In the Czech Republic the number of new insolvency petitions has begun rising again. In August 2020, the number of insolvency petitions increased by 25% compared to the number of insolvency petitions in May 2020. However, more than 90% of this figure relates to the debt relief of individuals. The situation of legal entities is different. Petitions for the insolvency of legal entities are not currently on the rise. This can be attributed to various state support programmes which were put in place due to the COVID-19 pandemic, as well as a temporary relaxation of certain provisions of Czech insolvency law – the ability of a creditor to initiate insolvency proceedings was suspended (this suspension expired in August 2020) and the duty of a debtor's directors to initiate insolvency proceedings was also suspended (this suspension will expire, if the latest COVID-19 measures are adopted, in June 2021). As these measures are only temporary, in the upcoming months an increase in the insolvencies of legal entities is expected, unless the measures are re-introduced or extended, given the second wave of the COVID-19 pandemic in the Czech Republic.
The main statute of Czech insolvency law is Act No 182/2006 Coll., on Insolvency and Methods of its Resolution (Insolvency Act), as amended.
Furthermore, several regulations regarding the rules of procedure for insolvency proceedings and insolvency administrators, including their remuneration, also apply (namely Act No 312/2006 Coll., on the Insolvency Administrators, as amended).
If an employer becomes insolvent, employees' wage claims may be paid by the Labour Office of the Czech Republic under the conditions set out in Act No 118/2000 Coll., on the Protection of Employees in case of Employer Insolvency and Amending Certain Acts, as amended.
The process of solvent liquidation as well as consensual restructuring are mainly governed by Act No 89/2012 Coll., the Civil Code, as amended and Act No 90/2012 Coll., on Commercial Companies and Cooperatives (Business Corporations Act), as amended.
The Czech insolvency law regime comprises one type of court-supervised insolvency proceeding (insolvenční řízení), within the framework of which the debtor's insolvency may be resolved through:
Involuntary administration (nucená správa), which is a specific process applicable to certain regulated entities, may be imposed by a supervising authority as one of the possible remedies. Involuntary administration is mentioned here to complete the picture but it will not be referred to further unless stated otherwise.
The company, or its executive body (board of directors), legal representative or liquidator (if the company is in the process of liquidation) must file an insolvency petition (insolvenční návrh) without undue delay once it learns, or having exercised due care should have learnt, that the company is insolvent (see 2.5 Requirement for Insolvency).
Any person set out above that violates the above duty will be liable for damages or other loss caused to a creditor by this violation. Damages or other loss are calculated as the difference between the registered claim as determined in the insolvency proceedings and the amount which the creditor actually receives in respect of such registered claim.
The measures adopted to mitigate the impact of the COVID-19 pandemic state that the duty of debtors to file an insolvency petition has been suspended from 24 April 2020 until six months after the end or cancellation of the emergency measures, but no later than 31 December 2020 (it is likely that this will be extended until June 2021 given the second wave of the COVID-19 pandemic in the Czech Republic).
Insolvency proceedings are initiated upon the filing of an insolvency petition which may also be filed by one or more creditors of the debtor. In the case of a financial institution whose licence has been withdrawn, the Czech National Bank as the supervisory authority is also entitled to file an insolvency petition.
The creditor must include in the insolvency petition all facts certifying the debtor's insolvency and proving that it has a due claim against the debtor, and must include the application for the registration of such claim in the insolvency proceedings. If a creditor files an insolvency petition against a legal entity-entrepreneur, the creditor is generally obliged to pay an advance for the costs of the insolvency proceedings of CZK50,000 (approximately EUR2,000).
The fact that an insolvency petition almost immediately appears in the (publicly available) Insolvency Register is open to abuse by creditors who may be tempted to file an insolvency petition in order to put illegitimate pressure on the debtor or to use it as an unlawful tool to reduce competition from other entrepreneurs (usually referred to as a "frivolous" insolvency petition). To mitigate these concerns, if the relevant insolvency court has reasonable doubts about whether the insolvency petition filed by a creditor is justified, the insolvency court may decide not to publish the insolvency petition and any other documents in the insolvency file in respect of such a "frivolous" petition in the Insolvency Register. Both the legal entity – as the insolvency petitioner – and its executive directors, may under certain conditions be jointly and severally liable for any damage or other loss caused due to the commencement of insolvency proceedings and due to any measures taken during the course of proceedings if such initiation of insolvency proceedings is not justified. The same persons may also incur criminal liability.
Insolvency proceedings may only be legitimately initiated for debtors who are insolvent (or in impending insolvency, if the insolvency petition is filed by the debtor). The factual state of the insolvency will be examined by the insolvency court.
Under Czech insolvency law, two insolvency tests are generally carried out:
Cash Flow Test
This tests whether a debtor:
A debtor is deemed to be unable to fulfil its monetary obligations if it:
A debtor is deemed to be able to fulfil its monetary obligations if the difference (or expected difference) between the monetary obligations due and its available funds is (or is expected to be) less than one tenth of the monetary obligations due, as set out in an applicable liquidity statement or liquidity development outlook.
Balance Sheet Test
This looks at whether a debtor:
The valuation of the debtor's assets also takes into account the subsequent management of these assets and the subsequent operation of the enterprise as long as it can reasonably be assumed that the debtor will be able to continue with the management of the assets or operation of the enterprise in light of all the circumstances.
Before becoming insolvent, the debtor may file an insolvency petition on the grounds of "impeding insolvency" (hrozící úpadek). This condition occurs when, in light of all the circumstances, it may reasonably be expected that the debtor will not be able to duly fulfil a material part of its monetary obligations in a timely manner.
The Insolvency Act is not applicable to financial institutions and health insurance companies as long as they possess their respective licences. Any unfavourable economic situation of such institutions should first be resolved within the framework of the relevant regulatory regime.
Depending on the severity of the situation, the following would be applicable:
In such a case, more sensible remedies may be used (eg, prohibition on disposal of estate, suspension of the exercise of the creditors' right to satisfaction from the collateral provided, or removal or replacement of the executive directors). In addition, direct involuntary administration may be exercised by the Czech National Bank, or special involuntary administration may be exercised by a special administrator.
After the licence of such an institution has been withdrawn, such institution can become subject to insolvency proceedings under the Insolvency Act (the special Chapter IV of the Insolvency Act, called "Insolvency of financial institutions", would also be applicable).
There are no specific statutory out-of-court workout proceedings under Czech law. In the case of the debtor's insolvency, there is a general obligation (currently temporarily suspended due to COVID-19 pandemic legislation) on the company as the debtor and its executive directors to file an insolvency petition without undue delay so that the insolvency proceedings can be officially initiated.
However, it is possible for the debtor to reach an out-of-court settlement with its creditors if the criteria for insolvency have not been met. These out-of-court relationships between debtors and creditors are not specifically regulated by insolvency law, although they are generally regulated by the Civil Code and the Business Corporations Act.
Czech law does not require mandatory negotiations to take place before the commencement of the formal insolvency proceedings. If during the negotiations relating to the out-of-court settlement, any creditor or the debtor files an insolvency petition, consensual restructuring negotiations are in fact blocked, and statutory insolvency proceedings are initiated.
Generally, there is a perception among restructuring participants that non-judicial or other informal restructuring processes are preferable to statutory insolvency proceedings. Banks and other major creditors are often supportive of out-of-court restructurings/workouts. However, it always depends on the specific situation and the measures to be adopted in each case. The key thing is to find consensus among all the major creditors.
If the parties agree to an informal out-of-court settlement, a "standstill agreement" would normally be negotiated by the largest creditors of the debtor. Czech law does not set specific requirements for the content of such an agreement. The detailed content will depend on the financial, business, operational and other aspects of the debtor, the seriousness of the debtor's distress and the level of the debtor's indebtedness.
Common Clauses in Standstill Agreements
The most common clauses that appear in standstill agreements relate to: no prepayments or repayments unless pro rata, no new security or guarantees to any creditor and no enforcing of existing securities, no intra-group transfers, no preferential increase in interest or commission, no loan acceleration or demand or close-out swaps, no termination of facilities and no petition or filing for insolvency and/or enforcement proceedings.
Independent Business Reviews
Before entering into the standstill agreement, an independent business review of the debtor will typically be requested. Independent business reviews are executed by external independent advisers or auditors. These auditors are usually hired and paid directly by the debtor. In an independent business review, the auditors assess the debtor's situation and set a deadline within which the restructuring measures should be implemented.
Formation of Committees
Banks with the largest exposure usually establish a steering or co-ordinating committee, led by a lead or co-ordinating bank with the necessary experience and resources. Other committees may also be formed, eg, trade creditors or shareholders.
How and by whom new money is injected outside insolvency proceedings depends on each particular case, including tax implications and the extent and ranking of indebtedness of the debtor. In practice, the current creditors or shareholders of the debtor may provide the debtor with new money because they are the parties most interested in preserving the debtor as a going concern (for more details, see 6.10 Priority New Money).
Pursuant to the general rules, creditors must always act honestly and in good faith, their conduct must conform to good morals and the law. If not, their actions may be invalid or ineffective.
The undervalue legal act, the intentionally curtailing legal act and the preference legal act could also be declared as ineffective (see 11.1 Historical Transactions).
In insolvency proceedings, in general, none of the participants may be unfairly damaged or illegally advantaged. Creditors in principally the same or a similar position have essentially equal opportunities and the rights of the creditors acquired in good faith before the commencement of insolvency proceedings may not be restricted by the decision of the insolvency court.
When negotiating a contract, creditors should communicate to each other all factual and legal facts which they know or should know, so that each party can be convinced of the possibility of concluding a valid contract. If the conclusion of a contract is highly probable, the party which, despite the other party's reasonable expectations would terminate the negotiations without a fair reason for doing so, is acting dishonestly.
Czech law does not provide for any kind of "cram-down" procedures for an out-of-court restructuring. The unanimous consent of all creditors is in such case necessary. A dissenting creditor can only be overruled in formal insolvency proceedings.
Credit agreements (club/syndicated credit facility agreements) usually contain terms authorising a majority or super majority of creditors to bind dissenting creditors, inter alia, to change the credit agreement terms. The use of intercreditor agreements is still not very common.
The new Directive (EU) 2019/1023 of the European Parliament and of the Council on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), when implemented in the Czech Republic, will provide a legal framework for conducting preventative restructurings and will thus improve the feasibility of out-of-court restructurings in the Czech Republic.
Czech law recognises the following basic types of security over assets: pledge/mortgage, which is the most frequently used security, and security transfer/assignment.
In addition, the pledge or security transfer over cash, a financial instrument or some other types of assets can be created as financial collateral, as set out in Act No 408/2010 Coll. on Financial Security (as amended). The benefit of this is that, as per Section 366(1)(b) of the Insolvency Act, the exercise of rights and discharge of obligations under a financial collateral arrangement agreed and created prior to the commencement of insolvency proceedings (unless the collateral taker was aware of such fact or should and could be aware of such fact) will not be affected by the Insolvency Act.
Secured creditors can enforce their collateral when the secured debt is not fulfilled properly and on time. The enforcement of the collateral is usually carried out by a court sale of a pledged asset, a public auction or a private sale (if agreed). For financial collateral arrangements, a forfeiture of collateral can also be agreed.
Following the commencement of the insolvency proceedings, the claims of creditors cannot be enforced by the court. The right to satisfaction from collateral concerning property owned by the debtor may be exercised and newly acquired only under conditions stipulated by the Insolvency Act.
Secured creditors must register their claims in the insolvency proceedings via an application of claims, in which they must invoke, inter alia, their collateral.
Secured creditors are entitled to the satisfaction of their claims from the proceeds of the enforcement of the relevant security assets minus the expenses of liquidation up to a maximum of 5% of the proceeds, the expenses of administration up to a maximum of 4% of the proceeds, and the remuneration of the insolvency administrator.
In bankruptcy, the security will be enforced by the insolvency administrator based on the instructions of the relevant secured creditor.
Depending on the size of the registered claim of an individual secured creditor, secured creditors are able to significantly slow down or block the relevant processes by using their majority, filing numerous appeals and giving certain instructions, for example, in relation to obtaining approval for the reorganisation plan or in respect of the adoption of the resolution of the creditors' meeting as to how to resolve the debtor's insolvency.
Secured creditors may instruct the insolvency administrator as to how the collateral should be administered and liquidated. This does not apply to priority insolvency financing (úvěrové financování), as explained in 5.5 Priority Claims in Restructuring and Insolvency Proceedings. The insolvency administrator may refuse these instructions, in which case, this must be confirmed by the insolvency court. In many cases, however, the consent of the majority of secured creditors is required.
The Insolvency Act recognises the following key types of unsecured claims:
In general, creditors with priority claims, creditors with claims not to be satisfied within insolvency proceedings, creditors with subordinated claims and contingent claims (until the relevant condition is met) do not have the right to vote in the insolvency proceedings.
In general, unsecured trade creditors are kept whole during the reorganisation process and they should typically be satisfied as unsecured creditors (other than the unsecured creditors whose claims are not affected by the reorganisation).
To approve the reorganisation plan, the debtor's creditors are divided into classes. Creditors which share the same legal status and fundamentally identical economic interests belong to one class (for more, see 6.3 Roles of Creditors and 6.12 Restructuring or Reorganisation Agreement).
The debtor's creditors exercise their voting right by a collective vote at a creditors' meeting and through representation in the creditors' committee (see 6.3 Roles of Creditors and 7.3 Organisation of Creditors or Committees). Generally, for the validity of the creditors' meeting's resolution, the vote of a simple majority of (present or duly represented) creditors (calculated based on the value of their claims) is required.
Adopting a Resolution
The creditors' meeting may adopt a resolution on whether to resolve the debtor’s insolvency by bankruptcy or reorganisation. Such a resolution must be approved by at least half of the secured creditors present and at least half of the unsecured creditors present, or by 90% of creditors present (in both cases, calculated based on the value of claims). In the case of reorganisation, in general, all classes of the debtor's creditors have to approve the reorganisation plan.
Appointment to the Creditors' Committee
Unsecured creditors have a right to be appointed to the creditors' committee, where both secured and unsecured creditors are represented. There must be at least as many members of the creditors' committee proposed by unsecured creditors as by secured creditors. The members of the creditors' committee proposed by the unsecured creditors shall be elected and removed by the votes of the unsecured creditors (the same applies to secured creditors). For more details, see 7.3 Organisation of Creditors or Committees. Furthermore, creditors (including unsecured creditors) have the right to reject the registered claim of another creditor (the authenticity, value or order of such a claim). See 4.2 Rights and Remedies for more about creditors' ability to block or disrupt insolvency proceedings.
The concept of a preliminary injunction exists under Czech law.
Unless the insolvency court decides otherwise, from the moment when the effects associated with the commencement of insolvency proceedings occur, the debtor must refrain from dealing with (transacting in) the insolvency estate and property that may belong in it with regard to significant changes in composition, use or the determination of such estate. This does not apply inter alia to actions necessary for the operation of the debtor's enterprise within its normal management or to a reduction of the insolvency estate which is not just negligible.
Before the court decision on insolvency is issued, if it is necessary to prevent changes within the scope of the insolvency estate to the detriment of creditors, the insolvency court may by a preliminary injunction further restrict the debtor's right to deal with the insolvency estate. The debtor may be required not to dispose of certain assets belonging to the insolvency estate or to do so only subject to obtaining the prior consent of a preliminary insolvency administrator.
Apart from secured creditors' claims, there are two main types of priority claims under the Insolvency Act. Both may be satisfied in full at any time after the court decision on insolvency (in reorganisation, before or immediately after the reorganisation plan's effective date).
Claims against the Insolvency Estate
Claims which originated after the commencement of insolvency proceedings or after the declaration of the moratorium are, for example: the reimbursement of expenses and the remuneration of a preliminary insolvency administrator and members and substitutes of the creditors' committee, or the claims of creditors from the priority insolvency financing (see 6.10 Priority New Money).
Claims which originated after the court decision on insolvency are, for example: the expenses and the remuneration of the insolvency administrator and the costs associated with the maintenance and administration of the debtor's insolvent estate (see 5.1 Differing Rights and Priorities).
Claims Equal to Those against the Insolvency Estate
Unlike the claims against the insolvency estate, it is not relevant whether some claims arose prior to or after the commencement of insolvency proceedings. These claims are, for example, labour claims of the debtor's employees or the claims of creditors for damage caused to health.
Unless provided otherwise, such priority claims shall be claimed in writing against "the person with a right to deal with the insolvency estate" (ie, the debtor or the insolvency administrator). The person with a right to deal with the insolvency estate shall satisfy such claims from the insolvency estate.
Unless provided otherwise, creditors with claims against the insolvency estate and claims equal to those against the insolvency estate do not have the right to vote at the creditors' meetings.
Under Czech law, the only form of statutory restructuring is reorganisation. The reorganisation proceeding as part of insolvency proceedings, is a court-approved process. Generally speaking, the objective of reorganisation is the gradual satisfaction of creditors' claims while preserving the operation of the debtor's enterprise, secured by economic measures for economic recovery under the reorganisation plan. The debtor or any creditor who registered their claim can apply for the approval of reorganisation (rozhodnutí o povolení reorganizace) as a method of resolution of the debtor's insolvency.
Reorganisation is generally available to debtors that are entrepreneurs and that either:
The debtor can disapply these requirements if (when filing an insolvency petition or before the insolvency court rules that the debtor is insolvent) it submits a reorganisation plan together with its insolvency petition approved by at least half of the secured creditors and at least half of the unsecured creditors (in both cases, calculated based on the value of claims). The petition for approval of reorganisation must also be approved by the creditors' meeting.
The reorganisation plan must be submitted no later than 120 days after the approval of reorganisation. The debtor always has priority to prepare the reorganisation plan.
The reorganisation plan and vote on its approval are heard at the creditors' meeting convened for this purpose. In such a case, the voting is carried out in classes of creditors determined by the reorganisation plan.
If the majority of voting creditors in the given class, the claims of which represent at least half of the total nominal value of all the claims of the voting creditors of the relevant class, has voted for the approval of the reorganisation plan, then such class of creditors has approved the reorganisation plan. The insolvency court will approve the reorganisation plan if:
Generally, after the reorganisation plan has been approved, the debtor has the right to deal with the insolvency estate. If any legal act of the debtor would have a significant impact on the insolvency estate, however, the consent of the creditors' committee would be required.
The dealing with (transacting in) the insolvency estate is supervised by the insolvency administrator. The insolvency court may, upon the petition of the insolvency administrator or the creditors' committee (or even without a petition), restrict the right of the debtor to deal with the insolvency estate. In such a case, the right to deal with (transact in) the insolvency estate will pass to the insolvency administrator.
To achieve the purpose of the reorganisation plan, the debtor may borrow new money as priority insolvency financing (for more information, see 6.10 Priority New Money).
To approve the reorganisation plan, the debtor's creditors are divided into several classes. Each class consists of creditors which have, in principle, the same legal status and fundamentally identical economic interests.
Each secured creditor, shareholders of the debtor, and creditors whose claims are not affected by the reorganisation plan always constitute a separate class of creditors. In each class, decisions are adopted by a simple majority of the nominal value of their claims. In the case of shareholder class, the majority is calculated based on the share capital and must be at least two thirds of its total amount.
During the reorganisation procedure, creditors form creditors' bodies (a creditors' meeting and a creditors' committee) – for more information, see 7.3 Organisation of Creditors or Committees.
The debtor (or a creditor if it submitted the reorganisation plan) must prepare a report on the reorganisation plan, which must contain information that the creditors of a certain class must be aware of in order to be able to decide whether or not to accept the reorganisation plan.
Generally, the insolvency court will approve the reorganisation plan if it meets the statutory requirements and if it has been approved by all the classes of creditors. If the reorganisation plan is not approved by all the classes of creditors, the insolvency court may overrule the dissenting creditors.
This "cram-down" procedure can be applied only if the following statutory requirements are met:
All transferable claims against the debtor can generally be transferred during insolvency proceedings. If a creditor is changed, the insolvency court decides whether the new creditor will enter into the insolvency proceedings.
If the creditor has acquired the claim through an assignment or in a similar manner after the commencement of the insolvency proceedings, or within six months prior to the commencement of the insolvency proceedings, the new creditor should also provide the insolvency court with an affidavit identifying its ultimate beneficial owner.
The Insolvency Act does not regulate situations where several companies forming a corporate group resort to reorganisation. However, in the case of insolvency or imminent insolvency of a company forming a group with a debtor which is subject to insolvency proceedings, each group company may file its insolvency petition with the insolvency court in its district or with the insolvency court where the insolvency proceedings of the debtor are being held. Moreover, the chairman of such insolvency court should appoint the same insolvency administrator for all companies that form such a corporate group.
After Commencement of Insolvency Proceedings
After the commencement of the insolvency proceedings, the debtor is obliged to refrain from dealing with the insolvency estate, if such act would bring significant change to the composition, use or determination of the insolvency estate. This does not apply, inter alia, to actions necessary for the operation of the debtor's enterprise within the ordinary management or when the reduction of the debtor's enterprise is not just negligible.
After Petition for Approval of Reorganisation
After the petition for approval of reorganisation, the debtor must also refrain from any legal acts which could endanger the proposed reorganisation.
After the approval of reorganisation, the restrictions on the right to deal with the insolvency estate of the debtor are lifted, unless the insolvency court decides otherwise. The debtor may only perform legal acts that could have a significant impact on the insolvency estate and its maintenance, with the consent of the creditors' committee. The insolvency administrator supervises the debtor's activities.
From the Effective Day of the Reorganisation Plan
As from the effective day of the reorganisation plan, the debtor's right to deal with the insolvency estate may only be restricted for the benefit of other persons in the reorganisation plan. To the extent that the debtor's right to deal with the insolvency estate is restricted, the insolvency administrator should deal with the insolvency estate. The creditors' committee supervises the implementation of the reorganisation plan.
One of the reorganisation measures is for the debtor to sell some (or sometimes even, substantially all) of its assets. From the reorganisation plan effective day, the debtor becomes the person who can deal with (transact in) the insolvency estate, and the debtor's executive directors are in charge and are entitled (as foreseen in the reorganisation plan) to execute the sale of assets belonging to the insolvency estate.
In some circumstances, the consent of the creditors' committee or the insolvency administrator may be required.
The concept of "credit bid" is not provided for in the Insolvency Act. A "stalking horse" bidding technique could well be utilised, however.
The rights of all creditors (even if they did not register their claims) against the debtor, and the rights of third parties to assets belonging to the insolvency estate, shall cease to exist after the reorganisation plan effective day. The creditors of the debtor are the only persons set out in the reorganisation plan.
The debtor may, in order to sustain or restore the operation of its enterprise, conclude on customary commercial terms, credit or similar agreements for the purpose of obtaining priority insolvency financing. The debtor may conclude such credit agreements and related security agreements.
The debtor must enter into such agreements with its existing secured creditors, unless the secured creditors offer worse terms than the best available offer.
The claims from priority insolvency financing constitute a claim against the insolvency estate which should be satisfied before all other claims, with the exception of the expenses and remuneration of the insolvency administrator. Even if the creditor that supplied the priority insolvency financing is not an existing secured creditor who had the right of priority to provide priority insolvency financing, the claim from the priority insolvency financing has the same ranking as the claim of those secured creditors.
New assets acquired from the proceeds of the priority insolvency financing cannot become subject to security under pre-existing security documents.
The creditors must register their claims no later than within the deadline set out in the court decision on insolvency. Each creditor is responsible for the accuracy of the information contained in the application for its claims.
The value of the claim should be stated in the application so the claim can be registered in the insolvency proceedings.
All the registered claims are then subject to review by the insolvency administrator. The review of registered claims takes place at the review meeting by the insolvency court. The value, authenticity and the order of the claims may be challenged by the insolvency administrator, the debtor or registered creditors. If the value of the claim is challenged, the value is determined in separate proceedings before the insolvency court.
If the actual value of the claim is determined to be less than 50% of the value proposed by the relevant creditor, such claim shall be disregarded completely. Moreover, if it is determined after the review that a secured creditor's right to satisfaction of its claim is less than 50% of its proposed value, or that its right to satisfaction from the security is of a lower ranking than stated in the application for registration of the claim, then the creditor's right to satisfaction of such claim from the security shall be disregarded in the insolvency proceedings.
The reorganisation plan must always be approved by the insolvency court.
If a mutual performance agreement (such as a purchase agreement) has not yet been fully fulfilled by the debtor and another contractual party, the debtor (subject to obtaining the consent of the creditors' committee) may discharge such agreement and seek that its counterparty discharges its part of the agreement as well, or the debtor may refuse to discharge the agreement.
The reorganisation plan is binding on all participants in the insolvency proceedings as well as on all other persons whose rights and obligations are affected by the plan. The rights to assets belonging to the insolvency estate of third parties shall cease to exist on the reorganisation plan effective day. Creditors of the debtor shall only be the persons referred to in the reorganisation plan. However, the effectiveness of the reorganisation plan does not affect the rights of creditors against co-debtors and guarantors.
In general and unless the insolvency courts states otherwise in a preliminary injunction or elsewhere, the mutual set-off of claims of a creditor and the debtor is only permissible after the court decision on insolvency (with some exceptions), if the legal conditions of this set-off were met before the decision on the method of resolving the insolvency. From the moment of publication of the petition for the approval of reorganisation in the Insolvency Register, the set-off of mutual claims of the debtor and a creditor is not permissible, unless the insolvency court determines otherwise in a preliminary injunction. After the reorganisation plan effective day, the mutual claims may be set-off again.
The above does not apply to close-out netting which is generally unaffected by insolvency proceedings.
If the debtor fails to fulfil essential obligations under the reorganisation plan during its implementation or if it turns out that a substantial part of the reorganisation plan cannot be fulfilled, the insolvency court shall decide on the conversion of the reorganisation into bankruptcy, unless the reorganisation plan has already been discharged in all material respects.
In general, the shareholders can receive or retain their ownership if the reorganisation plan states so.
Insolvency of legal entities is usually resolved by bankruptcy.
Bankruptcy is a liquidation method for resolving the debtor's insolvency. Following the declaration of bankruptcy by the insolvency court, registered non-preferred claims of creditors are (more or less) proportionally satisfied from the proceeds of monetisation of the insolvency estate.
The publication of the decision on the declaration of bankruptcy in the Insolvency Register has, inter alia, the following effects:
In general, in the declaration on bankruptcy, the operation of the debtor's enterprise does not terminate.
Registration of Creditors' Claims
Creditors must register their claims via an application of claims. Such an application can be submitted to the insolvency court from the commencement of the insolvency proceedings until the end of the deadline set out in the decision on insolvency.
Secured creditors are entitled to be satisfied from the proceeds of the enforcement of the relevant security assets.
Unsecured creditors (non-preferred) are satisfied proportionally (pari passu) based on the resolution to distribute the proceeds from the monetisation of the insolvency estate (rozvrhové usnesení) issued by the insolvency court. However, that is only possible if some undistributed proceeds exist, and only after the full satisfaction of the priority claims has taken place.
Contingent claims are satisfied in accordance with the conditions under which they were agreed.
Right of Set-Off
Subject to some exceptions, the right of set-off of mutual claims of the debtor and creditor is permissible after the court decision on insolvency, if the statutory conditions of such setting-off were met before the decision on the method of the resolution of insolvency.
Such a set-off is not permissible if the debtor's creditor failed to become a registered creditor in relation to a claim eligible for setting-off; gained such a claim by an ineffective legal act; knew about the debtor's insolvency at the time of acquisition of such claim ; or has not yet paid the due claim of the debtor to the extent to which it exceeds the claim eligible for setting-off.
Moreover, the set-off is not permissible during a moratorium, unless the insolvency court determines otherwise by a preliminary injunction. This also applies if the statutory conditions of this set-off were met before the declaration of the moratorium.
Unless it is contrary to the common interest of the creditors, the insolvency court may – through a preliminary injunction – prohibit a set-off of the mutual claims of the debtor and the creditor for certain cases or for a defined period of time.
The provisions of the Insolvency Act do not have an effect on the close-out netting provision under the Act No 256/2004 Coll., on Capital Market Business, as amended, if such close-out netting was concluded before the commencement of the insolvency proceedings.
The insolvency administrator decides on the method of monetisation of the insolvency estate subject to obtaining the consent of the creditors' committee (in some circumstances, the consent of the insolvency court may also be needed). Secured creditors may instruct the insolvency administrator as to how the collateral should be administered and liquidated.
The insolvency estate may be monetised by:
The property belonging to the insolvency estate should be listed in the inventory of the insolvency estate (soupis majetkové podstaty). Any buyer should acquire a "clean" legal title to the property.
During the monetisation of the insolvency estate, the insolvency administrator is bound by the statutory pre-emption rights (not by contractual pre-emption rights, nor by arrangements preventing the assignment of debtor's claims). By the monetisation of the insolvency estate, the effects of the execution (including the court enforcement proceedings), as well as any other defects attached to the insolvency estate, cease to exist. This does not, however, apply to servitudes and easements. Also, all security rights attached to the property shall cease to exist.
Unless otherwise provided, the defects (závady) on the property do not pass to the acquirer upon monetisation of assets. The exception is the case of the monetisation of the debtor's enterprise by a single agreement, where rights and obligations pass on to the purchaser.
The debtor and some other insiders, such as the debtor's employees, shareholders, and persons forming a corporate group with the debtor, may not acquire property belonging to the insolvency estate within a period of three years after the closing of bankruptcy.
Under Czech law, there is no such legal concept as credit bidding. However, there is no legal obstacle to filing a stalking horse bid.
Creditors are organised into a creditors' meeting and a creditors' committee or a creditors' representative.
The creditors' meeting consisting of (with some exceptions) all creditors who registered their claims in the insolvency proceeding is the creditors' supreme body. The creditors' meeting is convened and governed by the insolvency court. The creditors' meeting has the right to elect and remove members of the creditors' committee. Moreover, the creditors' meeting votes on the method of resolution of the insolvency and the approval of a restructuring plan, or on the appointment or removal of the insolvency administrator.
To adopt a resolution of the creditors' meeting, in general, a simple majority of present or duly represented creditors, based on the amount of claims, is required.
Creditors' Committee or Creditors' Representative
The creditors' committee must be appointed by the creditors' meeting (with confirmation by the insolvency court) if there are more than 50 registered creditors. In other cases, only a creditors' representative may be appointed. The creditors' committee has three to seven members, and both secured and unsecured creditors must be represented (a quorum for voting is a majority of all members). The creditors' committee, for example, supervises the activity of the insolvency administrator or grants consent for the conclusion of priority insolvency financing agreements.
Under the EU Regulation 2015/848, on Insolvency Proceedings (recast) (EU Insolvency Regulation), the judgment on the opening of insolvency proceedings and all the decisions related to it are recognised in any other EU member state (except Denmark), with no further formalities.
The insolvency decisions from outside the European Union may be recognised in the Czech Republic subject to the provisions of Act No 91/2012 Coll., on Private International Law, as amended (Private International Law Act). Foreign insolvency decisions are recognised in the Czech Republic under the condition of mutual reciprocity, provided that the debtor's centre of main interests (COMI) is located in the state that issued the decision and the debtor's assets in the Czech Republic are not subject to insolvency proceedings which have already been commenced before the Czech courts.
In cross-border cases within the European Union (except Denmark), the Czech courts and insolvency administrators should co-operate with foreign courts and insolvency administrators by way of disclosure of information and by granting the opportunity to participate in insolvency proceedings.
In the case of non-EU countries, bilateral international treaties may apply.
Under the EU Insolvency Regulation, the main insolvency proceedings will be held before the courts of the member state within whose territory the debtor's COMI is situated. The law applicable to the secondary insolvency proceedings shall be that of the member state within the territory of which the secondary insolvency proceedings are commenced.
Under the Private International Law Act, similar rules would be applicable vis-à-vis non-EU countries.
Under Czech law all creditors have, in principle, the same rights as creditors of their class and rank, regardless of whether they are foreign or domestic.
In the case of non-EU/EEA countries, some special procedural rules may apply.
In the Czech Republic, individuals and general partnerships (or a similar foreign company) meeting the conditions stipulated by law for obtaining the relevant licence are authorised to perform the activity of insolvency administrator. In the case of individuals and partners of general partnerships, these conditions include, in particular, integrity and qualification requirements (education and passing an exam). If a person fulfils all the above requirements, they may submit an application for registration in the list of insolvency administrators maintained by the Ministry of Justice.
Insolvency administrators are appointed for all types of insolvency proceedings. In addition to the role of a regular insolvency administrator, there are also:
The insolvency administrator prepares a list of registered claims and examines each claim and decides whether to acknowledge or refuse its value or authenticity. The insolvency administrator then reads this list at the review creditors' meeting.
The activities of the insolvency administrator are monitored by the insolvency court and the creditors' committee.
If the debtor's insolvency is resolved by bankruptcy, the insolvency administrator has the right to deal with the insolvency estate. Under the conditions stipulated by law, the insolvency administrator monetises the assets belonging to the insolvency estate, either as a whole or in parts.
The insolvency administrator has a supervisory role in resolving the insolvency through reorganisation.
The insolvency administrator is obliged to act with the duty of care of a diligent business person and provides creditors and the insolvency court with a written report on the status of the insolvency proceedings at least once every three months. The insolvency administrator is liable for damage or other loss suffered by the debtor, the creditors or third parties for violation of his or her duties, unless the insolvency administrator was unable to prevent the damage, despite having exercised all reasonable efforts.
In the decision on insolvency, the insolvency court appoints the insolvency administrator for the insolvency proceedings from an official list of insolvency administrators on a rotating basis. If the decision on insolvency is connected with the decision on approval of reorganisation and if an insolvency administrator is provided for in the reorganisation plan, then the insolvency court appoints an insolvency administrator based on that plan.
The insolvency court may remove an insolvency administrator who fails to fulfil their obligations with the duty of care of a diligent business person or who grossly violates an important obligation imposed by law or by the insolvency court.
The creditors may agree at the creditors' meeting, which follows the review meeting, that the insolvency administrator appointed by the insolvency court should be removed and that a new insolvency administrator will be appointed. This appointment of an insolvency administrator must be confirmed by the insolvency court.
The debtor is obliged to provide the insolvency administrator with all-round co-operation during the determination of which assets belong to the insolvency estate.
Firstly, in some circumstances, the debtor and certain other persons must file an insolvency petition (see 2.3 Obligation to Commence Formal Insolvency Proceedings).
Secondly, the debtor, and respectively its executive directors and liquidator (if the company is in the process of solvent liquidation), must co-operate with the insolvency administrator and follow his/her instructions during the ascertainment of the insolvency estate.
Thirdly, members or former members of the executive body may be liable for the fulfilment of all the business corporation's obligations if (i) it has been decided that the business corporation is insolvent; and (ii) such a member of the statutory body knew or should and could have known that the business corporation was facing imminent insolvency and, in breach of the duty of care of a diligent business person, failed to take all the necessary and reasonably foreseeable steps to prevent such insolvency. The court shall decide this on the basis of a petition by the insolvency administrator or a creditor. Even without a petition the court may decide that the member of the statutory body may be disqualified from office and that such person may not hold the office in any business corporation or act as a person in a similar position for a period of three years.
Members of the executive body shall, at the request of the insolvency administrator, return consideration received under their service agreements as well as any other consideration received from the business corporation during the previous two years before the decision on insolvency becomes legally effective, provided that they breached their duty of care of a diligent business person to prevent the occurrence of insolvency. The above applies only where the insolvency proceeding was initiated by a petition filed by a person other than the debtor and the insolvency court declares that the business corporation is insolvent.
Under Act No 40/2009 Coll., the Penal Code, as amended, numerous criminal offences may be committed in relation to insolvency proceedings.
When a member of the executive body files an insolvency petition belatedly, then he or she may be directly liable to the creditor for damages caused thereby.
In the case of liability for the fulfilment of the business corporation's obligations, a court can decide to disqualify a member of the executive body from office, and demand the return of provided consideration, mostly on the basis of a petition filed by the insolvency administrator or a creditor (see 10.1 Duties of Directors).
Any legal acts (including omissions) may be declared ineffective in the Czech Republic, based on the decision of the insolvency court (initiated by the insolvency administrator) if it becomes evident that:
For undervalues and preferences, the standard look-back period is one year prior to the commencement of the insolvency proceedings or three years for intra-group transactions.
In the case of intentionally curtailing legal acts, the look-back period is five years prior to the commencement of the insolvency proceedings.
An action to set aside a transaction can only be filed by the insolvency administrator within one year from the effective day of the court decision on insolvency. Actions cannot be filed by individual creditors. If the creditors' committee adopts a resolution that a certain transaction should be set aside, the insolvency administrator has an obligation to file the relevant action.
This type of action may be filed in both bankruptcy and reorganisation.
The information provided in this chapter is valid as of the 31 October 2020.
The Development of the Czech Insolvency and Restructuring Market
During the spring and summer months, around 100 insolvency petitions are typically filed for commercial companies each month. In 2020, the monthly balance was just over 50 companies. In this way, the Czech Republic resembles other countries that are protecting their companies from insolvency during the COVID-19 pandemic. A wave of insolvencies is expected following this spring and autumn's comprehensive COVID-19 measures, unless the measures are re-introduced or extended, given the second wave of the COVID-19 pandemic in the Czech Republic. Smaller companies, especially in the most affected sectors (hotels, restaurants, travel agencies and automotive industry companies), are expected to be particularly hard hit.
As creditors have been unable to file insolvency petitions until the end of August 2020, the insolvency courts can expect a greater workload during the autumn of this year, which will lead to the slower settlement of cases compared to the situation before the COVID-19 pandemic. However, that has not happened so far, due to the ongoing state support programmes, such as the COVID rent programme, COVID Plus, COVID III, the Anti-virus programme and other temporary changes in insolvency law. Although it is no longer possible to participate in some of the state support programmes, these programmes are still having an effect on the number of insolvencies in companies in the Czech Republic.
Due to the second wave of COVID-19 in the Czech Republic, the present situation is actually highly volatile. The Czech government has already extended some of the subsidies and support programmes from the spring, as well as adopted new ones. As the area of insolvency and restructuring in the Czech Republic is currently most affected by the pandemic, we will focus mostly on the relevant changes in insolvency law and the most important state support programmes mitigating the impact of the economic crisis.
State Support Programmes Mitigating the Impact of COVID-19
COVID – rent programme
This programme is intended to provide support to businesses and entrepreneurs that were prohibited from selling goods and services in rented premises for at least a part of the period from 13 March 2020 to 30 June 2020 and from 21 October 2020 to 21 January 2021. The essence of the programme envisages the following model of participation: the landlord discounts 30% of the rent, the tenant pays 20% (at present the tenant pays 50% and no discount may be obtained from the landlord) and the state contributes 50%. The support is provided in the form of state subsidies for the paid rent. The Czech government allocated CZK2.5 billion to this programme in the first wave and has allocated a further CZK1.2 billion in the second wave.
COVID Plus programme
Large export-oriented businesses (with at least 250 employees) may receive support under the so-called "COVID Plus" programme. Under this programme, the state-owned Export Guarantee and Insurance Corporation (EGAP) could guarantee loans provided by a commercial bank on the condition that the commercial bank applies for a guarantee. For working capital loans, a guarantee will be granted for a maximum period of three years, while investment loans will be guaranteed for a maximum period of five years. The minimum guaranteed loan amount is CZK5 million, with 25% of the exporter’s total annual revenue from products and services for 2019 set as the maximum amount of the guaranteed loan. The EGAP guarantee should go up to 80% of the loan principal. Eligible loans must be granted:
COVID III programme
The Czech-Moravian Guarantee and Development Bank (Českomoravská záruční a rozvojová banka, a.s. or CMZRB), the Czech state-owned development bank, provided a capped portfolio guarantee to commercial banks which will automatically cover individual loans in their portfolios if they meet certain eligibility criteria. The CMZRB guarantees up to 90% of the loan principal for companies that have no more than 250 employees, and up to 80% of the loan principal for companies with 250–500 employees. The CMZRB guarantees loans up to CZK50 million with a guarantee period up to three years. The COVID III programme is active until the end of 2020, however, the Czech government will probably extend it until the end of 2021.
This so-called COVID III programme follows the already used up and significantly smaller COVID I and COVID II programmes.
The anti-virus programme covers wages paid to employees who cannot work in companies which are, however, still obliged to pay them. The companies may apply for a full or partial employment allowance from the Anti-virus programme, which includes three schemes. Mode A is for employees who have been quarantined or employees who cannot be assigned work due to closure of the establishment. Mode B is for related economic difficulties (eg, if the employer is unable to allocate work to employees due to a reduction in the demand for services, or the unavailability of raw materials or manufactured goods in the case of production). In mode C, employers with up to 50 employees could reduce their contributions to social security and to the state employment policy for employees in the months of June, July and August 2020.
It is still possible to apply for an allowance under mode A until 31 December 2020. Mode B was valid until 31 October 2020 and mode C until 31 August 2020.
Temporary Changes in Czech Insolvency Law Mitigating the Impact of COVID-19
Due to the complicated situation of the COVID-19 pandemic, almost all businesses face an increased risk of becoming financially distressed or even insolvent, and subsequently subject to insolvency proceedings. In the Czech Republic, a new law aiming to mitigate the impact of the COVID-19 pandemic (known in the Czech Republic as "Lex Covid") has been adopted. Lex Covid became effective on 24 April 2020.
Currently, the Czech government is discussing the second version of Lex Covid, called Lex Covid II, which would extend the applicability of some of the measures mentioned below.
Creditors' right to file an insolvency petition
No insolvency petitions filed by creditors from 24 April 2020 until 31 August 2020 were "taken into account". This means that an insolvency petition filed by a creditor was deemed not to have been filed. There is no exception to this rule and no connection to the government measures or the pandemic situation. This measure has already expired and, most probably, Lex Covid II will not extend it.
Debtor's duty to file an insolvency petition
Lex Covid suspends the debtor's and its director's obligation to file an insolvency petition until six months after the end of emergency measures, but by no later than 31 December 2020. Lex Covid II will further extend this period until 30 June 2021. Only debtors which were not insolvent before the emergency measures were introduced, and which became insolvent as a direct consequence of those measures, can apply for this suspension. All other debtors have the same obligation to file an insolvency petition as they had before the emergency measures due to the COVID-19 pandemic were adopted.
A debtor-entrepreneur who was not insolvent on 5 October 2020 will be entitled to file an application for an emergency moratorium until 30 Jun 2021 under relieved conditions in Lex Covid II. Under Lex Covid, a debtor who was not insolvent on 12 March 2020 could file an application until 31 August 2020 for the same emergency moratorium as under the conditions of Lex Covid II. The maximum duration of the emergency moratorium is three months, but the debtor may request an extension for another three months. Following the end of the moratorium, a record in the Insolvency Register will become inaccessible to the public, which prevents potential negative publicity.
If a reorganisation plan was approved earlier than 12 March 2020, pursuant to Lex Covid, a debtor could file an application for temporary suspension of the implementation of the reorganisation plan. The debtor could file the application within a period of six months after the national emergency status was cancelled, but by no later than 31 December 2020. During the suspension of the reorganisation plan, an insolvency court cannot rule that reorganisation is transformed into bankruptcy.
Act No 177/2020 Coll. on Certain Measures Regarding the Repayment of Loans during the COVID-19 Pandemic introduced an opt-in loan moratorium for both individual and corporate borrowers. A loan moratorium provided debtors with a moratorium (three or six months) on their outstanding principal and (in some cases also) interest loan payments, in order to prevent serious economic damage and maintain financial stability in the light of the COVID-19 pandemic. The borrower had to notify the creditor and declare that the reason for non-payment was the negative economic impact of the COVID-19 pandemic (no proof was required). This option was available for all loans entered into and drawn before 26 March 2020 and also undrawn loans entered into before 26 March 2020. The notification of the debtor needed to be submitted by the debtor for a period of either three (ie, until 31 July 2020) or six months (ie, until 31 October 2020). During this period, a debtor was not obliged to make any principal repayments. It remains to be seen if the loan moratorium will be extended.
Rent Deferral for Tenants
The Act No 210/2020 Coll., Act on Certain Measures to Mitigate the Impact of the SARS CoV-2 Pandemic on Tenants of Business Premises, provides a protection period, during which a landlord is not allowed to terminate a lease agreement until 31 December 2020, based solely on the grounds that a tenant is in default with rent payments. The protection period applies only if the tenant's default occurred in the period from 12 March 2020 to 30 June 2020 and was caused by the government restrictions related to the COVID-19 national emergency which made the operation of the tenant's business impossible or substantially more difficult. If a tenant fails to pay the outstanding rent by 31 December 2020, the landlord will have the right to terminate the lease with a five-day termination notice.
Similar rules were also approved to mitigate the negative impact of COVID-19 on the tenants of residential premises.
In July 2019, the new Directive (EU) 2019/1023 of the European Parliament and of the Council on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) (the Directive) came into force. This Directive should be transposed into the Czech legal system by 17 July 2021 (an extension until 17 June 2022 is possible).
Nowadays, in the Czech Republic, the statutory legislation regarding preventive restructuring is completely absent. Therefore, the regulation of preventive restructuring under the Directive is significantly different from how Czech insolvency proceedings are usually regulated. To address this, an expert group acting under the Ministry of Justice has been set up to propose how this Directive can be implemented in the Czech legal environment in the form of a separate legal regulation. Such a Bill has not yet been published.
The information provided in this chapter is valid as of the 31 October 2020.