Czech Republic: Stop to bullying insolvency petitions

In the last week of January, the Czech Government passed an amendment to the Insolvency Act, which was prepared by the Ministry of Justice. The aim of the amendment is to respond to the growing widespread practice of the filing of unjustified insolvency petitions by creditors. The amendment intends to allow courts to reject such petitions.

The commencement of insolvency proceedings is of an informative nature only. It does not automatically mean the bankruptcy of the debtor; such bankruptcy is to be confirmed by the insolvency court which will review the debtor’s financial situation and decide on bankruptcy. The fact that insolvency proceedings have been initiated in respect of a certain company (irrespective of whether the company is bankrupt or not) is immediately recorded in the insolvency register, which is publicly accessible.

Information about the commencement of insolvency proceedings is negatively perceived by the public. It is assumed that the respective company is in financial difficulties. Certain creditors misuse this fact by filing unjustified insolvency petitions which can lead to liquidation consequences, even for economically sound companies. Some creditors have been filing insolvency petitions against their competitors with an aim to harm their reputation and to exclude them from competition. The amendment wants to prevent this.

The key points of the approved amendment include an option of the court:

• to reject the creditor’s insolvency petition for being apparently unjustified;
• to determine a pecuniary penalty for the apparently unjustified insolvency petition;
• to limit, for reasons that are worthy of special consideration, some of the effects associated with the commencement of insolvency proceedings (as a result, debtors will not be limited e.g. when disposing of their assets);
• to impose a duty on creditors to give security (based on the debtor’s proposal) for securing compensation for damage or other harm incurred by the debtor as a result of the unjustified commencement of insolvency proceedings and measures adopted in the course of such proceedings, namely until a decision on the insolvency petition is delivered.

The amendment should be submitted shortly to the Chamber of Deputies.