In the current climate, the demand for jobs substantially exceeds the supply. Even so, for employers it can still be difficult to find a quality employee who meets the specific requirements for the given job. Once a suitable employee is found for the vacant position, they complete the usual formalities – submitting documents on their education, health and evidence of criminal records, agree with the employer on wages and other conditions of the employment and sign the labor contract. The employee will then start work on an agreed date and fulfill their employment obligations, the employer pays their wages and the employment relationship is mutually satisfactory for both participants – until one day when an insolvency trustee calls. They inform the employer that the employee has been declared bankrupt and, as a result, the employer must pay a portion of the employee’s wage directly to the insolvency trustee as part of the enforcement of the decision.

Insolvency is not Execution

This is nothing unusual. Employers, in general, are familiar with the situations where an employee’s wage is subject to distraint – in this instance, they pay a part of the employee’s wage to an account specified by the recipient. However, in the case of insolvency the situation is more complicated, as the insolvency trustee may also ask the employer to contribute to the insolvency payments a portion of the wage already paid out to the employee in the past, i.e. to actually pay twice.

How is this possible? The Insolvency Act stipulates that the wage or salary of the debtor in certain instances belongs to the insolvency assets. Under the law, all the debtor’s debtors (e.g. in this instance, the person who is paying the wage) are obliged to pay the insolvency trustee rather than the debtor.

The obligation to pay to the insolvency trustee may arise at varying times. The actual commencement of the insolvency proceeding itself does not automatically affect further claims of the debtor. Nevertheless, from this point it is necessary to monitor the insolvency register carefully and be sure that the court has not issued a preliminary ruling to stipulate that liabilities towards the debtor must be paid to the trustee.

Another issue that needs to be monitored relates to bankruptcy. Here, the court may decide that any persons with liabilities towards the debtor (including those who pay wages) must not provide any payment to the debtor; instead directly pay the insolvency trustee.

The next possible stage of the insolvency proceeding, adjudication of bankruptcy, has the same effect. From the moment of announcement of the bankruptcy judgment, the debtor’s debtors are obliged to pay their liabilities towards the debtor into the bankruptcy assets. Again this will require payment directly to the trustee, rather than to the debtor.

There may be an alternative situation which arises where the bankruptcy is resolved in form of discharge of debts, either by selling the bankrupt’s assets or by agreeing to a schedule of payments. In the case of discharge of debts, the risk that the employer will have to pay twice is lower.

Ignorance is no Excuse

The Insolvency Act states that where liabilities subject to the insolvency assets are paid to the debtor (i.e. not to the trustee) and not fulfilled, they are not discharged and the insolvency trustee may enforce any non-discharged liabilities. Therefore, the trustee may demand that the wage paid to the debtor, or the portion subject to them, be paid again into the insolvency assets, so that it can be divided among the creditors. The only way the employer may become relieved of the obligation, if the payments were made to the debtor, is to prove that the employer was not and could not have been aware of the preliminary ruling, adjudication of insolvency or, as the case may be, adjudication of bankruptcy.

No one is obliged under the Insolvency Act, or any other act, to monitor the insolvency register. Therefore, the employer may argue that the employee failed to inform them about their bankruptcy or bankruptcy proceedings and that no announcement was received from the insolvency trustee – i.e. that the employer was not and could not have been aware of anything, and therefore could not pay the money owed to any account specified by the trustee.

However, several recent decisions of the Supreme Court of the Czech Republic suggest that this approach may be ultimately unsuccessful – mainly due to the fact that insolvency trustees are not obliged to inform the debtors. So far, the Supreme Court has only considered judgment relating to the original Act on Bankruptcy and Settlement, though it is likely the same view will be applied to the current legal regulation as well. Importantly, the Court has previously directed that it is not important whether the debtor’s debtor was aware of its obligation to pay to the insolvency assets, but whether it could have been aware of that. As of 1 January 2008, the insolvency register has been available to for all parties to view – in the past, information was displayed on the official notice boards of the courts as well as in the Commercial Bulletin.

As a result of this, we would recommend employers examine the Commercial Bulletin and the Insolvency Register (perhaps reviewing them periodically thereafter) as an additional step to be taken when entering into a new employment relationship. Though an additional administrative load for the employer, it is the safest way to avoid the risk of the repeated payments of wage or, as the case may be, the cost of a lawsuit with the insolvency trustee – the results of which are often very uncertain.