Insolvency 2021

Last Updated November 23, 2021

Czech Republic

Law and Practice

Authors



BADOKH has a ten-strong restructuring and insolvency practice, led by partner Petr Kuhn. All the partners in the restructuring and insolvency group have been partners of international law firms, and have practised for nearly 20 years on average. BADOKH’s experience in high-profile reorganisations recently proved valuable in the landmark insolvency of Arca Investments, in which BADOKH successfully advised the company to the point of the court appointing a designated trustee and allowing the company’s reorganisation. Although the company’s registered seat is in Slovakia, BADOKH managed to open the main insolvency proceeding in the Czech Republic, arguing that the company’s centre of main interest had been relocated to the Czech Republic. The firm has also advised large debtors, creditors and investors in multiple local and cross-border in-court and out-of-court restructurings and insolvencies, including the reorganisations of major local hard coal producers OKD, large local manufacturing conglomerate VITKOVICE and real estate company L88 (an owner of Radio Free Europe/Radio Liberty facilities in the Czech Republic).

In September 2021, the number of newly commenced corporate insolvency proceedings in the Czech Republic per month was almost identical to that in September 2019 – ie, not long before the COVID-19 pandemic. Ninety corporate insolvency proceedings were newly commenced in September 2019, compared to 93 in September 2021. However, the current data shows that the number of newly commenced insolvency proceedings is already starting to rise, and this upward trend is expected to continue.

Junk Bonds Insolvencies

If we were to try and identify a particular kind of insolvency proceeding that is typical for 2021 in the Czech Republic, it would probably be the insolvency of entities issuing bonds – or, as it were, junk bonds. As such bonds were usually sold to the general public, a huge number of creditors were involved in all such cases.

In 2021, almost every restructuring practitioner has worked on some of the following insolvency proceedings: KARA Trutnov, a.s., pietro filipi, s.r.o., EMTC - Czech a.s. and, last but definitely not least, Arca Investments, a.s.

The insolvency proceedings against Arca Investments, a.s. were one of the most important insolvency proceedings of 2021, for many reasons. The total amount of the registered claims and the value of assets involved made it by far the biggest insolvency proceeding in the Czech Republic. In addition, a ground-breaking ruling regarding the centre of main interest (COMI) was enacted: even though Arca Investments, a.s. resides in Slovakia and has always done so, the High Court in Prague ruled in favour of the main insolvency proceeding being conducted in the Czech Republic. This sets an important precedent for cross-border insolvencies in the CEE region, where lots of companies are established in one jurisdiction but conduct substantial business activities in the other.

Preventative Restructuring

In August 2021, the Czech Ministry of Justice published a new draft bill on preventative restructuring, implementing 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). The bill is to take effect on 1 July 2022 and will be the first legal framework on out-of-court restructuring in the Czech Republic.

Several insolvency statutes and regulations form part of Czech law, with the main piece of legislation in this area being Act No 182/2006 Coll, on Insolvency and Methods for Its Resolution (the Insolvency Act), as amended.

Act No 89/2012 Coll, the Civil Code, as amended, and Act No 90/2012 Coll, on Business Corporations and Co-operatives (the Business Corporations Act) also regulate certain aspects related to insolvency law – ie, consensual restructuring, the fiduciary duties of directors, the internal organisation of legal entities and the process of liquidating solvent companies.

Certain procedural rules are set out by government regulations, such as Regulation No 311/2007 Coll, on Rules of Procedure for Insolvency Proceedings and Implementing Certain Provisions of the Insolvency Act.

Act No 312/2006 Coll, on Insolvency Trustees, as amended, is another applicable statute, which regulates the role of insolvency trustees. The remuneration of insolvency trustees is provided for by Regulation No 313/2007 Coll, on Insolvency Trustees’ Remuneration, Reimbursement of Their Expenses, Remuneration of Members of the Creditors’ Committee and their Alternates, and Reimbursement of their Necessary Expenses.

Act No 118/2000 Coll, on the Protection of Employees in Case of Employer Insolvency and Amending Certain Acts, as amended, applies in the insolvency of an employer. It sets forth the conditions under which an employee whose wage claims are not paid to them by their insolvent employer is entitled to satisfaction by the Labour Office of the Czech Republic in the employer’s stead.

The Czech Insolvency Act regulates insolvency proceedings (insolvenční řízení), which in the Czech Republic are conducted by an insolvency court. In these proceedings, the insolvency of the debtor may be resolved in three different ways: liquidation bankruptcy, reorganisation, and debt relief.

Reorganisation (reorganizace) is a very flexible way of resolving a debtor’s insolvency, similar to Chapter 11 proceedings in the USA. 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).

Liquidation bankruptcy (konkurs) generally consists of the liquidation of the insolvency estate. Established claims of creditors are then satisfied proportionally from the proceeds of realisation of the debtor’s assets, while unsatisfied claims are not annulled unless the law provides otherwise. Liquidation bankruptcy generally leads to a lower rate of creditor satisfaction, as the liquidation of the insolvency estate is carried out through distress sales.

Debt discharge (oddlužení) 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 individuals or legal entities that are not classified as business persons under the law and do not have debts arising from business.

Apart from insolvency proceedings, Czech insolvency law also covers involuntary administration (nucená správa). This process may be applied to certain regulated bodies by their supervisory body as another way of resolving financial distress.

The company, its executive body, its legal representative or its liquidator (in a solvent liquidation) are obliged to file an insolvency petition without undue delay once the petitioner learns, or should have learnt upon applying due care, that the company is insolvent.

These persons are liable for any and all damages or other loss resulting from a direct breach of their duty. Damages or other loss suffered by a creditor is defined as the difference between the full amount of the creditor’s established claim and the amount they actually receive.

The debtor’s duty to file an insolvency petition was temporarily suspended until 30 June 2021 due to the COVID-19 pandemic. Since then, debtors have once again been obliged to file an insolvency petition if the pertinent conditions are met.

Insolvency proceedings in the Czech Republic are initiated by a petition filed by the debtor or by one or several creditors. However, as a protection against unsubstantiated insolvency petitions, the law imposes stricter conditions on insolvency petitions filed by a creditor.

Firstly, to file a petition, the creditor must be able to prove a due receivable against the debtor, which must be attached to the insolvency petition in the form of an application for the registration of such receivable. The signature on the petition must be notarised to avoid any doubt about the identity of the petitioner.

Frivolous Insolvency Petitions

Creditor-initiated insolvencies may threaten solvent debtors, as even unsubstantiated insolvency petitions are registered in the publicly accessible insolvency register. To prevent potential reputational damage to debtors, the courts must make preliminarily assessments of creditors’ petitions before publication, and may decide not to publish the petition if there is any reasonable doubt as to whether it is substantiated.

To further dissuade frivolous insolvency petitions, Czech insolvency law provides for a special kind of civil liability of both the legal entity that filed an unjustified insolvency petition and the directors of the entity. Under said liability, both the legal entity (petitioner) and its directors may be held jointly liable for any damages caused by a frivolous insolvency petition.

Furthermore, a creditor must also pay a deposit of CZK50,000 (approximately EUR2,000) when filing a petition for the insolvency of a legal entity or a business person, in order to cover the expected costs of the proceedings.

Under Czech law, insolvency (or impending insolvency in debtor-initiated insolvencies) is one of the conditions for the commencement of insolvency proceedings, and as such is assessed by the courts.

The Czech Insolvency Act prescribes two tests to determine a debtor’s insolvency.

Liquidity Test

The first is a general test of illiquidity, known as the cash-flow test, under which a debtor is deemed insolvent if:

  • it has multiple creditors;
  • it has outstanding monetary obligations that have been overdue for over 30 days; and
  • it is unable to pay its obligations.

The last condition is deemed to be fulfilled if:

  • a debtor has stopped payments on a material portion of its monetary obligations;
  • a debtor does not fulfil its obligations for more than three months (regardless of the size of said obligations);
  • it is impossible to satisfy creditors’ claims through enforcement proceedings; or
  • a debtor fails to comply with certain procedural demands of the courts during insolvency proceedings (such as the requirement to submit a list of assets).

However, business persons in the role of the debtor are not deemed unable to pay their obligations if the difference between their due monetary obligations and their current or expected disposable funds is lower than one tenth of their outstanding obligations. These facts must be attested by an audit.

Balance Sheet Test

Business persons and legal entities are also insolvent in case of over-indebtedness – ie, if they fail the balance sheet test, which is the second test. Over-indebtedness occurs if the debtor:

  • has multiple creditors; and
  • the sum of its liabilities exceeds the value of all its assets (considering the potential going-concern prognosis).

Furthermore, a debtor may initiate insolvency proceedings if, considering all circumstances, it must reasonably expect to become unable to fulfil a material part of its obligations; this situation is called impending insolvency. In this case, a debtor-initiated insolvency allows for a speedier resolution of the debtor’s financial situation.

The Czech Insolvency Act specifically excludes certain public corporations and funds from its scope. Furthermore, financial institutions and health insurance companies are protected for as long as they possess a licence. Political parties are also protected during the period between the announcement of elections and the actual elections. Under certain circumstances, a legal entity may also be excluded from the scope of the Insolvency Act if state or regional bodies assume its debts (entities that are “too big to fail”, critical infrastructure, etc).

If financial institutions and health insurance providers become financially unstable, the public authorities (Czech National Bank/Ministry of Health) may step in to protect the clients of said institutions, and may take administrative as well as economic measures to stabilise the institutions.

The Czech Insolvency Act provides for a special regime for financial institutions (banks, credit companies, stockbrokers, etc). The Czech National Bank may take various measures to stabilise their financial situation, be it ex ante via prudential measures and risk management, or ex post via involuntary administration, forced removal of directors, etc, by the Czech National Bank. After intervening to protect the clients of said financial institutions, the Czech National Bank may revoke the institutions' licences. In such a case, regular insolvency proceedings may be initiated, with certain exceptions as specified in the Czech Insolvency Act.

There is currently no specific legal framework available under Czech law regarding out-of-court workouts and/or restructuring proceedings.

A draft bill aims to implement 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). This bill is still in the early stage of the legislative process, and is expected to become effective in 2022.

The bill ought to give business persons a flexible tool to avert impending bankruptcy and rescue their viable businesses in a timely way. The proposal builds on the search for the broadest possible agreement between the business person and creditors on the restructuring measures set out in the restructuring plan. This is best done in the context of private negotiations, which may be successful even without the restructuring court’s intervention in non-conflict scenarios.

Although no legal framework for out-of-court restructuring proceedings is yet available under Czech law, out-of-court restructuring proceedings can still happen in the Czech Republic (and do).

As long as the criteria for insolvency have not yet been met, the debtor may try to reach an out-of-court settlement with its creditors. If already insolvent, the debtor has to file for insolvency or it may file for a moratorium if it obtains the consent of at least 50% of its creditors. During the moratorium (which can last up to three months, and can be extended by a further month with the creditors’ consent), the insolvency court will not find the debtor insolvent. This gives the debtor some time to solve its impending or already existing insolvency or to prepare its reorganisation properly.

Under Czech law, insolvency proceedings may be initiated without the requirement of any additional mandatory negotiations prior to the proceedings.

Many out-of-court restructurings in the Czech Republic usually start with the conclusion of a standstill agreement between the debtor and its most important creditors. Czech law does not stipulate any specific requirements for such agreement, and its 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 a 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 and therefore accessible to anyone). 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 toward 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.

The process of injecting new money outside insolvency proceedings varies from case to case and depends on the specifics of each debtor. When determining the ideal way of financing, any tax or accounting implications need to be considered, together with the debtor’s existing indebtedness. It is common for the debtor’s shareholders and biggest creditors to provide the debtor with the necessary financing, as it is in their best interest to keep the debtor’s business afloat. Methods of injecting new money include the following in particular:

  • debtor-in-possession financing;
  • sale of those debtor’s assets that are not necessary for the debtor’s production;
  • toll financing;
  • factoring;
  • leasing; and
  • mezzanine financing.

For more details, please see 6.10 Priority New Money.

No specific rules determine how creditors should act in an out-of-court restructuring process; only the general rules apply. This largely means that the creditors must act in good faith when entering into agreements and avoid standardly illegal activities such as preferential or oppressive treatment, fraudulent transfers or loansharking.

Credit agreements do not typically contain terms permitting a majority or super-majority of lenders to bind dissenting lenders to changed credit agreement terms in out-of-court restructurings.

“Cram-down” procedures for an out-of-court restructuring are currently not specified by Czech law, and overruling dissenting creditors is therefore not (yet) permitted in informal out-of-court restructuring proceedings. The unanimous consent of all creditors is necessary in these situations. Intercreditor agreements that require dissenting creditors to act in a certain way in connection with their claims have not yet become popular in the Czech Republic.

However, the new bill implementing the EU Directive on restructuring and insolvency (for more details, see 3.1 Consensual and Other Out-of-Court Workouts and Restructurings) is expected to contain specific rules regarding out-of-court restructurings in the Czech Republic, including “cram-down” scenarios.

There are four main types of security under Czech law:

  • pledge/mortgage – the creditor is entitled to satisfy its claims from the proceeds obtained by the sale of the pledged thing up to the stipulated amount if the debtor fails to discharge its debt in a due and timely manner;
  • personal guarantee – the guarantor is obliged to satisfy the creditor if the creditor’s debtor fails to discharge its debt to the creditor;
  • financial guarantee – 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 guarantee instrument are met; and
  • security transfer of a right – 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.

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 by the parties.

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 the conditions stipulated by said Act. The most common types of security recognised by the Insolvency Act are pledge/mortgage and security transfer of a right. 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.

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 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 restructuring or official insolvency proceedings. 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.

If liquidation bankruptcy is the chosen bankruptcy resolution method, which means the insolvency trustee assumes the powers of the debtor’s management and sells off the debtor’s assets, usually in a public auction or outside a public auction in co-operation with the insolvency court and creditors’ bodies, then the secured creditors have the right to give binding instructions to the insolvency trustee as to how to manage and sell the asset(s) that serve as security for the respective creditor’s claim. The secured creditor is further entitled to preferential satisfaction of its secured claim from the proceeds of the sale of assets serving as security and to be elected to the creditors’ committee (on a pro rata basis alongside the unsecured creditors).

Conversely, in reorganisations 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). Within a reorganisation, 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.

Czech insolvency law distinguishes between the following groups of creditors:

  • creditors with preferential claims against the estate or claims equivalent to claims against the estate – these claims are normally satisfied in full from the insolvency estate (unless the estate is not sufficient to cover all these preferential claims; specific types of such claims are listed in the Insolvency Act and include, for example, claims of the insolvency trustee, costs associated with the management of the estate, employees’ claims, claims arising during the course of the insolvency proceedings including debtor-in-possession financing, etc);
  • secured creditors (for details on the rights of secured creditors, please see 4.3 Special Procedural Protections and Rights);
  • unsecured creditors – “standard” creditors of the debtor who have filed their claims and have not been rejected are unsecured creditors and receive a proportionate payment (its size depending on the value of the estate) of their claim upon termination of the insolvency proceedings;
  • contractually subordinated creditors – these can be satisfied only after full satisfaction of standard unsecured creditors or respective superior creditors;
  • statutory subordinated creditors – any remaining surplus of the insolvency estate (after the satisfaction of all other claims) may be distributed to the statutory subordinated creditors (typically debtor’s shareholders); and
  • claims that are not to be satisfied within the insolvency proceedings, including 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.

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 claims against the estate, as this position helps to keep the debtor’s business running and operational.

In the current absence of any special laws governing out-of-court restructuring proceedings, unsecured creditors are able to block restructuring efforts if their consent is necessary for the envisaged restructuring measures. However, this is likely to change after the EU Directive on restructuring and insolvency is implemented (for more details, see 3.1 Consensual and Other Out-of-Court Workouts and Restructurings).

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). These creditors may also file petitions with the insolvency court, for instance, to inform the court about important facts regarding the proceedings or to 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 and the extent and value of the estate.

The Czech Insolvency Act provides for “preliminary injunctions”, which may be granted by the insolvency court after the official commencement of the insolvency proceedings. By way of a preliminary injunction, the insolvency court orders the following:

  • the appointment of an interim insolvency trustee;
  • limitations on the debtor in its financial and business operations in order to protect the insolvency estate – eg, by making such operations conditional upon the prior consent of the (interim) insolvency trustee; or
  • payment by the insolvency petitioner of a deposit for the costs and potential damages that the debtor might suffer in connection with a frivolous insolvency petition.

An automatic consequence of any pending insolvency proceedings is that the debtor is not allowed to dispose of its estate in any way that would be considered to exceed normal business activity conducted by the debtor, unless certain conditions are met.

In Czech insolvency proceedings, the legal term for priority claims is “claims against the estate” or “claims equivalent to claims against the estate”. The law includes the following among such claims:

  • 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 if they arose after the declaration of bankruptcy;
  • new money claims (eg, debtor-in-possession financing);
  • taxes and other similar public charges if they arose after the declaration of bankruptcy;
  • employees’ claims against the debtor; and
  • other claims specified by law.

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.

Reorganisation under Czech law is similar to Chapter 11 proceedings in the USA. It is a formal process supervised by the court, the insolvency trustee and the creditors’ committee throughout.

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. Out-of-Court Restructurings and Consensual Workouts.

Reorganisation is a very flexible way of resolving a debtor’s insolvency. 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).

Entry Requirements

Reorganisation is only available to large entrepreneurial debtors who fulfil one of the following criteria:

  • the debtor must prove a minimum annual net turnover of CZK50 million (approximately EUR2 million) during the accounting period prior to the year in which the petition for insolvency was filed; or
  • the debtor must employ at least 50 employees.

These criteria may be waived if the debtor files a pre-packaged reorganisation plan along with the insolvency petition, or before the court declares the debtor insolvent. Such plan must be filed as already approved by the majority of both secured and unsecured creditors.

Duration

In a standard reorganisation, the reorganisation plan must be submitted within 120 (or up to 240) days after the court permits reorganisation. On average, reorganisation takes 13 months from the commencement of the proceedings to the confirmation of the reorganisation plan (excluding its implementation).

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.

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. The court may use a cross-class cram-down to substitute the approval of dissenting classes (see 6.4 Claims of Dissenting Creditors).

Creditors may challenge various procedural steps, as well as the reorganisation plan itself. 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 it would be likely to receive in liquidation (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 is agreed between the debtor and the relevant creditor.

Insolvency proceedings provide the company with an automatic moratorium. Creditors may only assert their claims within the insolvency proceedings.

The company 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 insolvency court has the right to limit the debtor’s right to dispose of the insolvency estate. The court may take a petition of the insolvency trustee or the creditors’ committee into account when restricting the debtor’s rights, but it is not obliged to do so. If the debtor is restricted in exercising its right to dispose of the insolvency estate, the right passes to the insolvency trustee.

The debtor may borrow new money as priority insolvency financing during insolvency proceedings, or for purposes tied to the reorganisation plan (see 6.10 Priority New Money).

Creditors are 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.

Creditors vote on procedural issues at a creditors’ meeting divided into classes of secured and unsecured creditors. They may elect a creditors’ committee, which supervises the debtor and has access to extensive internal information about the debtor and its business. The creditors’ committee may hire advisers, whose costs are paid from the insolvency estate.

Intra-group creditors or persons related to the debtor are generally excluded from decision-making.

The reorganisation plan must contain detailed information on the past, current and planned business of the debtor, as well as other information that is vital to the creditors’ decision to approve or disapprove the plan.

A cross-class cram-down may be used at the court’s discretion as a mechanism by which the reorganisation plan can be imposed on an entire class of dissenting creditors or members.

The following conditions must be fulfilled in order to use the cross-class cram-down:

  • at least one creditor class has approved the plan (excluding the class of equity owners);
  • the reorganisation plan ensures equal treatment of each individual claim within each individual creditor class that rejected the plan;
  • 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 6.12 Restructuring or Reorganisation Agreement); and
  • another insolvency or liquidation of the debtor is not a foreseeable possibility resulting from the implementation of the plan.

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. The court may then disapprove the entry of the assignor within three days; otherwise, the entry 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.

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 in proximity of its registered seat, or with the insolvency court in charge of the insolvency proceedings of another member of the corporate group.

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 in the administration and disposal 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.

After the debtor submits a petition for the approval of reorganisation, it 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.

Once the reorganisation plan becomes effective, the debtor may dispose of the insolvency assets without any restrictions. However, the debtor is supervised by the creditors’ committee, which monitors the implementation of the reorganisation plan. In some cases, the debtor may be restricted from taking certain legal actions, in which case the insolvency trustee takes its place.

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.

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.

Credit Bid and Stalking-Horse Bids

Even though there are no specific rules for a stalking-horse bid or credit bid process in Czech law, the reorganisation plan can allow them (and 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 reorganisation, provided that a) the reorganisation plan does not specifically prohibit a set-off of creditors' claims against the debtor or b) 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 which transactions prior to the insolvency proceedings will still be recognised in the insolvency proceedings (if the pre-packed reorganisation is approved by the insolvency court).

Effective as of the date set out in the reorganisation plan, 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, unless the law or the reorganisation plan stipulates otherwise. Only those creditors who are included in the reorganisation plan remain creditors of the debtor.

Under certain circumstances, a debtor (or its 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 receive the benefit of priority ranking and are considered 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).

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 insolvency. 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 insolvency trustee at a court session (přezkumné jednání), in which the insolvency trustee may challenge the amount, authenticity and priority of the claims. Creditors holding such claims may challenge the insolvency trustee’s decision in a separate court proceeding. Should they 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. If a creditor registers a claim with security ranking higher than what is established by the review, such claim is then regarded as unsecured.

Fairness Test

A reorganisation plan is approved by a meeting of creditors, who vote on a class-by-class basis. The plan must be approved by each of the classes; however, the court may decide to replace the approval of some classes. Such cram-down is applicable under the conditions of fairness, equal treatment of creditors within dissenting classes, and viability of the reorganisation plan.

Under the 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 bankruptcy.

Disclaiming Contracts

Where mutual agreements have not been entirely fulfilled as of the day of the declaration of insolvency, the debtor-in-possession (or insolvency trustee) 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.

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.

Generally, transactions such as a set-off are not permissible in insolvency proceedings (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.        

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. The court shall not do so if the plan has already been fulfilled in all material aspects.

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.

Under the Insolvency Act, the ownership interests of the original equity owners continue to exist after reorganisation, although most reorganisation plans do stipulate a change of equity ownership, or liquidation at the end of reorganisation.

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.

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 the 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.

Insolvency Proceedings

Since no out-of-court restructuring proceedings are currently regulated by law in the Czech Republic, only official 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 be legal grounds for the debtor’s insolvency.

There are three legal grounds for the commencement of insolvency proceedings in the Czech Republic:

  • cash-flow insolvency – the debtor has more than one creditor, is overdue on the payment of its obligations for more than 30 days and is unable to meet its obligations;
  • over-indebtedness – the debtor has more than one creditor and its assets no longer cover its liabilities; and
  • impending insolvency.

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.

Once the insolvency proceeding has thus been officially initiated, the insolvency court examines whether the conditions for declaring the debtor bankrupt have been met; 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.

Under Czech law, there are three methods of a debtor’s bankruptcy resolution:

  • a liquidation bankruptcy leading to the sale of the debtor’s estate, (partial) satisfaction of the creditors’ claims and liquidation of the debtor;
  • reorganisation designed to restructure the debtor’s business so it can remain a going concern and continue running its business; and
  • debt relief, which is mostly applicable to natural persons.

In most insolvency proceedings where liquidation bankruptcy is the chosen bankruptcy 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 (please see 4.3 Special Procedural Protections and Rights for more details); and
  • 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.

The Insolvency Act provides for two basic types of creditor bodies. The first is the creditors’ meeting, which is the supreme or main creditor body, in which all the registered creditors may exercise their influence on the course of insolvency proceedings.

The second type of creditor body is the creditors’ committee or creditors’ representative, depending on the number of registered creditors.

Creditors’ Meeting

The creditors’ meeting is the supreme and most important creditor body established in insolvency proceedings. It is basically a meeting 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 (even those whose claims were rejected by the insolvency trustee) may attend the 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.

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. 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).

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

Creditors’ Committee and Representative of the Creditors

The creditors’ committee is an executive body, to be mandatorily established in insolvency proceedings if more than 50 registered creditors participate in the insolvency proceedings. The creditors’ committee has three to seven members, who are elected by the creditors’ meeting (see above). Both secured and unsecured creditors are to be elected as members of the creditors’ committee. The election of members of the creditors’ committee is subject to approval by the insolvency court.

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.

Recast Insolvency Regulation

EU Regulation 2015/848 on Insolvency Proceedings (recast) (the Recast Insolvency Regulation) is directly applicable in all EU member states (except Denmark) and, as such, the Czech Republic automatically recognises specified foreign insolvency proceedings.

For debtors located in the EU, the courts of the member state in which the debtor’s 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.

National Legislation

Act No 91/2012 Coll, 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.

The Czech Republic has not adopted the UNCITRAL Model Law.

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 have still only limited experience in this field.

Under the Recast Insolvency Regulation, the law of the state where the proceedings were opened generally applies.

Pursuant to the Act on Private International Law, the conflict-of-law provisions of the Recast Insolvency Regulation are to be applied mutatis mutandis in situations where the Regulation is not applicable.

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.

See 8.1 Recognition or Relief in Connection with Overseas Proceedings 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.

Czech insolvency law specifically recognises the insolvency trustee as the person appointed in the insolvency proceedings. For details regarding the insolvency trustee’s role, please see 9.2 Statutory Roles, Rights and Responsibilities of Officers.

Czech law also recognises special types of insolvency trustees, such as:

  • the interim insolvency trustee, who is (if deemed necessary) appointed by the insolvency court by virtue of a preliminary injunction even before the declaration of the debtor’s bankruptcy; and
  • a separate insolvency trustee appointed to conduct special activities within the insolvency proceedings where the regular insolvency trustee would have a conflict of interests (typical in insolvency proceedings of a group of interconnected creditors).

Once appointed, the insolvency trustee must act with due and professional care and in the common interest of all creditors. They are responsible for any damages suffered by third parties due to any breach of their duties.

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

  • examining the assets and accounts of the debtor;
  • disposing of the debtor’s assets and managing its estate (if liquidation bankruptcy is the chosen bankruptcy resolution method);
  • examining the lawfulness of the registered claims and preparing the list of all claims and creditors;
  • providing reports on the trustee’s activity;
  • selling the debtor’s assets and enforcing the debtor’s claims (if liquidation bankruptcy is the chosen bankruptcy resolution method);
  • enforcing the debtor’s claw-back claims; and
  • supervising the debtor’s business activity (especially in reorganisation).

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, without having to give reasons for such resolution. The insolvency court may remove the insolvency trustee from office if they are in breach of their duties or have a conflict of interests.

Only people who have passed a special exam for insolvency trustees administered by the Ministry of Justice of the Czech Republic and who are registered in the list of insolvency trustees may be appointed as insolvency trustees in insolvency proceedings. They must generally be proficient in law, economics, taxation and accounting. Alternatively, partnerships and foreign companies whose partner is a person meeting the above requirements may be appointed as insolvency trustees.

The insolvency trustee is appointed by the insolvency court in the declaration of the debtor’s bankruptcy as a matter of regular practice. However, the court does not have discretion over whom it shall appoint as the insolvency trustee, since the court appoints the insolvency trustee by rota, using an algorithm to determine who is to be appointed based on pre-defined rules.

There are certain exceptions to the rule described above, as follows:

  • the insolvency court may appoint a particular insolvency trustee who has a specific set of skills required in that particular proceeding;
  • the insolvency court usually appoints the same insolvency trustee to debtors who form a connected group of legal entities (such as parent companies and their subsidiaries);
  • the debtor may select its own insolvency trustee in its reorganisation plan approved by the majority of its secured and unsecured creditors; and
  • the creditors’ meeting may, at its first meeting, remove the current insolvency trustee from office and appoint a new one at its discretion (a qualified majority of creditors is required to adopt such a resolution).

The insolvency court may remove the insolvency trustee from office if they are in breach of their duties or have a conflict of interests.

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

Due Filing of an Insolvency Petition

Firstly, directors of an insolvent legal entity are obliged to file an insolvency petition (see 2.3 Obligation to Commence Formal Insolvency Proceedings). 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 toward 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 liable and forced to do the following, by way of a court decision:

  • 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.

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 about their past involvement in insolvent legal entities.

Criminal Liability

Finally, unlawful actions both during tenure as a director of a legal entity and during insolvency proceedings may constitute multiple felonies under Czech criminal law and, as such, might entail criminal liability.

Under certain circumstances, creditors may assert their claims directly against directors who breached their duties outside of insolvency proceedings. The insolvency trustee of a legal entity may (and in some circumstances is obliged to) assert the entity’s claims against such directors on behalf of the entity. Finally, the insolvency trustee may also file an action that would oblige the directors to return any consideration they received and pay the difference between the established claims of the creditors and the insolvency estate. Please see 10.1 Duties of Directors for details.

Under the Czech Insolvency Act, the insolvency court may declare the debtor’s legal acts (or omissions) ineffective, based on the insolvency trustee's action, 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 disproportionally, more than they would be in the case of bankruptcy, to the detriment of other creditors; or
  • 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.

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.

BADOKH

28. října 767/12
110 00 Prague 1
Czech Republic

+420 222 937 514

+420 222 937 515

info@badokh.com www.badokh.com
Author Business Card

Trends and Developments


Authors



BADOKH has a ten-strong restructuring and insolvency practice, led by partner Petr Kuhn. All the partners in the restructuring and insolvency group have been partners of international law firms, and have practised for nearly 20 years on average. BADOKH’s experience in high-profile reorganisations recently proved valuable in the landmark insolvency of Arca Investments, in which BADOKH successfully advised the company to the point of the court appointing a designated trustee and allowing the company’s reorganisation. Although the company’s registered seat is in Slovakia, BADOKH managed to open the main insolvency proceeding in the Czech Republic, arguing that the company’s centre of main interest had been relocated to the Czech Republic. The firm has also advised large debtors, creditors and investors in multiple local and cross-border in-court and out-of-court restructurings and insolvencies, including the reorganisations of major local hard coal producers OKD, large local manufacturing conglomerate VITKOVICE and real estate company L88 (an owner of Radio Free Europe/Radio Liberty facilities in the Czech Republic). The firm would like to thank Tomas Smetana for his contribution.

COVID-19 Aftermath

In 2020, everyone expected 2021 to have a record-high number of newly commenced corporate insolvency proceedings in the aftermath of the COVID-19 pandemic. In October 2021, it can be seen that these expectations were not quite met. In fact, thus far, 2021 has been a rather average year in terms of corporate insolvency.

This does not mean that the Czech Republic was not hit hard by COVID-19 – quite the opposite. The Czech Republic was in fact among the most affected countries in the world in terms of COVID-19-related deaths and other health and social issues, but also in terms of the impact on the economy.

As a very much export-oriented market, a huge part of which consists of automotive and other industries (to a much larger extent than in most other European countries, where the main focus is on services), the Czech economy came to an almost complete halt for an extended period of time in 2020. The governmental programmes, which were largely similar to those implemented in other countries (such as Anti-virus, COVID III, COVID Plus and COVID Rent), and the lawmaker’s response to the COVID-19 pandemic (Lex Covid) helped some businesses to overcome the hard times arising from the completely unexpected and unprecedented disastrous situation. Unfortunately, it is becoming quite clear that many businesses did not really master their financial problems; the above-mentioned programmes only postponed their exit from the market. Since the real financial crisis has not yet started, it is not quite clear at the moment exactly how many businesses will have this kind of problem.

In September 2021, the number of newly commenced corporate insolvency proceedings in the Czech Republic per month was almost identical to that is September 2019 – ie, not long before the COVID-19 pandemic. Ninety corporate insolvency proceedings were newly commenced in September 2019, compared to 93 in September 2021. However, the current data shows that the number of newly commenced insolvency proceedings is already starting to rise, and this upward trend is expected to continue. Unfortunately, there is no reason to believe otherwise: the facts speak for themselves.

The annual Harmonised Index of Consumer Prices (HICP) inflation rate in the Czech Republic in October 2021 is expected to be around 4.4%. It is already around 10% in some industries, and is expected to rise even more. Most of the COVID-19-related government programmes have already ended, and the businesses that became dependent on such support will soon have to exit the market, taking other businesses with them due to secondary insolvency. The Czech Republic’s economy has also been hit quite heavily by the lack of car chips on the world markets and by the lack of building materials. Newly reinvented restrictions on immigration have also left a lot of businesses without the requisite workforce.

It is unfortunately almost certain that 2022 will really be the year with a record-high number of newly commenced insolvency proceedings. The Czech insolvency courts and all insolvency practitioners seem to be well prepared for this.

Preventative Restructuring

Czech insolvency law traditionally ranks high in the World Bank’s Doing Business study. In 2020, when the most recent study was published, the Czech Republic received the twentieth highest "Resolving Insolvency" score out of 190 ranked countries.

Nevertheless, in order to increase the satisfaction of unsecured creditors’ claims, the government is currently working on a new bill on preventative restructurings (the Bill), implementing 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).

The Bill was published by the Czech Ministry of Justice in August 2021 and is slated to come into force on 1 July 2022 (the latest possible date for implementing the Directive was set to 17 July 2022). Because the legislative process is still at its beginning, the final wording of the Bill is as yet unknown.

The Bill aims to enable the debtor to restructure its business together with its creditors and other parties affected by the restructuring plan before it becomes insolvent. This way, the value of the debtor’s assets and going-concern value is expected to be preserved in a more efficient manner compared to formal insolvency proceedings.

According to the draft Bill, preventative restructuring shall be accessible only to businesses that are legal entities and that are not specifically excluded from the scope of application of the Bill (eg, the state, financial institutions, insurance companies, etc).

Only business entities whose financial difficulties are so serious that failing to adopt restructuring measures would result in their insolvency by the mere passage of time may start a restructuring process, according to the draft Bill. On the other hand, the financial difficulties cannot be so bad that the business entity is about to become insolvent in the form of illiquidity (platební neschopnost). Entrepreneurs who are insolvent due to over-indebtedness but have sufficient liquidity are not excluded from preventative restructuring. Furthermore, they must act in good faith in relation to the feasibility of the restructuring plan, which specifies the restructuring measures and divides the affected parties into classes, among other features.

Generally, the restructuring plan should be approved by all classes of affected parties. However, under certain conditions, approval of the affected parties can be imposed by the restructuring court (cross-class cram-down).

The court’s involvement in the restructuring process should be limited to helping to find consensus among all parties, and only where this is in the joint interest of the affected parties and to settle any disputes arising from the restructuring process.

Action to Compensate the Insolvency Estate

Another important novelty in Czech insolvency law was introduced by an extensive amendment to the Czech Business Corporations Act, which entered into force on 1 January 2021.

This novelty provides the insolvency trustee of a bankrupt company with the option to sue a board member who contributed to the company’s insolvency by committing a breach of his or her duty to the company. The insolvency court may decide on the basis of the insolvency trustee’s action that such board member is obliged to pay compensation to the insolvency estate, which could be as high as the company’s debts and the value of its assets. When deciding on the amount of the compensation, the court should take into consideration the extent to which the breach of such person’s duties contributed to the insufficiency of the insolvency estate for the satisfaction of claims registered in the insolvency proceedings.

Since the insolvency trustees do not pay any court fees for the filing of such actions, it is expected that some insolvency trustees will try to use this novelty in the years to come to obtain additional assets for the insolvency estate.

Junk Bond Insolvencies

If we were to try and identify a particular kind of insolvency proceedings that is typical for 2021 in the Czech Republic, it would probably be the insolvency of entities issuing bonds – or, as it were, junk bonds. As such bonds were usually sold to the general public, a huge number of creditors were involved in all such cases.

In 2021, almost every restructuring practitioner has worked on some of the following insolvency proceedings: KARA Trutnov, a.s., pietro filipi, s.r.o., EMTC - Czech a.s. and Arca Investments, a.s.

The insolvency proceedings against Arca Investments, a.s. were one of the most important insolvency proceedings of 2021, for many reasons. The total amount of the registered claims and the value of assets involved made it by far the biggest insolvency proceeding in the Czech Republic. In addition, a ground-breaking ruling regarding the centre of main interest (COMI) was enacted: even though Arca Investments, a.s. resides in Slovakia and has always done so, the High Court in Prague ruled in favour of the main insolvency proceeding being conducted in the Czech Republic. This sets an important precedent for cross-border insolvencies in the CEE region, where lots of companies are established in one jurisdiction but conduct substantial business activities in the other.

BADOKH

28. října 767/12
110 00 Prague 1
Czech Republic

+420 222 937 514

+420 222 937 515

info@badokh.com www.badokh.com
Author Business Card

Law and Practice

Authors



BADOKH has a ten-strong restructuring and insolvency practice, led by partner Petr Kuhn. All the partners in the restructuring and insolvency group have been partners of international law firms, and have practised for nearly 20 years on average. BADOKH’s experience in high-profile reorganisations recently proved valuable in the landmark insolvency of Arca Investments, in which BADOKH successfully advised the company to the point of the court appointing a designated trustee and allowing the company’s reorganisation. Although the company’s registered seat is in Slovakia, BADOKH managed to open the main insolvency proceeding in the Czech Republic, arguing that the company’s centre of main interest had been relocated to the Czech Republic. The firm has also advised large debtors, creditors and investors in multiple local and cross-border in-court and out-of-court restructurings and insolvencies, including the reorganisations of major local hard coal producers OKD, large local manufacturing conglomerate VITKOVICE and real estate company L88 (an owner of Radio Free Europe/Radio Liberty facilities in the Czech Republic).

Trends and Development

Authors



BADOKH has a ten-strong restructuring and insolvency practice, led by partner Petr Kuhn. All the partners in the restructuring and insolvency group have been partners of international law firms, and have practised for nearly 20 years on average. BADOKH’s experience in high-profile reorganisations recently proved valuable in the landmark insolvency of Arca Investments, in which BADOKH successfully advised the company to the point of the court appointing a designated trustee and allowing the company’s reorganisation. Although the company’s registered seat is in Slovakia, BADOKH managed to open the main insolvency proceeding in the Czech Republic, arguing that the company’s centre of main interest had been relocated to the Czech Republic. The firm has also advised large debtors, creditors and investors in multiple local and cross-border in-court and out-of-court restructurings and insolvencies, including the reorganisations of major local hard coal producers OKD, large local manufacturing conglomerate VITKOVICE and real estate company L88 (an owner of Radio Free Europe/Radio Liberty facilities in the Czech Republic). The firm would like to thank Tomas Smetana for his contribution.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.