Under Czech law, insolvency petitions (regardless of whether they are filed by a creditor or debtor) and all other insolvency documents must be published in the Insolvency Register by the insolvency court within two hours of receipt. The register is publicly accessible online. Since the launch of the register in 2008, it has served as an effective, modern and transparent tool within the insolvency regulation framework. However, this transparency has also had negative side effects.

Legal and commercial consequences

A published insolvency petition has serious legal and business consequences for debtors, whether they are natural persons or legal entities.

Once insolvency proceedings are publicly announced in the register:

  • the debtor (which need not actually be insolvent or over-indebted) will be restricted in substantial dealings with its assets;
  • no pledge can be established over the debtor's assets; and
  • previously obtained enforceable decisions against the debtor's assets cannot be enforced.

As the register is available online, the debtor's credit and its reputation among its business partners, suppliers and customers are at stake, and the negative effects of the insolvency petition can cause serious detriment to the debtor's business. The published insolvency petition may restrain the allegedly insolvent debtor from:

  • completing planned business transactions;
  • participating in tender procedures; and
  • obtaining loans from financial institutions and EU funds.

It is no surprise that insolvency petitions are sometimes abused to harm, defame, discredit or extort market competitors. Such petitions are commonly referred to as 'frivolous insolvency petitions' (the colloquial term in Czech literally translates to 'bullying petition').

Typical frivolous petitions

Frivolous insolvency petitions are typically observed in sectors which are built on repeat long-term relationships (ie, real estate construction and development). These petitions aim to discredit and damage competitors' reputation in a particular market.

While frivolous petitions usually satisfy all formal legal prerequisites:

  • they are often purposely filed with an insolvency court that lacks territorial jurisdiction;
  • the petitioners will appeal all procedural decisions of the particular insolvency court;
  • the alleged debtor will be unable to account for the petitioner's claim in its books; and
  • the petitioner's claim will be based on incomplete and dubious documentation.

Together, these common features serve to extend the period during which the debtor is listed in the register. This undesirable status can last several months. Surveys have shown that the business consequences of a frivolous insolvency petition can result in actual insolvency proceedings or in the liquidation of a given entity, even if the information about the commencement of insolvency proceedings against the alleged debtor is published in the register for several days.

While only 0.5% to 1% of all insolvency petitions are categorised as frivolous, this still means that several hundred frivolous petitions are filed each year which intentionally harm a competitor's reputation on the Czech market. In response to this rising trend, the following steps have been taken by the Supreme Court and the legislature.

Supreme Court decision

In 2015 the Supreme Court handed down a groundbreaking decision in which it ruled that anyone that files an insolvency petition along with fictitious evidence intentionally in order to harm an alleged debtor may be convicted of blackmailing or defamation under the Criminal Code. This criminal offence is punishable by imprisonment for up to four years or a financial penalty. Interestingly, the alleged debtor in the underlying case was an attorney at law.

According to the Supreme Court, whether the relevant behaviour of the petitioners could or should be assessed as a criminal offense depends on:

  • the motivation and intentions of the petitioner; and
  • the tools which it used to harm the alleged debtor.

The Supreme Court's decision sends an important message to future frivolous petitioners, as it draws attention to the potential criminal consequences of these petitions.

Insolvency Act amendment

The legislature likewise realised that frivolous petitions not only harm competitiveness within the Czech markets, but also undermine the objectives of Czech insolvency law. Historically, insolvency courts in different regions of the country have reacted differently to frivolous petitions (many of which are highly complex), which brought the insolvency courts and their decisions into disrepute in the eyes of the general public, as the courts are, at the very least, considered inefficient. Nevertheless, it should be highlighted that a significant portion of insolvency courts dismiss frivolous petitions as lacking merit within a few days.

In light of this, a new bill to amend the Insolvency Act has been discussed in Parliament. One of the key changes introduced by the amendment (which is expected to come into force later this year) should strengthen the protection of debtors against frivolous petitions.

The amendment suggests a new procedure whereby insolvency petitions filed by creditors will be subject to a preliminary review if the insolvency court has doubts regarding the reasonableness of the particular insolvency petition. In contrast to the existing wording of the Insolvency Act, the insolvency court will have the authority to decide whether to publish a particular insolvency petition in the register.

The Czech legislature believes that this procedure will significantly reduce the number of frivolous petitions.

Comment

Both the Supreme Court decision and the amendment are steps in the right direction. They seek to protect alleged debtors that are wrongly accused and stigmatised by others as being insolvent. However, further steps must be adopted by the insolvency courts, including applying the Criminal Code more often in order to discourage the filing of frivolous insolvency petitions and eradicate this phenomenon altogether.

For further information on this topic please contact Petr Kuhn or Vladislav Klimeš at Badokh Kuhn Dostál Advokátní Kancelár by telephone (+420 222 937 515) or email (petr.kuhn@badokh.com or vladislav.klimes@badokh.com). The Badokh Kuhn Dostál Advokátní Kancelár website can be accessed at www.badokh.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.