Debt relief is by far the most frequent way of resolving insolvency under Czech law. According to statistics, as many as 26,482 insolvency petitions proposing debt relief (approximately 90% of all insolvency petitions) were filed in 2016. However, with the current headcount of judicial personnel, courts are substantially loaded with the high number of debt-relief cases. In this respect, the amendment to the Insolvency Act – that came into effect on 1 July 2017 – aims, among other things, to decrease the work load of the courts. This article presents some new aspects which will affect not only creditors’ rights.
Change in the claim review procedure and introduction of a debt-relief report
One of the new aspects of debt relief is the transfer of review proceedings from insolvency courts to insolvency trustees. Submitted claims will now be reviewed out of court by an insolvency trustee who will draw up a review report. In other words, court proceedings concerning the review of claims, to which creditors were used, will no longer be held. Instead, they will be replaced by the review report.
A key document for debt relief will be a debt-relief report to be drawn up and submitted by the insolvency trustee along with the review report. The debt-relief report is an important document for other activities of creditors in the proceedings, as it includes, among others, a recommended debt-relief method, an estimated proportion of satisfied creditors, information on facts preventing the approval of debt relief and other information relevant for the creditors.
The creditors may file objections to these reports at the court for a decision. However, only a short period of seven days from the publication of the report in the insolvency register is granted for filing the objections. Active creditors should carefully monitor new documents published in the insolvency register and should not miss the very tight deadline for submission of their objections.
A question may arise in this context relating to whether the court may ignore objections filed after the expiry of this deadline. We are of the opinion that it may not. One of the frequent objections raised by creditors thus far is the unfairness of the debtor’s intent. If the unfairness of the debtor’s intent is ascertained on the basis of an objection, the court should consider such an objection at least as a motion and should take this into account when deciding on the approval of debt relief even if the period for the submission of objectives has already expired.
Creditors’ meeting to be held only upon the motion of a “double majority of creditors”
Other limitations will be imposed on creditors in connection with the creditors’ meeting. The creditors’ meeting which decides, among others, on the debt-relief method and which followed the review proceedings so far, will now be convened only on the basis of a motion of a double majority of voters (i.e. absolute majority of all creditors having, at the same time, an absolute majority of submitted claims). A motion to hold a creditors’ meeting must be filed within seven days of publication of the debt-relief report. In this respect, the amendment reflects the fact that in general the creditors are not interested in participating in the meeting.
Nevertheless, it can be recommended that active creditors vote on the debt-relief method at least remotely by ballots. Please note in this connection that the amendment basically adopts the courts’ case law relating to the possible combination of debt-relief methods. Debt relief by way of sale of (a part of) the insolvency estate with an instalment schedule may be executed with the debtor’s consent and in addition to the insolvency trustee’s motion.
Limited possibility to recall an appointed insolvency trustee
The creditors’ rights are affected also in relation to recalling and appointing a new insolvency trustee. A quorum calculated from the value of receivables will no longer be sufficient for the creditors’ meeting to adopt a resolution on debt relief. Instead, the aforesaid double majority based on the value of claims and on the number of creditors will be required. Thus, we are of the opinion that a new insolvency trustee will be elected only exceptionally after the amendment.
Debt relief will no longer automatically transform into bankruptcy
Furthermore, under the amendment, a failed debt-relief case will no longer be automatically transformed into bankruptcy as has been seen so far. If the insolvency court does not approve debt relief, the debt-relief petition is dismissed or withdrawn. In simple terms, the debtor will be declared bankrupt only if the bankruptcy proceedings are not conducted at the expense of the state. In general, the basic criterion is whether the debtor’s estate is completely insufficient to satisfy the creditors.
Requirement to justify disagreement with the relief of business debts
The amendment affects also the rules for relieving debtors with business debts. If a creditor with a business claim wishes to challenge debt relief, they will now need to express and justify such a negative opinion along with the lodgement of its claim. In other words, unlike today, it will no longer be possible to wait for the creditors’ meeting which will not be convoked as a matter of principle (see above). Nevertheless, this new development raises several doubts as to, for example, the extent to which courts are authorised to reconsider the creditors’ opinions.
Limited group of persons authorised to draw up and submit a debt-relief motion
The most important change for the debtors is probably the rule that debt-relief motions will have to be mandatorily drawn up and filed on behalf of the debtor by an attorney-at-law, notary, court bailiff, insolvency trustee, or accredited person. As a matter of principle, the debtor alone will not be authorised to file a debt-relief motion. At the same time, the amendment limits the fee for drawing up and filing the motions to CZK 4,000 without VAT and CZK 6,000 respectively for joint debt relief of spouses. The accredited persons will not be authorised to charge any fees to debtors.
These changes are primarily aimed at combating non-qualified debt-relief service providers.
Changes affecting insolvency trustees
Principal changes have also affected insolvency trustees. In addition to the attempt to shift a larger administrative load to the insolvency trustees mentioned above, insolvency trustees will now be appointed from lists maintained by regional courts rather than district courts as currently maintained. Thus, insolvency trustees can be expected to wind up their establishments on a large scale. Moreover, the amendment of the act on insolvency trustees substantially tightens the supervision on insolvency trustees by the Ministry of Justice and considerably increases fines for administrative offences.
Other changes in debt-relief rules
The changes discussed above show that the amendment substantially affects the existing debt-relief rules. Current debates indicate that the amendment will not be the last legislative change. The Ministry of Justice submitted a draft amendment which should, among other things, abolish the current statutory requirement for the payment of at least 30% of unsecured debts and to make debt relief accessible to a larger group of persons. Although it is almost certain that the draft amendment will not gain the required support during the current electoral term, it is not excluded that sooner or later the debt-relief legislation will be further amended.