The Insolvency Act has significantly strengthened the position of creditors in comparison with the former Bankruptcy and Composition Act. Nevertheless, the position of a creditor is fundamentally affected by its voting rights, by which it may influence countless decisions.
However, many disputed issues arise in practice, for example, whether a creditor with a contested claim or a creditor affiliated with a debtor may vote. In this context, the new rules regarding voting rights cannot be ignored.
New regulation of voting rights for disputed claims
Insolvency practitioners are faced with complicated issues, such as to what extent the voting rights of creditors with which this right is not automatically associated should be acknowledged. Up to adoption of the amendment, the courts had decided on the voting rights of creditors at creditor meetings, as a rule, without sufficient preparations. However, as we know from our experience, the court decisions were not always correct or, at a bare minimum, not convincingly justified.
The amendment to the Insolvency Act – that came into effect on 1 July 2017 – seeks to prevent a judge from making court decisions without being adequately prepared. Creditors who request acknowledgement of voting rights are now required to file a relevant petition by a seven-day deadline prior to the creditors’ meeting. However, this deadline does not end earlier than five days after publishing the list of lodged claims in the insolvency register. It must be possible to infer from the list to what extent a creditor may vote. The facts decisive for voting rights may be supplemented and evidence of their verification may be submitted to the insolvency court no later than two business days prior to the creditors’ meeting. Thus, creditors who would like to take advantage of their voting rights should carefully monitor the insolvency register.
New regulations for prohibited voting, especially for creditors affiliated with a debtor
The originally adopted concept of the Insolvency Act anticipated that, with the exception of the election of the creditors’ committee, no creditor was able to vote on its own matters or on matters of persons closely related to the creditor or persons who constitute a concern with the creditor (“creditor affiliated with a debtor”). However, from the standpoint of creditors affiliated with a debtor, a completely opposite approach was adopted from 1 January 2014: a creditor could vote in matters of persons affiliated with a debtor unless the law explicitly prohibited it. Nevertheless, this concept did not remain intact for very long. By 1 July 2017, the legislator introduced a wide range of relatively complicated rules.
The restrictions affect, in particular, creditors affiliated with a debtor. These creditors will not be able to vote at creditor meetings at all, unless the law stipulates otherwise. An exception could be, in particular, a situation where the insolvency court decides on a petition under previously established terms.
In addition, the voting ban affects specific issues relating to conflicts of interest and to parties other than affiliated creditors. This especially involves voting where a creditor has voted on the acquisition of assets in its favour or in favour of persons who belong to the same group as the creditor.
Another new development is that a court may under strict terms decide on prohibiting voting based on a previously filed petition in relation to a specific issue and a specific creditor. This applies to cases where the law deprives a creditor of its voting right. Similarly, the insolvency court will, on the other hand, be able to acknowledge the voting right of a creditor in cases where a general ban applies. Hence, the insolvency courts acquire powerful instruments that will perhaps be sensibly used in practice.
Obligation to provide evidence of the real owner
A new obligation introduces a related change for creditors who have acquired a claim for a debtor during the last six months prior to commencing insolvency proceedings or after commencing proceedings. The obligation concerns the requirement to provide evidence of the real owner of an assigned claim with an affidavit attached to the lodged claim. Demonstrating the real owner should help disclose creditors affiliated with a debtor. Thus, the legislator attempts to prevent the deliberate transfer of claims to a seemingly neutral person in order to cope with conflicts of interest and voting bans.
Until the affidavit is provided, the creditor will not be able to exercise its voting rights. The insolvency trustee, in particular, will verify that the affidavit corresponds to reality. However, the other creditors will be able to provide to the trustee or the insolvency court information relating to any untruthful declarations.
The new obligation will apply only to legal entities and to claims over EUR 10,000. On the other hand, the obligation will not apply to certain cases established under the Act on Measures against the Legalisation of Proceeds from Criminal Activities and the Financing of Terrorism, which this amendment relies on with regard to this change.
However, experience shows that the discussed change, which could be avoided to a larger or smaller extent, will not help to achieve its objective.