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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 summarised the key proceedings and liabilities, to provide you a complex overview on the matter.
The debtor is insolvent if:
the debtor has more than one creditor
the financial obligations are for more than 30 days overdue
the debtor is unable to fulfil its obligations
The debtor is unable to fulfil its obligations if:
There are three main types of insolvency resolution methods:
bankruptcy liquidation – debtor’s business activities are stopped and all the debtor’s assets are sold. The creditors’ receivables are proportionally satisfied through distribution of the proceeds of the sale;
reorganisation – debtor’s business activities continues according to a reorganisation plan approved by the creditors. The creditors’ receivables are paid off gradually;
debt relief (“personal bankruptcy”) is a way of dealing with bankruptcy available for:
The debtor is released from all its debts subject to the conditions approved by the creditors and the court.
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 are as follows:
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.
The insolvency court may, before the declaration of insolvency, impose an obligation to the petitioner to pay a deposit for the costs of the insolvency proceedings up to CZK 50,000.
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:
an appointment of an insolvency administrator
information on when the consequences of the insolvency decision will come into effect
an invitation to creditors to register their claims
date and place of the creditors’ meeting
and other information acc. to Section 136 (1) of the Insolvency Act
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 are as follows:
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:
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: https://isir.justice.cz/isir/common/stat.do?kodStranky=FORMULAR. Applications of claims and their annexes shall be submitted in duplicate to the insolvency court.
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. 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.
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:
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.
The closure of insolvency proceedings depends on the selected insolvency resolution method.
The bankruptcy liquidation is usually terminated after the final report drawn up by the insolvency administrator is approved by the insolvency court. Although unsatisfied claims do not cease to exist, the termination of the bankruptcy liquidation is followed by cessation of existence of a corporate debtor.
Reorganisation ends with the insolvency court’s decision on acknowledgement of the fulfilment of the reorganisation plan or substantial parts thereof. In cases stipulated by law, reorganisation may be also transformed into bankruptcy liquidation. In particular such situation occurs when the debtor is unable to comply with the reorganisation plan.
Debt relief ends with the insolvency court’s decision acknowledging the implementation of debt relief. If the debtor complies with all obligations under the approved debt relief method, the insolvency issues an order freeing the debtor the payment of debts included in the debt relief procedure to the extent to which they have not yet been met. Debt relief can be also transformed into bankruptcy liquidation when the debtor fails to comply with debt relief conditions.
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.
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:
such a member of the statutory body might be obliged to return the remuneration or other benefits acquired according to the management agreement for a period of two years preceding the declaration of insolvency, provided the insolvency proceedings were initiated by a creditor; and
if the bankruptcy is declared, based on a petition from the insolvency administrator, the member of the statutory body may be obliged to provide the company with the funds equal to the difference between the company’s assets and its obligations.
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.
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:
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.