The insolvency proceedings, described in this publication, is a legal proceeding concerning a debtor’s insolvency or impending insolvency and the method of its solution. The Act No. 182/2006 Coll., on Bankruptcy and Settlement (Insolvency Act), governs insolvency procedures in the Czech Republic. Our experts have summarised the key proceedings and liabilities, to provide you a complex overview on the matter.
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Introduction
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.
Types of insolvency resolution methods
There are three main types of insolvency resolution 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.
Insolvency proceedings
Initiation of insolvency proceedings
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. 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 and the conditions for the existence of insolvency are met. 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 satisfaction from the insurance may be exercised and acquired only under the conditions of the Insolvency Act;
- the exercise of judgment or execution may be ordered, but it cannot be performed;
- it is not possible to execute an agreement between the creditor and the debtor on deductions from wages or from other income;
- the court may order limitations on the right to set-off claims, or authorise an set-off where it is prohibited.
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 unless:
- the set-off became legally possible before the declaration of bankruptcy liquidation;
- the creditor registers the claim which it wishes to set-off;
- the creditor has not acquired the claim with knowledge of debtor’s insolvency or through an avoidable act;
- the creditor pays the amount by which the debtor’s claim exceeds the creditor’s claim, if any.
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.
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. The court immediately notifies to known creditors who have their habitual residence, domicile or residence in the European Union member states except for Denmark, to register their claims.
No excuse for missing the deadline for filing applications shall be admissible. The period for register the claims runs from the day when the declaration of insolvency was delivered to the known foreign creditors. This period is usually 2 months long.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.
Liability of creditors for denied claims
Penalties
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 follows from the above, it can have serious consequences for the member of the statutory bodies of insolvent companies not to act with due care to avoid the company’s insolvency, or not to file insolvency petition in time.
Data regarding insolvency proceedings in the Czech Republic
During the lockdowns at the beginning of 2021, the government support and moratorium, including the deferral of debtor’s obligations to file for insolvency, had helped to reduce the number of insolvency applications.
Despite concerns that the number of insolvency filings will increase rapidly after the end of government support and programs towards the end of the year, according to the data, only 25,055 insolvency filings have been made for the whole year of 2021 in total. That is the second lowest number in the last 10 years.
In 2022, however, there is already an increase in insolvency applications for legal entities. A total of 5,881 insolvency petitions were filed in the first quarter of 2022:
- 5,595 natural persons,
- 286 legal entities.
The average satisfaction of the unsecured creditors remains at the level of 7% of their registered receivables in the bankruptcy proceedings.
Even though the average satisfaction of the unsecured creditors is quite low, it is highly recommended to register your receivable against an insolvent debtor. The registration of the receivable in the insolvency proceedings is one of the conditions to create accruals on the unpaid receivable in the full amount and claim a full refund on the amount of VAT paid.
We will be more than happy to help you with the receivable registration as well as with all the relating tax issues.
