Changes in securing bank guarantees in Czech insolvency: addressing the Elma-Therm case

The recent Amendment on the Czech Insolvency Act (the “Amendment”) enters into force on 1 July 2017.

The Amendment states that a creditor is entitled to be satisfied from its security even when its contingent or future claim (such as bank guarantee) becomes actual after the start of the security provider’s insolvency.

These changes seek to address issues arising from the controversial decision of the Czech Supreme Court in the Elma-Therm case (the “Decision”) where it was held that bank guarantees can only amount to secured claims if the payment obligation of the issuing bank is due before the insolvency of the security provider has commenced.

It followed from the Decision that when evaluating bank guarantees (and other future or contingent claims), it does not matter if the security was established before the start of the security provider’s insolvency. The only relevant factor is the date that the payment obligation of the bank is due. If that moment occurs at any moment after the insolvency petition of the security provider is published, the bank cannot be satisfied as a secured creditor.

The Decision has attracted wide criticism amongst legal scholars and practitioners alike since its publication in 2015 due to a perceived counterintuitive and formalistic interpretation of law. There have been various attempts to mitigate the impact of the Decision, however no solutions have proven to be ideal. The Amendment is therefore a step forward to protect reasonable expectations of lenders in Czech market.

However, the Amendment does not go as far as to change the rules set by the Decision for the ranking of such security. As the bank will only become a secured creditor at the moment of payment under the bank guarantee, any creditor who was provided with the same collateral to secure its actual claims before the opening of insolvency would rank higher than the bank. This means that such other creditor will be satisfied before the bank, even though the bank established the security prior to any other creditor.

Banks and other lenders can mitigate the above security ranking issue by establishing in rem negative pledge, however not each collateral can be protected and a due review is recommended on a case-by-case basis.

If you have any questions related to the Amendment, please do not hesitate to get in touch.