Introduction

Insolvency law in the Czech Republic has recently been subject to significant changes in relation to a major amendment (“Amendment”) to Act No. 182/2006 Coll., on Bankruptcy and Settlement (Insolvency Act), as amended (“Insolvency Act”). The Amendment became effective on 1 July 2017 and is broadly perceived as one of the most important developments in Czech insolvency law in several years. Some old rules have been amended while some new have been added, one of the most significant changes being an introduction of the so-called “coverage gap” principle.

Insolvency criteria

Czech law recognizes two types of insolvency: (1) so-called “over-indebtedness”, occurring when a debtor has multiple creditors and at the same time such creditor’s aggregate debts exceed the value of its assets, and (2) a “classical” insolvency (inability to pay due debts).

As regards the “classical” insolvency, a debtor is insolvent if it meets three conditions, namely:

  • it has multiple creditors,
  • its debts are overdue for more than 30 days and
  • it is not able to meet the debts.

As regards letter (c), there are several presumptions as to when such a situation occurs (e.g. in the case that payments of a significant part of the debts have been suspended or the debts are overdue for more than 3 months).

However, the Amendment comes with a reverse rebuttable presumption – unless rebutted, the debtor that meets the criteria set out in the presumption is deemed not to be insolvent. This presumption introduces the coverage gap principle.

Coverage gap

For the purposes of the Insolvency Act, a coverage gap means the difference between a debtor’s due monetary debts and available (liquid) financial means in case the first number is higher than the second (where the due debts exceed the available means). The coverage gap principle is aimed at protection of debtors that merely have a temporary inability to pay due debts, when one can expect that such adverse situation would soon be overcome.

According to the “coverage gap presumption”, a debtor – entrepreneur keeping accounts – is deemed to be able to meet the debts (and, therefore, the condition under letter (c) is not fulfilled) if the coverage gap:

  • is lower than 10% of the amount of due monetary debts or
  • will decrease below 10% of the amount of due monetary debts in the relevant time period.

The value of the coverage gap (letter (a)) must be stated in a statement on liquidity status (“Liquidity Statement”). The decrease of the coverage gap (letter (b)) must be stated in a liquidity development outlook (“Liquidity Outlook”) while the relevant time period is the period for which the Liquidity Outlook is issued.

Both documents – the Liquidity Statement and the Liquidity Outlook – have to be created in compliance with implementing legislation by an auditor, expert or an economic consultant in the field of restructuring and insolvency who complies with the requirements of implementing legislation.

If the insolvency petition has been filed by a creditor, the Liquidity Statement and the Liquidity Outlook must be submitted by the debtor to the insolvency court within 14 days after a decree on commencement of insolvency proceedings has been published in the insolvency register. An extension of the 14-day time period at the debtor’s request is possible only under reasons worthy of special consideration.

It should be noted, however, that the coverage gap presumption is rebuttable. The mere submission of the Liquidity Statement and / or the Liquidity Outlook does not strictly exclude the meeting of conditions of insolvency. Thus, it can be proved the debtor is insolvent regardless of the coverage gap level.

Conclusion

The introduction of the coverage gap principle represents one of the significant changes to Czech insolvency law in 2017. Although the Amendment is still relatively new and it is too early to make any conclusions, the presence of the rebuttable coverage gap presumption may be perceived positively. It is a modern provision which could in practice protect debtors with a promising future, despite their poor current situation, and save their businesses.