An extensive amendment to Act No. 182/2006 Coll., on Insolvency (the "Insolvency Act") will come into effect on 1 July 2017 (the "Amendment").

The Amendment takes into account the practical recommendations of insolvency judges and administrators as well as other legal professionals. It fundamentally changes many aspects of insolvency proceedings, from preliminary assessment of the insolvency petition, to supervision of the insolvency administrator by the Ministry of Justice and debt relief procedures.

The Amendment primarily aims to

  • protect the rights of parties in insolvency proceedings;
  • strengthen the supervisory powers of the Ministry of Justice;
  • regulate commercial subjects rendering services in the area of debt relief; and
  • secure firms against so-called misuse of insolvency petitions (in Czech: šikanózní návrh).

This article summarises and explains some of the main changes that the Amendment will introduce to the Insolvency Act.

Protection against misuse of insolvency petitions

Today, all insolvency petitions and other relevant information about insolvency proceedings must be published in the Insolvency Register. The insolvency court shall notify the commencement of the insolvency proceedings within as little as two hours after submission of the insolvency petition.

As of 1 July 2017, an insolvency petition submitted by a creditor will be preliminarily assessed by the insolvency court before its publication in the Insolvency Register. The insolvency court may decide not to publish the creditor's insolvency petition if it has doubts about the reasonableness of the petition. If the court decides to reject an insolvency petition as unjustified, it may impose a penalty on the petitioner of up to CZK 500,000 (approx. EUR 18,000).

Furthermore, a creditor who petitions for insolvency proceedings is obliged to pay a deposit of CZK 50,000 (approx. EUR 1,800) on the costs of the proceedings when submitting an insolvency petition against a legal entity that is an entrepreneur.

These changes should secure firms against so-called misuse of insolvency petitions submitted by alleged creditors.

Assessment of inability to pay debts and coverage gap

The Amendment implements a so-called "coverage gap" (in Czech: mezera krytí) into the Insolvency Act's definition of bankruptcy, meaning the difference between the amount of due financial liabilities and disposable income of an entrepreneur that also keeps accounting books. The coverage gap should serve as a negative assumption of bankruptcy due to the inability to pay debts. Given the coverage gap, the entrepreneur will not be in bankruptcy should the coverage gap not be less than ten percent of its due liabilities in the relevant period. This should help debtors defend themselves effectively in the event of unjustified insolvency petitions against them. The emphasis when assessing the inability to pay debts will thus shift to the real liquidity of the entrepreneur.

Rendering services related to debt relief

The petition for debt relief may no longer be drafted by the debtor itself, but will have to be drafted and submitted by an attorney, notary, executor, insolvency administrator or a legal person accredited by the Ministry of Justice for provision of services relating to debt relief. The remuneration for the provision of such services may not exceed CZK 4,000 (approx. EUR 150) without VAT.

Conclusion

The Amendment fundamentally changes many aspects of insolvency proceedings. Its application in practice will show if the changes really help secure firms against misuse of insolvency petitions or effectively defend debtors in the event of unjustified insolvency petitions against them.