On 14 February 2017 the President of the Czech Republic signed an extensive amendment to the Insolvency Act. The amendment brings significant changes to a number of aspects pertaining to insolvency proceedings, including security of contingent claims (including bank guarantees), the assessment of a company's insolvency and insolvency petitions, and discharge of debts. The amendment, inter alia, seeks to provide better protection against illegitimate insolvency petitions, and to clarify when a firm is actually insolvent. It will take effect at the beginning of the fourth month following publication in the Collection of Laws. As a result, it will most likely affect insolvency proceedings from 1 July 2017.
Major changes introduced by the amendment, some of which limit the existing rights of creditors, include the following in particular:
Security on contingent claims, including claims under bank guarantees and future claims
The amendment overrides the Supreme Court’s judgment in the ELMA-THERM case. In the judgment, the Supreme Court has concluded, in the context of the then applicable Bankruptcy and Resolution Act, that a bank is not entitled to satisfaction of its claim from the collateral of the bankrupt if the bank performed in compliance with a bank guarantee only issued in favour of the bankrupt only after the declaration of bankruptcy, although the pledge securing the bank guarantee had been entered in the Land Register before bankruptcy was declared. The intention of the legislature was to ensure that a bank or any other person performing under a bank or financial guarantee following the initiation of insolvency proceedings be considered a secured creditor on condition that the right to satisfaction from the security of a recourse claim against a debtor was entered in the Land Register before the commencement of the insolvency proceedings. Similarly, this rule is to apply to secured future claims arising after the initiation of insolvency proceedings.
Assessment of insolvency
The amendment extends the current definition of insolvency as inability to pay debts by an entrepreneur keeping accounts by introducing a 'liquidity gap', which is the difference between the amount of the outstanding debts and the amount of disposable income. An entrepreneur is not considered insolvent if the liquidity gap is lower than one tenth of his outstanding debts over a relevant period.
Preliminary assessment of insolvency petitions
An insolvency petition filed by creditors will now be subject to a preliminary assessment before being published in the Insolvency Register. If there are doubts as to the reasonable- ness of the petition, the court may rule against publishing the petition in the Insolvency Register for a limited period of time.
In the case of insolvency petitions filed by creditors, the insolvency petitioner, if keeping accounts, will be obliged to substantiate its claim against a legal entity with the acknowledgement of a debt, including either a legalised signature of the debtor, an enforceable judgment, a notarial or execution deed sanctioning the enforcement, or a confirmation by an auditor, forensic expert or tax adviser that the claim concerned is accounted for.
Limitation of voting rights of creditors forming a holding company with the debtor
The amendment significantly limits voting rights of creditors forming a holding company with the debtor.
Requirement to state the beneficial owner of a creditor of an assigned claim
Comprehensive changes affecting discharge of debts
One of the numerous changes brought by the amendment is that a removal of an appointed insolvency trustee will be more difficult for creditors. Also, no creditors' meeting will be held during the process of discharge of debts, unless a qualified majority of the creditors insist on holding the meeting. The debtor may no longer generally prepare a petition for discharge of debts himself, but rather, must authorise mainly an attorney or an 'accredited person' to do so. An accredited person will be a holder of a special licence granted by the Ministry of Justice.