One very serious problem associated with insolvency proceedings in the Czech Republic is submitting ‘vexatious’ insolvency petitions. In general, insolvency petitions are considered to be vexatious if they, in fact, pursue a goal other than that of resolving the debtor’s insolvency. Such petitions are often filed against financially sound entities in order to harm them in the eyes of their business partners and customers. Due to the effects associated with initiating insolvency proceedings, an insolvency petition filed against a financially sound entity may cause considerable damage and often result in its actual insolvency. By a recently adopted amendment to the Insolvency Act that came into effect on 1 July 2017, the legislator follows up on an ‘anti-vexation’ amendment and attempts to limit submitting of vexatious insolvency petitions.

Obligatory preliminary assessment of an insolvency petition

Most of the negative consequences of vexatious insolvency petitions stem from the fact that insolvency proceedings in the Czech Republic are in principle held publicly. Anyone can immediately learn about the commencement of insolvency proceedings from the Insolvency Register. Moreover, many entrepreneurs have set up internal mechanisms immediately alerting them that insolvency proceedings against their business partner or debtor have been commenced.

Until now, the insolvency court has been obliged to publish, without taking further steps, a notice of insolvency proceedings in the Insolvency Register within two hours of receiving the insolvency petition. However, under the amendment, such a rule only applies to insolvency petitions filed by debtors.

With respect to insolvency petitions filed by creditors, the amendment has introduced an ‘obligatory preliminary assessment’. Under this obligation, the court must first assess whether there are any reasons for which an insolvency petition could be dismissed for being apparently groundless. The court will publish the insolvency petition in the Insolvency Register only if it does not discover, based on the preliminary assessment, any grounds for dismissing the insolvency petition as apparently groundless. The court must do so no later than by the end of the business day immediately following the day the insolvency petition was filed. In practice, this means that insolvency proceedings will be held for a certain period of time without the public knowing about it, and thus such proceedings will partially lack transparency.

However, in our experience, a reason for dismissing the petition for being apparently groundless occurs rather sporadically. In this respect, in our view, the amendment will not help against at least partially sophisticated petitioners.

An insolvency petition may also be dismissed by a court not having territorial jurisdiction

So far, vexatious petitioners have often intentionally filed insolvency petitions with courts not having the respective territorial jurisdiction. Such courts did not usually take any actions before the issue of territorial jurisdiction was resolved. Unjustifiably initiated and apparently groundless insolvency proceedings were thus extended by several weeks before the appellate court ruled on territorial jurisdiction.

In response to this situation, the amendment explicitly allows the court at which proceedings are pending to take measures that cannot be postponed  prior to a decision on territorial jurisdiction. Thus, the court may decide, for example, not to publish the insolvency petition and other documents in the Insolvency Register and may also dismiss the insolvency petition, either for its formal defects or for its apparent groundlessness.

Increasing the fine for filing an apparently groundless petition

Another measure that should deter potential vexatious petitioners from submitting vexatious insolvency petitions is to increase the fine for filing such a petition. The so-far relatively low fine, up to a maximum of CZK 50,000, is increased to a maximum of CZK 500,000, which can already be seen as more adequate. However, insolvent or otherwise purpose-based entities will certainly not be deterred from filing apparently groundless insolvency petitions.

Requirement to prove a petitioner’s claim due against the debtor  

The insolvency petitioner must prove its claim against the debtor and attach the claim application to the insolvency petition. Often, however, these are doubtful or fictitious claims. In this connection, the legislator wants to prevent insolvency petitions from being filed on the basis of fictitious claims.

In the case of a petitioner who keeps accounting or tax records under the Income Tax Act and an insolvency petition filed against the debtor who is a legal entity, the new legislation requires that the petitioner prove its claim by providing the court with acknowledgment of the debt together with the debtor’s certified signature, an enforceable decision, a notarial deed permitting enforceability or confirmation by an auditor, a court expert, or a tax advisor that the petitioner has its claim posted in its accounting books. If the petitioner does not fulfil this obligation, the court will dismiss the insolvency petition.

This measure will certainly make the position of creditors more difficult, irrespective of whether they will be recovering doubtful or legitimate claims. We are already discussing with institutional creditors on how to optimally meet the new requirement. However, given the possibility of circumventing it by vexatious petitioners, the costs of this change may outweigh its benefits.