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Significant amendments to Czech Insolvency Act

Czech Republic
21/04/2017
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The new Amendment on the Czech Insolvency Act (the “Amendment”) will enter into force on 1 July 2017.

The Amendment introduces a “liquidity gap” test, which will be used when a debtor (entrepreneur) needs to determine whether it is considered insolvent or not. The liquidity gap is the difference between a debtor’s due debts and its readily available funds. A debtor will only be considered insolvent if the liquidity gap is higher than 10% of its overdue debts.

In order to discourage frivolous claims, creditors will have to justify their claim with written proof of the debt, such as a notarial acknowledgement of debt or an auditor’s confirmation. Furthermore, insolvency petitions filed by creditors will undergo a preliminary review by the court before being published in the Insolvency Register. Should petitions appear unfounded, the court may prevent publication. With this measure, the legislator hopes to address present issues arising from frivolous petitions instantly being published, which precludes companies from participating in public procurement and can harm the company’s reputation. Creditors filing an unsubstantiated petition will risk higher fines of up to CZK 500,000 (approximately EUR 18,500) upon introduction of the Amendment.

A feature of the Amendment welcomed by the banks is that secured contingent or future claims, such as bank guarantees, will now be able to be satisfied as secured claims provided the security is established before the opening of insolvency. This will still be the case if the bank’s payment to the guarantee beneficiary is made after the commencement of insolvency proceedings. This overrides the previous case law of the Supreme Court, where a bank that made a payment under the guarantee in the course of the insolvency was denied satisfaction from the security, on the basis that its claim only became actual after the opening of insolvency.

For the registration of a claim that was acquired by way of an assignment during the insolvency proceedings or six months before its commencement must be accompanied by a declaration on the creditor’s beneficial owner, otherwise the creditor cannot vote with such a claim in the insolvency proceedings.

If you have any questions related to the Amendment, please do not hesitate to contact us.

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