transfers of the whole business or parts thereof (to mention only a few).

Priority New Money

Under certain circumstances, a debtor (or insolvency trustee acting on its behalf) may obtain credit or other similar funding to sustain or restore the operations of its enterprise, or to fulfil the reorganisation plan. If secured creditors exist, the debtor must enter into credit or other similar agreements primarily with them, unless they offer terms that are less favourable than the best available offer.

Claims arising from such new credit agreements are considered priority claims directly “against the insolvency estate”. Such claims are satisfied before the claims of other creditors (except for the expenses and remuneration of the insolvency trustee). If the new creditor is not one of the original secured creditors, its claim has the same priority as those of other secured creditors.

No assets or funds acquired by such new funding may become subject to pre-existing security arrangements (for example, they may not become security under a pre-existing bank receivable security agreement).

Disclaiming Contracts

Where mutual agreements have not been entirely fulfilled as of the day of the declaration of bankruptcy, the debtor-in-possession may decide to either fulfil the agreement and demand the same from the counterparty or decline fulfilment of the agreement on behalf of the debtor. In such a case, the counterparty under the agreement may assert its claims for damages like any other creditor via an application to register a claim in the insolvency proceedings.

Credit Bids and Stalking-Horse Bids

Even though there are no specific rules for a stalking-horse bid or credit bid process under Czech law, the reorganisation plan can allow them (and in practice does, especially in bigger reorganisations). Even if the reorganisation plan does not specifically allow for a credit bid process, it can still be achieved in the reorganisation, provided that (i) the reorganisation plan does not specifically prohibit a set-off of creditors’ claims against the debtor or (ii) the insolvency court allows the secured creditor to set off its claim against the purchase price of the collateral.

Pre-negotiated Transactions

Transactions that have been pre-negotiated prior to the restructuring proceedings may be consummated if they are compatible with the confirmed reorganisation plan and the law. Czech insolvency law also knows the concept of the so-called pre-packed reorganisation, which allows the debtor and its creditors to negotiate – prior to the insolvency proceedings starting – which transactions will still be recognised in those insolvency proceedings (if the pre-packed reorganisation is approved by the insolvency court).

Determining the Value of Creditor Claims

During insolvency proceedings, any creditors with claims against the debtor must register, on their own responsibility, such claims within the specified deadline set out by the court in the decision on declaration of bankruptcy (usually within two months). In their applications, the creditors must calculate their claims and submit all the relevant evidence in support of them.

After the deadline, all claims are reviewed by the debtor and the insolvency trustee at a court session (přezkumné jednání), in which the insolvency trustee and/or the debtor may challenge the amount, validity and priority of the claims. Creditors holding such claims may challenge the insolvency trustee’s and debtor’s decision in a separate court proceeding. Should the creditors fail to do so, their claim is established in the amount and priority determined by the insolvency trustee at the court review hearing (ie, in the amount and priority not challenged by the insolvency trustee).

As a penalty for overstating claims, if the actual amount of an established claim is found to be less than 50% of the amount initially registered by the creditor, the entire claim is excluded from the insolvency proceedings and the creditor may face an additional fine. If a creditor registers a claim with security ranking higher than what is subsequently established by the review, such claim is then regarded as unsecured.

Reorganisation Plan

The reorganisation plan may be drawn up by the debtor or another person (typically a creditor). The creditors’ meeting may decide to deprive the debtor of the pre-emptive right to draw up a reorganisation plan and to grant it to another person. Please refer to the Petition to Initiate Reorganisation section of4.1 Opening of Statutory Restructuring, Rehabilitation and Reorganisation for further discussion.

Voting on the reorganisation plan is carried out by classes of creditors at a creditors’ meeting. The plan is approved by a given class if the majority of voting creditors vote for it, defined as creditors holding at least one half of the total nominal value of all claims of the voting creditors in that particular class.

Cross-Class Cram-Down

A cross-class cram-down allows the court to impose a reorganisation plan on dissenting creditors who disagree with the reorganisation plan. Such cram-down is applicable under the conditions of fairness, equal treatment of creditors and viability of the reorganisation plan. The cross-class cram-down can be imposed if:

• at least one creditor class (excluding equity owners) approves the plan;
• the reorganisation plan treats all claims within a rejecting class equally;
• the reorganisation plan must be considered fair to each individual creditor class in light of the fairness test set out by the Insolvency Act (see the Fairness Test section of 4.3 The End of the Restructuring, Rehabilitation and Reorganisation Procedure); and
• the plan does not foreseeably lead to further insolvency or liquidation.

Confirmation of the Reorganisation Plan

The court shall confirm the reorganisation plan if:

• it is in accordance with the law;
• one may reasonably assume that no dishonest intent is being pursued by the reorganisation plan;
• each class of creditors has approved the reorganisation plan or is deemed to have approved it (or cram-down is used to replace the approval);
• each creditor stands to receive satisfaction equal to or higher than the value they would be likely to receive in liquidation bankruptcy (or the creditor agrees with a lower level of satisfaction); and
• priority claims are to be settled as soon as the reorganisation plan becomes effective, unless otherwise agreed between the debtor and the relevant creditor.

Fairness Test

The reorganisation plan must treat dissenting creditors according to their priority. Thus, secured creditors must be satisfied at least in the amount equal to the value of their security. Unsecured creditors are satisfied before subordinated creditors and equity owners. Equity owners shall receive the same amount as in a liquidation scenario (usually nothing).

The court then reviews and confirms the plan on several conditions, including the absence of “dishonest intent” and that creditors receive more under reorganisation than they would within liquidation bankruptcy.

The Implementation Period

Implementation of the reorganisation plan begins once the plan is duly approved. If the debtor fails to follow the essential stipulations of the reorganisation plan, or if it becomes apparent that a substantial part of the plan cannot be fulfilled, the insolvency court may issue a decision on the conversion of the reorganisation into liquidation bankruptcy. The court shall not do so if the plan has already been fulfilled in all material aspects.

During the implementation period, the insolvency court steps back, leaving the primary supervisory role to the creditors’ committee and the insolvency trustee, who are tasked with overseeing the execution of the reorganisation plan. Once all of the objectives set forth by the reorganisation plan are fulfilled, the reorganisation ends by the formal declaration of the insolvency court on the approval of the reorganisation plan.

Secured Creditor Liens and Security Arrangements

Unless the reorganisation plan stipulates otherwise, all rights of any creditors (even those who did not register their claims in the proceedings) and all third-party rights to assets comprising the insolvency estate (liens, security arrangements, etc) cease to exist with effect from the date set out in the reorganisation plan. Only those creditors who are included in the reorganisation plan remain creditors of the debtor.

Position of the Debtor

Insolvency proceedings automatically impose a moratorium (limits on the business activity the debtor can legally carry out). Creditors may only assert their claims within the insolvency proceedings.

The debtor may continue to operate its business in insolvency proceedings, and any restrictions on disposals of the insolvency estate are lifted when the court permits reorganisation. Incumbent management may continue to manage the company, and the debtor-in-possession disposes of the insolvency estate under the insolvency trustee’s supervision. Consent of the creditors’ committee is nonetheless required if the disposal of parts of the insolvency estate is projected to result in a material alteration of the estate.

The debtor may borrow new money as priority insolvency financing during insolvency proceedings, or for purposes tied to the reorganisation plan (see the Priority New Money section of 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure).

Restrictions on Use of Assets

The restrictions on the use of the debtor’s insolvency estate vary throughout the insolvency proceedings.

From the commencement of insolvency proceedings, a debtor is restricted from administering and disposing of the insolvency estate in any way that would materially change the composition, use or designation of the estate. There are certain exceptions to this – eg, for transactions within the purview of the ordinary management of the debtor’s enterprise that are necessary for its operation, or for transactions that will bring about only a negligible reduction of the insolvency estate.

Debtor must also avoid any activities that would endanger the proposed reorganisation. Once the reorganisation has been approved, the disposal rights of the debtor are renewed, albeit under the insolvency trustee’s supervision. Certain transactions (with significant impact on the insolvency estate) require the consent of the creditors’ committee.

During the insolvency proceedings, the court, the insolvency trustee and the creditors’ committee may issue separate decisions that may further alter, curtail or modify the debtor’s rights regarding the insolvency estate. If the debtor is restricted in exercising its right to dispose of the insolvency estate, the right passes to the insolvency trustee.

Asset Disposition After Approval of the Reorganisation Plan

Once the reorganisation plan takes effect, the debtor is in possession and executes any sale of assets in line with the reorganisation plan, unless the debtor’s rights to dispose of the insolvency estate are restricted in favour of another person pursuant to the reorganisation plan. All other restrictions imposed by the law or by the court during the proceedings are lifted. The debtor’s executive directors are responsible for executing the sale of assets belonging to the insolvency estate. Nevertheless, supervision by the insolvency trustee and the creditors’ committee remains in place.

The debtor’s assets may be sold in accordance with agreements envisaged in the reorganisation plan, which generally gives good title to the purchaser.

Non-debtor Parties

Liabilities of co-debtors or guarantors are not affected by the reorganisation plan under Czech law. The same applies to third parties who provided security for the debtor’s obligations.

Creditors’ Meeting

The creditors’ meeting comprises all creditors who registered their claims against the debtor. It is responsible for electing and removing members of the creditors’ committee, as well as deciding on the approval of the reorganisation and, subsequently, the reorganisation plan. At the first creditors’ meeting the creditors can also dismiss a court-appointed insolvency trustee and appoint a new one, without having to give reasons for such resolution. The first creditors’ meeting usually takes place within two to three months of the declaration of the debtor’s insolvency.

Creditors whose registered claims were rejected by the insolvency trustee cannot exercise voting rights attached to contested claims unless they have been granted voting rights by the insolvency court. Creditors who would find themselves in a conflict of interests cannot vote either. All creditors have one vote for every CZK1 of their claim. Some issues are decided by all creditors, regardless of whether or not their claim is secured (eg, the removal and appointment of the insolvency trustee), and some issues are voted on separately in the classes of secured and unsecured creditors (eg, election of the members of the creditors’ committee or a vote on the reorganisation plan).

Creditors’ Committee

The creditors’ committee is an executive body comprised of three to seven members, who are elected by the creditors’ meeting, subject to approval by the insolvency court. In the absence of the creditors’ committee (or creditors’ representative in proceedings with fewer than 50 creditors) the powers of the creditors’ committee is exercised by the insolvency court.

The Committee should include both secured and unsecured creditors, with each group electing its own representatives. The main task of the creditors’ committee is to protect the common interests of the creditors, particularly by:

• supervising the activities of the insolvency trustee;
• granting approval for new money (credit financing);
• approving the expenses of the insolvency trustee;
• approving the debtor’s proposal to decline fulfilment of certain agreements; and
• approving remuneration of debtor’s management throughout reorganisation.

The creditors’ committee supervises the debtor and has access to extensive internal information about the debtor and its business (similar to the insolvency trustee). The creditors’ committee may engage advisers, whose costs are paid from the insolvency estate.

The creditors’ committee usually conducts regular meetings with the insolvency trustee and debtor’s representatives to review the ongoing matters and approve dispositions outside of the ordinary course of business.

Insolvency Trustee

The main responsibility of the insolvency trustee is to oversee the debtor’s assets, supervise the debtor’s management and directors, ensure the restructuring plan is implemented, monitor compliance, and review and challenge registrations of creditors’ claims to protect creditors’ interests.

In pre-packaged reorganisation, the debtor may nominate a specific trustee based on a (pre-pack) reorganisation plan approved by the majority of secured as well as unsecured creditors.

The main role of the insolvency trustee comprises in particular the following activities:

• examining the assets and accounts of the debtor and compiling a list of assets forming the debtor’s estate;
• examining the lawfulness of the registered claims and preparing the list of all claims and creditors;
• providing reports on the debtor’s activity to the insolvency court and to the creditors’ meeting;
• enforcing the debtor’s claw-back claims; and
• supervising the debtor’s business activity.

The insolvency trustee reports to the creditors’ committee and the insolvency court. The insolvency court may remove the insolvency trustee from office if they are in breach of their duties or have a conflict of interests.

Shareholders

The reorganisation plan may stipulate otherwise, but as a default rule, existing equity owners retain their ownership of the debtor. They may receive property on account of their ownership interest pursuant to the reorganisation plan. However, since their claims arising from equity ownership may only be satisfied after the satisfaction of all the other creditors, equity owners typically do not receive any payment or property, and their claims arising from equity ownership cease to exist. 

The ownership interests of the original equity owners may survive reorganisation, although most reorganisation plans do stipulate a change of equity ownership, or liquidation at the end of reorganisation.

Roles of Creditors

Creditors vote on procedural issues at a creditors’ meeting (see the Creditors’ Meeting section of 4.5 The Position of Office Holders in Restructuring, Rehabilitation and Reorganisation) divided into classes of secured and unsecured creditors. They may elect a creditors’ committee, which supervises the debtor and the insolvency trustee (see the Creditors’ Committee section of 4.5 The Position of Office Holders in Restructuring, Rehabilitation and Reorganisation). Intra-group creditors or persons related to the debtor are generally excluded from decision-making.

Creditors are further divided into classes set out in the reorganisation plan, differentiating creditors with a comparable legal status and economic interests. There must be a separate group for each secured creditor, shareholders of the debtor, and creditors whose claims are not affected by the reorganisation plan. Creditors may object to their division into classes. The classes then vote on the approval of the reorganisation plan.

Rights of Set-Off

Generally, transactions such as set-offs are not permissible in a reorganisation (with certain exceptions), unless they are approved by a preliminary injunction of the court. After the court issues a declaration of the debtor’s insolvency, set-off is permissible only if the conditions for it were met before the decision on the insolvency resolution method. A mutual set-off is once again allowed after the effective date of the reorganisation plan.

Trading of Claims Against the Debtor

Claims that are transferable outside insolvency may generally also be transferred during insolvency proceedings. The assignor must file a proposal for the assignee to enter the proceedings and prove the assignment by way of an officially certified document. Unless the court disapproves the transfer within three days, the entry of the assignee is deemed approved. 

In order to avoid related parties from controlling the insolvency proceedings, the ultimate beneficial owner of the assignee of the claim must be revealed, either via a public register or via an affidavit issued by the assignee. This applies to claims assigned after the commencement of the insolvency proceedings or within six months prior to the commencement.

Secured Creditors – Rights and Remedies

After the insolvency proceedings are initiated, the secured creditors are prohibited from individually enforcing their secured claims outside the insolvency proceedings. The creditor’s right to satisfaction from collateral comprised of the debtor’s property is governed by conditions stipulated by the Insolvency Act and may be exercised or newly acquired only under certain conditions.

Security provided to a creditor by a third party (other than the debtor) does not confer the status of a secured creditor within the meaning of the Insolvency Act (nor the Act on Preventive Restructuring).

Secured creditors are obliged to register their claims in the insolvency proceedings as secured (if they wish to be satisfied from the proceeds from the sale of the collateral) by submitting a claim application providing details of their collateral, among other things. The proceeds from the sale of the collateral from which the secured creditor is satisfied within the insolvency proceedings may be reduced only by: 

• expenses that arise in connection with the sale of the collateral, up to a maximum of 5% of the proceeds;
• expenses associated with the management of the collateral, up to a maximum of 4% of the proceeds; and 
• the statutory remuneration of the insolvency trustee.

Secured creditors with major claims have a crucial status in any reorganisation. Through their key status (depending on the size of their claims), they can effectively block or adopt major decisions and resolutions made during the insolvency proceedings. Such resolutions include the approval of a reorganisation plan or major resolutions of the creditors’ committee and/or the creditors’ meeting.

Secured Creditors – Special Procedural Protections and Rights

In reorganisation, the secured creditors make up a separate group of creditors who have to give their approval for the proposed reorganisation plan to be adopted. Thus, the secured creditors may block the reorganisation process if their claims are big enough (subject to cram-down rules). The claims of the secured creditors are satisfied as stipulated in the reorganisation plan. The secured creditors have a right to exercise certain control over the asset(s) that serve as a security.

Unsecured Creditors

There is no special regulation or treatment of unsecured trade creditors in the Czech Republic. However, once insolvency proceedings have been initiated and the debtor has been declared bankrupt, new claims of the debtor’s suppliers enjoy a preferential position and are considered to be priority claims against the estate, as this position helps to keep the debtor’s business running and operational.

Unsecured Creditors – Rights and Remedies

During insolvency proceedings, the unsecured creditors have the right to be elected to the creditors’ committee and to vote at the creditors’ meeting. Their ability to block or push through important decisions depends on the size of their claims, as this is often the crucial denominator when it comes to adopting important resolutions (eg, at the creditors’ meeting).

Unsecured creditors may also file petitions with the insolvency court to, for instance, inform the court of important facts regarding the proceedings or request the court to adopt certain resolutions impacting the proceedings. Unsecured creditors’ claims are satisfied on a pro rata basis, based on the size of their claims. 

Liquidation Outside Insolvency Proceedings

Liquidation outside insolvency proceedings is governed by the Czech Civil Code and is applicable in cases where a legal entity is dissolved by:

• a voluntary decision of the competent body;
• a judicial act;
• the expiry of a period;
• a decision of a public body;
• the achievement of the purpose for which it was created; or
• other reasons provided by statute.

Liquidation Bankruptcy (Konkurs)

Liquidation bankruptcy is the most common method of resolving insolvency of business corporations in Czech Republic. In liquidation bankruptcy, the debtor’s estate is sold off, creditors’ claims (partially) satisfied and the debtor is subsequently dissolved.

Insolvency proceedings can be initiated by filing an insolvency petition against a particular debtor, either by the debtor itself or by its creditor. For the insolvency petition to be successful, there must generally be legal grounds for the debtor’s insolvency – ie, the failure of the debtor to pass the liquidity test or the balance sheet test. See the Insolvency proceedings – before the declaration of bankruptcy section of 1.2 Types of Insolvency.

Legal entities are treated separately in Czech insolvency proceedings, and the law does not provide for a liquidation bankruptcy of a corporate group on a combined basis. See the Corporate Group section of 4.1 Opening of Statutory Restructuring, Rehabilitation and Reorganisation.

Liquidation Outside Insolvency Proceedings

After its dissolution, a legal entity must be liquidated. The liquidation process serves the purposes of settling the property of the dissolved legal entity, repaying debts owed to creditors, and disposing of the net liquidation quota resulting from the liquidation.

Upon entry into liquidation, the competent body of the legal entity selects a liquidator, who acquires the powers of the legal entity’s governing body. The liquidator’s activities are strictly limited to achieving the purpose inherent in the nature and objective of the liquidation.

The liquidator notifies all known creditors of the fact that the legal entity is now in liquidation. During liquidation, employees’ claims are satisfied first. The liquidator is obliged to invite the creditors of the legal entity to register their claims within a time period of not less than three months. The liquidation estate is sold during the liquidation, and creditors’ claims are satisfied from the proceeds of the sale. If it is not possible to fully settle claims of the same ranking, they will be satisfied pro rata.

Liquidation in Insolvency Proceedings

Once the insolvency proceeding has been officially initiated, the insolvency court examines whether the conditions for declaring the debtor bankrupt have been met (see the Insolvency proceedings – before the declaration of bankruptcy section of 1.2 Types of Insolvency). If they have, the bankruptcy of the debtor will be declared and the insolvency trustee will be appointed. The creditors then have two months in which to register their claims against the debtor. If conditions for reorganisation as a method of resolving the debtor’s bankruptcy are not met (see the Entry Criteria section of 4.1 Opening of Statutory Restructuring, Rehabilitation and Reorganisation), the insolvency court may declare bankruptcy liquidation right away. Otherwise, it is the creditors’ meeting that decides on the method of resolving the debtor’s bankruptcy and may either vote for reorganisation or liquidation bankruptcy.

In most insolvency proceedings where liquidation bankruptcy is the chosen insolvency resolution method, the rights of disposal of the debtor’s estate are vested in the insolvency trustee, who is then responsible for the sale of the debtor’s assets. It is in fact the insolvency trustee’s obligation to convert the debtor’s estate into money and to satisfy the debtor’s creditors.

The following are the most frequently used methods of selling the debtor’s assets available to the insolvency trustee:

• Public auction – generally considered to be the most transparent way of selling assets in insolvency proceedings; the contract with the auctioneer becomes effective only after approval by the creditors’ committee.
• Direct sale of assets outside a public auction – this option enables the insolvency trustee to sell the assets directly to an interested party; such process is subject to approval by the creditors’ committee and the insolvency court.
• Sale of assets conducted under a special regulation governing the enforcement of claims.
• Sale of secured assets as per the secured creditor’s instructions.
• Sale of all assets of the debtor by way of a single contract – subject to approval by the insolvency court and the creditors’ committee.

After the sale of the assets within insolvency proceedings, any legal defects or other defects affecting the assets cease to exist (unless specifically provided otherwise by the law), whereby the acquirer buys the assets free and clear of any third-party claims and liabilities.

Creditors’ Bodies in Liquidation

Creditors’ meeting

The creditors’ meeting may decide upon:

• the bankruptcy resolution method;
• the removal of the current insolvency trustee from office and the appointment of a new insolvency trustee; and
• the election of members of the creditors’ committee.

Resolutions adopted by the creditors’ meeting may only be cancelled by the insolvency court if such resolutions are contrary to the best interest of all creditors. See the Creditors’ Meeting section of 4.5 The Position of Office Holders in Restructuring, Rehabilitation and Reorganisation.

Creditors’ committee and representative of the creditors

The main obligation of the creditors’ committee is to protect the common interest of all creditors and to co-operate with the insolvency trustee so that the purpose of the insolvency proceeding can be achieved. In particular, the creditors’ committee:

• supervises the activities of the insolvency trustee;
• provides assistance to the insolvency trustee;
• approves the costs of the insolvency trustee and the insolvency estate;
• may examine the debtor’s accounts and documents; and
• may approve the sale of the debtor’s assets.

All members of the creditors’ committee are obliged to act with due care and are responsible for any damages arising from a breach of this obligation. They must also prioritise the common best interest of all creditors above their own when acting as members of the creditors’ committee.

Members of the creditors’ committee are entitled to reimbursement for costs arising out of their service on the creditors’ committee and appropriate remuneration determined by the insolvency court. In practice, the remuneration usually granted to the members of the creditors’ committee is much lower than their actual costs. See the Creditors’ Committee section of 4.5 The Position of Office Holders in Restructuring, Rehabilitation and Reorganisation.

Insolvency Trustee

The main role of the insolvency trustee in liquidation bankruptcy comprises in particular the following activities:

• examining the assets and accounts of the debtor and compiling the insolvency estate;
• disposing of the debtor’s assets and managing its estate;
• examining the lawfulness of the registered claims and preparing the list of all claims and creditors;
• providing reports on the trustee’s activity to the court and to the creditor’s meeting;
• selling the debtor’s assets and enforcing the debtor’s claims;
• enforcing the debtor’s claw-back claims.

The insolvency trustee reports to the creditors’ committee and the insolvency court. At its first meeting, the creditors’ meeting may remove the insolvency trustee from office and appoint a new one. The insolvency court may remove the insolvency trustee from office if they are in breach of their duties or have a conflict of interests. See the Insolvency Trustee section of 4.5 The Position of Office Holders in Restructuring, Rehabilitation and Reorganisation.

Liquidation bankruptcy concludes after the debtor’s assets have been successfully liquidated using one of the methods prescribed by the Insolvency Act and procedural regulations. Upon obtaining the proceeds from the liquidation, the insolvency trustee is obliged to prepare a final report, which must include:

• a summary of all preferred claims against the estate that have arisen throughout the procedure;
• an overview of expenses incurred in the administration of the estate;
• a summary of the liquidation of the estate; and
• most importantly, a breakdown of the amount to be distributed to registered creditors in the distribution schedule.

Creditors have the right to file objections to the final report. After reviewing these objections, the insolvency court will make a decision on the final report. If the court approves the final report, it instructs the insolvency trustee to prepare the distribution schedule. In the distribution schedule the insolvency trustee is obliged to specify the amount designated for satisfying the registered creditors. The rule for distributing proceeds among creditors within the same class is based on a proportional allocation relative to the amount of their registered claims.

Shareholders

Shareholders are deemed to be statutory subordinated creditors. Any remains of the liquidation surplus of the insolvency estate will be distributed to the shareholders. However, the regular recovery rate for shareholders as subordinated creditors is close to 0%. Additionally, there are no voting rights attached to a shareholder’s claim derived from its participation in the debtor.

Secured Creditors

The position of secured creditors in liquidation bankruptcy is significantly stronger, as they can exercise their right for preferential satisfaction from the proceeds of the liquidation of the collateral. Secured creditors have standard voting rights unless they are considered related parties to the debtor as well as having privileged right to decide on the method of liquidating the secured assets. The proceeds from sale cannot even be used as a payment for the priority claims against the estate. However, a portion of the proceeds from the sale is used to cover the insolvency trustee’s remuneration.

If multiple secured creditors obtained security over a particular asset, the creditor with the highest priority assumes the decisive authority on how to proceed with the sale of the asset. If their claims are of the same priority, they vote together. The insolvency trustee may reject any instructions if they believe the asset can be managed or sold under more favourable terms. The priority of secured creditors holding security interests over the same debtor’s assets is determined by the date the security was established.

Unsecured Creditors

Even in bankruptcy liquidation, the unsecured creditors do not have any specific or preferential rights. Unsecured claims can generally be satisfied only after secured and estate and priority claims. See the Unsecured Creditors sections of 2.1 Types of Creditors and 4.6 The Position of Shareholders and Creditors in Restructuring, Rehabilitation and Reorganisation.

Set-Off

Generally, set-off is not permissible in insolvency, unless it is approved by a preliminary injunction of the court. After the court issues a declaration of the debtor’s bankruptcy, set-off is permissible only if the conditions for it were met before the decision on the insolvency resolution method.

The international insolvency laws directly applicable in the Czech Republic are:

• the EU Regulation 2015/848 on Insolvency Proceedings (recast), known as the “Recast Insolvency Regulation,” and
• Act No 91/2012 Coll., on Private International Law (the “Act on Private International Law”).

These laws establish the legal framework for cross-border insolvency cases, ensuring co-ordination and clarity in international matters. The Czech Republic has not adopted the UNCITRAL Model Law.

The Recast Insolvency Regulation

The Recast Insolvency Regulation is directly applicable in all EU member state (except Denmark) and, as such, the Czech Republic automatically recognises specified foreign EU insolvency proceedings.

For debtors located in the EU, the courts of the member state in which the debtor’s centre of main interest (COMI) is situated have jurisdiction to open the main insolvency proceedings. The Recast Insolvency Regulation generally prescribes the automatic recognition of foreign insolvency proceedings, and all assets of the debtor will be subject to the foreign insolvency proceedings (unless secondary proceedings are opened).

If a debtor’s COMI is located in an EU member state, secondary proceedings may be opened in the Czech Republic only if the debtor has an establishment in the Czech Republic. These secondary proceedings will be limited to the Czech assets of the debtor.

Other judgments are also to be recognised and enforced in accordance with the Recast Insolvency Regulation, or in accordance with EU Regulation No 1215/2012. Grounds for non-recognition are narrow, but Czech courts may refuse the recognition of insolvency proceedings or decisions issued in another member state if the effects of such recognition would be manifestly contrary to the fundamental principles of Czech Law.

The Recast Insolvency Regulation further regulates the co-operation and communication between the EU courts and insolvency practitioners.

Act on Private International Law

The Act on Private International Law provides the basis for the recognition of foreign decisions in insolvency proceedings conducted in countries outside the EU. Recognition is possible subject to mutual reciprocity, provided that the debtor’s COMI is located in the foreign country that issued the decision and the debtor’s assets are not subject to Czech insolvency proceedings. There are also special rules for financial institutions and insurance companies.

European law distinguishes between the main insolvency proceeding and the secondary insolvency proceeding. Once the main proceeding is initiated all other proceedings are secondary. The primary proceeding takes place in a member state where the debtor has its COMI. All other secondary proceedings can lead only to winding up of the debtor’s assets and are limited to the assets located within the territory of the member state.

While the main (primary) insolvency proceeding is focused on the complex solution of the debtor’s insolvency (restructuring or liquidating the debtor’s assets), the secondary proceeding is focused on protecting the local creditors and ensuring the local assets are managed properly under local laws.

The main proceeding should be initiated in the member state where the debtor has its COMI which is presumed to be in the place of the debtor’s registered office, unless proven otherwise and unless the debtor’s registered office was moved from another member state within the last three months. COMI is assessed as of the initiation of the insolvency proceedings.

When assessing COMI, the insolvency courts must take into particular account creditors’ opinion on where the debtor’s COMI is located and the place where:

• day-to-day operations of the debtor are managed;
• the board of directors’ meetings are held;
• accounts are prepared;
• the chief executive spends most of their time doing business; and
• other stakeholders are situated (customers, employees, suppliers, creditors, etc).

None of these factors is individually conclusive, and typically, a combination of several is present. Once COMI is confirmed all other insolvency proceedings regarding the debtor’s assets may only be initiated as secondary proceedings.

If the debtor’s COMI is in the Czech Republic, the Insolvency Act applies with respect to insolvency proceedings and the Act on Preventive Restructuring applies with respect to preventive restructuring measures. Foreign debtors from another EU member state may be subject to secondary insolvency proceedings under the Recast Insolvency Regulation.

See 6.1 Sources of International Insolvency Law regarding the recognition of foreign insolvency proceedings and decisions handed down in foreign insolvency proceedings.

During insolvency proceedings conducted in the Czech Republic, all claims against the debtor must be asserted via registration in the insolvency proceedings. As such, claims that must be registered may not be decided upon by another court, and judgments issued by courts other than the insolvency court cannot be enforced during the course of the insolvency proceedings.

Recognition of judgments issued before the commencement of insolvency proceedings is possible. However, even these judgments cannot be enforced and must be registered in the insolvency proceedings. During review by the insolvency trustee, recognised judgments may be challenged only on very limited grounds.

The recognition and enforcement of foreign judgments other than those related to insolvency are generally governed by EU Regulation No 1215/2012. Other than that, international treaties and the Act on Private International Law may be applicable.

Co-operation and communication between the courts and insolvency practitioners is regulated by the Recast Insolvency Regulation. However, this happens on a rather ad hoc basis, and Czech courts and insolvency administrators still only have limited experience in this field.

Foreign creditors must prove their claims in Czech insolvency proceedings in the same way as local creditors. The deadline for registration, however, is extended for known foreign creditors depending on the delivery of a request for registration, while for Czech creditors, the deadline is two months from publication of the court’s declaration of insolvency in the online insolvency register.

In relation to insolvency proceedings, Czech corporate and insolvency law sets forth extensive duties and liabilities with regard to the directors of an insolvent debtor.

Due Filing of an Insolvency Petition

Directors of an insolvent legal entity are obliged to file an insolvency petition. Failure to do so may result in direct liability of the directors for the difference between the established claims of the creditors and their actual satisfaction in the proceedings, unless the directors can prove that the delay had no effect on the satisfaction of creditors.

Fiduciary Duties

If a director breaches their fiduciary duties towards a legal entity and fails to compensate the legal entity for damages, they are personally liable for any debts of the legal entity that the entity is unable to satisfy, up to the sum of uncompensated damages. The creditors may enforce their receivables directly against such directors, provided they first attempted to enforce their claims against the legal entity.

Furthermore, if a breach of fiduciary duties led to the insolvency, the directors may be held personally liable (see 7.2 Personal Liability of Directors).Moreover, directors of insolvent legal entities may be disqualified by the court from holding office in other legal entities for up to three years, and have a three-year duty to inform the shareholders of any legal entity that might select them for office of their past involvement in insolvent legal entities.

Each director is individually liable for a breach of the duty of care unless the company’s articles of association establish the statutory body as a collective body and precisely divide responsibilities among the company’s members based on their areas of expertise. In such cases, other members of the statutory body are obliged to supervise one another to ensure that each member performs their duties with appropriate care.

Directors may be held liable if they contributed to the debtor’s insolvency through breach of their fiduciary duties. The insolvency court may impose an obligation on the directors in breach to:

• return any consideration they received on account of their directorship for up to two years preceding the commencement of insolvency proceedings; and
• in the case of liquidation bankruptcy, pay the difference between the value of the insolvency estate and the value of established claims.

Under certain circumstances, creditors may assert their claims directly against directors who breached their duties outside of insolvency proceedings, provided creditors first attempted to enforce their claims against the debtor (the legal entity). In such cases, directors may be liable for damages up to the difference between the creditor’s claim and the amount up to which it was actually satisfied. Such creditors’ actions are, however, rather rare since the standard of proof to establish director’s liability is relatively high.

The insolvency trustee of a company may (and in some circumstances is obliged to) assert the company’s claims against such directors on behalf of the legal entity.

Once the insolvency proceeding is initiated, the directors are obliged to refrain from dealing with the estate and any assets that belong to the estate, if such actions would result in significant changes to the composition, use, or purpose of the insolvency estate, or in a substantial reduction of its value. Directors should also refrain from any acts that could result in a preferential satisfaction of selected creditors (compared to other creditors with similar claims).

The limitations do not apply to the fulfilment of duties prescribed by law or the operation of the debtor’s business within the scope of its regular business activities. Regular business activities are interpreted in relation to the circumstances of the specific case, such as turnover, number of employees, etc. The debtor may also avert imminent damage and settle preferred claims against the insolvency estate.

Directors of insolvent legal entities may be disqualified by the court from holding office in other legal entities for up to three years and have a three-year duty to inform the shareholders of any legal entity that might select them for office about their past involvement in insolvent legal entities.

Certain directors’ actions (or omissions) may lead to criminal liability. Such actions include frustrating the satisfaction of creditor’s claims under certain specific conditions, intentionally causing insolvency of a company, interfering with the insolvency trustee or impeding the performance of their duties, and interfering with the insolvency proceedings through creditors’ voting.

Under the Czech Insolvency Act, the insolvency court may declare the debtor’s legal actions (or omissions) ineffective, based on the insolvency trustee’s action, if the debtor hinders the ability to satisfy its creditors or favours certain creditors at the expense of others, in the following situations:

• if the debtor has undertaken to render performances free of charge or in exchange for a consideration whose usual price is substantially lower than the usual price of the performance which the debtor has undertaken to render;
• if the claims of certain creditors are satisfied disproportionately, more than they would be in the case of bankruptcy, to the detriment of other creditors; and
• if the debtor has intentionally hindered the creditor’s satisfaction, provided that such intention was known to the other party or, considering all circumstances, must have been known to the other party.

Generally, in order for a legal act or omission to be declared ineffective (apart from the intentional hindering of creditors’ satisfaction), it must have occurred while the debtor was already insolvent, or else it must have contributed to the debtor’s insolvency. This condition does not apply to intra-group transactions.

The standard look-back period in the case of undervalued transactions or preferential transactions is one year for third-party creditors and three years for intra-group creditors or related parties. The look-back period is calculated from the commencement of the insolvency proceedings.

For transactions whose intention is to hinder the satisfaction of creditors, the period is extended to five years. The identity of the other party is therefore key with respect to the look-back period.

An action to set aside or annul transactions of the debtor may be brought solely by the insolvency trustee. The creditors’ committee can adopt a decision based on which the insolvency trustee is obliged to file a motion for a certain action. The action may be filed within one year of the declaration of insolvency, in both reorganisation and liquidation bankruptcy.

A successful claim will not invalidate the transaction, but all performance that was provided on the basis of the ineffective transaction belongs to the insolvency estate.