This update looks at recent decisions reached by the Constitutional Court and the insolvency court when deciding on a nullity plea in insolvency proceedings. These decisions could have a significant effect on the overall outcome of insolvency proceedings, and the reasoning behind them could be applied in future proceedings.
In an earlier judgment the insolvency court referred to the provision of the Insolvency Act (182/2006 Coll), as amended, whereby a party acting in a holding-type group (ie, within a group of companies) with an insolvent company may not be a member of the creditor's committee or fully use its voting rights at the creditor's meeting (for further details please see "Lender's position in insolvency proceedings"). The Commercial Code (513/1991 Coll), as amended, defines a 'holding-type group' as a "relationship between companies in which one company can factually or legally exercise an essential influence on the conduct or operation of the other company's business".
In a recent case, in which the reasoning that a holding company relationship existed between the creditor and the borrower was used to prohibit the creditor from voting at the creditors' meeting, the Constitutional Court held that the insolvency court's earlier argument was insufficient because such conclusion had not been reached before and such legal opinion might have serious ramifications in future. In particular, the Constitutional Court pointed out that the insolvency court had to deal with the material and duly reasoned objection raised by the creditor that the conclusion of the existence of a holding company relationship between the creditor and the borrower was absurd. According to the Constitutional Court, such conclusion "clearly may not be implied from the reasoning of the insolvency court". Due to a lack of arguments and the impossibility of reviewing the decision in question, the Constitutional Court had no choice but to annul the insolvency court's decision. As usual, the Constitutional Court did not give its view on the subject matter of the case (ie, the possible existence of a holding company relationship between the creditor and the borrower), and only ordered the insolvency court either to expand its argument or to alter its decision.
Furthermore, the bank also filed a nullity plea, reasoning that the court schedule, pursuant to which cases are allocated in the district, is vague and thus in breach of the constitutional right to due process. This statement was confirmed by a deciding court, resulting in the cancellation of the bankruptcy proceedings. However, the decision was appealed and the judgment is pending.
The reasoning behind the insolvency court's earlier decision was unorthodox and introduced a completely new approach to the lender/creditor relationship in insolvency proceedings. It has been criticised by many legal practitioners because of its lack of proper legal reasoning and particularly because of its material effect on the position of lenders in insolvency proceedings. The recent Constitutional Court decision upheld this critical position and concluded that the possible existence of a holding company relationship between the creditor and the borrower must be very well reasoned and the insolvency court must deal with substantial objections raised by the lender.
For further information on this topic please contact Pavla Křečková or Iva Baranova at CMS Cameron McKenna vos by telephone (+420 296 798 111), fax (+420 221 098 000) or email ([email protected] or [email protected]).