The debtor is insolvent if:

The debtor is unable to fulfil its obligations if:

• the debtor stopped to reimburse a substantial part of its financial obligations; or
• the debtor has financial obligations for more than 3 months overdue;
• it is not possible to satisfy any outstanding monetary claims against the debtor by enforcement execution; or
• the debtor has not fulfilled the obligation imposed by the court to provide lists enumerated in Section 104 par. 1 of the Insolvency Act.

Preventive restructuring

In 2023, Act No. 284/2023 Coll., on Preventive Restructuring (the Preventive Restructuring Act) was adopted to help entrepreneurs prevent bankruptcy and avoid the need to initiate insolvency proceedings. The option of preventive restructuring can be used by all commercial corporations, with exceptions provided for by the Preventive Restructuring Act (banks, insurance companies, financial institutions, health insurance companies and others).

If an entrepreneur is interested in using the institute of preventive restructuring, it must meet the following conditions:

• being in good faith in maintaining or restoring the operability of its business plant;
• not being insolvent;
• facing real financial difficulties to such an extent that failure to adopt restructuring measures would lead to bankruptcy.

Preventive restructuring is inadmissible if it is initiated or continued by an entrepreneur pursuing a bad faith purpose and also by the entrepreneur:

• is in liquidation;
• which has been declared bankrupt in the last 5 years; or
• for which a preventive restructuring has been terminated in the last 5 years prior to its reopening by a declaration of inadmissibility of the preventive restructuring for bad faith.

In the process of preventive restructuring, the role of the entrepreneur is crucial, as it is obliged to monitor its situation and, if necessary, take the necessary preventive measures in time.  To facilitate the identification of potential problems, the Ministry of Justice has launched the Financial Health web application.

Preventive restructuring begins with a call for negotiations on a restructuring plan and a proposal for a so-called rehabilitation plan. The entrepreneur is also obliged to notify the restructuring court, which is the regional court, of the commencement of the restructuring.  Within six months at the latest, the entrepreneur is obliged to submit the restructuring plan to the parties concerned for a vote.

Preventive restructuring may end:

• by fulfilling, or not fulfilling, the restructuring plan;
• by the court’s decision not to confirm the restructuring plan or its subsequent revocation;
• by the court’s decision on the bankruptcy of the entrepreneur in insolvency proceedings.

Unlike insolvency proceedings, preventive restructuring is primarily intended to enable entrepreneurs experiencing financial difficulties to find a solution together with their creditors and thereby reach a mutual agreement on how to enable the entrepreneur to continue its activities and ensure satisfaction of all (or at least the majority of) creditors’ claims. Preventive restructuring is essentially a private and private law process in which not all documents (incl. the rehabilitation plan and the restructuring plan) need to be made public.

Types of insolvency resolution methods

If the preventive restructuring was not successful or could not be used and the debtor finds itself in bankruptcy, it can be resolved by the following three main methods:

In addition to the three main methods of insolvency resolution, there are also special methods provided by the Insolvency Act for certain entities or for certain types of cases.

Stages of the insolvency proceedings

Stages of the insolvency proceedings are as follows:

• initiation of insolvency proceedings by filing of an insolvency petition;
• the declaration of insolvency;
• decision on the resolution method of the debtor’s insolvency;
• implementation of the method; and
• termination of insolvency proceedings.

Initiation of insolvency proceedings in the Czech Republic

Insolvency proceedings may be initiated only by the insolvency petition filed either by a debtor or by a creditor. The insolvency proceedings begin on the date when the insolvency petition is filed with a competent insolvency court.

The insolvency petition can be filled either in paper or electronic form.

If an insolvency petition is filed by a creditor against a legal entity, the petitioner is obliged to make a deposit of CZK 50,000 for the costs of the insolvency proceedings.

If the petition is filed against a legal person who is not an entrepreneur or against a natural person, the petitioner is obliged to pay a deposit of CZK 10,000.

In addition to the deposit, the creditor filing a petition for the commencement of insolvency proceedings is obliged to pay a court fee of CZK 2,000.

Declaration of insolvency

The insolvency court shall issue a declaration of insolvency if the evidence proves that the debtor is insolvent. The insolvency should be declared within a maximum of 15 days, without a court hearing.

The declaration of insolvency also contains decision on:

Moratorium

If the debtor is an entrepreneur, he can use the moratorium as protection from his creditors. The moratorium is declared by the insolvency court after the filing of the insolvency petition for a maximum of 3 months. It makes sense to use the moratorium when the debtor has become insolvent but can prove that he will be able to meet his obligations again after the moratorium period (e.g. production failure, secondary insolvency, pandemic).

For the duration of the moratorium, the debtor cannot be declared insolvent and the same effects as by the commencement of insolvency proceeding are triggered. However, creditors may still file claims and intervene in the proceedings during the moratorium. Although the effects of filing and intervening in the proceedings only take effect when the moratorium period is over.

Legal effects of initiation of insolvency proceedings

Legal effects of initiation of insolvency proceedings are as follows:

• claims and other rights relating to the insolvency estate cannot be applied through an action;
• the right to be satisfied from security relating to property owned by the debtor or property belonging to the estate may be exercised and acquired anew only under the terms of the Insolvency Act;
• enforcement of a judgment or execution may be ordered or initiated but cannot be carried out, except for alimony claims arising after the commencement of insolvency proceedings. For these, enforcement or execution may be carried out in the case of execution by deductions from wages
• it is not possible to execute an agreement between the creditor and the debtor on deductions from wages or from other income.

Set-off is generally available to the creditors in respect of mutual claims until the declaration of insolvency, or until the filing of a proposal for reorganisation. However, set-off is not possible after the declaration of insolvency, if the creditor:

• has not become a registered creditor with regard to the set-off of its claim;
• obtained a set-off claim by ineffective legal action;
• was aware of the debtor’s bankruptcy at the time of acquisition of the set-off claim; or
• has not yet paid the debtor’s outstanding claim to the extent that it exceeds the creditor’s set-off claim.

The debtor’s employer is obliged to cooperate with every written request of the insolvency administrator. This obligation is imposed if the debtor has had an employment contract with the employer in the 12 months preceding the opening of the insolvency proceedings.

Registration of Claims

Creditors whose receivables are secured by property of the estate under a mortgage or a title transfer security arrangement are secured creditors. Other creditors are unsecured.

Creditors have to register their claims on a special form. You can find the application form here. Applications of claims and their annexes shall be submitted in duplicate to the insolvency court.

Applications shall be submitted by data box or in electronic form with a recognised electronic signature. If electronic submission is not possible, applications shall be submitted in paper form in duplicate, including all annexes.

The insolvency court shall invite creditors, who wish to submit their claims in the insolvency proceedings, to submit applications. Creditors may file applications until the insolvency decision is made and the court may not shorten this period in any way.

The insolvency court is obligated to set out the deadline for the registration of claims in the decision on declaration of insolvency. The creditors shall register their claims in period of 2 months. This period is a procedural one, which means that it is sufficient to send the claim application on the last day of the deadline. No excuse for missing the deadline for filing applications shall be admissible.

Satisfaction of the registered claims

When all assets pertaining to the insolvency estate are monetised, it’s time to satisfy the registered claims.

If the proceeds from the monetisation of the insolvency estate are not sufficient to meet all of the registered claims, following claims are satisfied in full:

• insolvency administrator’s fee and cash expenses;
• claims of creditors arising during the moratorium;
• creditors’ claims from credit financing (provided to finance the debtor during insolvency proceedings);
• costs associated with the insolvency estate administration and maintenance
• labour-law claims of the debtor’s employees;
• creditors’ claims to maintenance and to compensation for damage to health.

Other claims are satisfied proportionally.

Claims secured by an asset of the debtor are satisfied from the proceeds from the monetisation of the security. If the proceeds exceed the claim, the exceeding amount is distributed between the unsecured debtors. If the proceeds are not sufficient to meet the secured claim, the unsatisfied part of the secured claim is deemed as unsecured claim.

Closure of insolvency proceedings

The closure of insolvency proceedings depends on the selected insolvency resolution method.

Penalties for insolvency proceedings in the Czech Republic

In case the creditor registers a claim, which is then denied or admitted in amount of less than 50 % of its originally registered amount, the entire claim is disregarded by operation of law. The court may decide to impose on the creditor to pay to the insolvency estate a penalty in the amount of the difference between the amount of the claim filed by the creditor and the registered amount.

Liability of the statutory bodies

Members of statutory bodies of companies are obligated to file an insolvency petition without undue delay when the company becomes insolvent. A member of a statutory body who did not submit an insolvency petition regarding “their” insolvent company is responsible for damages or other injuries related to the breach of his obligation.

According to section 66 of the Czech Business Corporations Act, in case the member of the statutory body of the company contributed to the company’s insolvency:

As can be seen from the above, insolvency proceedings can have serious consequences for a member of the company’s statutory body. In particular, if he/she fails to act with due care and diligence or fails to file an insolvency petition on time. In this context, it should also be noted that the tax authorities quite often file criminal charges against members of statutory bodies in cases where the amount of CZK 50,000 or more in tax has not been paid. In order to reduce the potential financial risk – especially in large corporations – it is necessary to have a well-drafted agreement on the performance of the office, as well as its approval by the company’s supreme body, and appropriate insurance.