Czech Republic

A look at corporate, personal and, where relevant, partnership insolvency proceedings in Czech Republic, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.


Konkurs

Bankruptcy

  • Konkurs is a terminal form of insolvency relevant to corporate and individual business debtors. It is declared by the court after an insolvency petition is filed either by a debtor or by a creditor. Konkurs may be declared either simultaneously with the declaration on insolvency or after this declaration.
  • Once insolvency has been declared, an insolvency trustee will be appointed to realise the debtor’s assets. The proceeds are divided among creditors. Secured creditors have absolute priority over other creditors with respect to the proceeds from the realisation of the assets that are subject to their security; unsecured creditors are paid from the proceeds of those assets only after satisfaction of the claims of secured creditors and those claims that take administrative priority.
  • Publication of the insolvency petition online immediately results in an automatic stay of creditor claims (secured and unsecured).
  • Where the debtor is a natural person and a non-entrepreneur, or where the annual turnover of the debtor does not exceed CZK2 million and the debtor does not have more than 50 creditors, the court may order a so-called minor bankruptcy: a shortened and simplified version of bankruptcy.
  • Secured creditors are entitled to give instructions to the insolvency trustee on how to administer and realise assets that are subject to their security.

Oddluzeni

Debt relief

  • A debt relief procedure is available for natural persons who meet the statutory definition of insolvency (debts that are more than 30 days overdue and owed to at least two or more creditors and the inability of the debtor to pay such debts).
  • Petition for debt relief cannot be drafted by the debtor themselves but must instead be submitted by an attorney, notary, executor, insolvency administrator or a legal person accredited by the Ministry of Justice for services related to debt relief, provided that their payment for this service does not exceed the statutory amount.
  • A debt relief procedure has two stages. The first is realisation of a debtor’s assets, in which scenario the secured creditors are satisfied only from the proceeds of the realisation of the assets that are subject to their security. This form of debt relief is completed upon the realisation of the debtor’s assets and the distribution of the proceeds among creditors.
  • The second stage is realisation of a debtor’s assets via a payment calendar. Again, the secured creditors are satisfied only from the proceeds of the realisation of the secured assets (unless they opt for the payment calendar). Unsecured creditors are satisfied via a court and insolvency trustee driven payment calendar and the debt relief is completed when such payment calendar results in: (i) full satisfaction of unsecured creditors; (ii) 60% satisfaction of unsecured creditors in three years; (iii) 30% satisfaction of unsecured creditors in five years; or (iv) less than 30% satisfaction of unsecured creditors in five years provided that the debtor shows that they are using their best efforts to satisfy their debts.
  • Secured creditors are entitled to give instructions to the insolvency trustee on how to administer and realise assets that are subject to their security.

Reorganizace

Reorganisation

  • A court and creditor-driven process to reorganise the debtor’s liabilities based on a reorganisation plan approved by creditors and the court.
  • To be eligible, the debtor must have a turnover of at least CZK50 million per year or at least 50 employees. If these criteria are not met, the debtor may become eligible if they submit a reorganisation plan accepted by at least 50% of secured creditors and by at least 50% of unsecured creditors.
  • The debtor prepares a reorganisation plan that, to be approved, must be accepted by all of the debtor’s secured creditors and a majority of its unsecured creditors. Further conditions of the approval are set out in the Insolvency Act, the most important of which is that each creditor must receive a higher return than in the potential konkurs scenario.
  • The insolvency trustee supervises the fulfilment of the plan.
  • There will be a stay on enforcement action by all creditors until the court approves the reorganisation plan. Once the plan has been approved, secured creditors can enforce their security under the terms of the plan.

Moratorium

Moratorium

  • A moratorium can be applied for by the debtor either before the insolvency petition is filed or after the filing of the insolvency petition but before the court issues its decision on declaration of insolvency.
  • The purpose of the moratorium is to provide the debtor with protection from creditors’ enforcement actions in order to give it the opportunity to resolve its financial difficulties, or to prepare for organised insolvency (usually reorganisation).
  • The maximum duration of the moratorium is four months.

Pokyn Zajištěného Věřitele

Instruction of the secured creditors

  • Administration and realisation of the secured assets in konkurs or oddluzeni may take place only in line with the instruction of the secured creditors.

Šikanózní Návrh

Protection against misuse of insolvency petitions

  • Before an insolvency petition can be published in the Insolvency Register it will be preliminarily assessed by the insolvency court, which will specifically consider its reasonableness. This is an attempt to prevent the misuse of insolvency petitions without proper grounds. In the event the petition is found to be unreasonable the court has the power to impose a penalty up to CZK500,000 (approx. EUR18,000). As a further step to discourage the presentation of invalid petitions, the Act also requires any creditor presenting a petition to pay a deposit of CZK50,000 (approx. EUR1,800).

Mezera Krytí

Coverage gap

  • If the debtor meets the criteria of so-called “coverage gap” it is deemed able to fulfil its liabilities (and therefore is not bankrupt).
  • Coverage gap occurs if the amount of due financial liabilities exceeds the disposable income, provided the gap between the two figures is less than 10% of the liabilities due over the assessed period.
  • This effectively gives individuals a presumption of being solvent, meaning the creditor must prove otherwise, giving debtors an opportunity to remedy the problem, particularly if it results from cash flow issues.
  • The coverage gap must be evidenced by a report that meets statutory requirements and is prepared by a qualified person.

Soudní Výkon Rozhodnutí

Court ordered sale

  • Judicial sale of property initiated by a secured creditor, who must obtain an enforcement entitlement (in the form of an enforceable court judgment or direct enforcement agreement).
  • The process is administered by the court.

Verejna Drazba

Public auction

  • The most common form of sale for the enforcement of security over property by a secured creditor who must obtain an enforcement entitlement (in the form of an enforceable court judgment or direct enforcement agreement).
  • The process is administered by a licensed public auctioneer.

Anticipated changes in the next two years

The EU Directive on Restructuring and Insolvency1  requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.

Notable features required to be included in Member States’ national laws include:

  • An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
  • A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
  • An ability to cram down dissenting classes of creditors.
  • Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
  • Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

Contact: Miroslav Dubovsky


1 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 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.