Czech insolvency rules to change under Lex COVID-19

In response to the anticipated economic impact of the Covid-19 pandemic, on 31 March 2020 the Czech Government approved the so-called ‘Lex COVID-19’ and sent the draft law to the Parliament for expedited legislative processing. This article focuses on the implications of the Lex COVID-19 on the insolvency proceedings in the Czech Republic. For wider implications of the Lex COVID-19, please see this article.

The proposal is subject to further changes by the Czech Parliament. If passed, the changes to the insolvency rules shall be effective upon publishing in the Czech Collection of Laws.

Suspension of existing rules

The main protective measure for businesses is the suspension of the statutory duty of the management to file for insolvency without delays after the management has learnt about the insolvency of the company. However, the right to suspend the filing shall not apply if the debtor was insolvent before the emergency measure were adopted (presumably 12 March 2020) or if the insolvency is not principally related to the pandemic situation. This means that the debtors and their management will not face personal repercussions for causing any damage to creditors as a result of them failing to meet this duty. However, other statutory duties of the management, such as due care, shall still apply.

The suspension of the duty to file is proposed to remain in place for the period of six months following the end of the emergency measures, but no later than 31 December 2020.

The Lex COVID-19 further suspends the right of creditors to file for their debtor’s insolvency until 31 August 2020. Any such creditor’s filing in this period will be disregarded and will not be published in the insolvency register. The relevant creditor will need to file a new petition after 31 August 2020.

Extraordinary Moratorium

The new law introduces an additional protective measure for business entities and individual entrepreneurs by way of an extraordinary moratorium. A petition for an extraordinary moratorium may be filed until 31 August 2020 unless the debtor was insolvent on or prior to 12 March 2020, in which case only an ordinary moratorium can be applied for.

Unlike the ordinary moratorium under the current insolvency rules, the extraordinary moratorium does not require consent from the majority of the debtor’s creditors with the moratorium. The extraordinary moratorium shall be declared by the court for as long as three months and may be prolonged for another three months subject to the approval of the majority of the creditors.

The effects of the extraordinary moratorium are quite extensive and may have a significant impact on the debtor’s business partners, in particular suppliers and financing banks. Rights of the business counterparties to terminate their contracts or to refuse to perform under such contracts will be very limited. This will also apply to loan providers, such as banks, unless the new drawdown of loans or other financial performances is refused because of a breach that has occurred before the declaration of the extraordinary moratorium.

Specific measures in reorganisations

Debtors with approved reorganisation plan as of 12 March 2020 may ask the court to suspend the debtor’s obligation to fulfil the plan. The right of suspension may not be extended beyond the period of six months following the end of the emergency measures, but no later than 31 December 2020.

Specific measures in relation to discharge of debt proceedings (oddlužení)

The Lex COVID-19 introduces new rules for debtors with instalment plans approved before 31 May 2019.

Debtors may ask the court to approve lower monthly instalments if individual circumstances (such as their personal economic situation) has significantly changed. New instalments may lead to a lower satisfaction than 50% of the creditors’ claims and the opinion of creditors on the debtor’s proposal will not be ascertained by the courts. The court may issue such a decision anytime until the expiration of 12 months following the end of the emergency measures.

The court will not terminate the discharge of debt proceedings if the debtor fails to meet the major part of the instalment plan if such failure is predominantly the result of the pandemic situation.

Due to the expected decrease in income of the debtors, the Lex COVID-19 gives the debtors the right to ask the court to grant the relief from the remaining unpaid debts under less strict conditions. If following the expiration of the instalment plan (a five year period) the debtor has paid to its unsecured creditors less than 30% (or 50% in some cases) of the debt, the court may grant the debt relief to the debtor if the debtor demonstrates that the above thresholds were not reached due to the reasons outside the debtor’s control. This may be particularly relevant in the current pandemic situation. If this happens, the debtor would not be required to prove further conditions necessary for the debt relief as applicable under the current insolvency rules.

The above changes may mean that in the proceedings approved by the court before 31 May 2019, the unsecured creditors’ satisfaction rate may fall below the minimum of 30% (and the debtor will still have the remaining unpaid debts waived) if the debtor is able to prove that the drop in the creditors’ satisfaction is the result of the pandemic situation.

This article has been prepared using information available as of 1 April 2020. We will update this content if the draft law changes during the course of its approval by the Czech Parliament.